77578 Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 

DEPARTMENT OF VETERANS 

AFFAIRS 

38 CFR Part 5 

RIN 2900–AL83 

Elections of Improved Pension; OldLaw and Section 306 Pension

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

SUMMARY: The Department of Veterans 

Affairs (VA) proposes to reorganize and 

rewrite in plain language its regulations 

relating to its ‘‘old-law’’ and ‘‘section 

306’’ pension programs, as well as its 

regulations concerning elections of 

improved pension. These revisions are 

proposed as part of VA’s reorganization 

of all of its compensation and pension 

regulations in a logical, claimantfocused, and user-friendly format. The 

intended effect of the proposed 

revisions is to assist readers in locating 

and understanding these regulations.

DATES: Comments must be received by 

VA on or before February 25, 2005.

ADDRESSES: Written comments may be 

submitted by: mail or hand-delivery to 

Director, Regulations Management 

(00REG1), Department of Veterans 

Affairs, 810 Vermont Avenue, NW., 

Room 1068, Washington, DC 20420; fax 

to (202) 273–9026; e-mail to 

VAregulations@mail.va.gov; or, through 

http://www.Regulations.gov. Comments 

should indicate that they are submitted 

in response to ‘‘RIN 2900–AL83.’’ All 

comments received will be available for 

public inspection in the Office of 

Regulation Policy and Management, 

Room 1063B, between the hours of 8 

a.m. and 4:30 p.m., Monday through 

Friday (except holidays). Please call 

(202) 273–9515 for an appointment.

FOR FURTHER INFORMATION CONTACT: Bill 

Russo, Chief, Regulation Rewrite Project 

(00REG2), Department of Veterans 

Affairs, 810 Vermont Avenue, NW., 

Washington, DC 20420, (202) 273–9515.

SUPPLEMENTARY INFORMATION: The 

Secretary of Veterans Affairs has 

established an Office of Regulation 

Policy and Management (ORPM) to 

provide centralized management and 

coordination of VA’s rulemaking 

process. One of the major functions of 

this office is to oversee a Regulation 

Rewrite Project (the Project) to improve 

the clarity and consistency of existing 

VA regulations. The Project responds to 

a recommendation made in the October 

2001 ‘‘VA Claims Processing Task 

Force: Report to the Secretary of 

Veterans Affairs.’’ The Task Force 

recommended that the compensation 

and pension regulations be rewritten 

and reorganized in order to improve 

VA’s claims adjudication process. 

Therefore, the Project began its efforts 

by reviewing, reorganizing and 

redrafting the regulations in 38 CFR part 

3 governing the compensation and 

pension (C&P) program of the Veterans 

Benefits Administration (VBA). These 

regulations are among the most difficult 

VA regulations for readers to 

understand and apply.

Once rewritten, the proposed 

regulations will be published in several 

portions for public review and 

comment. This is one such portion. It 

includes proposed regulations regarding 

elections of Improved pension benefits 

as well as regulations concerning two 

prior pension programs, Old-Law 

pension and Section 306 pension.

Outline 

Overview of New Part 5 Organization 

Overview of Proposed Subpart F 

Organization 

Table Comparing Current Part 3 Rules with 

Proposed Part 5 Rules 

Background of Prior Pension Programs 

Overview of Proposed Regulation Changes 

Content of Proposed Regulations 

Choosing Improved Pension over Certain 

Other VA Pension Programs: Veterans 

and Survivors

5.460 Definitions of Certain VA Pension 

Programs 

5.461 Electing Improved Pension Instead 

of Old-Law or Section 306 Pension 

5.462 Right of Surviving Spouses 

Receiving Spanish-American War Death 

Pension to Elect Improved Death Pension 

5.463 Effective Dates of Improved 

Pension Elections 

5.464 Multiple Pension Awards Not 

Payable 

Continuing Entitlement to Old-Law or 

Section 306 Pension: Veterans and 

Survivors

5.470 Reasons for Discontinuing or 

Reducing Section 306 or Old-Law 

Pension 

5.471 Annual Income Limits and Rates 

for Section 306 and Old-Law Pension 

5.472 Evaluation of Income for Section 

306 and Old-Law Pension 

5.473 Counting a Dependent’s Income for 

Section 306 and Old-Law Pension 

5.474 Deductible Expenses for Section 

306 Pension Only 

5.475 Gaining or Losing a Dependent for 

Section 306 and Old-Law Pension 

5.476 Net Worth for Section 306 Pension 

Only 

5.477 Effective Dates for Section 306 and 

Old-Law Pension Reductions or 

Discontinuances 

5.478 Time Limit to Establish Continuing 

Entitlement to Section 306 or Old-Law 

Pension 

Explanation of Additional Proposed 

Removals from Part 3 

Endnote Regarding Removals from Part 3 

Paperwork Reduction Act 

Regulatory Flexibility Act 

Executive Order 12866 

Unfunded Mandates 

Catalog of Federal Domestic Assistance 

Numbers 

List of Subjects in 38 CFR Part 5

Overview of New Part 5 Organization 

We plan to remove the compensation 

and pension benefit regulations from 38 

CFR part 3 and relocate them in new 

part 5. We also plan to reorganize the 

regulations so that all provisions 

governing a specific benefit are located 

in the same subpart, with general 

provisions pertaining to all 

compensation and pension benefits also 

grouped together. We believe this 

reorganization will allow claimants and 

their representatives, as well as VA 

personnel, to find information relating 

to a specific benefit more quickly. 

The first major subdivision would be 

‘‘Subpart A—General Provisions.’’ It 

would include information regarding 

the scope of the regulations in new part 

5, delegations of authority, general 

definitions, and general policy 

provisions for this part. 

‘‘Subpart B—Service Requirements for 

Veterans’’ would include information 

regarding a veteran’s military service, 

including the minimum service 

requirement, types of service, periods of 

war, and service evidence requirements. 

This subpart was published as proposed 

on January 30, 2004. See 69 FR 4820.

‘‘Subpart C—Adjudicative Process, 

General’’ would inform readers about 

types of claims and filing procedures, 

VA’s duties, rights and responsibilities 

of claimants, general evidence 

requirements, and general effective 

dates for new awards, as well as 

revision of decisions and protection of 

VA ratings. 

‘‘Subpart D—Dependents and 

Survivors of Veterans’’ would inform 

readers how VA determines whether an 

individual is a dependent or a survivor 

of a veteran. It would also provide the 

evidence requirements for these 

determinations. 

‘‘Subpart E—Claims for Service 

Connection and Disability 

Compensation’’ would define serviceconnected compensation, including 

direct and secondary service 

connection. This subpart would inform 

readers how VA determines entitlement 

to service connection. The subpart 

would also contain those provisions 

governing presumptions related to 

service connection, rating principles, 

and effective dates, as well as several 

special ratings. This subpart will be 

published as three separate Notices of 

Proposed Rulemaking (NPRMs) due to 

its size. The first, concerning 

presumptions related to service 

Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 77579

connection, was published on July 27, 

2004. See 69 FR 44614. 

‘‘Subpart F—Nonservice-Connected 

Disability Pensions and Death 

Pensions’’ would include information 

regarding the three types of nonserviceconnected pension: Improved pension, 

Old-Law pension, and Section 306 

pension. This subpart would also 

include those provisions that state how 

to establish entitlement to Improved 

pension, and the effective dates 

governing each pension. The portion 

concerning Old-Law and Section 306 

pension and elections of Improved 

pension is the subject of this document. 

A subsequent NPRM will cover 

Improved pension. 

‘‘Subpart G—Dependency and 

Indemnity Compensation, Death 

Compensation, Accrued Benefits, and 

Special Rules Applicable Upon Death of 

a Beneficiary’’ would contain 

regulations governing claims for 

dependency and indemnity 

compensation (DIC); death 

compensation; accrued benefits; benefits 

awarded, but unpaid at death; and 

various special rules that apply to the 

disposition of VA benefits, or proceeds 

of VA benefits, when a beneficiary dies. 

This subpart would also include related 

definitions, effective-date rules, and 

rate-of-payment rules. This subpart will 

be published as two separate NPRMs 

due to its size. The portion concerning 

accrued benefits, special rules 

applicable upon the death of a 

beneficiary, and several effective date 

rules, was published as proposed on 

October 1, 2004. See 69 FR 59072. The 

portion concerning DIC benefits and 

general provisions relating to proof of 

death and service-connected cause of 

death will be the subject of a separate 

NPRM. 

‘‘Subpart H—Special and Ancillary 

Benefits for Veterans, Dependents, and 

Survivors’’ would pertain to special and 

ancillary benefits, including benefits for 

children with various birth defects. 

‘‘Subpart I—Benefits for Certain 

Filipino Veterans and Survivors’’ would 

pertain to the various benefits available 

to Filipino veterans. 

‘‘Subpart J—Burial Benefits’’ would 

pertain to burial allowances. 

‘‘Subpart K—Matters Affecting 

Receipt of Benefits’’ would contain 

provisions regarding bars to benefits, 

forfeiture of benefits, and renouncement 

of benefits. 

‘‘Subpart L—Payments and 

Adjustments to Payments’’ would 

include general rate-setting rules, 

several adjustment and resumption 

regulations, and election-of-benefit 

rules. 

The final subpart, ‘‘Subpart M—

Apportionments and Payments to 

Fiduciaries or Incarcerated 

Beneficiaries’’ would include 

regulations governing apportionments, 

benefits for incarcerated beneficiaries, 

and guardianship. 

Some of the regulations in this NPRM 

cross-reference other compensation and 

pension regulations. If those regulations 

have been published in this or earlier 

NPRMs for the Project, we cite the 

proposed part 5 section. We also 

include, in the relevant portion of the 

Supplementary Information, the Federal 

Register page where a proposed part 5 

section published in an earlier NPRM 

may be found. However, where a 

regulation proposed in this NPRM 

would cross-reference a proposed part 5 

regulation that has not yet been 

published, we cite to the current part 3 

regulation that deals with the same 

subject matter. The current part 3 

section we cite may differ from its 

eventual part 5 replacement in some 

respects, but we believe this method 

will assist readers in understanding 

these proposed regulations where no 

part 5 replacement has yet been 

published. If there is no part 3 

counterpart to a proposed part 5 

regulation that has not yet been 

published, we have inserted 

‘‘[regulation that will be published in a 

future Notice of Proposed Rulemaking]’’

where the part 5 regulation citation 

would be placed. 

