and of a portion of amounts equivalent to the cost for the year of allowing military service under section 8348(g) of the Act (effective July 1, 1970); (4) appropriations to the fund to finance the unfunded liability created by statutes which provide new or liberalized benefits or extend coverage of the Act to new groups of employees or provide increases in pay on which the benefits are computed, such appropriations being authorized by virtue of the statutory increase in benefits pursuant to section 8348(f) of the Act; and (5) interest earned from the investment of moneys not presently needed for payments from the fund as well as gains on the sale of such investments, such amounts being invested in interest-bearing securities of the United States in accordance with section 8348(c) of the Act. The amounts in the United States Treasury to the credit of the fund are invested in United States Government securities. Investment in the private market is not permitted by the Act. In 1973 approximately 80 percent of the fund's assets was invested in interest-bearing special certificates of indebtedness of the United States and 20 percent was invested in marketable interest-bearing obligations of the United States.

Under the provisions of the Act the term "fund balance" means as of a given date the investments of the fund calculated at par value plus the cash balance of the fund on the books of the Treasury. Sec. 8331(18) of the Act.

Under the provisions of the Act the term "unfunded liability" means the estimated excess of present value of all benefits payable from the fund to employees and Members, and former employees and Members, subject to the Act, and their survivors over the present value of deductions to be withheld from future basic pay of employees and Members (section 8334 deductions) subject to the Act, as well as future agency contributions to be made on their behalf, plus the present value of Government appropriations to the fund pursuant to section 8348(f) of the Act, plus the fund balance as of the date the unfunded liability is determined. Sec. 8331(19) of the Act. Basically, the unfunded liability is determined by assuming that no additional employees will be covered by the Act subsequent to the determination date and then determining, based on actuarial predictions, what the

New or liberalized annuity benefits were not payable until and unless an appropriation was made to the fund in an amount sufficient to prevent an increase in unfunded accrued liability of the fund under former sec. 8348(g) of the Act, 72 Stat. 1064 (1958).

total cost of the obligations under the Act will be, assuming present employees will continue to earn benefits until their actuarily predicted cessation of work and deducting from the amount the actuarily predicted amounts which will be paid into the fund under the Act with respect to those employees, plus the fund balance as of the date the unfunded liability is determined. As of June 30, 1969, the fund balance was $20.6 billion. On that date the unfunded liability was $57.7 billion.

As of June 30, 1969, total aggregate section 8334 deductions, voluntary contributions, and service credit payments from the inception of the fund were $18.2 billion. The total aggregate lump-sum credit as of that date is impossible to determine because records of the amounts retirees have received of their lump-sum credit in annuities are not retained. Actual aggregate refunds and death claims as of June 30, 1969, were $3.2 billion, so the total aggregate lump-sum credit as of June 30, 1969, could not have exceeded $15 billion.

The Government has liberalized benefits many times over the years without appropriating sufficient funds to equal the additional actuarily computed liability attributable to the increased benefits. Some of these liberalized benefits include: (a) Annuity increases to people already receiving benefits but who are no longer contributing; (b) early retirement, without corresponding reduction in benefits; (c) underfinanced past service such as military service for which no contributions were made; (d) higher annuities based on service contributed for at rates designed to finance a much lower level of benefits; and (e) general pay raises.

As of June 1969, the annual input into the fund from employees' section 8334 deductions and equal contributions by Government agencies was 13 percent of payroll, whereas benefits and administrative expenses under the Act cost an amount equal to 13.86 percent of payroll. It was estimated that at that rate by 1975 the cost of benefits and administrative expenses under the Act would exceed the income of the fund from all sources and by 1987 the fund balance would be completely exhausted. Because of this situation legislation was proposed to stabilize and control the unfunded liability. In 1969 Pub. L. 91-93 was enacted which contained the following financing provisions: (1) The employees' section 8334 deductions and the Government agencies' employer contributions were raised to 7 percent each, for a total of 14

percent of payroll, to cover the costs of current benefits and administrative costs which were 13.86 percent of payroll at that time; (2) all future legislation creating retirement liability by benefit or pay increases or extension of coverage would be deemed to authorize appropriations to the fund to finance the unfunded liability attributable thereto on a 30-year amortization schedule; and (3) permanent indefinite appropriations were provided in gradually increasing amounts over 10 years so that they would equal, in 1980, 100 percent of the amount equivalent to what would be the interest on the unfunded liability each year, computed at the interest rate used in computing the unfunded liability, as well as the estimated costs of annuities for that year attributable to credit allowed for military service. Under these financing provisions, it is estimated that the unfunded liability will level off at approximately $76 billion in 1980 with the exception of additional liability attributable to the cost-of-living increases pursuant to section 8340 of the Act.

The Civil Service Commission has the administrative responsibility for the processing and adjudicating of all claims for benefits under the Act.

