B-176509, SEP 18, 1972, 52 COMP GEN 139

B-176509, SEP 18, 1972, 52 COMP GEN 139

LEAVES OF ABSENCE - LUMP SUM PAYMENTS - TAXABLE - PENNSYLVANIA PERSONAL INCOME TAX A DEDUCTION FOR THE PENNSYLVANIA PERSONAL INCOME TAX FROM LUMP-SUM ANNUAL LEAVE PAYMENTS TO FEDERAL EMPLOYEES SEPARATING FROM GOVERNMENT SERVICE (5 U.S.C. 5551(A)) IS REQUIRED NOTWITHSTANDING THAT A LEAVE BALANCE MAY INCLUDE LEAVE CARRIED FORWARD FROM AGENCIES NOT GEOGRAPHICALLY LOCATED WITHIN PENNSYLVANIA REGARDLESS OF WHEN THE LEAVE WAS EARNED OR THE CURRENT RESIDENCE OF THE EMPLOYEE, AND THAT THE LEAVE ACCRUED BUT WAS NOT PAID PRIOR TO THE ENACTMENT OF THE TAX LAW OR ITS EFFECTIVE DATE SINCE FOR THE PURPOSES OF FEDERAL INCOME TAX WITHHOLDING, LUMP-SUM LEAVE PAYMENTS ARE WAGES TAXABLE AS INCOME FOR THE YEAR OF RECEIPT AND, THEREFORE, THE PAYMENTS ARE SUBJECT TO THE AGREEMENT BETWEEN THE UNITED STATES TREASURY DEPARTMENT AND THE COMMONWEALTH OF PENNSYLVANIA RESPECTING THE WITHHOLDING OF THE TAX FROM THE COMPENSATION OF FEDERAL EMPLOYEES.

TO R. G. BORDLEY, DEFENSE SUPPLY AGENCY, SEPTEMBER 18, 1972:

YOUR LETTER OF JULY 12, 1972(YOUR REFERENCE: DSAH-CFF), SUBMITS A REQUEST DATED JUNE 9, 1972, BY MR. NORMAN MOGUL, SPECIAL DISBURSING AGENT, FOR OUR ADVANCE DECISION AS FOLLOWS:

THE PROPRIETY OF DEDUCTIONS FOR PENNSYLVANIA PERSONAL INCOME TAX FROM LUMP SUM PAYMENTS PAID TO EMPLOYEES SEPARATING FROM GOVERNMENT SERVICE HAS BEEN QUESTIONED. IN PARTICULAR, THE DOUBT LIES IN THE TAXABILITY OF: (A) THOSE LEAVE BALANCES CARRIED FORWARD FROM OTHER GOVERNMENT AGENCIES NOT GEOGRAPHICALLY LOCATED WITHIN THE COMMONWEALTH OF PENNSYLVANIA REGARDLESS OF WHEN IT WAS EARNED OR THE CURRENT RESIDENCE OF EMPLOYEE AND (B) LEAVE ACCRUED BUT NOT PAID PRIOR TO THE ENACTMENT OF THE TAX LAW OR ITS EFFECTIVE DATE AS IT WOULD APPLY TO: (1) ALL EMPLOYEES IN GENERAL OR (2) NONRESIDENT EMPLOYEES SPECIFICALLY.

INTERIM DECISION REQUESTED FROM OFFICE OF COUNSEL, DPSC (REFERENCE 1G) SUPPORTS THE NON-DEDUCTION OF TAXES FOR ALL LUMP SUM PAYMENTS. HOWEVER, TAX DEDUCTIONS WILL CONTINUE AND THE MONIES PLACED IN SUSPENSE PENDING RECEIPT OF YOUR DECISION. AT SUCH TIME, THE MONIES WILL BE DISBURSED ACCORDINGLY, I.E., TRANSMITTED TO THE STATE OR TO THE RESPECTIVE EMPLOYEES.