Because of its large size, proposed 

part 5 will be published in a number of 

NPRMs, such as this one. VA will not 

adopt any portion of part 5 as final until 

all of the NPRMs have been published 

for public comment. 

In connection with this rulemaking, 

VA will accept comments relating to a 

prior rulemaking issued as part of the 

Project, if the matter being commented 

on relates to both NPRMs. VA will 

provide a separate opportunity for 

public comment on each segment of the 

proposed part 5 regulations before 

adopting a final version of part 5. 

Overview of Proposed Subpart F 

Organization

This NPRM proposes regulations 

governing elections of Improved 

pension and the requirements for 

maintaining entitlement to old-law or 

section 306 pension. These regulations 

would be contained in proposed subpart 

F of new 38 CFR part 5. Although these 

regulations have been substantially 

restructured and rewritten for greater 

clarity and ease of use, most of the basic 

concepts contained in these proposed 

regulations are the same as in their 

existing counterparts in 38 CFR part 3. 

In a future NPRM, we will propose 

regulations concerning the Improved 

pension program. 

Table Comparing Current Part 3 Rules 

With Proposed Part 5 Rules 

The following table shows the 

relationship between the current 

regulations in part 3 and those proposed 

or redesignated regulations contained in 

this NPRM:

Proposed part 5 section or paragraph 

Based in whole or in 

part on 38 CFR part 3 

section or paragraph 

(or ‘‘new’’) 

5.460 ......................... 3.1(u), (v), (x) 

5.461(a) and (b) ........ 3.711 

5.461(b)(1) through 

(b)(3).

New 

5.461(c) ..................... 3.711 

5.461(d) ..................... 3.960(a) 

5.462 ......................... 3.712(a) 

5.463 ......................... 3.713(a) 

5.464 ......................... 3.700(a)(4) 

5.470(a) ..................... 3.960(b), 3.252(a), (b) 

5.470(b) ..................... 3.960(d) 

5.470(c) ..................... 3.960(c) 

5.471 ......................... 3.28 

5.472(a) ..................... 3.262(b) 

5.472(b)(1) and (2) .... 3.252(c); 3.262(a) 

5.472(b)(2)(i) and (ii) 3.262(h) 

5.472(b)(3) ................ 3.260(g) 

5.472(b)(4) ................ Introduction to 3.260, 

3.660(a)(4) 

5.472(c)(1) ................. 3.262(a)(2), (3) 

5.472(c)(2) ................. 3.262(j)(4) 

5.472(c)(3) ................. 3.261(a)(22), 

3.262(a)(1) 

5.472(d)(1) and (d)(2) 3.262(k)(1), (k)(2) 

5.472(d)(3) ................ 3.262(a) 

5.472(d)(4) ................ 3.262(k)(1) 

5.472(d)(5) ................ 3.262(k)(3) 

5.472(d)(6) ................ 3.262(k)(4) 

5.472(d)(7) ................ 3.262(k)(5) 

5.472(e) ..................... 3.261(a)(20) 

5.472(f)(1) ................. 3.262(c) 

5.472(f)(2) ................. 3.262(r) 

5.472(f)(3) ................. 3.261(a)(12) 

5.472(f)(4) ................. 3.261(a)(13) 

5.472(f)(5) ................. 3.261(a)(31) 

5.472(f)(6) ................. 3.262(t), (t)(2) 

5.472(f)(7) ................. 3.261(a)(20) 

5.472(f)(8) ................. 3.261(a)(7) 

5.472(f)(9) ................. 3.262(a)(2) 

5.472(f)(10) ............... 3.261(a)(26) 

5.472(f)(11) ............... 3.261(a)(22) 

5.472(f)(12) ............... 3.262(e), (e)(1), 

(e)(2), (f), (g), (i)(2), 

(j)(1), (j)(2), (j)(3) 

5.472(f)(13) ............... New 

5.472(g)(1) ................ 3.262(d), (f) 

5.472(g)(2) ................ 3.262(f) 

5.472(g)(3) ................ 3.262(k)(1) 

5.472(h) ..................... 3.262(d) 

5.473(a) ..................... 3.262(b)(2) 

5.473(b)(1) ................ New 

5.473(b)(2) ................ 3.262(b)(2) 

5.473(c) ..................... 3.252(e) 

5.473(d) ..................... 3.261(a)(4) 

5.474(a) ..................... 3.960(a) 

5.474(b) ..................... 3.262(l), 3.262(l)(1), 

(l)(2), (l)(3) 

5.474(c) ..................... 3.262(n), (p) 

77580 Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 

Proposed part 5 section or paragraph 

Based in whole or in 

part on 38 CFR part 3 

section or paragraph 

(or ‘‘new’’) 

5.474(d) ..................... 3.262(k)(6) 

5.475(a) ..................... 3.260(a), (f) 

5.475(b) ..................... 3.260(f), 3.252(e)(4) 

5.475(c) ..................... 3.252(d) 

5.476 ......................... 3.263 

5.477(a) ..................... 3.660(a)(2) 

5.477(b) ..................... 3.500, 3.501, 3.502, 

3.503 

5.478(a) ..................... 3.260(b) 

5.478(b) ..................... 3.660(b)(1) 

5.478(c) ..................... 3.960(d) 

Readers who use this table to compare 

existing regulatory provisions with the 

proposed provisions, and who observe a 

substantive difference between them, 

should consult the text that appears 

later in this document for an 

explanation of significant changes in 

each regulation. Not every paragraph of 

every current part 3 section affected by 

these proposed regulations is accounted 

for in the table. In some instances, other 

portions of the part 3 sections that are 

contained in these proposed regulations 

will appear in subparts of part 5 that are 

being published separately for public 

comment. For example, a reader might 

find a reference to paragraph (a) of a 

part 3 section in the table, but no 

reference to paragraph (b) of that section 

because paragraph (b) will be addressed 

in a separate NPRM. The table also does 

not include material from the current 

sections that will be removed from part 

3 and not carried forward to part 5. A 

listing of material VA proposes to 

remove from part 3 appears later in this 

document. 

Background of Prior Pension Programs 

‘‘Old-law pension’’ refers to the 

nonservice-connected disability and 

death pension programs that were 

available to claimants before July 1, 

1960. These programs were superseded 

by the ‘‘Veterans’ Pension Act of 1959.’’

Public Law 86–211, 73 Stat. 432. 

However, section 9(b) of that Act 

protected the right of people receiving 

pension under the ‘‘old law’’ programs 

to continue receiving pension under the 

laws in effect on June 30, 1960. 

‘‘Section 306’’ pension refers to the 

nonservice-connected disability and 

death pension programs that were 

available to claimants on or after July 1, 

1960, and through December 31, 1978. 

Sometimes also referred to as ‘‘86–211 

pension,’’ or ‘‘306 pension,’’ Section 306 

pension arose out of Public Law 86–211. 

VA has adopted the name ‘‘Section 306’’

to refer to these programs because it was 

section 306 of the ‘‘Veterans’ and 

Survivors’ Pension Improvement Act of 

1978,’’ Public Law 95–588, 92 Stat. 

2508, that grandfathered rates paid 

under both section 306 and old-law 

pension. 

Sections 306(a)(1) and (b)(2) of Public 

Law 95–588 provide that any person 

entitled to receive VA pension under 

the prior pension laws as in effect on 

December 31, 1978, can elect to receive 

Improved pension instead. For any 

individual who is eligible to make an 

election but does not do so, sections 

306(a)(2) and (b)(3) grandfather in the 

current rates paid by providing that:

[Such] person * * * shall continue to 

receive pension at the monthly rate being 

paid to such person on December 31, 1978, 

subject to all provisions of law applicable to 

basic eligibility for and payment of pension 

under [such person’s pension program], as in 

effect on December 31, 1978, [subject to 

income limits specified for that pension 

program].

Public Law 95–588, § 306(a)(2). A 

virtually identical grandfather clause is 

contained in section 306(b)(3). 

Sections 306(a)(3) and (b)(4) go on to 

provide for automatic increases in the 

annual income limits and the spousal 

income exclusion by the same 

percentage as the automatic cost-ofliving adjustments under the Improved 

pension program. 

A claimant cannot establish new 

entitlement to either Section 306 or OldLaw pension; once a beneficiary loses 

entitlement under either of these 

programs, the only pension program for 

which VA may consider entitlement is 

Improved pension under Public Law 

95–588. 

Before 1998, VA required recipients of 

Section 306 or Old-Law pension to 

submit annual eligibility verification 

reports (EVRs) to VA under current 38 

CFR 3.256. However, VA no longer 

requires annual EVRs from this group of 

beneficiaries. According to VA’s Office 

of Policy, Planning, and Preparedness, 

as of January 2004, there were 179 

veterans receiving Old-Law disability 

pension, 618 surviving spouses and/or 

children receiving Old-Law death 

pension, 13,523 veterans receiving 

Section 306 disability pension, and 

52,832 surviving spouses and/or 

children receiving Section 306 death 

pension. 

Overview of Proposed Regulation 

Changes 

Several current regulations from 

which these proposed regulations are 

derived apply to more than one needbased program in effect before January 

1, 1979. These programs include OldLaw pension, Section 306 pension, and 

parents’ DIC, as well as regulations for 

establishing the dependency of parents. 

Because of the benefit-based structure of 

proposed part 5, we propose to divide 

these current part 3 regulations into 

separate part 5 regulations, each 

addressing a different type of benefit. 

