Microsoft Copilot: Taxability of government retirement as deferred compensation under 26 U.S.C. 864(c)(6)

By ftsig-admin | September 11, 2025

INTRODUCTION:

For more on the subject of these questions, see:

  1. Form 8275 Attachment to 1040NR for use by Retired Government Employee, FTSIG
    https://ftsig.org/form-8275-attachment-to-1040nr-for-use-by-retired-government-employee/
  2. Policy Document: Retirement and Pensions, Form #08.028
    https://sedm.org/Forms/08-PolicyDocs/RetirementAndPensions.pdf

QUESTION 1:

Below are maxims of law dealing with privileges:

“Actio personalis moritur cum persona. A personal action dies with the person. This must be understood of an action for a tort only.”

Privilegium est beneficium personale et extinguitur cum person. A privilege is a personal benefit and dies with the person. 3 Buls. 8.

[Bouvier’s Maxims of Law, 1856; https://famguardian.org/Publications/BouvierMaximsOfLaw/BouviersMaxims.htm]

Which “person” are they talking about, the OFFICE or the OFFICER? If someone receives deferred compensation for a military office they once held that is now extinguished, can financial obligations connected to the deferred compensation still lawfully exist under 26 U.S.C. 864(c)(6)?

ANSWER 1:

Let’s unpack this in two layers — first the maxims and the meaning of “person” in that context, then the deferred compensation question under 26 U.S.C. § 864(c)(6).

Which “person” do the maxims refer to — the OFFICE or the OFFICER?

The two maxims you quoted are from Bouvier’s Maxims of Law (1856):

  • Actio personalis moritur cum persona — a personal action dies with the person.
  • Privilegium est beneficium personale et extinguitur cum persona — a privilege is a personal benefit and dies with the person.

In common law, “persona” in these maxims refers to the legal person who holds the right or privilege — not the abstract office itself. But here’s the subtlety:

  • In public law, especially in the franchise/office analysis we’ve discussed before, a “person” can mean:
    • The natural human being (the officer) in their private capacity.
    • The legal/artificial person — the office or status created by law, which is a separate “person” in law.

When the maxim says a privilege “dies with the person,” it means the legal personality to which the privilege was attached. If the privilege was attached to a public office (e.g., a commissioned military officer’s statutory benefits), then when that office is extinguished, the legal person that was the office ceases to exist — and so do privileges inseparable from it.

So:

  • If the privilege is inseparable from the office, “person” = the office as a legal person.
  • If the privilege is personal to the human being (e.g., a tort claim for pain and suffering), “person” = the officer in their natural capacity.

Deferred compensation for a former military office and § 864(c)(6)

26 U.S.C. § 864(c)(6) is part of the “effectively connected income” rules for nonresident aliens and foreign corporations. It says, in essence:

Income from the performance of services in the United States is treated as U.S.-source and effectively connected even if it is received in a later year — i.e., deferred compensation — if the income is attributable to services performed in the U.S.

Key points:

  • It applies to nonresident aliens (or foreign entities) who performed services in the U.S.
  • It “catches” deferred payments so they remain taxable as U.S.-source ECI in the year received, even if the taxpayer has since left the U.S. or ceased the activity.
  • It is indifferent to whether the office still exists — it looks at when and where the services were performed.

How this interacts with the maxims

If we treat a military commission as a public office (which it is), then:

  • The office is the legal “person” that held the privilege of pay and benefits.
  • Once the office is extinguished (discharge, retirement, resignation), the privileges tied to holding that office end.
  • However — deferred compensation is not a continuing privilege of office; it is a contractual or statutory obligation that vested while the office existed.
    • In law, that obligation can survive the end of the office because it is now a chose in action (a property right) belonging to the payee, not a continuing privilege of the office.

