Rev. Rul. 63-167

Advice has been requested with respect to the effect of the community property laws of Texas on the computation of the retirement income credit, under section 37 of the Internal Revenue Code of 1954, by a fully insured married individual domiciled in Texas who receives payment of an old-age insurance benefit under section 202(a) of Title II of the Social Security Act, as amended, 42 U.S.C. 402(a).

Revenue Ruling 55-598, C.B. 1955-2, 17, holds, in part, that, for purposes of the retirement income credit, a spouse in a community property state should treat his share of income earned by the other spouse as earned income received by him and that social security payments, as well as taxable pensions, attributable to earnings which constitute community income, are similarly handled for purposes of the credit. The social security payments to which that ruling relates were payments made to a fully insured individual who had qualified for such payments.

Section 37(a) of the Code allows a qualified individual a limited credit against tax on account of his retirement income. However, section 37(d) of the Code, provides, among other limitations, that, for purposes of section 37(a) of the Code, the retirement income shall not exceed $1,524 less any amount received by the individual as a pension or annuity under Title II of the Social Security Act.

Section 1.37-4 of the Income Tax Regulations provides, in effect, that in determining the limitation of section 37(d) of the Code, where amounts received during the taxable year as a pension or annuity under Title II of the Social Security Act are treated as community income under community property laws applicable to such income, such amounts shall be treated as received one-half by each spouse.

Under Texas law all property of the husband (both real and personal) owned or claimed by him before marriage, as well as that acquired afterwards by gift, devise or descent, and the increase of all lands thus acquired, is the separate property of the husband. Vernon's Annotated Civil Statutes, article 4613. Corresponding property of a wife is the separate property of the wife. Vernon's Annotated Civil Statutes, article 4614. All property acquired by either the husband or the wife during marriage, except that which is the separate property of either, is deemed the common property of the husband and wife. Vernon's Annotated Civil Statutes, article 4619.

In the case of Hopkins v. C. W. Bacon, 262 U.S. 122 (1930), Ct. D. 260, C.B. IX-2, 201 (1930), it was held that the interest of a wife in community property in Texas is a present vested interest and that one-half of the community income is, therefore, her income. It is the general rule under Texas law that all property accumulated during marriage is community property unless it was received by gift, devise, or inheritance (Commissioner v. Chase Manhattan Bank, 259 Fed. (2d) 231 (1958), certiorari denied, 359 U.S. 913 (1959)), but this rule is subject to the qualification that the separate character of funds or property given in exchange for other property is transmitted to the property acquired (Mamie S. Hammonds v. Commissioner, 106 Fed. (2d) 420 (1939)). The character of property as community or as separate is determined under Texas law at the time it is acquired, and the word "acquired" is interpreted as contemplating the inception of title to property. J. P. King Jr. v. Homer L. Bruce, 197 S.W. (2d) 830 (1946). Compensation for services performed as an employee has its inception in the performance of services. C. J. Wrightsman v. Commissioner, 40 B.T.A. 502 (1939), affirmed, 111 Fed. (2d) 227 (1940).

Although an old-age insurance benefit paid under section 202(a) of Title II of the Social Security Act to a primary beneficiary may be said to be "attributable to earnings" or "earned" in the sense that such a benefit is available only to an individual who has had wages or self-employment income subject to the social security tax, a worker's benefits are not dependent on the degree to which he was called upon to support the social security system by taxation (Flemming, Secretary of Health, Education, and Welfare v. Ephram Nestor, 363 U.S. 603 (1960), rehearing denied, 364 U.S. 854 (1960)), or, in the case of an employed individual, on the amount of taxes paid by his employer. An old-age insurance benefit is, therefore, not in the nature of an annuity bottomed on premium payments (see the Nestor case), or of additional compensation paid by an employer for past services, but is a payment by the Federal Government in promotion of the general welfare (Helvering et al. v. George P. Davis, 301 U.S. 619 (1937)), the right to which is determined only as a particular payment of such benefit becomes due. Therefore, it is held that no payment of an old-age insurance benefit is "acquired" as property within the meaning of the community property laws of Texas until the date on which the insured individual becomes entitled to such payment.

Since all property "acquired" during marriage and domicile in Texas other than the increase of separate lands and property acquired by gift, devise or descent is community property (subject to an exception which has no application to a "pension or annuity" which is not in the nature of a purchased annuity), it is further held that when a fully insured individual is married and domiciled in Texas on the date he becomes entitled to a payment of a primary old-age insurance benefit under section 202(a) of Title II of the Social Security Act, as amended, such payment is community property and is divided between the husband and wife for the purpose of determining the limitation on retirement income of each spouse under section 37(d) of the Code.

Revenue Ruling 55-598, C.B. 1955-2, 17, is hereby modified to remove therefrom the implication that, for purposes of computing the retirement income credit, the community or separate character of old-age insurance benefit payments to a primary beneficiary under the Social Security Act is determined at the time the beneficiary's wages subject to taxation under the Federal Insurance Contributions Act are earned.

Revenue Ruling 63-168, page 9, holds, as far as is here pertinent, that the character of a civil service retirement annuity, paid under the compulsory program under the Civil Service Retirement Act, as separate or as community property is determined under the community property laws of California, Washington and Idaho by the marital status and domicile of the employee during the performance of the services to which the annuity is attributable.

That Revenue Ruling is distinguishable from the instant ruling because of the difference between the types of retirement benefits involved. Unlike an old-age insurance benefit paid under the Social Security Act, which is considered to be a payment in promotion of the general welfare and is not taxed, a civil service retirement annuity is taxed as an employee annuity under section 72 of the Code ( Rev. Rul. 56-539, C.B. 1956-2, 28), and the taxable portion of the annuity is considered to be in the nature of deferred compensation paid by the employer.

Accordingly, for the purpose of determining whether a regular civil service retirement annuity is separate or community property, such annuity represents earnings and has its inception in the performance of services by the employee.