THE PENNSYLVANIA PERSONAL INCOME TAX STATUTE PROVIDES IN PART, QUOTING FROM PURDON'S PENNSYLVANIA STATUTES ANNOTATED, TITLE 72, SECTION 7316(SUPP. 1972-1973):

EVERY EMPLOYER MAINTAINING AN OFFICE OR TRANSACTING BUSINESS WITHIN THIS COMMONWEALTH AND MAKING PAYMENT OF COMPENSATION (I) TO A RESIDENT INDIVIDUAL, OR (II) TO A NONRESIDENT INDIVIDUAL TAXPAYER PERFORMING SERVICES ON BEHALF OF SUCH EMPLOYER WITHIN THIS COMMONWEALTH, SHALL DEDUCT AND WITHHOLD FROM SUCH COMPENSATION FOR EACH PAYROLL PERIOD A TAX COMPUTED IN SUCH MANNER AS TO RESULT, SO FAR AS PRACTICABLE, IN WITHHOLDING FROM THE EMPLOYEE'S COMPENSATION DURING EACH CALENDAR YEAR AN AMOUNT SUBSTANTIALLY EQUIVALENT TO THE TAX REASONABLY ESTIMATED TO BE DUE FOR SUCH YEAR WITH RESPECT TO SUCH COMPENSATION. THE METHOD OF DETERMINING THE AMOUNT TO BE WITHHELD SHALL BE PRESCRIBED BY REGULATIONS OF THE DEPARTMENT (OF REVENUE).

PERSONAL INCOME TAX INFORMATION BULLETIN NUMBER 3(WITHHOLDING INSTRUCTIONS FOR EMPLOYERS), ISSUED BY THE PENNSYLVANIA DEPARTMENT OF REVENUE, A COPY OF WHICH WAS FORWARDED WITH YOUR LETTER, STATES IN PART:

COMPENSATION, INCLUDING TIPS, SALARIES, WAGES, COMMISSIONS, BONUSES, OVERTIME PAY, VACATION PAY, INCENTIVE AWARDS, ETC., BASICALLY ANYTHING REGARDED AS "WAGES" FOR FEDERAL INCOME TAX WITHHOLDING PURPOSES ARE SUBJECT TO WITHHOLDING FOR PURPOSES OF PENNSYLVANIA PERSONAL INCOME TAX.***.

ALL COMPENSATION PAID TO A RESIDENT OF PENNSYLVANIA IS SUBJECT TO WITHHOLDING, EVEN THOUGH THE SERVICES MAY HAVE BEEN RENDERED OUTSIDE PENNSYLVANIA. HOWEVER, IN THE EVENT A PENNSYLVANIA RESIDENT EMPLOYEE IS EMPLOYED WHOLLY WITHOUT PENNSYLVANIA AND SUBJECT TO THE WITHHOLDING TAX OF THE STATE WITHIN WHICH HE IS EMPLOYED, THE EMPLOYER IS NOT OBLIGATED TO WITHHOLD PENNSYLVANIA PERSONAL INCOME TAX.

THE TAX SHALL BE DEDUCTED AND WITHHELD ON COMPENSATION PAID TO NONRESIDENT EMPLOYEES FOR SERVICES PERFORMED IN PENNSYLVANIA. ACCORDINGLY, IF A NONRESIDENT EMPLOYEE PERFORMS ALL OF HIS SERVICES IN PENNSYLVANIA, THE TAX SHALL BE DEDUCTED AND WITHHELD FROM ALL COMPENSATION PAID HIM.

IF A NONRESIDENT EMPLOYEE PERFORMS SERVICES PARTLY WITHIN AND PARTLY OUTSIDE THE COMMONWEALTH, ONLY COMPENSATION FOR SERVICES WITHIN THE COMMONWEALTH IS SUBJECT TO WITHHOLDING.***.