So under § 864(c)(6):

  • If the recipient is a nonresident alien at the time of payment, and the deferred pay is attributable to services performed in the U.S. while holding the military office, the statute says it is still taxable as U.S.-source ECI in the year received.
  • The fact that the office is extinguished does not erase the taxability under § 864(c)(6), because Congress explicitly preserved the connection between the income and the original U.S. service.
  • The maxim about privileges “dying with the person” would not cancel the obligation here, because the payment is no longer a privilege of office — it is a vested contractual/statutory debt owed to the former officer.

Bottom line:

  • In the maxims, “person” can mean the legal person of the office if the privilege is attached to the office, or the natural person if it’s a purely personal right.
  • Deferred compensation for a military office is a vested right that survives the end of the office; under § 864(c)(6), if the payee is a nonresident alien, it remains taxable as U.S.-source ECI when paid, because the statute explicitly overrides the “privilege dies with the person” principle for tax purposes.

If you’d like, I can diagram this as a timeline showing:

  1. Creation of the office (privileges attach).
  2. Vesting of deferred compensation rights.
  3. Extinguishment of the office.
  4. Later payment and § 864(c)(6) tax reach.

That would make the “privilege vs. vested right” distinction visually clear. Would you like me to build that?

QUESTION 2:

Yes

ANSWER 2:

Alright — here’s the timeline diagram showing how a privilege of office (like a military commission) differs from a vested right (like deferred compensation), and how § 864(c)(6) keeps the tax hook in place even after the office itself is gone.

Timeline: Office, Privilege, and Deferred Compensation under § 864(c)(6)

Code

 ┌───────────────────────┐
 │ 1. Office Created      │
 │ (Commission Granted)   │
 └─────────┬──────────────┘
           │
           ▼
 ┌───────────────────────────────┐
 │ Privileges Attach to the      │
 │ OFFICE (legal "person")       │
 │ - Pay, allowances, benefits   │
 │ - Authority, duties           │
 └─────────┬─────────────────────┘
           │
           ▼
 ┌───────────────────────────────┐
 │ 2. Services Performed          │
 │ (While in Office)              │
 │ - Earnings accrue              │
 │ - Deferred comp rights vest    │
 │   (contract/statute)           │
 └─────────┬─────────────────────┘
           │
           ▼
 ┌───────────────────────────────┐
 │ 3. Office Extinguished         │
 │ (Retirement, discharge, etc.) │
 │ - Privileges of office end     │
 │ - Legal "person" of office     │
 │   ceases to exist              │
 └─────────┬─────────────────────┘
           │
           ▼
 ┌───────────────────────────────┐
 │ 4. Deferred Compensation Paid  │
 │ (After office ends)            │
 │ - Payment is a vested right    │
 │   of the former officer        │
 │ - No longer a "privilege"      │
 │   of the office                │
 └─────────┬─────────────────────┘
           │
           ▼
 ┌───────────────────────────────────────────────┐
 │ 5. § 864(c)(6) Tax Reach                       │
 │ - If payee is a nonresident alien, income is   │
 │   still U.S.-source & effectively connected    │
 │   because it was earned for services performed │
 │   in the U.S.                                  │
 │ - Taxability survives the end of the office    │
 └───────────────────────────────────────────────┘

Key Legal Distinctions

  • Maxims (privilegium est beneficium personale…):
    • “Person” = the legal person to which the privilege is attached.
    • If privilege is tied to the office, it dies with the office.
  • Deferred Compensation:
    • Not a continuing privilege of the office — it’s a vested contractual/statutory right earned while the office existed.
    • Survives the end of the office because it’s now a property right of the former officer.
  • § 864(c)(6):
    • Looks at where and when the services were performed, not whether the office still exists.
    • Keeps deferred pay taxable as U.S.-source ECI for nonresident aliens, even years later.

If you want, I can also overlay this with the “office vs. officer” liability chain we discussed earlier — showing how the legal “person” of the office can die, but obligations tied to vested rights can still be enforced against the natural person. That would connect the maxims, franchise theory, and § 864(c)(6) in one integrated chart. Would you like me to build that?

Posted in Artificial Intelligence (AI) Discovery, Effectively connected