1.122-1—Applicable rules relating to certain reduced uniformed services retirement pay.
(a) Rule applicable prior to January 1, 1966.
In the case of a member or former member of the uniformed services of the United States (as defined in 37 U.S.C. 101(3)) who has made an election under Subchapter I of Chapter 73 of Title 10 of the U.S. Code (also referred to in this section as the Retired Serviceman's Family Protection Plan (10 U.S.C. 1431 )) to receive a reduced amount of retired or retainer pay, gross income shall include the amount of any reduction made in his retired or retainer pay before January 1, 1966, by reason of such election, unless such reduction, or portion thereof, is otherwise excluded from gross income under Part III of Subchapter B of Chapter 1 of the Internal Revenue Code of 1954 or any other provision of law.
(b) Rule applicable after December 31, 1965—
(1)
In a case of a member or former member of the uniformed services of the United States (as defined in 37 U.S.C. 101(3) ), gross income shall not include the amount of any reduction made in his or her retired or retainer pay after December 31, 1965, by reason of—
(ii)
The provisions of Subchapter II of Chapter 73 of Title 10 of the U.S. Code (also referred to in this section as the Survivor Benefit Plan (10 U.S.C. 1447 )).
(2)
(i)
In a case where a member or former member of the uniformed services has, pursuant to the election described in paragraph (a) of this section, received before January 1, 1966, a reduced amount of retired or retainer pay, he shall, after December 31, 1965, exclude from gross income under section 122(b) and this subdivision all amounts received as uniformed services retired or retainer pay until there has been so excluded an amount of retired or retainer pay equal to the “consideration for the contract” (as described in subdivision (iii) of this subparagraph).
(ii)
Upon the death of a member or former member of the uniformed services, where the “consideration for the contract” (as described in subdivision (iii) of this subparagraph) has not been excluded in whole or in part from gross income under section 122(b) and subdivision (i) of this subparagraph, the survivor of such member who is receiving an annuity under Chapter 73 of Title 10 of the U.S. Code shall, after December 31, 1965, exclude from gross income under section 72(o) and this subdivision such annuity payments received after December 31, 1965, until there has been so excluded annuity payments equalling the portion of the “consideration for the contract” not previously excluded under subdivision (i) of this subparagraph.
(a) The total amount of the reductions, if any, before January 1, 1966, in retired or retainer pay by reason of an election under Subchapter I of Chapter 73 of Title 10 of the United States Code, plus
(b) The total amount, if any, deposited by the serviceman at any time pursuant to the provisions of sections 1438 or 1452(d) of Title 10 of the United States Code, plus
(c) The total amount, if any, excludable from income under section 101(b)(2)(D) and paragraph (a)(2) of § 1.101-2 with respect to a survivor annuity provided by such retired or retainer pay, minus
(d) The total amount, if any, excluded from income before January 1, 1966, pursuant to the provisions of section 72 (b) and (d) with respect to a survivor annuity provided by such retired or retainer pay.
(iv)
In determining whether there has been a recovery of the “consideration for the contract” under subdivision (i) of this subparagraph, the exclusion of retired pay from income after December 31, 1965, under sections 104(a)(4) and 105(d) shall not be considered as recovery of all or part of the “consideration for the contract.”
(c) Special rules.
In any of the following situations, the computation of the excludable portion of disability retired pay received by the member or former member of the uniformed services shall be governed by the following rules:
(1)
An exclusion under section 122(a) and paragraph (b)(1) of this section is applicable only in the taxable year in which a reduction in retired pay is made under the Retired Serviceman's Family Protection Plan (10 U.S.C. 1431) or the Survivor Benefit Plan (10 U.S.C. 1447 ).
(2)
Where the member or former member of the uniformed services is entitled to exclude the whole or a portion of his retired pay under the provisions of section 104(a)(4) or section 105(d) and under section 122(a) and paragraph (b)(1) of this section, the exclusion under section 122(a) and paragraph (b)(1) of this section shall be applied prior to the exclusions under sections 104(a)(4) and 105(d).
