over the two plsposition

there originally con Federal income tax

cation, and Cong., 2nd Samending the

Sallie Mariage of section house of with

ome

payer. Thus, through the control the taxpayer had over the two plans with respect to the transfer and disposition of funds, it transferred 80x dollars from Plan A to Plan B. The amount transferred reduced only the existing underfunding of Plan B. It did not reduce the taxpayer's contribution requirements for the current taxable year to Plan B. Each such pension trust is deemed a separate entity for Federal income tax purposes. Neither plan was terminated.

The specific question is whether the transfer of funds as described above results in additional income to the taxpayer.

Section 1.61-1 of the Income Tax Regulations provides that gross in come means all income from what ever source derived unless excluded by law.

The amounts which the taxpayer contributed to Plan A in years prior to the transfer were deductible to the extent provided in section 404 of the Code which pertains to deduction for contributions of any employer to an employee's trust or annuity plan and compensation under a deferred-payment plan. The deduction allowed by section 404 is based on the premise that the trust, annuity, plan, or deferred-payment plan is a plan which qualifies under section 401 (a). Section 401(a) provides that the plan is to be for the exclusive benefit of the employees or their beneficiaries covered by the plan. Section 401(a) (2) provides that the funds contributed to such a plan must not be diverted from this purpose. Section 1.401-2(a) (3) of the regulations provides that “As used in section 401(a) (2), the phrase 'purposes other than for the exclusive benefit of his employees or their beneficiaries' includes all objects or aims not solely designed for the proper satisfaction of all liabilities to employees or their beneficiaries covered by the trust.” (Emphasis supplied). Use of the funds which were originally contributed on behalf of the employees covered under Plan A,

for the benefit of the employees cov- tions of Sallie Mae constitute obligaered under Plan B, is not carrying out tions of the United States or of an the purpose for which such funds agency or instrumentality thereof withwere originally contributed.

in the meaning of section 895. Accordingly, for Federal income tax Sallie Mae was created by the Edupurposes, the funds withdrawn from cation Amendments of 1972, P.L. 92Plan A are deemed to be income to 318, 92nd Cong., 2nd Sess. (June 23, the taxpayer under the provisions of 1972), 86 Stat. 235, amending the section 61 of the Code. See Rev. Rul. Higher Education Act of 1965, P.L. 68-223, 1968-1 C.B. 154. The tax- 89-329, 89 Cong., 1st Sess. (Nov. 8, payer must include the amount of 1965), 79 Stat. 1219, as amended (the funds so transferred in its gross in- “Act”). The purpose of the Act is to come for the year of the transfer, sub- provide liquidity, primarily through ject to the provisions of section 111 instituting secondary market and warerelating to the recovery of amounts housing facilities, for insured student previously deducted. Further, any de- loans made by eligible lenders under duction for the funds transferred from the Guaranteed Student Loan ProPlan A to Plan B shall be subject to gram, a program provided for by the the provisions and limitations imposed Act and related legislation. Sallie Mae by section 404(a).

will obtain funds for its operations

primarily from the sale of its stock tax consequences to the qualified pen- and obligations. The Act authorizes sion plan and trust involved in the the appropriation of $5,000,000 to the transfer of funds, see Rev. Rul. 73. transfer of funds, see Rev. Rul. 73

Secretary of Health, Education and 534, page 132, this Bulletin.

Welfare (“HEW”) for advancing funds to Sallie Mae.

Under the Act the common stock 26 CFR 1.61-1: Gross income.

of Sallie Mae may be issued only to (Also Sections 895, 7701; 1.895-1, 301.7701-13.)

limited classes of persons and its trans

ferability is to be governed by regulaStudent Loan Marketing Associations of the Secretary of HEW. tion stock and obligations. Stock The Act further provides that Sallie and obligations of the Student Mae may issue its common stock only Loan Marketing Association (Sallie in amounts which do not exceed the Mae) constitute stock or obliga- maximum number of shares prescribed tions of a corporation which is an by the Secretary of HEW from time to instrumentality of the U.S. within time. the meaning of section 7701(a)(19) With the approval of the Secretary (C)(ii) of the Code and the obliga- of the Treasury Sallie Mae is authortions constitute obligations of the ized to issue, and have outstanding, U.S. or of a U.S. agency or instru interest-bearing obligations. The mamentality within the meaning of turities and interest rates of such oblisection 895.

gations may be fixed by Sallie Mae. Rev. Rul. 73-548

The Secretary of HEW is authorized,

prior to July 1, 1982, to guarantee Advice has been requested as to principal and interest on obligations whether stock and obligations of the issued by Sallie Mae in an amount Student Loan Marketing Association determined by the Secretary of HEW (Sallie Mae) constitute stock or obli- in consultation with the Secretary of gations of a corporation which is an the Treasury. instrumentality of the United States The Act provides that all stock and within the meaning of section 7701 (a) obligations issued by Sallie Mae un(19) (C) (ii) of the Internal Revenue der the Act shall be "exempt securCode of 1954, and whether the obliga- ities” within the meaning of the Fed.