THE SECRETARY OF THE TREASURY HAS ENTERED INTO SEVERAL AGREEMENTS, EACH SUPERSEDING THE OTHER, WITH THE COMMONWEALTH OF PENNSYLVANIA, PURSUANT TO 5 U.S.C. 5517 AND EXECUTIVE ORDER NO. 10407, 17 F.R. 10131(NOVEMBER 8, 1952), 3 CFR 1949-1953 COMP., P. 905, 5 U.S.C. 5517(NOTE), PROVIDING FOR THE WITHHOLDING OF PENNSYLVANIA INCOME TAX FROM THE WAGES OF FEDERAL EMPLOYEES. THE MOST RECENT SUCH AGREEMENT WAS SIGNED BY THE FISCAL ASSISTANT SECRETARY OF THE TREASURY ON MARCH 14, 1972, AND BY THE SECRETARY OF REVENUE, COMMONWEALTH OF PENNSYLVANIA ON MAY 10, 1972. APPEARS AS APPENDIX NO. 2 TO PART III, TREASURY FISCAL REQUIREMENTS MANUAL FOR GUIDANCE OF DEPARTMENTS AND AGENCIES, AND PROVIDES IN RELEVANT PART:

THE HEAD OF EACH AGENCY OF THE UNITED STATES SHALL COMPLY WITH THE REQUIREMENTS OF THE WITHHOLDING PROVISIONS OF THE PENNSYLVANIA INCOME TAX LAW *** EXCEPT AS OTHERWISE PROVIDED HEREIN, WITH RESPECT TO EMPLOYEES OF SUCH AGENCY WHO ARE SUBJECT TO SUCH TAX AND WHOSE REGULAR PLACE OF FEDERAL EMPLOYMENT IS WITHIN THE COMMONWEALTH OF PENNSYLVANIA.

THE COMPENSATION OF FEDERAL EMPLOYEES ON WHICH THE PENNSYLVANIA INCOME TAX SHALL BE WITHHELD SHALL BE THEIR 'WAGES" AS DEFINED IN SECTION 3401(A), AS AMENDED, OF THE INTERNAL REVENUE CODE OF 1954 AND REGULATIONS ISSUED THEREUNDER.***

EARLIER AGREEMENTS HAD SUBSTANTIALLY THE SAME PROVISIONS.

THE AGREEMENT GOVERNS THE WITHHOLDING OF THE PENNSYLVANIA INCOME TAX WITH RESPECT TO FEDERAL EMPLOYEES. SEE TREASURY FISCAL REQUIREMENTS MANUAL, SUPRA, PART III, SECTION 4020.10. UNDER THE TERMS OF THE AGREEMENT AS QUOTED ABOVE, THE QUESTION OF WHETHER OR NOT LUMP-SUM PAYMENTS FOR ANNUAL LEAVE ARE SUBJECT TO WITHHOLDING FOR PENNSYLVANIA IS DETERMINED BY REFERENCE TO THEIR TREATMENT FOR PURPOSES OF FEDERAL INCOME TAX WITHHOLDING. SECTION 3401(A) OF THE INTERNAL REVENUE CODE OF 1954 PROVIDES THAT, WITH CERTAIN EXCEPTIONS NOT HERE RELEVANT, THE TERM "WAGES" FOR PURPOSES OF FEDERAL INCOME TAX WITHHOLDING MEANS ALL REMUNERATION FOR SERVICES PERFORMED BY AN EMPLOYEE FOR HIS EMPLOYER. THIS DEFINITION IS AMPLIFIED IN SECTION 31.3401(A)-1 OF THE INTERNAL REVENUE SERVICE REGULATIONS, 26 CFR 31.3401(A)-1, AS FOLLOWS:

(A) IN GENERAL. (1) THE TERM "WAGES" MEANS ALL REMUNERATION FOR SERVICES PERFORMED BY AN EMPLOYEE FOR HIS EMPLOYER UNLESS SPECIFICALLY EXCEPTED UNDER SECTION 3401(A) OR EXCEPTED UNDER 3402(E).

