Internal Revenue Service
Revenue Ruling
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smRev. Rul. 55-249
1955-1 C.B. 218
Sec. 61
IRS Headnote
Compensation received by members of the Armed Forces of the United States for the first 60 days of the accrued leave standing to their credit at the time of discharge, whether such leave accrued either on or before August 31, 1946, or subsequent thereto, does not fall within the purview of the tax-exempt payments for leave as referred to in section 7 of the Armed Forces Leave Act of 1946. 60 Stat. 963, as amended, 37 U.S.C. 36. Such compensation constitutes active service pay and, as such, is taxable income subject to the exclusion provided for by section 22(b)(13) of the Internal Revenue Code of 1939. The compensation, to the extent taxable, is subject to the withholding of income tax at source under section 1622(a) of the Code.
Full Text
Rev. Rul. 55-249
Advice has been requested whether compensation received by a member of the Armed Forces of the United States upon discharge for the accrued leave standing to his credit at that time constitutes taxable income for Federal income tax purposes, or is exempt from tax under the provisions of section 7 of the Armed Forces Leave Act of 1946, 60 Stat. 963, as amended, 37 U.S.C. 36.
The taxpayer, an Army captain, was honorably discharged from the service in 1953 after 2 years of active service in the United States. At that time he was paid for 42 days of unused leave accrued during the 2-year period prior to the date of his discharge. He questioned the inclusion of the payment for such leave in the amount of the `Total wages' shown on the Withholding Tax Statement, Form W-2, given him by the Army.
The pertinent provisions of the Armed Forces Leave Act of 1946, supra , as amended, are as follows:
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SECTION 3. * * *
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(b) Notwithstanding any other provision of this Act or any other law or regulation, no member of the Armed Forces (other than a member on terminal leave on September 1, 1946) shall be permitted to accumulate or to have to his credit at any time after August 31, 1946, accumulated or accrued leave aggregating in excess of sixty days, except that leave actually taken during any fiscal year may be charged to leave accruing during such fiscal year without regard to such sixty-day limitation: Provided , That no cash settlement shall be made for unused or accumulated leave in excess of sixty days upon discharge or retirement subsequent to August 31, 1946.
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SECTION 4. * * *
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(c) Any member of the armed forces discharged after August 31, 1946, having unused accrued leave standing to his credit at time of discharge shall be compensated for such unused leave in cash on the basis of the base and longevity pay, and allowances, applicable to such member on the date of discharge including for enlisted persons the allowances as provided for such enlisted persons in subsection (a) of this section: Provided , that no cash settlement shall be made to any member (1) discharged for the purpose of accepting a commission or warrant or entering into an enlistment in his respective branch of the armed forces, or (2) electing to carry over such unused leave to a new enlistment in his respective branch of the armed forces on the day following date of discharge. * * *
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SECTION 5. * * *
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(b) In any case in which a member of the armed forces on active duty on September 1, 1946 (other than a member on terminal leave on such date) has to his credit on August 31, 1946, accumulated or accrued leave aggregating in excess of sixty days, such leave in excess of sixty days shall be settled and compensated for only in the manner provided in section 6 of this Act and if application is made to the Secretary not later than June 30, 1951.
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Section 6 of the Act provides for the manner in which leave designated by section 5 of the Act shall be settled and compensated for section 5 generally relates to leave accumulated by Armed Forces members discharged prior to September 1, 1946, and to leave in excess of 60 days accumulated as of August 31, 1946.
Section 7 of the Act provides that all amounts paid or payable under section 6 of this Act, in cash, bonds, or both, shall not be assignable except as provided in subsection (d) of such section, shall be exempt from claims of creditors, including any claim of the United States, and shall not be subject to attachment, leavy, or seizure by or under any legal or equitable process whatever. It further provides that all such amounts (except interest in the case of bonds) shall be exempt from taxation. See D.C. 793, C.B. 1943-2, 189.
As stated in Regulations 118, section 39.22(a)-1, gross income includes, in general, compensation for personal and professional services, business income, profits from sales of and dealings in property, interest, rent, dividends and gains, profits, and income derived from any source whatever unless exempt from tax by law. In the instant case the leave for which the taxpayer was compensated comes within the 60 days to which he was entitled as part of his basic pay for active duty. The pay received was for than 60 days leave accumulated subsequent to August 31, 1946. The taxpayer was not discharged prior to that date and therefore he was not paid under section 6 of the Act and such payment does not come within the exemption granted in section 7 of the Act.
In view of the foregoing, it is held that compensation received by members of the armed forces for the the first 60 days of the accrued leave standing to their credit at a time of discharge after August 31, 1946, whether such leave accrued either on or before August 31, 1946, or subsequent thereto, does not fall within the purview of the tax-exempt payments for leave as referred to in section 7 of the Armed Forces Leave Act of 1946, as ameded, supra 37 U.S.C. 36 . Such compensation constitutes active service pay and, as such, is taxable income subject to the exclusion provided for by section 22(b)(13) of the Internal Revenue Code of 1939. The compensation, to the extent taxable, is subject to the withholding of income tax at source under section 1622(a) of the Code