cancelled $5,000 of the principal of the loan. The loan cancellation was authorized by section 5 of Pub. L. 92385, 86 Stat. 554, which amended the foregoing Act. Section 5 stated that the Secretary of Agriculture shall cancel up to $5,000 of the principal of a loan made in connection with a loss resulting from a major or natural disaster (including drought) which occurred after June 30, 1971, and before July 1, 1973, where the loss or damage is not compensated for by insurance or otherwise. (See Pub. L. 93. 24, 87 Stat. 24, enacted April 20, 1973, which repealed the above loan cancellation provisions in section 5 of Pub. L. 92-385.)

Although Pub. L. 92-385 is cast in terms of the cancellation of the prin .cipal of a loan, the Senate Report accompanying Pub. L. 92-385 characterizes this type of loan and loan can cellation as a “grant” of up to $5,000 coupled with a bona fide loan for the balance of the uninsured loss. S. Rep. No. 92-1008, 92d Cong., 2d Sess. 2 (1972).

Where an emergency loan is made to a farmer because of an uncompensated production loss sustained as a result of destruction of or damage to his growing crops by a major or natural disaster, the method used by the Farmers Home Administration for computing his uncompensated production loss is to first determine the excess of his average crop production

that gross income includes all income 61 (a) of the Code and the regulations
from whatever source derived, unless thereunder.
excluded by law.

Since the $8,000 crop loss sustained
Section 165(a) of the Code allows

163(a) of the Code allows by the taxpayer was a loss of future a deduction for any loss sustained dur- profits or potential income (the taxing the taxable year which is not com

payer having no adjusted basis in his pensated for by insurance or other

growing crops), no loss deduction is wise. In the case of individuals, sec allowable under section 165 of the tion 165(c) limits deductions allowedCode. See Rev. Rul. 73-51. and com. under section 165(a) to (1) losses

pare section 1.165-6(c) of the reguincurred in a trade or business, (2)

lations. The amounts the taxpayer losses incurred in a transaction en

actually expended in growing such tered into for profit, though not con crops, however, may be deductible as nected with a trade or business, and

business expenses in the year in which (3) casualty or theft losses not con

they are paid or incurred as provided nected with a trade or business.

under section 162 and section 1.162-12 Generally, the amount of any sec

of the regulations. tion 165(a) loss deduction for prop

The disaster loan “cancellation" erty damaged or destroyed shall not

considered in Rev. Rul. 71-160, exceed the taxpayer's adjusted basis

1971-1 C.B. 75, is distinguishable as prescribed by section 1.1011-1 of

from the loan "cancellation" in the the regulations. Section 1.165-1(c) of

instant case. That Revenue Ruling inthe regulations.

volves a loan "cancellation" made to Rev. Rul. 73-51, 1973-1 C.B. 75,

a taxpayer, an individual, who inin holding that any loss resulting from

curred a property loss that was deducdamage to surviving merchantable

tible under section 165 of the Code. trees caused by an ice storm would be

The instant case, however, does not in the nature of a contemplated loss

involve a loan "cancellation" made in of future profits or potential income,

connection with a property loss that and thus not a deductible loss, states

is deductible under section 165. that section 165 of the Code contemplates only a loss of actual or measurable property, and this does not encompass a failure of profits or the 26 CFR 1.61-5: Allocation by cooperative loss of potential income.

associations; per-unit retain certificates

tax treatment as to cooperatives and The purpose of the loan “cancella patrons. tion” provisions of Pub. L. 92-385 is

Whether certain stock received by a proto provide disaster victims, including duction credit association is income wholly

exempt from Federal income taxes within

the meaning of section 265(1) of the Inotherwise uncompensated disaster

ternal Revenue Code of 1954. See Rev. losses. Such a loan “cancellation,” Rul. 73-471, page 89. when made in connection with the crop production loss suffered by the taxpayer in the instant case, has the substantive effect of providing him 26 CFR 1.61-7: Interest. with with compensation for his loss of

compensation for his loss of Federal income tax treatment of interest future profits or potential income that received by a beneficiary from an estate

with regard to a specific legacy. See Rev. would have been included in his gross

Rul. 73-322, page 44. income absent the disaster.

Accordingly, the $5,000 “cancelled” portion of the emergency loan (the "grant”) in the instant case is includ

id 26 CFR 1.61-7: Interest. ible in the taxpayer's gross income

Whether interest paid on obligations of

a political subdivision of a State is exempt pursuant to the provisions of section from tax. See Rev. Rul. 73-433. page 21.

over his production per acre for the year of the disaster. This excess is then multiplied by the unit market price of the product for the year of the disaster, and the resulting figure is again multiplied by the acres of production for such year. The amount so obtained, after reduction by the proceeds of insurance on the crop and by any gain in other production areas, is the farmer's uncompensated production loss.

