Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-80

1972-1 C.B. 55

Sec. 72
Sec. 101
Sec. 165

IRS Headnote

A widow who, by remarriage before age 60, forfeits her right to receive a survivor annuity from the Civil Service Retirement and Disability Fund is not entitled to a loss deduction under section 165(c)(2) of the Code.

Full Text

Rev. Rul. 72-80

Advice has been requested whether, under the circumstances described below, a widowed taxpayer is entitled to a loss deduction under section 165(c)(2) of the Internal Revenue Code of 1954.

The taxpayer was 47 years of age in 1967 when her husband died at age 49 while in his 28th year of employment with the Federal Government. Upon her husband's death, the taxpayer qualified for and received a survivor annuity benefit from the Civil Service Retirement and Disability Fund. She had made no contributions, directly or indirectly, to the Fund and had never worked for the Federal Government.

Under Civil Services laws and regulations the taxpayer was entitled, upon proper application, to receive a survivor annuity in monthly installments until her remarriage if she remarried before reaching age 60, or until her death if she did not remarry. If she should remarry (or die) before recovering the amount of her deceased husband's contribution to the fund, plus interest thereon, she (or her estate) would receive a lump sum payment refunding the difference between her husband's contribution to the fund plus interest and the amount she had already received as an annuity. Furthermore, if the annuity should be terminated by her remarriage before age 60, it could be reinstated upon dissolution of the marriage by annulment, divorce, or death, and repayment of the lump sum benefit (if any) described above.

Under section 72 of the Code and the regulations thereunder, provision is made, in effect, for the exclusion of such survivor annuity payments from the gross income of the surviving spouse to the extent that such payments represent the contributions made by her deceased spouse plus the death benefit of section 101(b) of the Code.

In this case, however, the taxpayer remarried in 1969 and her annuity payments accordingly ceased. At that time the taxpayer had received insufficient annuity payments to make it possible for her to have excluded from her gross income under section 72 of the Code an amount equal to the sum of her husband's contributions and the allowable death benefit of section 101 of the Code.

The taxpayer's remarriage thus, from her point of view, not only resulted in a "forfeiture" of at least some of the annuity payments to which she was otherwise entitled, but also necessarily resulted in her inability to benefit further, for tax purposes, from the potential exclusion from gross income of part of these further annuity payments pursuant to section 72. The question asked is whether either or both of these effects gives rise to a deductible loss under section 165 of the Code.

Section 165(c)(2) of the Code provides, in part, that in the case of an individual, there shall be allowed as a deduction any loss sustained during the taxable year in any transaction entered into for profit.

The surviving wife was the beneficiary of the employee and as such was entitled to the payments involved and the tax benefits referred to by reason of various provisions of law recognizing her rights to such benefits as the beneficiary of the deceased employee rather than by reason of any contract that she had entered into or any consideration that she had paid or given. Since this case involves no claim that the beneficiary received less than that to which she was actually entitled as a beneficiary of the deceased employee, the matter has no relevance to section 165(c)(2) of the Code. For tax purposes, the surviving widow provided no consideration, entered no transaction for profit, and suffered no loss, however much income or tax benefit anticipated or hoped for by her may not actually have been realized. Therefore, her forfeiture resulted in nothing more than a relinquishment of anticipated income and did not give rise to a deductible loss under section 165(c)(2) of the Code. Compare Guy T. Helvering v. Cora K. Louis, 77 F.2d 386 (1935).

The exclusion from gross income provided by section 72 of the Code is applicable only to amounts received as an annuity (or in lieu thereof), and therefore has no application for the purpose of excluding from her gross income other unrelated income that she may have. Allowing a deduction under section 165 in such circumstances would amount to doing indirectly what cannot be done directly under specific provisions of the Internal Revenue Code if it is done in recognition of the fact that the taxpayer had "lost" the benefits of section 72 of the Code to which she was previously entitled. "Nothing in section 23(e) [the 1939 Code predecessor of section 165 of the 1954 Code] indicates that Congress intended to allow petitioner to reduce ordinary income actually received and reported by the amount of income he failed to realize." Walter M. Hort v. Commissioner, 313 U.S. 28 (1941), Ct. D. 1502, C.B. 1941-1, 319, 321.

Accordingly, the forfeiture was no more than a failure to receive anticipated income and does not result in a deductible loss under section 165(c)(2) of the Code.