This NPRM pertains to Old-Law and 

Section 306 pension and not to parents’

DIC or establishing the dependency of 

parents. Future NPRMs will address 

these current part 3 regulations as they 

pertain to parents’ DIC and establishing 

the dependency of parents. 

Content of Proposed Regulations 

Choosing Improved Pension Over 

Certain Other VA Pension Programs: 

Veterans and Survivors 

5.460 Definitions of Certain VA 

Pension Programs 

Proposed § 5.460 is based on current 

§ 3.1(u), (v), and (x). The current 

regulation describes various types of VA 

pensions in terms of when the pensions 

were ‘‘in effect.’’ Paragraphs (a) and (b) 

of proposed § 5.460 amend current 

§ 3.1(u) and (v) to describe the VA 

pensions in terms of the time periods 

during which those pensions were 

‘‘available to new claimants.’’ We 

believe this is clearer because these 

pensions are still ‘‘in effect’’ in the 

limited sense that beneficiaries continue 

to receive them.

Proposed paragraph (c) defines 

‘‘Spanish-American War death pension’’

instead of ‘‘service pension,’’ which is 

defined in § 3.1(x), because to our 

knowledge there are no surviving 

veterans of the Spanish-American War. 

5.461 Electing Improved Pension 

Instead of Old-Law or Section 306 

Pension 

Proposed § 5.461 is based on current 

§§ 3.711 and 3.960(a). Proposed § 5.461 

includes a parenthetical reference to the 

word ‘‘choose’’ immediately after the 

more technical term ‘‘elect’’ in the 

heading to proposed paragraph (a) and 

the first time that the word ‘‘elect’’

appears in the regulation text. The 

parenthetical reference provides a plainlanguage synonym for the technical 

term, ‘‘elect.’’

The first sentence of current § 3.711 

states that individuals who are eligible 

to elect Improved pension may do so 

‘‘under the provisions of 38 U.S.C. 1521, 

1541, or 1542 as in effect on January 1, 

1979.’’ We propose to remove this 

phrase. Instead, proposed § 5.461 

simply refers to Improved pension. We 

believe that removing the phrase makes 

the proposed regulation clearer. We note 

that the regulations pertaining to 

Improved pension would immediately 

precede the regulations pertaining to 

Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 77581

elections of Improved pension in new 

part 5. 

Current § 3.711 provides that unless 

the provisions of current § 3.714 apply, 

an election of Improved pension is final 

when the payee or his or her fiduciary 

negotiates one check for this benefit. We 

propose to remove this reference to 

§ 3.714 because we are proposing to 

remove § 3.714. The proposed removal 

of § 3.714 is described later in this 

NPRM. We propose to add three 

circumstances under which an election 

may be canceled. All of these 

circumstances are matters of 

longstanding VA policy, are reasonable, 

and are helpful to VA beneficiaries. 

First, because the vast majority of VA 

beneficiaries now receive benefits by 

direct deposit and the current regulation 

that states when an election becomes 

final is based on negotiation of a check, 

proposed paragraph (b)(1) states that 

beneficiaries who receive benefits by 

direct deposit may cancel an election of 

Improved pension if the beneficiary 

informs VA of a desire to cancel the 

election before the financial institution 

receives the second direct deposit 

payment. 

Second, proposed paragraph (b)(2) 

states that if VA later determines that 

the beneficiary was incompetent when 

he or she elected Improved pension, the 

election can be canceled if the 

beneficiary or his or her guardian 

cancels the election within one year 

after the date the election became 

effective. 

Finally, proposed paragraph (b)(3) 

states that a beneficiary can cancel an 

election within one year after the 

effective date of the election if he or she 

elected Improved pension based on 

erroneous information that VA 

provided. However, VA must determine, 

based on the same evidence of record, 

that it provided the beneficiary with 

erroneous information. One example of 

this rule’s application would be if VA 

mistakenly informed the beneficiary 

that he or she would be entitled to a 

higher rate upon election of Improved 

pension and later VA determines that 

this was not the case, based on the same 

evidence of record at the time VA 

mistakenly informed the beneficiary of 

his or her entitlement to a higher rate. 

Proposed § 5.461(d) is based on 

§ 3.960(a), which currently provides that 

beneficiaries who do not elect Improved 

pension will continue to receive section 

306 or old-law pension at the rate 

payable on December 31, 1978, unless 

that rate must be reduced or 

discontinued as provided in § 3.960(b) 

and (c). Current paragraph § 3.960(a) is 

incomplete in implying that the reasons 

provided in paragraphs (b) and (c) are 

the only situations in which a Section 

306 pension or Old Law pension rate 

might be reduced. Current § 3.551, for 

example, provides for reductions when 

certain beneficiaries are hospitalized at 

VA expense. Therefore, proposed 

§ 5.461(d) states that in the absence of 

an election, the December 31, 1978, rate 

will continue ‘‘unless that rate must be 

reduced or discontinued under § 5.470 

or another regulation in this part.’’

5.462 Right of Surviving Spouses 

Receiving Spanish-American War Death 

Pension to Elect Improved Death 

Pension 

Proposed § 5.462 is derived from 

current § 3.712(a). Proposed § 5.462 

states that the regulations governing 

finality of election under proposed 

§ 5.461(b) also apply to surviving spouse 

beneficiaries of Spanish-American War 

death pension who elect Improved 

death pension. This is longstanding VA 

policy. Proposed § 5.461(d) does not 

apply to surviving spouses of SpanishAmerican War veterans because 

Spanish-American War death pension is 

not based on income or net worth but 

on the veteran’s service only. The 

proposed regulation states that these 

surviving spouses who do not elect 

Improved pension will continue to 

receive Spanish-American War death 

pension. 

We propose to remove the statutory 

references to 38 U.S.C. 1536 and 1541, 

and instead refer to Spanish-American 

War death pension and Improved death 

pension. We believe that removing these 

statutory references makes the 

regulation easier to understand. 

5.463 Effective Dates of Improved 

Pension Elections 

Proposed § 5.463 is derived from 

current § 3.713(a) and states that an 

election of Improved pension will be 

effective on the date that VA receives it. 

5.464 Multiple Pension Awards Not 

Payable 

Proposed § 5.464 is derived from 

§ 3.700(a)(4) without any substantive 

changes. 

Continuing Entitlement to Old-Law or 

Section 306 Pension: Veterans and 

Survivors 

5.470 Reasons for Discontinuing or 

Reducing Section 306 or Old-Law 

Pension

Proposed § 5.470 is derived from 

current § 3.960(b) through (d). We 

propose to replace the current word 

‘‘terminate’’ and all its iterations with 

the word ‘‘discontinue’’ and all its 

iterations. Throughout all of part 5, the 

Project proposes to use the word 

‘‘discontinue’’ instead of ‘‘terminate’’ in 

reference to ending VA benefits because 

we believe the word ‘‘terminate’’ has an 

adversarial connotation. While one 

could argue that the word ‘‘terminate’’

better describes the finality of losing 

entitlement to prior pension than the 

word ‘‘discontinue,’’ we wish to remain 

consistent in our terminology to the 

extent possible. More significantly, we 

note that the word ‘‘discontinuance’’ in 

reference to ending a beneficiary’s 

entitlement is statutory. See 38 U.S.C. 

5112. 

Proposed § 5.470(c), based on current 

§ 3.960(c), states that VA will reduce 

pension based on the loss of a 

dependent if the dependent was 

established before January 1, 1979. The 

regulation need only cover dependents 

established before that date because 

section 306 and old-law pension rates 

are based on calendar year 1978 

dependency and income. Pension rates 

under these programs do not increase 

when a dependent is established on or 

after January 1, 1979. Proposed 

§ 5.470(c) clarifies that reductions due 

to the loss of a dependent are final and 

such reduced rates do not increase. 

5.471 Annual Income Limits and Rates 

for Section 306 and Old-Law Pension 

The proposed regulation, § 5.471, is 

derived from current § 3.28. 

Proposed paragraph (a) informs 

readers that annual income limits as 

well as historical pension rates are 

available on VA’s Web site, http://

www.VA.gov.

Rather than referring to increasing 

annual income limits ‘‘by reason of the 

provisions of 38 U.S.C. 5312,’’ as 

current § 3.28 does, proposed § 5.471(b) 

refers instead to the cost-of-living 

increase in Social Security benefit 

amounts. We believe this reference is 

more familiar to readers and 

incorporates the provisions of 38 U.S.C. 

5312. We note that current § 3.27 refers 

to the Social Security cost-of-living 

increase rather than to 38 U.S.C. 5312. 

5.472 Evaluation of Income for Section 

306 and Old-Law Pension 

Current §§ 3.261 and 3.262 provide 

the regulatory framework VA uses to 

determine how to calculate income for 

purposes of section 306 pension, oldlaw pension, dependency of a parent, 

and parents’ DIC. Because those sections 

deal with the evaluation of income in 

different contexts, they are lengthy and 

complex. As a result, they can be 

difficult to understand and use. We 

propose to divide the subject matter 

addressed by current §§ 3.261 and 3.262 

into separate regulations pertaining to 

these three subjects—dependency of a 

77582 Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 

parent, parents’ DIC, and section 306 

and old-law pension. Because income 

determinations for section 306 and oldlaw pension are similar in many 

respects, we propose to continue to 

combine the regulations for these 

programs. Proposed § 5.472 deals only 

with evaluation of income for section 

306 and old-law pension. Income 

regulations for dependency of a parent 

and parents’ DIC will be addressed in 

other NPRMs. 

Proposed § 5.472(b) states the basic 

rule that VA must count all payments of 

any kind from any source in 

determining income. Beginning with 

this basic rule permits simplification of 

the proposed regulation because the allinclusive nature of the basic rule 

eliminates the need to catalog types of 

countable income. All income counts 

unless there is a specific exclusion. 

Therefore, we propose to remove the 

first sentence of current § 3.262(j)(2). A 

discussion of our proposed removal of 

current § 3.261 and additional removals 

from § 3.262 are later in this NPRM 

under ‘‘Explanation of Additional 

Proposed Removals from Part 3.’’

