Ralph P. Waterman - Page 7

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          not argue that the severance payment is a pension or a form of              
          retirement pay.  Therefore, the question we consider is whether             
          the severance payment is "compensation received for active                  
          service * * * in a combat zone".                                            
               By means of regulations, compensation excludable from gross            
          income under section 112 has not been limited to active duty pay            
          while in a combat zone.  In particular, section 1.112-1(b)(5),              
          Example (5), Income Tax Regs., provides:                                    
               In July, while serving in a combat zone, an enlisted                   
               member voluntarily reenlisted.  After July, the member                 
               neither served in a combat zone nor was hospitalized                   
               for wounds incurred in the combat zone.  In February of                
               the following year, the member received a bonus as a                   
               result of the July reenlistment.  The reenlistment                     
               bonus can be excluded from income as combat zone                       
               compensation although received outside of the combat                   
               zone, * * * [because] the member completed the                         
               necessary action for entitlement to the reenlistment                   
               bonus in a month during which the member served in the                 
               combat zone.                                                           
          This regulation, to a limited extent, may expand upon the                   
          statutory language "compensation received for active service"               
          because reenlistment bonuses could be to secure future service              
          which is not served in a combat zone.4                                      
               Example (5) indicates that the time and place of payment are           
          irrelevant when considering whether compensation is excludable              
          under section 112.  More importantly, the example contains a                
          variation from the section 112 language to the extent that there            

               4 We note that neither party has challenged the validity of            
          the regulations under consideration.                                        




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