executor of the estate of her divorced husband, representing arrearages in periodic payments required by an amended decree of divorce, constitutes "periodic payments" includible in the gross income of the wife in the year of receipt. Where a lump sum is paid in settlement of arrearages in alimony the payment retains the character of the original payments for which it is substituted and if the latter qualified as "periodic payments", the former does also. Alimony payments are deductible by the husband under section 215 of the Code if they are taxable to the wife under the provisions of section 71 of the Code. Inasmuch as the lump-sum payment in the instant case is less than the arrearages in the support payments, this entire lump-sum payment will be considered settlement of arrearages. This follows the rationale in the case of Estate of Harold W. Ross v. Commissioner, 18 T.C. 1013 (1952), acquiescence, C.B. 1954-1, 6, consolidated for trial with the case of Jane C. Grant v. Commissioner, 18 T.C. 1013 (1952), affirmed 209 F. 2d 430 (1954), where the court held that the full amount paid to the wife was deductible by the husband even though it was paid in settlement of future claims as well as in settlement of past and present obligations to pay. Accordingly, the entire lump-sum payment of 150 dollars, made in this case under an agreement to satisfy past, present, and future obligations under the divorce decree, is a payment of arrearages in alimony, which is taxable to the wife and deductible by the husband, since such lump-sum payment is less than the aggregate amount of the arrearages. SECTION 72.-ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE CONTRACTS 26 CFR 1.72-2: Applicability of section. (Also Section 402; 1.402(a)-1.) Rev. Rul. 67-179 The retirement allowance received under a State employees' retirement system, consisting of both (1) an “annuity” derived from employees' contributions, and (2) a "pension" derived from employer contributions, is attributable to but one "separate program of interrelated contributions and benefits" as that term is used in section 1.72-2 of the Income Tax Regulations, and is viewed as received under a single contract for purposes of determining whether a participant's contributions will be recovered within the 3-year period provided in section 72(d) of the Internal Revenue Code of 1954. Advice has been requested with respect to the applicability of section 72(d) of the Internal Revenue Code of 1954 to certain distributions from a qualified State employees' retirement system. The retirement system provides for payment of a retirement allowance consisting of (1) an "annuity" derived from contributions made by the employee and (2) a "pension" derived from contributions made by the employer. The retirement allowance is distributable to a participant upon his retirement at age 60. The "annuity" portion represents the actuarial equivalent (in continuing periodic payments) of his accumulated contributions at the time of his retirement. The "pension" portion is a stipulated percentage of his final average salary multiplied by his years of service. The retirement system provides for 270-829-67 the payment of these benefits under various settlement options. To receive any benefits under the retirement system, an employee who has elected to contribute to the "annuity" portion must make the required contributions thereto or forfeit both the "annuity" and "pension" portions. In the instant case a distributee received a retirement allowance consisting of an "annuity" of 20 dollars per year for life and a "pension" of 20x dollars per year for life. The employee's consideration for the contract amounted to 100x dollars. Section 402(a) (1) of the Code provides that certain distributions by exempt employees' trusts are taxable under section 72. For purposes of applying section 72 of the Code to such distributions, section 1.72-2(a) (3) (i) of the Income Tax Regulations provides, in part, that each separate program of the employer consisting of interrelated contributions and benefits shall be considered a single contract. Section 1.72-2(a) (3) (ii) of the regulations lists definitely determinable retirement benefits as one example of a separate program of interrelated contributions and benefits. Section 72(d) of the Code provides that where part of the consideration for an annuity, endowment, or life insurance contract is contributed by the employer, and, during the 3-year period beginning on the date on which an amount is first received under the contract as an annuity, the aggregate amount receivable by the employee under the terms of the contract is equal to or greater than the consideration for the contract contributed by the employee, then all amounts received as an annuity under the contract shall be excluded from gross income until there has been so excluded an amount equal to the consideration for the contract contributed by the