Proposed § 5.472(b)(3) clarifies that 

VA rounds down after subtracting 

deductible expenses from countable 

income. 

Proposed § 5.472(b)(4) incorporates 

the introductory language of current 

§ 3.260, but clarifies that although VA 

computes income for the year of receipt, 

VA does not discontinue benefits based 

on income that exceeds the income limit 

until the beginning of the following 

calendar year. 

While VA counts all income except 

where there is specific authority to 

exclude it, VA permits deductions from 

countable income in some instances. 

That is, the amount of income 

ultimately counted is the difference 

between income and certain deductible 

expenses directly associated with that 

income. Proposed paragraph (c) lists 

permitted deductions from particular 

income sources. Deductions from all 

income sources for section 306 pension 

purposes are contained in a separate 

regulation, proposed § 5.474. 

Proposed § 5.472(c)(1) continues a 

rule in current § 3.262(a)(2) that permits 

the deduction of expenses incident to 

the operation of businesses and 

professions from income from those 

sources. We propose to clarify that 

‘‘business’’ includes the operation of a 

farm and transactions involving 

investment property. Because of this 

definitional change, it is only necessary 

to state in § 5.472(c)(1) that losses 

sustained in operating a business or 

profession may not be deducted from 

income from any other source. This is 

consistent with the rule in current 

§ 3.262(a)(3) that states that ‘‘[a] loss 

sustained in operating a business, 

profession, or farm or from investments 

may not be deducted from income 

derived from any other source.’’ Note 

also that current § 3.262(a)(3) implies 

that investment income is counted and 

that current § 3.262(k)(5) provides, with 

respect to section 306 pension, that 

profit from the sale of nonbusiness 

property is not counted. With respect to 

investments, VA only counts income 

when the investment property is sold 

and does not constantly adjust income 

based on increases or decreases in the 

market value of investment property 

due to market fluctuations. Therefore, 

VA essentially already treats investment 

transactions as business transactions.

Proposed § 5.472(c)(2) continues a 

provision in current § 3.262(j)(4) that 

permits deduction of related medical, 

legal, or other expenses from sums 

recovered under disability, accident, or 

health insurance. Of course, the same 

expenses cannot be deducted twice. 

Therefore, we propose to state in 

§ 5.472(c)(2) that if medical expenses are 

deducted under that paragraph, they 

cannot be deducted as unusual medical 

expenses under § 5.474. 

Proposed § 5.472(d) provides the rules 

VA uses to determine whether income 

from property is the income of a 

pension beneficiary (or a veteran’s 

spouse for Section 306 pension 

purposes). Property ownership is an 

important indicator of the right to 

income from that property, but it is not 

always controlling. In keeping with 

longstanding VA practice, we propose to 

state in paragraph (d)(3) that if a 

beneficiary transfers ownership of 

income-producing property to another 

person or legal entity, but retains the 

right to that income, the income will be 

counted. 

Current § 3.262(k)(1) provides, in part, 

that ‘‘if property is owned jointly each 

person will be considered as owning a 

proportionate share.’’ The claimant’s 

share of property held in partnership 

will be determined on the facts found.’’

Current § 3.262(k)(2) provides, in part, 

that the claimant’s share of ‘‘[i]ncome 

received from real or personal property 

* * * will be determined in proportion 

to his right according to the rules of 

ownership.’’ We propose to combine 

and simplify these provisions in 

proposed § 5.472(d)(4) by stating: 

‘‘[w]here a pension beneficiary owns 

property jointly with others, including 

partnership property, each person will 

be considered as receiving an equal 

share of the income from that property 

in the absence of evidence showing 

otherwise.’’ (Pension beneficiaries may 

submit evidence showing that they 

receive a greater or lesser share of the 

income.) We believe this will be much 

easier for beneficiaries to understand. 

Proposed paragraph (d)(5), based on 

applicable portions of current 

§ 3.262(k)(3) and (4), provides an 

exclusion for an old-law pension 

beneficiary’s net profit from the sale of 

a principal residence when that profit is 

used to purchase another principal 

residence within specified time 

constraints. Current § 3.262(k)(3), 

provides in part:

In determining net profit from the sale of 

property owned prior to the date of 

entitlement, the value at the date of 

entitlement will be considered in relation to 

the selling price. Where payments are 

received in installments, payments will not 

be considered income until the claimant has 

received amounts equal to the value of the 

property at the date of entitlement.

Because, under the current regulation, 

the basis for calculating net profit on the 

sale of a residence is only the value at 

the date of entitlement if the pension 

beneficiary owned the property before 

the date he or she became entitled to 

pension, the basis for calculating the net 

profit on the sale of a residence acquired 

after the date of entitlement would be its 

cost. We propose to clarify that in the 

installment sale provision set out in 

proposed § 5.472(d)(5)(iii).

Proposed § 5.472(e) is an exception to 

our general guideline that we list only 

exclusions and not income that counts. 

Because there are many different VA 

benefits, most of which are excluded for 

prior pension purposes, we believe it 

would be simpler in this instance to list 

the VA benefits that count rather than 

those that don’t. 

Although VA insurance payments are 

excluded from income under proposed 

§ 5.472(e) because they may be 

considered VA benefits, proposed 

paragraph (f)(7) specifically provides 

that payments under policies of 

Servicemembers’ Group Life Insurance, 

United States Government Life 

Insurance, and National Service Life 

Insurance do not count as income in 

order to make sure that it is clear that 

these payments are not considered 

income for VA purposes. 

Most of the income exclusions that 

apply to both Section 306 and Old-Law 

pension are listed in proposed 

§ 5.472(f). In proposed paragraph (f)(3), 

we propose to change the description 

from ‘‘six-months’ death gratuity’’ as it 

is in current § 3.261(a)(12), to ‘‘death 

gratuity payments under 10 U.S.C. 1475 

through 1480.’’ The phrase ‘‘six-months’

death gratuity’’ is obsolete. Although the 

gratuity consisted of six-months’ pay 

when Congress originally authorized VA 

Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 77583

to pay this benefit (see Public Law 66–

99, 41 Stat. 367 (1919)), that is no longer 

the case. Over the years, these death 

gratuity payments have evolved into a 

fixed sum, rather than an amount equal 

to six-months’ pay. See 10 U.S.C. 1478. 

Current § 3.261(a)(7) states that VA 

will not count as income, ‘‘Rental value 

of property owned and resided in by 

claimant.’’ The intent of the regulation 

is to make it plain that VA will not 

impute a rental value to a pension 

beneficiary’s own property and count 

that value as income. However, if a 

beneficiary resides in a duplex, for 

example, VA would count any rent that 

the beneficiary receives. We propose to 

clarify any potential confusion by 

stating in proposed § 5.472(f)(8) that the 

exclusion is for ‘‘[t]he rental value of a 

beneficiary’s use of his or her own real 

property, such as the rental value of the 

beneficiary’s personal residence.’’

Proposed § 5.472(f)(12) combines all 

of the various § 3.262 ten percent 

exclusions in one place. One of these 

10-percent exclusions, found at current 

§ 3.262(i)(2), is for certain payments 

received from the ‘‘Bureau of 

Employees’ Compensation.’’ The Bureau 

of Employees’ Compensation was 

abolished in 1974. See 20 CFR 1.5. Its 

functions are now carried out by the 

Office of Workers’ Compensation 

Programs of the U.S. Department of 

Labor. See 20 CFR 1.6(b). This change 

would be reflected in proposed 

paragraph (f)(12)(iv). 

In a future NPRM, we plan to propose 

a new regulation to be contained in 

proposed subpart L of proposed new 

part 5. The new regulation would list all 

income sources and assets that are 

statutorily excluded in determining 

entitlement to all need-based programs 

that VA administers. This separate 

regulation is the future regulation 

mentioned in proposed § 5.472(f)(13).

These broad exclusions that will be 

addressed in a future NPRM are 

therefore not specifically listed in 

proposed § 5.472. These include some of 

the income exclusions that currently 

appear in §§ 3.261 and 3.262. These are 

Agent Orange settlement payments, 

certain relocation payments, annuity 

payments elected under the Retired 

Serviceman’s Family Protection Plan, 

restitution to individuals of Japanese 

ancestry, income received by American 

Indian beneficiaries from trust or 

restricted lands, payments under the 

Alaska Native Claims Settlement Act, 

payments from certain volunteer 

programs, Victims of Crime Act of 1984 

payments, and monetary allowances 

under 38 U.S.C. chapter 18 for certain 

children of veterans who served in 

Vietnam and Korea. 

5.473 Counting a Dependent’s Income 

for Section 306 and Old-Law Pension 

Proposed § 5.473 is derived from 

those portions of §§ 3.252, 3.261, and 

3.262 that pertain to counting income of 

dependents. Other portions of current 

§ 3.252 no longer apply to section 306 

or old-law pension and we propose to 

remove them. These removals are 

discussed later in this NPRM under 

‘‘Explanation of Additional Proposed 

Removals from Part 3.’’

Proposed paragraphs (a) and (b) of 

proposed § 5.473 state that VA excludes 

the separate income of a veteran’s child 

for both old-law and section 306 

pension purposes. This is not a change 

and is implied in the current regulation, 

although not explicitly stated. However, 

because VA’s Improved pension 

program counts children’s income as a 

veteran’s or surviving spouse’s income 

in most cases, it is helpful to state 

explicitly that children’s income doesn’t 

count for purposes of calculating 

income for veterans who are receiving 

prior pension. 

Current § 3.262(b)(2) provides that VA 

presumes that including a veteran’s 

spouse’s income would not cause 

hardship to the veteran unless there is 

evidence showing expenses ‘‘beyond the 

usual family requirements.’’ Proposed 

§ 5.473(b)(2)(i)(B) provides two 

examples of such expenses’special 

training for a handicapped child and 

expenses for the prolonged illness of a 

family member. However, if the 

spouse’s income is excluded because it 

is needed to pay for unusual medical 

expenses, those medical expenses 

cannot be used as deductible medical 

expenses. This is longstanding VA 

policy that we propose to include in the 

regulation. 