Section 61 of the Internal Revenue Code of 1954 and section 1.61-1 of the Income Tax Regulations provide

26 CFR 1.61-7: Interest.

Whether the interest paid on obligations issued after July 13, 1972, by the Washington Metropolitan Area Transit Authority is exempt from tax. See Rev. Rul. 73-462. page 22.

26 CFR 1.61-7: Interest.

Whether interest paid on obligations of a political subdivision of a state is exempt from tax. See Rev. Rul. 73-481, page 23.

26 CFR 1.61-7: Interest.

Whether interest paid on obligations of a political subdivision of a State is exempt from tax. See Rev. Rul. 73-516, page 23.

arrangements. These residential facili- payment to X is in consideration for
ties and supporting services are pro- an appartment unit and other facili-
vided to residents pursuant to two ties. It is not in consideration for serv-
contracts. Under the first contract, ices for which separate arrangements
the resident makes an initial lump- are made under the agreement be-
sum payment which is determined by tween X and the resident. Thus, the
reference to the age of the resident. payment does not come within the
In consideration for this lump-sum exception from rent described in sec-
payment, X provides the resident, fortion 3.08 of Rev. Proc. 71-21 since no
the remainder of his life, an apart significant services are rendered in
ment and the use of social and recre- connection with that payment.
ational facilities, laundry facilities, Accordingly, it is held that the
medical facilities, and other common lump-sum payments received by X
facilites. The agreement provides that are advance rentals within the mean-
use of the facilities does not include ing of section 1.61-8(b) of the regula-
any services provided by X in such tions and must be included in the
facilities. Under the second contract, gross income of X for the taxable year
in consideration of a monthly pay- of receipt.
ment, X provides the resident with Rev. Rul. 64-231, 1964-2 C.B. 139,
various services including meals, laun- is distinguishable from the instant case
dry, housekeeping, and social and because it dealt with a question of
medical care.

charitable qualification and not with
The specific question is whether the the issue of the year of inclusion of
lump-sum payments are includible in income.
the income of X for the taxable year Rev. Rul. 64-231 is distinguished.
during which received, or whether
such payments are includible in gross
income of X over the actuarially de-

26 CFR 1.61-12: Income from discharge of termined life expectancy of the resi- indebtedness. dents.

Interest forgiven by sole sharein all of the Internal Reve. Section 61 (a) of the Internal Reve- holder of debtor. A solvent accrual nue Code of 1954 provides, in general, method corporation whose interest that gross income means income from indebtedness to its sole shareholdwhatever source derived, including er was forgiven realized gross inrents. Section 1.61-8(b) of the In- come to the extent its deduction of come Tax Regulations provides, in such interest in previous years had part, that gross income includes ad- resulted in a tax benefit. vance rentals, which must be included

Rev. Rul. 73-432 in income for the year of receipt regardless of the period covered or the Advice has been requested whether method of accounting used by the tax a solvent corporation realized gross payer.

income under the circumstances deRev. Proc. 71-21, 1971-2 C.B. 549, scribed below. relates to the treatment of advance A was the sole shareholder of R payment for services. Section 3.08 corporation which was legally indebted thereof, provides, in part, that for the to him in the principal amount of purposes of the Revenue Procedure 40x dollars and for accrued interest and section 1.61-8(b) of the regula- in the amount of 8x dollars. R had tions, the term "rent" does not include deducted this interest on Federal inpayments for the use or occupancy of come tax returns for prior years and rooms or other space where significant had received a tax benefit therefrom. services are also rendered to the oc- A forgave the 8x dollars interest owed cupant.

him by R at a time when R was In the instant case, the lump-sum neither bankrupt nor insolvent.

advance rentals within the mean

26 CFR 1.61-8: Rents and royalties. (Also Section 451; 1.451-1.)

Lump-sum payments received for providing residential facilities to retirement community. Lumpsum payments received by a calendar-year accrual-method corporation from residents of a retire ment community for providing them an apartment unit and the use of social, recreational, laundry, medical and other common facilities, for the remainder of their lives are advance rentals within the mean ing of section 1.61-8(b) of the regulations and must be included in gross income for the taxable year of receipt; Rev. Rul. 64-231 distinguished. Rev. Rul. 73-549

Advice has been requested regarding the proper treatment, for Federal income tax purposes, of lump-sum payments received by a corporation from residents of a retirement community, under the circumstances de scribed below.