employee. Thereafter all amounts so received under the contract shall be included in gross income. The retirement allowance of 40 dollars per year, which is the sum of the "annuity" and "pension" portions, is a definitely determinable retirement benefit. In addition, since, under the facts the contributions and benefits relating to the "annuity" and "pension" portions are interrelated, the retirement allowance as a whole is held to be attributable to a separate program of interrelated contributions and benefits and is treated as received under a single contract. It is further held that, since the aggregate amount of 120 dollars to be received by the distributee during the 3-year period beginning on the date the first payment is received as an annuity under the contract will exceed the total amount of 100 dollars (the employee's consideration for the contract), section 72(d) of the Code is applicable to the amounts to be received. Accordingly, each annuity payment must be excluded from the distributee's gross income until there has been so excluded the total amount equal to the employee's consideration for the contract, after which all amounts so received will be includible in gross income. 26 CFR 1.72-6: Investment in the contract. (Also Sections 2031, 2512; 20.2031-7, 25.2512-5.) Rev. Rul. 67–39 The annuity tables contained in Revenue Ruling 62-216, C.B. 1962– 2, 30, prescribe a standard to be used in valuing annuity contracts issued from time to time by an organization such as a corporation, trust, fund or foundation (other than a commercial insurance company) in exchange for money or other property. Such tables are to be used for estate and gift tax purposes and for income tax purposes with respect to annuity contracts so issued as well as for purposes of section 72 of the Internal Revenue Code of 1954. Revenue Ruling 62-216, C.B. 1962-2, 30, clarified. 26 CFR 1.72-16: Life insurance contracts purchased under qualified employee plans. Rates not usable for computing one-year term premiums in determining the amount required to be included in the income of an employee on account of current life insurance protection provided under qualified employee plans. See Rev. Rul. 67–154, page 11. SECTION 74.-PRIZES AND AWARDS 26 CFR 1.74-1: Prizes and awards. Rev. Rul. 67-40 The television set an individual taxpayer was permitted to purchase for a nominal price, as a result of winning a contest, is a prize within the meaning of section 74(a) of the Internal Revenue Code of 1954. The amount to be included in the taxpayer's gross income is the difference between the fair market value of the television set and the price he paid. Advice has been requested whether an individual taxpayer is in the receipt of gross income for Federal income tax purposes under the following circumstances. The taxpayer removed a coupon from a department store's newspaper advertisement and, in compliance with the instructions in the advertisement, redeemed the coupon at the store for a numbered certificate. The rules of participation were printed on the face of the certificate and provided that if the holder of a certificate matched his certificate number with the number posted on an item of merchandise in the store, the holder was entitled to purchase the item for the price listed on the back of the certificate. The posted numbers were changed daily during the sale. In each case the item price listed on the backof the certificate was a small fraction of its fair market value. The taxpayer searched the store for the numbered items and disCovered that his certificate number matched that posted on a television et. He purchased the set for the price listed on the back of the Certificate. Section 74(a) of the Internal Revenue Code of 1954 provides, in pertinent part, that gross income includes amounts received as prizės and awards. Section 1.74-1(a) (2) of the Income Tax Regulations provides that if the prize or award is not made in money but is made in goods or ervices, the fair market value of the goods or services is the amount. to be included in gross income. The difference between the fair market value of the television set and the price the taxpayer paid for it is a prize within the meaning of section 74(a) of the Code and is the amount the taxpayer is required to include in his gross income for Federal income tax purposes. (Also Section 3401; 31.3401(a)-1.) Rev. Rul. 67-89 Awards received by army nurses, selected by the senior officers of a certain army hospital for outstanding performance in connection with their employment, from a fund contributed to the Department of the Army by an individual for the purpose of making such awards, are amounts received from their employer, and are includible in the gross income of the recipients for Federal income tax purposes under section 74 (a) of the Internal Revenue Code of 1954. Advice has been requested with respect to the Federal tax treatment of awards made to certain