5.474 Deductible Expenses for Section 

306 Pension Only 

Proposed § 5.474 is based on the 

portions of current § 3.262 that pertain 

to expenses that may be deducted from 

all countable income. However, these 

deductions apply only to section 306 

pension and not to old-law pension. 

Proposed § 5.474(a) states that 

deductible expenses paid after 

December 31, 1978, can only be used to 

continue entitlement to section 306 

pension in order to make that fact more 

clear. They cannot be used to increase 

pension benefits because Public Law 

95–588 provides that rates paid under 

the prior pension programs cannot 

increase. See current § 3.960(a). 

Proposed § 5.474(b)(1)(i) describes a 

‘‘family member’’ for Section 306 

pension purposes. Currently, § 3.263 

cross-references § 3.250 for the 

description of a family member, while 

paragraphs (l)(1) and (2) of § 3.262 use 

similar language to describe such 

relatives. We therefore propose to 

incorporate this description of a ‘‘family 

member’’ for Section 306 pension 

purposes as ‘‘a relative of the 

beneficiary who is a member of the 

beneficiary’s household whom the 

beneficiary has a moral or legal 

obligation to support. This includes 

family members who are physically 

absent from the household for a 

temporary purpose or for reasons 

beyond their control.’’

In a future NPRM, we plan to propose 

a new regulation pertaining to Section 

306 pension to be contained in 

proposed subpart L of proposed new 

part 5. This new regulation would 

provide a comprehensive explanation of 

what constitutes a ‘‘medical expense’’

for the purpose of all VA-administered 

need-based benefits. Therefore, we 

propose to remove the phrase currently 

found in § 3.262(l), ‘‘[h]ealth, accident, 

sickness and hospitalization insurance 

premiums will be included as medical 

expenses * * *.’’ Instead, proposed 

§ 5.474(b)(1)(ii) refers the reader to the 

new regulation.

Proposed § 5.474(b)(6) is based on the 

last sentence of current § 3.262(l), which 

states that VA will estimate future 

medical expenses and then adjust them, 

if necessary, upon receipt of an 

amended estimate or at the end of the 

year when the beneficiary files an 

‘‘income questionnaire.’’ The income 

questionnaire was the method of income 

reporting before the advent of Eligibility 

Verification Reports (EVRs) in 1985. 

However, recipients of Section 306 

pension have not been required to 

complete annual EVRs since the end of 

calendar year 1997 because on October 

6, 1998, VA amended § 3.256(b)(2) so 

that old-law and section 306 pension 

beneficiaries are not required to submit 

EVRs unless VA determines that doing 

so is necessary to preserve program 

integrity. 63 FR 53593 (Oct. 6, 1998). 

Therefore, we propose to remove the 

reference to the income questionnaire, 

and instead provide a cross-reference to 

the regulation that would replace 

current §§ 3.256 and 3.660(a), which 

would state that pension beneficiaries 

must inform VA if there is a change in 

income. 

Proposed § 5.474(c)(1) defines ‘‘final 

expenses’’ as the amount an individual 

pays for a deceased individual’s last 

illness and burial. We believe that 

having a definition makes the regulation 

clearer. We also propose to state that VA 

cannot allow the same expense as both 

a final expense and an unusual medical 

77584 Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 

expense in order to make this 

longstanding policy clearer to readers. 

5.475 Gaining or Losing a Dependent 

for Section 306 and Old-Law Pension 

Proposed § 5.475 differs from current 

§ 3.260 because most of current § 3.260 

no longer applies to pension awards. 

Paragraphs (a)(2) and (b)(3) of section 

306, Public Law 95–588, provide that 

VA generally continues to pay the 

December 31, 1978, rate to beneficiaries 

of section 306 or old-law pension. A 

future NPRM will address § 3.260 as it 

applies to parents’ DIC. 

Paragraphs (a) and (b) of proposed 

§ 5.475 explain the steps VA takes when 

a section 306 or old-law pension 

beneficiary gains or loses a dependent. 

These proposed paragraphs are based on 

current § 3.260(f), which pertains to rate 

changes for pension and parents’ DIC. 

However, VA does not generally change 

section 306 and old-law pension rates 

unless the beneficiary loses a dependent 

who was established for VA purposes 

before January 1, 1979. In such cases, 

VA reduces, discontinues, or keeps rates 

the same but does not increase pension 

rates. (VA must also change pension 

rates when current § 3.551 pertaining to 

hospital adjustments applies. Another 

exception would be a hypothetical case 

in which VA computed 1978 annual 

income incorrectly and amended 1978 

income to pay a different ‘‘protected’’

rate.) 

Proposed § 5.475(a)(2) states that if a 

veteran beneficiary of section 306 

pension gains a spouse, VA will not 

consider income that the spouse 

received or deductible expenses paid by 

or on behalf of the spouse before the 

date the person became the veteran’s 

spouse for VA purposes. We believe this 

is fair to claimants and relatively easy 

to administer, while remaining 

consistent with statutory provisions that 

a spouse’s income must be counted. We 

believe that a spouse’s income cannot 

reasonably be assumed to be that of the 

veteran before the date the person 

becomes the veteran’s spouse for VA 

purposes. The proposed regulation is 

also consistent with longstanding VA 

practice. 

Proposed § 5.475(b)(1) clarifies that 

when a section 306 or old-law pension 

beneficiary loses his or her last 

dependent, the annual income limit is 

lowered. Proposed § 5.475(b)(2) clarifies 

that if a dependent was established 

before January 1, 1979, VA must 

recompute a new ‘‘protected’’ December 

31, 1978, rate based on the changed 

dependency status and recomputed 

1978 income. Proposed paragraph 

(b)(2)(i) also makes it clearer that VA 

will continue the December 31, 1978, 

rate if a recomputed rate based on a 

dependency change is higher than the 

previous rate. This could occur if a 

veteran receiving Section 306 pension 

lost a spouse who had income or if a 

surviving spouse pension beneficiary 

lost a child whose income was counted 

as the surviving spouse’s by virtue of 

current § 3.252(e)(3). 

Proposed § 5.475(c) is based on 

current § 3.252(d) and pertains to 

spousal estrangement for Section 306 

pension purposes. The current 

regulation provides that the ‘‘rates’’

provided by 38 U.S.C. 1521(c) may be 

authorized to certain married veterans 

who do not live with or are estranged 

from their spouses. The reference to ‘‘38 

U.S.C. 1521(c)’’ is actually to 38 U.S.C. 

1521(c) as in effect on December 31, 

1978 (when it was numbered 38 U.S.C. 

521(c)), or more simply, the ‘‘December 

31, 1978, rate for a veteran with a 

spouse.’’ However, it is not only the 

rates that apply to such married 

veterans, but also the annual income 

limits. The proposed regulation would 

so provide. Proposed § 5.475(c) also 

clarifies the longstanding VA policy that 

the spousal income is not included 

unless the annual income limit for a 

married veteran applies. 

Current paragraphs (c), (d), and (e) of 

§ 3.260, relating to proportional 

computations, are not included in 

proposed § 5.477 or elsewhere in these 

proposed subpart F regulations. We 

propose to remove these provisions 

from regulations governing old-law and 

section 306 pension because they 

pertain to proportional computations for 

original or resumed awards. 

Proportional computations no longer 

apply to section 306 or old-law pension 

claims because new claims are not 

allowed, nor can these benefits be 

resumed after they have been 

discontinued, under section 306 of 

Public Law 95–588. Paragraphs (c) and 

(d) of current § 3.260, as they apply to 

proportional computations for parents’

DIC, will be addressed in a future 

NPRM. 

5.476 Net Worth for Section 306 

Pension Only 

Current § 3.263 provides the 

regulatory authority for evaluating net 

worth in determining the dependency of 

a parent as well as entitlement to 

section 306 pension. Proposed § 5.476 

applies only to section 306 pension for 

reasons previously outlined.

We propose to use the term ‘‘net 

worth’’ only and remove references to 

‘‘corpus of estate’’ because we believe 

‘‘net worth’’ to be the more commonly 

understood term. The terms ‘‘net worth’’

and ‘‘corpus of estate’’ are defined 

synonymously in 38 CFR 3.263(b) and 

3.275(b) and used interchangeably. 

Sections 1522 and 1543 of title 38, 

United States Code, are both titled, ‘‘Net 

worth limitation.’’ However, the term 

‘‘net worth’’ is not used in the text of the 

statutes. Instead, the statutes refer to the 

‘‘corpus of the estate’’ of an affected 

individual. Although the term ‘‘net 

worth’’ is not used in the text of these 

statutes, there is no indication that there 

is any intended difference between the 

two terms. In VAOGCPREC 64–91, VA’s 

General Counsel confirmed that the 

terms ‘‘corpus of estate’’ and ‘‘net 

worth’’ are used interchangeably ‘‘[i]n 

the context of estate valuation for 

certain need-based veterans’ benefits.’’

In order to prevent any misconception 

that there is a difference between the 

two terms, we propose to use one term, 

‘‘net worth.’’

Proposed § 5.476(a) includes current 

and longstanding VA policy concerning 

the evaluation of a ‘‘reasonable lot 

area,’’ as being that which is reflective 

of lot sizes in the area. This rule is 

necessarily broad because lot sizes vary 

from locale to locale. It might be 

reasonable in some parts of the country 

to retain significant acreage. In other 

parts of the country, the same acreage 

would constitute a sizeable asset and 

the test of ‘‘reasonableness’’ would 

dictate disposal for the beneficiary’s 

maintenance. 

Proposed § 5.476(c) specifies that the 

income VA must consider in a net worth 

determination is income as determined 

under § 5.472. We propose this 

specification in order to make it clear 

that the income VA considers in a net 

worth determination is the same as 

income considered for any Section 306 

pension purpose. The law (38 U.S.C. 

