Rev. Rul. 67-456

Advice has been requested by A , a retiree from the uniformed services of the United States, whether he may elect in a particular year to exclude from his gross income an amount less than the portion of his `consideration for the contract' which he is entitled to exclude under section 122 of the Internal Revenue Code of 1954. He desires to do this so that he may have gross income at least equal to the amount of his deductions, and thus extend the time during which his retirement pay would, in effect, be nontaxable.

A , who reports his income on the calendar year basis and is eligible to receive nondisability retirement pay of $500 a month, elected under the Retired Serviceman's Family Protection Plan (RSFPP) to receive reduced retirement pay of $400 a month. He received such reduced payments of $400 a month for 60 months prior to January 1, 1966.

Section 122 of the Code provides as follows:

(a) GENERAL RULE.-In the case of a member or former member of the uniformed services of the United States who has made an election under chapter 73 of title 10 of the United States Code to receive a reduced amount of retired or retainer pay, gross income does not include the amount of any reduction after December 31, 1965, in his retired or retainer pay by reason of such election.

(b) SPECIAL RULE.-(1) AMOUNT EXCLUDED FROM GROSS INCOME.-In the case of any individual referred to in subsection (a), all amounts received after December 31, 1965, as retired or retainer pay shall be excluded from gross income until there has been so excluded an amount equal to the consideration for the contract. The preceding sentence shall apply only to the extent that the amounts received would, but for such sentence, be includible in gross income.

(2) CONSIDERATION FOR THE CONTRACT.-For purposes of paragraph (1) and section 72(o), the term `consideration for the contract' means, in respect of any individual, the sum of-

(A) the total amount of the reductions before January 1, 1966, in his retired or retainer pay by reason of an election under chapter 73 of title 10 of the United States Code, and

(B) any amounts deposited at any time by him pursuant to section 1438 of such title 10.

For 1966 and each subsequent year, A is required to report as gross income only the retirement pay actually received, $4,800 ($400 a month for 12 months). The $1,200 reduction under RSFPP which A does not receive is not, pursuant to section 122(a) of the Code, includible in his gross income. However, under Federal income tax law in effect prior to 1966, A was required to report the amount he would have been eligible to receive had he not elected the survivor benefits-an aggregate of $30,000 gross income ($500 a month for 60 months)-although he actually received only $24,000 ($400 a month for 60 months).

In this case, $6,000 ($30,000-$24,000), which A included in gross income under prior Federal income tax law, is the total amount of the reductions before 1966 which, under section 122(b)(2) of the Code, is termed `consideration for the contract.' Furthermore, under section 122(b) of the Code the entire amount termed `consideration for the contract' must be excluded from A's retirement pay otherwise includible in his gross income, which is received for 1966 and subsequent taxable years, until the amount so excluded equals this $6,000.

Thus, for the year 1966 A should not include any of his retirement pay in gross income, and for the year 1967 A should include in gross income only $3,600 of the $4,800 retirement pay actually received. These amounts are computed as follows:

                               YEAR 1966