Rev. Rul. 58-326

Advice has been requested whether the income tax liability reduction provisions of sections 1301 and 1303 of the Internal Revenue Code of 1954 are applicable to rewards paid by the Commissioner of Internal Revenue to informers.

A taxpayer furnished information which was used in an investigation of violation of internal revenue laws by an individual who was subsequently convicted and sentenced for tax evasion. During the taxable year in question, the convicted tax evader paid an amount in settlement of his total tax liability and a reward was paid to the informer.

Section 1301 of the Code provides for the readjustment of the tax on income received in the taxable year where such income is attributable to several years. However, as provided in subsection (a) of section 1301, this readjustment is applicable only if the income in question results from `an employment.' Subsection (b) of that section defines `an employment' as an arrangement for the performance of personal services by an individual or partnership to effect a particular result.

Section 7623 of the Code (the counterpart of section 3792 of the Internal Revenue Code of 1939) authorizes the Secretary of the Treasury or his delegate to pay such sums `as he may deem necessary' for detecting and punishing persons guilty of violating the internal revenue laws.

Under the regulations relating to section 3792 of the Internal Revenue Code of 1939 (Treasury Decision 5770, C.B. 1950-1, 126, applicable to the 1954 Code by authority of Treasury Decision 6091, C.B. 1954-2, 47), all relevant factors, including the value of the information furnished in relation to the facts developed by the investigation, are taken into account in determining whether a reward shall be paid, and, if so, the amount, and no person is authorized to bind the Commissioner of Internal Revenue as to the payment of any reward or the amount thereof.

The provisions of section 7623 of the Code, and the regulations applicable thereto, clearly indicate that the Commissioner is under no obligation to pay any definite sum for information leading to the detection and punishment of persons guilty of violating the internal revenue laws; therefore, no contract of employment arises between the Commissioner and a party submitting information.

Section 1303(a) of the Code provides for a limitation on the income tax attributable to `back pay' included in gross income if the amount of back pay received or accrued during the taxable year exceeds 15 percent of the gross income of the individual for such year. In determining the applicability of this section, `back' is defined in subsection (b) of section 1303 as remuneration, including wages, salaries, retirement pay, and other similar compensation, which is received or accrued during the taxable year by an employee for services performed before the taxable year for his employer, and which would have been paid before the taxable year except for the intervention of any one of certain enumerated events, none of which occurred in the instant case.

Accordingly, it is held that the offer of the Commissioner to pay a reward for information leading to the detection and punishment of persons guilty of violating the internal revenue laws does not, as between the Commissioner and the informer, result in such a contractual arrangement as to constitute `an employment' as such term is comprehended under section 1301 of the Code; nor does the amount received by the informer constitute `back pay' within the meaning of section 1303 of the Code.