1503 as in effect December 31, 1978 

(when it was numbered 38 U.S.C. 503)) 

defines ‘‘annual income under this 

chapter,’’ as all payments received 

except for certain kinds of payments 

specifically excluded or deducted. 

Therefore, we must conclude that the 

reference to income in the net worth 

statute (38 U.S.C. 1522 as in effect 

December 31, 1978 (when it was 

numbered 38 U.S.C. 522)) refers to the 

same definition of income because both 

provisions are in the same chapter. 

At the same time, we propose to state 

that when VA considers a beneficiary’s 

living expenses, VA cannot consider 

expenses excluded or deducted in 

determining income. This statement 

clarifies that the same expenses cannot 

be deducted twice. Because we are 

making this clarification concerning 

income and because we believe that the 

phrase ‘‘all of the beneficiary’s living 

expenses’’ sufficiently encompasses 

Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 77585

medical expenses, we do not believe it 

is necessary to specifically mention 

unusual medical expenses in proposed 

paragraph (c). Therefore, we propose to 

remove the reference to unusual 

medical expenses currently in 

§ 3.263(d).

Proposed § 5.476 does not incorporate 

the following phrase currently found in 

§ 3.263(d): ‘‘whether the property can be 

readily converted into cash at no 

substantial sacrifice.’’ VA has 

traditionally defined the phrase 

‘‘substantial sacrifice’’ as meaning that 

benefits should not be discontinued for 

excessive net worth if the beneficiary 

cannot readily convert other assets into 

cash. Therefore, proposed paragraph 

(c)(1), provides for consideration of 

‘‘[t]he value of liquid assets and the 

current market value of other property 

the beneficiary can readily convert into 

cash.’’ We believe this wording would 

be clearer to beneficiaries, as well as 

consistent with VA practice. 

Finally, proposed § 5.476(d) includes 

a cross-reference to the listing of 

payment sources that, by statute, VA 

must exclude from consideration in 

determining entitlement to need-based 

benefits. As previously mentioned, we 

will propose a regulation in a separate 

NPRM that would list income sources 

and assets that are statutorily excluded 

from consideration for all of VA’s needbased programs. Therefore, the 

following four such sources, currently 

listed in § 3.263(e) through (h), are not 

included in proposed § 5.476: ‘‘Agent 

Orange settlement payments’; 

‘‘Restitution to individuals of Japanese 

ancestry’; ‘‘Monetary allowance under 

38 U.S.C. chapter 18 for certain 

individuals who are children of 

Vietnam veterans’; and ‘‘Victims of 

Crime Act.’’

5.477 Effective Dates for Section 306 

and Old-Law Pension Reductions or 

Discontinuances 

Proposed § 5.477(a) is based on the 

first sentence of current § 3.660(a)(2), 

which provides:

Where reduction or discontinuance of a 

running award of [S]ection 306 pension or 

[O]ld-[L]aw pension is required because 

dependency of another person ceased due to 

marriage, annulment, divorce or death, or 

because of an increase in income, which 

increase could not reasonably have been 

anticipated based on the amount actually 

received from that source the year before, the 

reduction or discontinuance shall be made 

effective the end of the year in which the 

increase occurred.

Proposed § 5.477(a) clarifies the actual 

effective date that VA pays a reduced 

rate or discontinues benefits by stating, 

‘‘If required, VA will pay a reduced 

section 306 or old-law pension rate or 

discontinue benefits effective January 1 

of the calendar year immediately 

following [certain events].’’ Proposed 

paragraphs (a)(1) through (a)(3) then go 

on to specify those events. We believe 

that stating the effective date in this 

manner—focusing on the date that the 

new rate begins rather than on the date 

that the old rate ends—clarifies the 

effective-date provisions for reductions 

and discontinuances. We propose 

similar wording throughout the Project. 

VA intends no substantive change by 

this rewording. 

Proposed § 5.477(b) provides that if a 

reduction or discontinuance is required 

for any reason other than the events 

specified in paragraph (a) or in 

§ 5.478(a), VA will apply the general 

effective-date rules. These are currently 

found in §§ 3.500 through 3.503. A 

future NPRM will address §§ 3.500 

through 3.503.

5.478 Time Limit To Establish 

Continuing Entitlement to Section 306 

or Old-Law Pension 

Proposed § 5.478(a) is based on 

current § 3.260(b), which provides that 

‘‘[w]here there is doubt as to the amount 

of the anticipated income,’’ VA will 

make its decision concerning payment 

for a particular calendar year based on 

the best income information it has 

concerning income for that year. If it 

appears that income exceeds the annual 

income limit, VA will discontinue the 

benefit. Proposed § 5.478(a) makes the 

application of § 3.260(b) to prior 

pension clearer to readers. 

However, proposed § 5.478(b), 

derived from portions of § 3.660(b)(1), 

provides that beneficiaries have until 

the end of the following year to provide 

evidence to show that income was 

actually below the limit and thereby 

establish continuing entitlement to 

pension. We propose to include an 

example as an aid to readers. 

Proposed § 5.478(c), based on current 

§ 3.960(d), clarifies further that if no 

income evidence is submitted or if the 

evidence submitted does not warrant 

continued benefits, the discontinuance 

of section 306 or old-law pension is 

final. 

Explanation of Additional Proposed 

Removals From Part 3 

Although all of part 3 would be 

removed and replaced by proposed part 

5, we invite public comment concerning 

rules in current part 3 that we do not 

propose to transfer to proposed part 5, 

i.e., that we simply propose to remove. 

Some of these have already been 

discussed in this NPRM, but others are 

discussed below. 

We propose to remove § 3.26. 

Paragraphs (a) through (c) describe the 

annual income limits for old-law and 

section 306 pension. We believe this 

regulation no longer has value because 

the statutory provisions are obscure to 

most readers. More importantly, the 

cited statutes set forth the January 1, 

1979, income limits only. We believe it 

is more useful to describe how and 

where to find the current income limits, 

which we have done in proposed 

§ 5.471. Current § 3.26(d) is redundant 

of the final sentence of current § 3.28. 

We propose to remove § 3.261. This 

regulation currently contains a table that 

lists income exclusions and deductions, 

and applicability of net worth, for VA’s 

need-based benefits that existed before 

January 1, 1979: old-law pension, 

section 306 pension, and parents’ DIC. 

The § 3.261 table also lists income 

exclusions and deductions, and 

applicability of net worth, for VA 

determinations concerning parents’

dependency. Most of the entries in the 

table cross-reference § 3.262, where the 

inclusion or exclusion of a particular 

type of income is explained in greater 

detail. We believe that some readers 

may rely only on the information in the 

table and fail to refer to the specific 

provisions of § 3.262. Because it is a 

bedrock principle of regulatory 

construction that a specific provision 

will trump a more general one, we 

propose to remove all of the paragraphs 

in § 3.261 that cross-reference § 3.262. 

Therefore, when a paragraph from the 

§ 3.261 table has an associated crossreference in the last column of the table, 

we have not included that entry in the 

derivation table at the beginning of this 

NPRM. For example, § 3.261(a)(6) is not 

included on the derivation table because 

it would be removed in favor of the 

more specific provision it cross 

references, § 3.262(c). 

There are currently 13 paragraphs in 

§ 3.261 that do not contain associated 

§ 3.262 cross-references. These are 

paragraphs (a)(4), (7), (9), (10), (11), (12), 

(13), (20), (22), (23), (26), (27), and (31). 

Of these, paragraphs (a)(4), (7), (12), 

(13), (20), (22), (26), and (31) are 

included in the derivation table at the 

beginning of this NPRM as the source of 

certain proposed part 5 regulations. 

The ‘‘[a]nnuities’’ entry in paragraph 

(a)(14) of § 3.261 does not contain a 

cross-reference to § 3.262. However, as 

previously discussed in this NPRM in 

the discussion of proposed § 5.472, this 

entry will be included in a future 

proposed regulation. 

We propose to remove paragraphs 

(a)(9) and (27) of § 3.261 because these 

paragraphs list included income 

sources. Under proposed § 5.472, VA 

77586 Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 

counts all payments unless specifically 

excluded. For the same reason, we 

propose to remove the ‘‘[r]efund’’ entry 

in paragraph (a)(14). We propose to 

remove paragraph (a)(10), which 

excludes the ‘‘[r]easonable value of 

allowances to person in service in 

addition to base pay’’ for Section 306 

child pension beneficiaries. We do not 

believe there are any remaining 

beneficiaries to whom this exclusion 

applies. 

We propose to remove paragraph 

(a)(11) of § 3.261 because authority for 

mustering-out pay was repealed by 

Public Law 89–50, 79 Stat. 173. 

We propose to remove paragraph 

(a)(23) of § 3.261, which excludes 

overtime pay for ‘‘Government 

employees’’ for old-law veteran pension 

beneficiaries. We do not believe there 

are any remaining beneficiaries to 

whom this exclusion applies. 

Current § 3.261(a)(20) lists VA 

benefits. As previously described in the 

discussion of proposed § 5.472(e), the 

portions of § 3.261(a)(20) that pertain to 

section 306 and old-law pension would 

be described in proposed § 5.472(e) in 

terms of those VA benefits that count. 

We propose to remove the portion of 

current § 3.261(a)(20) that lists the 

subsistence allowance under Chapter 31 

of 38 U.S.C. as a countable payment 

because we do not believe that any of 

the remaining veteran beneficiaries of 

old-law pension receive these 

vocational rehabilitation payments. We 

also propose to remove the portion of 

§ 3.261(a)(20) that lists veterans’

educational assistance under 38 U.S.C. 

chapter 34 because VA no longer pays 

this benefit.

We propose to remove the second 

sentence of § 3.262(j)(3), an income 

exclusion that applies only to old-law 

death pension beneficiaries, for 

payments equaling lump-sum amounts 

based on the death of a veteran. We 

believe that all such payments have 

already been received because the 

veteran must have died before July 1, 

1960, in order for a beneficiary to be 

receiving old-law death pension. 

