Rev. Rul. 59-48

Advice has been requested whether the sum received by a Federal civil service employee in accordance with a private law passed by Congress to reimburse him for salary loss resulting from administrative error is subject to the back pay treatment provided by section 1303 of the Internal Revenue Code of 1954.

In the instant case, a Federal agency offered a civil service employee a position at an annual salary of $4,000 effective in July, 1947, which he accepted, but he was transferred to that position at a salary of $3,000. The employee attempted to have the agency adjust his salary to the larger amount during a period of five years but was unsuccessful. He sought legislative action. A private law was enacted authorizing and directing a a payment to him representing the difference between the amount he should have received and the amount he did receive for his services during the period in question. Such amount was received in 1956.

Section 1303 of the Code provides, in part, as follows:

(b) DEFINITION OF BACK PAY.-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:

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

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

Section 1.1303-1 of the Income Tax Regulations provides that if the amount of `back pay,' as defined in section 1303(b) of the Code, received or accrued by an individual during the taxable year exceeds 15 percent of the individual's gross income for such year it may be allocated as provided in that section of the regulations.

The use in section 1303(b)(1)(D) of the Code of the expression `similar in nature' in referring to events other than those specified, and the broad interpretation to which it lends itself, indicates that it was the intention of Congress that the provisions of section 1303(b) of the Code should be liberally applied. See Rev. Rul. 57-566, C.B. 1957-2, 589.

In the instant case, the employee had two possible ways of recovery-(1) by bringing legal action, or (2) by a private law through the Congress of the United States. The alternative that he choose comes within the provisions of section 1303 of the Code as an event `similar in nature.'

Accordingly, it is held the amount paid to a Federal civil service employee, in accordance with a Congressional private law, representing a retroactive pay adjustment to reimburse him for loss resulting from an administrative error, constitutes back pay and is subject to such treatment provided by section 1303 of the Code if the amount received is in excess of 15 percent of his gross income for the year paid.