Suits based on claims for benefits under the Act are made directly against the United States. Suits to recover benefits under the Act are deemed to be claims founded upon a law of Congress and are within the jurisdiction conferred upon Federal courts by the Tucker Act, section 1346 et seq. of title 28 of the United States Code. Pursuant to the provisions of sections 8312, 8313, 8314, and 8315 of title 5 of the United States Code, a Federal employee forfeits his right to receive certain retirement benefits under the Act if he is convicted of certain offenses or is guilty of certain conduct. However, when payment of annuity is denied pursuant to 5 U.S.C. section 8312, 8314, or 8315, the unrefunded amount contributed by the individual toward the annuity shall be refunded, generally with interest, to him or his beneficiary pursuant to 5 U.S.C. section 8316.

Petitioners on their income tax returns for the calendar years 1969 and 1970 deducted the amounts of $996 and $1,276, respectively, representing the sums withheld from petitioner's wages pursuant to section 8334 of the Act.

Respondent in his notice of deficiency disallowed the deduction for amounts withheld under section 8334 of the Act

from petitioner's wages for each of the taxable years 1969 and 1970.

Although a deduction for the amounts withheld from petitioner's wages was claimed on their tax returns, on brief petitioners contend that the section 8334 deductions are not currently taxable income to cash basis taxpayers. Petitioner contends that the amounts which were withheld from his salary were contributions by his employer and not by him since he was allowed no option to receive the amount in cash. Petitioner argues that the provision of the statute that he consent to the deductions is nothing more than an advance agreement for a reduced salary with an employer's payment to a retirement fund of the amount of the reduction. Petitioner concludes that if the civil service retirement plan is considered a qualified pension trust under section 401(a), I.R.C. 1954,6 then under the provisions of section 402(a) the amount withheld from his salary, being in effect a contribution to the qualified employee's trust by his employer, is not includable in his taxable income until distributed or made available to him so as to be taxable to him under section 72. Petitioner points out that respondent in his rulings has taken the position that the civil service retirement plan is a qualified pension plan under section 401(a). See Rev. Rul. 70-150, 1970-1 C.B. 106; I.T. 4102, 1952-2 C.B. 173.

Petitioners' primary contention is, however, that under our holding in Thomas Trebotich, 57 T.C. 326, 334-336 (1971), affd. 492 F. 2d 1018 (C.A. 9, 1974), the retirement system under the Act is not a qualified plan under section 401(a) as there was no independent trust or similar vehicle outside the Government control into which funds were placed and the fund was not adequately funded as of June 30, 1969. Petitioner contends that under the provisions of section 402(b) relating to taxability of a beneficiary of a nonexempt trust, the amounts withheld from his salary are not taxable to him since the Act does not provide for an independent trust not controlled by his employer in which he has an interest. Petitioner argues that there is no basis aside from the provisions of section 402(a) or (b) for taxing the amounts withheld from his salary to him in the years in which the amounts are withheld since he is a cash basis taxpayer and such amounts have not been constructively received by him and no

• All references are to the Internal Revenue Code of 1954 unless otherwise indicated.

benefit in the nature of property has been received by him. Petitioner points out that he could not elect to receive the section 8334 deductions in cash and argues on this basis that these amounts are neither cash nor its equivalent so as to constitute constructive income to him under the holdings in Commissioner v. Oates, 207 F. 2d 711 (C.A. 7, 1953), affirming 18 T.C. 570 (1952); Ray S. Robinson, 44 T.C. 20 (1965); Basil F. Basila, 36 T.C. 111 (1961); Ernest K. Gann, 31 T.C. 211 (1958); Howard Veit, 8 T.C. 809 (1947), but are merely unsecured promises by his employer to pay him the amounts when due within the meaning of Rev. Rul. 71-419, 1971-2 C.B. 220; Rev. Rul. 69-650, 1969-2 C.B. 106; Rev. Rul. 60-31, 1960-1 C.B. 174.

Petitioners recognize that we have on two occasions held that amounts withheld from a civil service employee's salary for payment into the civil service retirement fund were not excludable from that employee's taxable income in the year the amounts were withheld. Cecil W. Taylor, 2 T.C. 267 (1943), affirmed sub nom. Miller v. Commissioner, 144 F. 2d 287 (C.A. 4, 1944); Isaiah Megibow, 21 T.C. 197 (1953), affd. 218 F. 2d 687 (C.A. 3, 1955). However, they argue that the same arguments were not present in those cases which are being presented in the instant case and that those cases were not fully considered.

Petitioners further contend that the holdings in the Taylor and Megibow cases treat a Federal civil service employee differently from the treatment accorded to employees of private corporations under similar circumstances. Petitioners argue that this interpretation of the provisions with respect to taxability of a beneficiary under an employee's pension plan or a deferred-income arrangement is in violation of the due process clause of the fifth amendment to the Constitution of the United States as discriminatory against a Federal employee as compared to other persons. Petitioners cite, in support of their contention, a number of cases including Moritz v. Commissioner, 469 F. 2d 466 (C.A. 10, 1972), reversing 55 T.C. 113 (1970).

The taxpayer in the case of Isaiah Megibow, supra, contended, as does petitioner in the instant case, that the amount withheld from his salary as a Federal civil service employee was not a part of his salary but was a payment by the United States, his employer, into a qualified pension plan on his behalf and therefore was not taxable to him under the provisions of section