Current § 3.262(e)(1) provides in part 

that:

Where the retirement benefit is based on 

the claimant’s own employment, payments 

will not be considered income until the 

amount of the claimant’s personal 

contribution (as distinguished from amounts 

contributed by the employer) has been 

received. Thereafter the 10 percent exclusion 

will apply.

Similarly, current § 3.262(e)(2) 

provides in part that:

Where a person was receiving or entitled 

to receive pension and retirement benefits 

based on his or her own employment on 

December 31, 1964, the retirement payments 

will not be considered income until the 

amount of the claimant[’s] personal 

contribution (as distinguished from amounts 

contributed by the employer) has been 

received. Thereafter the 10 percent exclusion 

will apply.

We propose to remove these two 

provisions. It is extremely unlikely that 

an old-law pension beneficiary’s 

contributions to retirement plans or a 

Section 306 pension beneficiary’s 

contributions to retirement plans based 

on employment on December 31, 1964, 

were not recovered long ago. 

We propose to remove references to 

the following effective dates in current 

§ 3.262 for exclusion of particular 

income types: July 1, 1959 (paragraph 

(g)(2)); January 10, 1962 (paragraph 

(k)(4)(iii)); January 1, 1965 (paragraphs 

(e)(1) and (2), (j)(1), and (k)(5)); October 

7, 1966 (paragraphs (i)(2), (j)(2), and 

(j)(4)); and January 1, 1971 (paragraphs 

(k)(1) and (k)(6)). Although current 

section 306 and old-law pension rates 

are based on 1978 income, it is highly 

unlikely that VA will process a 

retroactive adjustment to a prior 

pension award effective more than 30 

years in the past; therefore, we believe 

these effective dates are no longer 

necessary. 

We propose to remove current 

§ 3.262(m), which concerns deducting 

the veteran’s final expenses and just 

debts from death pension awards. 

Current § 3.262(p) specifies that VA 

allows final expenses as a deduction 

during the year of the veteran’s last 

illness and burial or during the year the 

beneficiary paid the expenses. Because 

the last date that a surviving spouse or 

child could establish entitlement to 

Section 306 pension was December 31, 

1978, these claims were made long ago. 

If a case should arise in which a 

surviving spouse or child claims to have 

paid final expenses or just debts many 

years previously which were claimed 

but remained unprocessed due to an 

error, the statute would govern the 

decision.

From paragraphs (n)(2) and (p) of 

§ 3.262, we propose to remove the 

references to ‘‘spouse’’ on the same 

basis as our proposal to remove 

§ 3.262(m). Spouses of veterans who die 

after December 31, 1978, may only be 

considered for Improved pension. This 

is true even if the veteran was in receipt 

of section 306 or old-law pension. 

We propose to remove § 3.270. This 

regulation currently introduces specific 

section numbers for regulations that 

govern entitlement to Section 306 and 

Old-Law pension and parents’ DIC, and 

for making dependent parent 

determinations. All of the regulations 

referenced in current § 3.270 are to be 

moved to various other regulations that 

are specific to the benefit indicated. 

Therefore, current § 3.270 would no 

longer be necessary. 

We propose to remove several 

provisions that pertain to initial 

entitlement to certain pension programs. 

First, we propose to remove paragraphs 

(a)(1), (b)(1), and (b)(2) of current § 3.3. 

These paragraphs pertain to initial 

entitlement to Spanish-American War 

service pension for veterans, Indian war 

death pension, and Spanish-American 

War death pension, respectively. 

Although new claims for these pensions 

are theoretically possible, they are 

unlikely in the extreme. As of 

September 2003, there was one 

surviving child beneficiary of an Indian 

war veteran, and there were 

approximately 400 surviving spouse and 

child beneficiaries of Spanish-American 

War veterans. VA RCS 20–0221, 

September 2002. To our knowledge, no 

veterans of either war survive. 

Therefore, we believe removal of these 

provisions is warranted. In the unlikely 

event of a new claim, the applicable 

statute would control. For the same 

reason, we propose to remove § 3.16, 

which pertains to computing service for 

service pension. 

Second, we propose to remove current 

paragraphs (a)(2) and (b)(3) of § 3.3, 

which pertain to initial entitlement to 

Section 306 pension. As previously 

outlined in this NPRM, new entitlement 

to Section 306 disability or death 

pension is not possible and has not been 

possible since January 1, 1979. We note 

that there are no regulations in current 

part 3 pertaining to initial entitlement to 

old-law pension. The governing statutes 

would control if VA discovers an old 

claim for Section 306 pension that has 

not been processed due to error or 

oversight. 

We propose to remove § 3.314, which 

pertains to basic pension 

determinations. The provisions in this 

regulation are either obsolete or 

redundant of other regulatory 

provisions. Paragraph (a) pertains to 

establishing basic eligibility for service 

pension, which we propose to remove 

for the reasons stated above in relation 

to current § 3.3(a)(1) and (b)(2). 

Paragraph (b) describes when rating 

decisions are required for nonserviceconnected disability pension, which we 

believe is a procedural matter that 

should not be included in new part 5. 

Paragraph (b)(1) is redundant of 

§ 3.3(a)(2)(iii) and (b)(3)(ii). The first 

sentence of § 3.314(b)(2) is redundant of 

§ 3.342(a). The second sentence of 

§ 3.314(b)(2) pertains to new entitlement 

Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 77587

to Section 306 pension, which we are 

removing for the reasons stated above in 

relation to current § 3.3(a)(2). Current 

§ 3.314(b)(3) pertains to increased oldlaw or section 306 pension because of 

the need for aid and attendance or the 

housebound rate. This provision is 

obsolete because section 306 and oldlaw pension cannot increase; the 

veteran must have established the need 

for aid and attendance or eligibility for 

the housebound rate before January 1, 

1979. 

We propose to remove § 3.17, which 

pertains to computing wartime service 

for nonservice-connected disability and 

death pension purposes. Because new 

entitlement cannot be established to 

section 306 or old-law pension, this 

regulation no longer pertains to those 

programs. The regulation still pertains 

to the Improved pension program; 

however, it is redundant of current 

§ 3.3(a)(3)(i) through (iv). 

We propose to remove § 3.401(i), 

which is an effective-date provision for 

an award of increased pension to a 

veteran who attains the age of 78. With 

the enactment of Public Law 95–588, 92 

Stat. 2497, Congress removed the ‘‘age 

of 78 rule.’’ This provision does not 

apply to the Improved pension program. 

Section 306 pension rates have been 

frozen since December 31, 1978. They 

may be reduced or discontinued under 

limited circumstances, but they cannot 

increase. In order for the ‘‘age of 78 

rule’’ to apply to section 306 pension 

beneficiaries, the beneficiary must have 

attained age 78 before January 1, 1979. 

Current 38 U.S.C. contains no statutory 

authority for the ‘‘age of 78 rule.’’

Similarly, we propose to remove 

current §§ 3.400(j)(2) through (6) and 

3.401(f). These are effective-date 

provisions for Spanish-American War 

service pension and the other prior 

pension programs. Because we are 

proposing to remove the regulations 

pertaining to new entitlement to 

Spanish-American War service pension, 

section 306 pension, and old-law 

pension, we propose to remove the 

applicable effective dates. 

We propose to remove § 3.712(b) as 

obsolete. This is a special provision that 

applies to surviving spouses in receipt 

of Spanish-American War death pension 

who require aid and attendance. Current 

§ 3.712(b) provides that these surviving 

spouses will receive either the SpanishAmerican War aid and attendance 

benefit of $149 monthly or the aid and 

attendance rate for section 306 death 

pension, whichever is greater. Current 

§ 3.712(b) further provides that the 

section 306 death pension rate is based 

on current income. In the early years 

following the introduction of improved 

pension, it was occasionally the case 

that section 306 death pension would 

pay more than Spanish-American War 

death pension or improved death 

pension. However, with each passing 

year, this has become less and less 

likely as Improved pension maximum 

annual pension rates increase while 

section 306 pension rates remain frozen. 

Now, it is a virtual impossibility. In 

order for a surviving spouse with no 

dependents to be entitled to more than 

$149 per month under section 306 death 

pension, the surviving spouse’s annual 

income would have to be less than 

$1,900 per year in 2004. If that were the 

case at this time, such a surviving 

spouse would almost certainly elect 

Improved death pension. (A surviving 

spouse eligible for aid and attendance 

who has no dependents and an annual 

income of $1,900 per year is entitled to 

$725 monthly in 2004 under the 

Improved pension program, unless he or 

she is in a nursing home and Medicaid 

is paying for care.) If a case arises in 

which a surviving spouse beneficiary of 

Spanish-American War death pension 

claimed that section 306 death pension 

should have been paid but was not paid 

due to error or oversight, the governing 

statute, 38 U.S.C. 1536(d)(2), would 

control. 

We propose to remove § 3.713(b) as 

obsolete. Current paragraph (b) creates a 

special exception to the general effective 

date in paragraph (a) for beneficiaries 

who were entitled to receive either 

section 306 or old-law pension on 

December 31, 1978, and who elected to 

receive improved pension before 

October 1, 1979. (Section 3.713(b) does 

not apply to Spanish-American War 

death pension). If a pension beneficiary 

were to claim entitlement to an earlier 

effective date based on the filing of an 

election before October 1, 1979, which 

VA somehow did not recognize as such 

at the time, the claim would be 

processed under section 306(d) of 

Public Law 95–588, 73 Stat. 432, the 

governing statute. 

We propose to remove § 3.252(e)(1) as 

obsolete. Current § 3.252(e)(1) provides 

that if a veteran’s child is born after the 

veteran dies, the surviving spouse 

cannot claim the child as a dependent 

until the child is born. Because the last 

date a surviving spouse could establish 

eligibility to old-law pension was June 

30, 1960, and the last date a surviving 

spouse could establish eligibility to 

section 306 pension was December 31, 

1978, current § 3.252(e)(1) no longer 

applies to section 306 or old-law 

pension. 

We propose to remove § 3.252(f), 

which contains specific provisions for 

computing a special reduced aid and 

attendance allowance under 38 U.S.C. 