(3)
Where the member or former member of the uniformed services waives a portion of his disability retired pay, or such retired pay reduced under the Retired Serviceman's Family Protection Plan (10 U.S.C. 1431 ),or the Survivor Benefit Plan (10 U.S.C. 1447) in favor of a nontaxable pension or compensation receivable under laws administered by the Veterans Administration (38 U.S.C. 3105 ), the waived amount of such disability retired pay, or reduced amount thereof, shall first be subtracted from any amounts which are excludable under the provisions of sections 104(a)(4) or 105(d) so as to reduce the amounts otherwise excludable under those sections.
(4)
Where the member or former member of the uniformed services receives (before any forfeiture) disability retired pay (whether or not reduced under the Retired Serviceman's Family Protection Plan) or the Survivor Benefit Plan which is partially excludable under section 104(a)(4), and also forfeits a portion of such disability retired pay under the Dual Compensation Act of 1964 (5 U.S.C. 5531 or any former corresponding provision of law), the amount of the forfeiture under such Act shall be applied against disability retired pay (before any forfeiture) in the same proportion that the excludable portion of such pay under section 104(a)(4) bears to the total amount of such pay after subtraction of any reduction under the Retired Serviceman's Family Protection Plan (10 U.S.C. 1431) or the Survivor Benefit Plan (10 U.S.C. 1447 ).
(5)
The exclusion provided by section 122(b) and paragraph (b)(2)(i) of this section shall be available with respect to repayments made upon removal from the temporary disability retired list even though such repayments were previously excluded from gross income under section 104(a)(4) or 105(d).
Code of Federal Regulations
(d) Examples with respect to the Retired Serviceman's Family Protection Plan.
The rules discussed in this section relating to the Retired Serviceman's Family Protection Plan (10 U.S.C. 1431) may be illustrated by the following examples:
Code of Federal Regulations
Code of Federal Regulations
Code of Federal Regulations
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Code of Federal Regulations
Code of Federal Regulations
Gross retired pay | $11,250 |
Less: Section 122(a) exclusion | (1,250) |
Reduced retired pay | 10,000 |
Less: Retired pay waived to receive V.A. compensation | (1,000) |
Adjusted retired pay— | 9,000 |
Less: | |
(i) Excludable retired pay computed under section 104(a)(4) as limited by 10 U.S.C. 1403 | $4,500 |
(ii) Less: Retired pay, not to exceed (i), waived to receive V.A. compensation | (1,000) |
(iii) Net disability exclusion | (3,500) |
Taxable retired pay before adjustment for Dual Compensation forfeiture | 5,500 |
Less: | |
Adjustment for Dual Compensation forfeiture of $4,088 | |
5500÷9000×$4,088 = $2,498 (rounded) | (2,498) |
Net taxable retired pay | 3,002 |
Code of Federal Regulations
Adjusted retired pay | $9,000 | |
Less: | ||
(i) Excludable retired pay under section (a)(4) as limited by 10 U.S.C. 1403 | $4,500 | |
(ii) Excludable retired pay under section 105(d) | 5,200 | |
(iii) Total | 9,700 | |
(iv) Less: Retired pay, not to exceed (iii), waived to receive V.A. compensation “sick pay” exclusion | (1,000) | |
(v) Net disability and “sick pay” exclusion | (8,700) | |
Net taxable retired pay | 800 |
Code of Federal Regulations
Gross retired pay (75%×$4,000) | $3,000 | |
Less: Section 122(a) exclusion | (500) | |
Reduced retired pay | 2,500 | |
Less: V.A. waiver | (1,300) | |
Adjusted retired pay | 1,200 | |
Less: | ||
(i) Section 104(a)(4) exclusion | $800 | |
(ii) Less: Retired pay, not to exceed (i), waived to receive V.A. compensation | (800) | |
Code of Federal Regulations
545
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(iii) Net disability exclusion | 0 | |
Net taxable retired pay | 1,200 |
(e) Principles applicable to the Survivor Benefit Plan.
The principles illustrated by the examples set forth in paragraph (d) of this section apply to an annuity under the Survivor Benefit Plan (10 U.S.C. 1447 ).