army nurses selected by the senior officers of a certain army hospital in recognition of outstanding performance in connection with their employment, where the awards are paid from a fund contributed to the Department of the Army for the sole purpose of making such awards. In the instant case, an individual made a substantial gift of money to the Department of the Army in memory of his late wife who had been an army nurse. The gift was accepted pursuant to section 2601 of Title 10 of the United States Code and was used to establish an award for the use and benefit of nurses assigned to a certain army hospital. As a condition of the gift, all or a portion of the earnings of the gift is to be awarded annually to one or more of the nurses assigned to the hospital, selected by the senior officers of the particular hospital, for outstanding performance in connection with their employment. Under the provisions of section 74 (a) of the Internal Revenue Code of 1954, gross income includes amounts received as prizes and awards. Section 1.74-1(b) of the Income Tax Regulations provides, in part, that prizes and awards from an employer to an employee in recognition of some achievement in connection with his employment are not excludable from gross income. The awards were made by the Department of the Army, as employer. to the recipients, as employees. Consequently, the awards received by the army nurses selected by the senior officers of a certain army hospital for outstanding performance in connection with their employment, from a fund contributed to the Department of the Army by an individual for the purpose of making such awards, are includible in the gross income of the recipients for Federal income tax purposes under section 74(a) of the Code. Such awards are wages within the meaning of section 3401(a) of the Code and are subject to withholding of Federal income tax. (Also Section 61; 1.61-1.) Rev. Rul. 67-135 An amount equal to the difference, if any, between the fair market value and the cost of a lease obtained by a taxpayer by means of a drawing conducted by the Bureau of Land Management of the Department of the Interior of the United States is not a prize under the provisions of section 74(a) of the Internal Revenue Code of Advice has been requested whether a taxpayer, under the circumstances described below, is in receipt of gross income, either within the meaning of section 74 (a) of the Internal Revenue Code of 1954, or under section 61 of the Code. Periodically the public is offered the opportunity to lease oil and gas rights to certain federally owned lands. The lands are administered by the Department of the Interior of the United States through its Bureau of Land Management and the leases are issued pursuant to the authority of the Mineral Leasing Act of 1920, Public Law 146, 66th Congress, 30 U.S.C. 181, as amended. The Bureau of Land Management posts a list of the tracts of land when they become available for leasing. The lands posted are not within any known geological structure of a producing oil and gas field and are leased without competitive bidding. Any citizen of the United States who has reached the age of 21 years may file, on a drawing entry card, one offer to lease for each tract of land in which he is interested. Each offer to lease must be accompanied by the payment of the standard filing fee and the payment of the first year's rental. The Bureau of Land Management retains all filing fees but returns the rental payments to the applicants who are not selected. Each applicant, when he submits an offer, agrees that he will be bound to a lease if his offer is chosen for acceptance. If a qualified applicant's offer to lease a tract of land is the only offer filed on that tract, his offer is accepted. However, when the lands available for leasing are posted it is not unusual that more than one applicant will file an offer to lease the same tract of land. When this occurs, the lessee is determined by a drawing. Section 74(a) of the Code provides, in part, that gross income includes amounts received as prizes. Section 61(a) of the Code provides, in part, that except as otherwise provided by law, gross income means all income from whatever source derived. The facts and circumstances surrounding the issuance of these oil and gas leases indicate that the drawing is used merely as an impartial method of selecting a lessee from the qualified applicants. Accordingly, the difference, if any, between the fair market value and the cost of a lease obtained by a taxpayer under these circumstances is not a prize under the provisions of section 74(a) of the Code, and such difference is not includible in the taxpayer's gross income under Section 61 (a) of the Code when he obtains the lease. Whether a minor-winner of the prize fund of the Irish Hospitals' Sweepstakes is in receipt of income when the prize fund is held by the Irish court. See Rev. Rul. 67-203, page 105. |