(2)THE NAME BY WHICH THE REMUNERATION FOR SERVICES IS DESIGNATED IS IMMATERIAL. THUS, SALARIES, FEES, BONUSES, COMMISSIONS ON SALES OR ON INSURANCE PREMIUMS, PENSIONS, AND RETIRED PAY ARE WAGES WITHIN THE MEANING OF THE STATUTE IF PAID AS COMPENSATION FOR SERVICES PERFORMED BY THE EMPLOYEE FOR HIS EMPLOYER.

(5) REMUNERATION FOR SERVICES, UNLESS SUCH REMUNERATION IS SPECIFICALLY EXCEPTED BY THE STATUTE, CONSTITUTES WAGES EVEN THOUGH AT THE TIME PAID THE RELATIONSHIP OF EMPLOYER AND EMPLOYEE NO LONGER EXISTS BETWEEN THE PERSON IN WHOSE EMPLOY THE SERVICES WERE PERFORMED AND THE INDIVIDUAL WHO PERFORMED THEM.

THE COMPREHENSIVE TAX GUIDE TO UNITED STATES CIVIL SERVICE RETIREMET BENEFITS, PUBLISHED BY THE INTERNAL REVENUE SERVICE (PUBLICATION 721(12 70)) DEALS SPECIFICALLY WITH LUMP-SUM ANNUAL LEAVE PAYMENTS AT PAGE 6:

A LUMP SUM PAYMENT FOR ACCRUED ANNUAL LEAVE RECEIVED UPON RETIREMENT IS TREATED AS A SALARY PAYMENT. IT IS TAXABLE AS ORDINARY INCOME FROM WAGES IN THE TAX YEAR THE PAYMENT IS RECEIVED.

CF., REV. RUL. 57-603, NO. 1957-51 INTERNAL REV. BULL. 55(DECEMBER 23, 1957).

THE PROVISION OF LAW AUTHORIZING LUMP-SUM PAYMENTS FOR ANNUAL LEAVE (5 U.S.C. 5551(A)) SPECIFICALLY STATES THAT "THE LUMP-SUM PAYMENT IS CONSIDERED PAY FOR TAXATION PURPOSES ONLY."

IT IS APPARENT FROM THE FOREGOING THAT LUMP-SUM ANNUAL LEAVE PAYMENTS ARE "WAGES" FOR PURPOSES OF FEDERAL INCOME TAX WITHHOLDING AND ARE THEREFORE, UNDER THE TERMS OF THE AGREEMENT WITH PENNSYLVANIA, "COMPENSATION" FROM WHICH PENNSYLVANIA PERSONAL INCOME TAX MUST BE WITHHELD. IT IS ALSO CLEAR FROM THE ABOVE-CITED REFERENCES, PARTICULARLY REV. RUL. 57-603 AND THE COMPREHENSIVE TAX GUIDE, THAT LUMP-SUM ANNUAL LEAVE PAYMENTS ARE TREATED UNDER FEDERAL LAW AND REGULATIONS AS WAGES FOR THE YEAR OF RECEIPT. UNDER THIS APPROACH, CIRCUMSTANCES CONCERNING THE ACCRUAL OF ANNUAL LEAVE - E.G., BALANCES CARRIED FORWARD FROM A FEDERAL AGENCY NOT LOCATED IN PENNSYLVANIA OR LEAVE ACCRUING BEFORE THE EFFECTIVE DATE OF THE PENNSYLVANIA INCOME TAX LAW - ARE IMMATERIAL.

ACCORDINGLY, IT APPEARS THAT WITHHOLDING OF PENNSYLVANIA INCOME TAX IS GENERALLY REQUIRED IN MAKING LUMP-SUM ANNUAL LEAVE PAYMENTS TO EMPLOYEES SEPARATING FROM THE SERVICE. OF COURSE ANY QUESTION AS TO THE AMOUNT ACTUALLY SUBJECT TO TAX IS FOR DETERMINATION BY THE INDIVIDUAL INVOLVED AND THE COMMONWEALTH OF PENNSYLVANIA.