Rev. Rul. 70-314

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the positions set forth in I.T. 3545, C.B. 1942-1, 49, and Revenue Ruling 66-168, C.B. 1966-1, 25, concerning the Federal income tax treatment of an amount designated as "interest" deposited in the Civil Service Retirement and Disability Fund under the circumstances described below.

A Federal employee resigned from the Federal service after October 1, 1956, and chose to receive a refund of amounts to his credit in the United States Civil Service Retirement and Disability Fund. The employee later reentered the Federal service and elected to make a redeposit to the Fund with respect to the refund in order to receive credit, in the computation of his annuity benefit, for the period of service covered by the refund. This redeposit consisted of the exact amount previously refunded to him, plus an amount designated as "interest" computed from the date of the refund to the date of redeposit. The refund and redeposit were made pursuant to provisions of the Civil Service Retirement Act, as amended, 5 U.S.C. 8301 through 8348.

Section 163(a) of the Internal Revenue Code of 1954 provides the general rule that there shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness. Interest has been defined as the compensation allowed by law or fixed by the parties for the use, forbearance, or detention of money. Old Colony Railroad Co. v. Commissioner, 284 U.S. 552 (1932), Ct. D. 456, C.B. XI-1, 274 (1932). For purposes of computing Federal income tax, an interest deduction is allowable only in the case of an amount paid on an unconditional and legally enforceable obligation for the payment of money. Paul Autenreith v. Commissioner, 115 F. 2d 856 (1940).

There is no unconditional or legally enforceable obligation on the part of the employee to repay any of the amounts withdrawn from the fund. While the employee is not allowed credit for the period of service covered by the refund until the redeposit is made, he may, nevertheless, choose not to make the redeposit. Accordingly, it is held that no part of the amount redeposited, or the "interest" thereon, is deductible as interest under section 163(a) of the Code.

However, the redeposit and the "interest" thereon become a part of the employee's total retirement account. These amounts represent a part of the consideration for his annuity. The total consideration for the annuity, including the "interest," is excludable from the gross income of the annuitant in the manner and to the extent provided by section 72(b) or 72(d) of the Code, whichever is applicable.

I.T. 3545 and Revenue Ruling 66-168 are hereby superseded since the positions stated therein are restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.