Rev. Rul. 59-276

Advice has been requested whether a police official of a municipal government may exclude from gross income, under section 120 of the Internal Revenue Code of 1954, a portion of the amount he received as salary in a period prior to October 1, 1958, which has been retroactively designated `subsistence allowance' by municipal ordinance.

In order to make their police officials eligible for the tax benefits of section 120 of the Code, a municipal government adopted an ordinance which retroactively to January 1, 1958, designated a portion of the amount received by such officials as salary prior to October 1, 1958, as a `subsistence allowance.' The ordinance was adopted subsequent to the effective date of the repeal of section 120 of the Code by section 3 of the Technical Amendments Act of 1958, C.B. 1958-3, 254, at 255.

Prior to its repeal by the Technical Amendments Act of 1958, supra , section 120 of the Code provided, in part, that gross income did not include a prescribed amount `received' as a statutory subsistence allowance by an individual who was employed as a police official by a state, a territory, the District of Columbia, a possession of the United States, or a political subdivision of any one of them.

In the instant case, the municipal ordinance was not adopted prior to the repeal date of section 120 of the Code. Therefore, no amounts were actually `received' as subsistence allowances by the police officials involved. The mere characterization of the payment as a subsistence allowance, for tax purposes, is not sufficient to meet the statutory requirement of section 120 of the Code, nor does it alter its legal status as a payment made in consideration of services rendered.

In the case of Emil Leicht v. Commissioner , 137 Fed.(2d) 433, the taxpayer voluntarily refunded a portion of his salary to his employer by crediting the employer with the sum upon a note which it owed him for a previous loan. The taxpayer contended that the amount so refunded should be excludable from his gross income. In denying the exclusion, the court held that a taxpayer cannot escape liability for tax on income which he has once received in absolute right by an attempt thereafter to alter its legal status through modification of the agreement out of which it arose. The court held that once the amount had been paid to the taxpayer as salary a later modification of the agreement under which it was paid was ineffective for tax purposes. See also Crellin's Estate v. Commissioner , 203 Fed.(2d) 812, certiorari denied, 346 U.S. 873; Robert L. Daine v. Commissioner , 168 Fed.(2d) 449; Peter Van Vlaanderen v. Commissioner , 175 Fed.(2d) 389.

Accordingly, it is held that statutory enactments of a governmental unit which retroactively designate as `subsistence allowance' a portion of salary previously received by police officials are not effective for the purposes of section 120 of the Code.