Y is a corporation organized for the purpose of operating residential facili

no supportive services for older persons. It reports its income on the basis of a calendar year and

that gross income means income trom

interese debtors.ess to the e. ved from its in the f forgiven debtor der 168-104, 19hen

Section 61 (a) (12) of the Internal spect of a decedent; income from an interRevenue Code of 1954 states that est in an estate or trust. gross income includes income from Whether the taxable income of a discre

Whether the taxable income of a discre

tionary trust is taxable to the trust under the discharge of indebtedness. An ex

the circumstances described. See Rev. Rul. ception to this general rule is contained 73-521, page 209. in section 1.61-12(a) of the Income Tax Regulations which provides, in

Section 62.-Adjusted Gross pertinent part, as follows:

Income Defined In general—The discharge of indebtedness, in whole or in part, may result in the 26 CFR 1.62-1: Adjusted gross income. realization of income. * * *. In general,

Deductibility of expenses incurred by a if a shareholder in a corporation which is

Congressman in publishing and distributing indebted to him gratuitously forgives the

to his constituents newsletters, reports, and debt, the transaction amounts to a contribution to the capital of the corporation to

questionnaires. See Rev. Rul. 73-356, page

31. the extent of the principal of the debt. (Emphasis added.)

The intention of the emphasized 26 CFR 1.62-1: Adjusted gross income. language is to make it clear, however, Tax treatment of amounts paid as salthat only the principal portion of the

aries of certain employees by a member of forgiven indebtedness will be con

Congress from his personal funds and

amounts paid by him to purchase typesidered a contribution to capital. The writers used exclusively for his official busiinterest portion should be included ness. See. Rev. Rul. 73-464, page 35. in the debtor's gross income in the year of forgiveness to the extent of any 26 CFR 1.62-1: Adjusted gross income. tax benefit the debtor derived from its

Traveling expenses of employees who deduction. See Rev. Rul. 68-104, 1968

have no regular or principal place of busi. 1 C.B. 361, which holds that when ness because of the nature of their trade or

business. See Rev. Rul. 73-529, page 37. amounts previously deducted from gross income (that thereby effected a tax benefit) are recovered in subse

Part II.-Items Spocifically Included in Gross quent years, such recoveries are in Incomo cluded in gross income for the year of recovery.

Section 71.-Alimony and Separate Accordingly, R realized gross in Maintenance Payments come when its sole shareholder for

26 CFR 1.71-1: Alimony and separate gave interest indebtedness that when

maintenance payments; income to wife or previously deducted resulted in a tax former wife. benefit to R.

(Also Section 215; 1.215-1.) See the announcement regarding Alimony; periodic payment; sum the substitution of acquiescence in re- of monthly payments for eleven sult only for acquiescence in the case years. A lump sum payment, comof Utilities & Industries Corporation, puted as the sum of monthly pay. 41 T.C. 888 (1964), acq., 1965-1 C.B. ments for eleven years, made by 3, at page 4 of this Bulletin.

a husband to his former wife purSee Rev. Rul. 67-200, 1967-1 C.B. suant to an agreement incorporated 15, with respect to the application of in a divorce decree that also pr

in a divorce decree that also proCorinne 108 and 1017 of the Code vided monthly payments for such

nterest forgiven may be period, is not a periodic payment

gross income where within the meaning of section 71(a) there is a consent to the adjustment of the Code. of the basis of the taxpayer's property. Rev. Rul. 73-392 26 CFR 1.61-13: Distributive share of

Advice has been requested whether partnership gross income; income in re

under the circumstances described be

low, a lump sum payment by a husband to his former wife pursuant to a divorce decree is includible in the gross income of the wife under section 71(a) of the Internal Revenue Code of 1954 and deductible by the husband under section 215.

In the preliminary negotiations leading to the divorce, the husband tentatively agreed to pay his wife 15x dollars a month for 11 years. Upon further negotiation, it was agreed that th the foregoing amount would be adjusted, and that the husband would pay 14x dollars a month to his wife rather than 15x dollars a month and that an additional 1x dollars a month for 11 years would be paid in a lump sum of 132x dollars within 6 months after the divorce decree. Subsequently, the divorce decree provided for payments in accordance with the final agreement, and the husband made the specified payment to his former wife.

Tu

The question presented is whether the lump sum payment of 132x dollars is a periodic payment within the meaning of section 71(a) of the Code.

Section 71(a) (1) of the Code provides, in pertinent part, that if a wife is divorced from her husband under a decree of divorce, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such decree in discharge of a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband under a decree incident to such divorce.

Section 71(c)(1) of the Code provides the general rule that, for purposes of section 71(a), installment payments discharging a part of an obligation the principal sum of which is, either in terms of money or property, specified in the decree, instrument, or agreement, shall not be treated as periodic payments. However, section 71(c) (2) provides, in part, that if by the terms of the decree, instrument, or agreement, the prin

the sonly for ac industries C0965-1 C.B.

paymation the prins of moneyee, instrue

exclude which interest