Rev. Rul. 58-443

Advice has been requested whether amounts paid to a retired military officer under the Act of September 2, 1957, Public Law 85-255, 71 Stat. 575, constitute back pay within the meaning of section 1303(b) of the Internal Revenue Code of 1954.

The Act of September 2, 1957, supra , provides that, upon application of any commissioned officer or former commissioned officer of the uniformed services who, upon advancement in rank, did not receive an increase in the rates of pay or allowance for any part of the period beginning July 1, 1932, and ending June 30, 1934, by reason of the application in the case of such officers of section 201 of the Economy Act of June 30, 1932, 47 Stat. 403, and section 4(a), Title 2, of the Economy Act of March 20, 1933, 48 Stat. 13, he will receive the aggregate amount of pay and allowance, in addition to that otherwise accruing, which would have accrued to such officer if the sections cited had not been applied in his case. The Act of September 2, 1957, supra , includes payments to widows and legal representatives of such officers where deceased and involves increases earned by such officers during the period cited but which were denied to them by reason of what is now considered to have been an improper interpretation of the acts referred to.

Section 1303(a) of the Code provides that if the amount of back pay received or accrued by a taxpayer during the taxable year exceeds 15 percent of his gross income for the year in which the back pay is received, the tax on such back pay shall be limited to the amount that would have been payable if the back pay had been included in the taxpayer's gross income in the years to which it is attributable. Section 1303(b) of the Code, containing the definition of back pay, provides in part as follows:

(b) * * * For purposes of this section, the term `back pay' means amounts includible in gross income under this subtitle which are one of the following-

(1) 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 one of the following events:

(A) bankruptcy or receivership of the employer:

(B) dispute as to the liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings;

(C) if the employer is the United States, a State, a Territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any of the foregoing, lack of funds appropriated to pay such remuneration; or

(D) any other event determined to be similar in nature under regulations prescribed by the Secretary or his delegate.

It is held that remunerations received by commissioned officers or former commissioned officers under the Act of September 2, 1957, supra , qualifies as back pay under section 1303(b)(1) of the Code as remuneration received by an employee for services performed for his employer, an agency of the United States, and which would have been paid before the taxable year except for lack of funds appropriated for such remuneration. If such back pay exceeds fifteen percent of the gross income received by such officer or former officer in question in the year in which it is received, it qualifies for the treatment provided by section 1303(a) of the Code for Federal income tax purposes.

The amounts so received constitute `wages,' as defined in section 3401(a), of the Code, subject to the withholding of income tax at source. See I.T. 3742, C.B. 1945, 320.