1521(d)(1) as in effect on December 31, 

1978 (when it was numbered 38 U.S.C. 

521(d)(1)). We believe there is no longer 

a need for § 3.252(f). Veterans are not 

entitled to the special reduced aid and 

attendance allowance unless they were 

in need of aid and attendance on or 

before December 31, 1978. VA publishes 

the income limits for continued 

entitlement to this allowance every year 

as the income limits increase. If there 

would be a case at some time to which 

§ 3.252(f) would apply (due to error or 

oversight), the statute would control. 

We propose to remove current § 3.257 

as obsolete. This regulation states that if 

old-law or section 306 pension is not 

payable to a surviving spouse because 

his or her annual income exceeds the 

income limit, VA will make payments to 

children as if there were no surviving 

spouse. Because new entitlement to oldlaw or section 306 pension cannot be 

established, VA cannot establish new 

entitlement to either old-law or section 

306 pension for a child if a surviving 

spouse’s income exceeds the income 

limit for either of these pensions. 

Removal of this regulation would not 

affect current pension awards to 

children.

We propose to remove current § 3.714 

as obsolete. Current § 3.714 

implemented the Adoption and Child 

Welfare Act of 1980, Public Law 96–272 

§ 310(b), 94 Stat. 500, which provided 

that certain beneficiaries who had once 

been in receipt of prior pensions had the 

right to disaffirm an election of 

improved pension, thereby restoring 

their right to prior pension. The primary 

purpose of the law was to restore 

Medicaid eligibility to those who lost it 

because they were required to elect 

improved pension under the regulations 

that previously governed eligibility to 

receive public assistance. Under section 

310(b), VA was required to obtain from 

every affected pension beneficiary an 

informed decision regarding whether he 

or she wish to continue to receive 

improved pension or disaffirm the 

earlier election. VA long ago complied 

with these notification provisions. 

Current § 3.714 also provides for a 

special informed election process for 

those pension beneficiaries who reside 

in states in which Medicaid eligibility is 

based on public assistance. However, 

section 114(a) of the Personal 

Responsibility and Work Opportunity 

Reconciliation Act of 1996, Public Law 

104–193, 110 Stat. 2105, provides that 

eligibility for Medicaid is no longer 

linked to the receipt of public 

assistance. In other words, there is no 

longer any state to which the first 

sentence of current § 3.714(b) applies. 

77588 Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 

Endnote Regarding Removals From 

Part 3 

For the reasons shown in the 

preceding supplementary information, 

the amendments proposed in this 

document would, if adopted, result in 

removal of current §§ 3.16, 3.17, 3.26, 

3.28, 3.252, 3.257, 3.261, 3.270, 3.314, 

3.711, 3.712, 3.713, and 3.714, and 

removal of portions of §§ 3.1, 3.3, 3.260, 

3.262, 3.263, 3.400, 3.401, 3.660, 3.700, 

and 3.960. This would be the case 

because those part 3 sections, or 

portions of sections, would be replaced 

by new part 5 sections or they would be 

removed entirely. Readers are invited to 

comment both on these part 5 removals 

and on the proposed new part 5 rules at 

this time. 

NPRMs frequently include formal 

‘‘amendatory language’’ listing the 

sections, or portions of sections, that 

would be removed if the proposed 

amendments are adopted. However, we 

have not included such ‘‘amendatory 

language’’ in this NPRM because of the 

nature of this Project. Because of the 

very large scope of the Project, we are 

publishing proposed amendments in 

several NPRMs. Then, after public 

comments in response to all of the 

NPRMs making up the Project have been 

reviewed and considered, VA will 

propose to remove all of part 3, 

concurrent with the implementation of 

part 5. 

Paperwork Reduction Act 

Although this document contains a 

provision constituting a collection of 

information in proposed 38 CFR 

5.478(b), under the provisions of the 

Paperwork Reduction Act (44 U.S.C. 

3501–3521), no new or proposed revised 

collection of information is associated 

with this proposed rule. The 

information collection requirement for 

proposed §§ 5.474 and 5.478(b) are 

currently approved by the Office of 

Management and Budget (OMB) and 

have been assigned OMB control 

numbers 2900–0624 and 2900–0101. 

Regulatory Flexibility Act 

The Secretary hereby certifies that 

this proposed regulatory amendment 

will not have a significant economic 

impact on a substantial number of small 

entities as they are defined in the 

Regulatory Flexibility Act, 5 U.S.C. 601–

612. This proposed amendment would 

not affect any small entities. Only VA 

beneficiaries could be directly affected. 

Therefore, pursuant to 5 U.S.C. 605(b), 

this proposed amendment is exempt 

from the initial and final regulatory 

flexibility analysis requirements of 

sections 603 and 604. 

Executive Order 12866 

This document has been reviewed by 

the Office of Management and Budget 

under Executive Order 12866. 

Unfunded Mandates 

The Unfunded Mandates Reform Act 

requires, at 2 U.S.C. 1532, that agencies 

prepare an assessment of anticipated 

costs and benefits before developing any 

rule that may result in an expenditure 

by State, local, or tribal governments, in 

the aggregate, or by the private sector of 

$100 million or more in any given year. 

This proposed rule would have no such 

effect on State, local, or tribal 

governments, or the private sector. 

Catalog of Federal Domestic Assistance 

Numbers 

The Catalog of Federal Domestic 

Assistance program numbers for this 

proposal are 64.100–102, 64.104–110, 

64.115, and 64.127.

List of Subjects in 38 CFR Part 5 

Administrative practice and 

procedure, Claims, Disability benefits, 

Pensions, Veterans.

Approved: October 14, 2004. 

Anthony J. Principi, 

Secretary of Veterans Affairs.

For the reasons set forth in the 

preamble, VA proposes to amend 38 

CFR chapter I as set forth below:

PART 5—COMPENSATION, PENSION, 

BURIAL, AND RELATED BENEFITS 

Part 5, as proposed to be added at 69 

FR 4832, January 30, 2004, is further 

amended by adding subpart F to read as 

follows:

Subpart F—Nonservice-Connected 

Disability Pensions and Death Pensions 

Choosing Improved Pension Over Certain 

Other VA Pension Programs: Veterans and 

Survivors 

Sec. 

5.460 Definitions of certain VA pension 

programs. 

5.461 Electing improved pension instead of 

Old-Law or Section 306 pension. 

5.462 Right of surviving spouses receiving 

Spanish-American War death pension to 

elect improved death pension. 

5.463 Effective dates of improved pension 

elections. 

5.464 Multiple pension awards not payable. 

5.465–5.469 [Reserved] 

Continuing Entitlement to Old-Law or 

Section 306 Pension: Veterans and Survivors 

5.470 Reasons for discontinuing or reducing 

section 306 or old-law pension.

5.471 Annual income limits and rates for 

section 306 and old-law pension. 

5.472 Evaluation of income for section 306 

and old-law pension. 

5.473 Counting a dependent’s income for 

section 306 and old-law pension. 

5.474 Deductible expenses for section 306 

pension only. 

5.475 Gaining or losing a dependent for 

section 306 and old-law pension. 

5.476 Net worth for section 306 pension 

only. 

5.477 Effective dates for section 306 and 

old-law pension reductions or 

discontinuances. 

5.478 Time limit to establish continuing 

entitlement to section 306 or old-law 

pension. 

5.479–5.499 [Reserved]

Authority: 38 U.S.C. 501(a) and as noted in 

specific sections.

Subpart F—Nonservice-Connected 

Disability Pensions and Death 

Pensions 

Choosing Improved Pension Over 

Certain Other VA Pension Programs: 

Veterans and Survivors

§ 5.460 Definitions of certain VA pension 

programs. 

(a) Section 306 pension means the 

nonservice-connected disability and 

death pension programs available to 

new claimants during the period 

beginning on July 1, 1960, and ending 

on December 31, 1978. 

(b) Old-Law pension means the 

nonservice-connected disability and 

death pension programs available to 

new claimants before July 1, 1960. 

(c) Spanish-American War death 

pension means pension payable to a 

surviving spouse or child of a veteran 

who served in the Spanish-American 

War. Entitlement is based solely on the 

veteran’s service in the SpanishAmerican war without regard to 

disability, income, or net worth.

(Authority 38 U.S.C. 501(a)).

§ 5.461 Electing improved pension instead 

of old-law or section 306 pension. 

(a) Right to elect (choose) Improved 

pension. Unless this section states 

otherwise, a pension beneficiary who 

was entitled to receive old-law pension 

or section 306 pension on December 31, 

1978, may instead elect (choose) to 

receive improved pension. 

(b) Finality of election. Unless one of 

the following exceptions applies, an 

election of Improved pension is final 

when a beneficiary negotiates a check 

for a payment of Improved pension. 

Once the election is final, the 

beneficiary cannot receive old-law or 

section 306 pension. An election may be 

canceled according to the following 

exceptions: 

(1) The beneficiary receives benefits 

by direct deposit or electronic funds 

transfer (DD/EFT). If the beneficiary 

receives a payment of improved pension 

benefits by direct deposit or electronic 

Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 77589

funds transfer, the beneficiary must 

cancel the election of improved pension 

before the financial institution receives 

the second Improved pension payment. 

Once the financial institution receives a 

second payment, the election is final. 

(2) The beneficiary is incompetent. If 

VA finds that a beneficiary was 

mentally incompetent when he or she 

elected Improved pension, the 

beneficiary (or guardian) may cancel 

that election. VA must receive the 

request to cancel the election within one 

year from the date the election became 

effective. 

(3) Beneficiary based election on 

erroneous VA information. A 

beneficiary who elected improved 

pension based on erroneous information 

provided by VA may cancel the election 

within one year after the date the 

election became effective. For this 

paragraph (b)(3) to apply, VA must 

determine that it previously provided 

erroneous information and that 

determination must be based on the 

same evidence that VA used when it 

previously provided the erroneous 

information. 

(c) If a veteran’s spouse is also a 

veteran eligible to elect Improved 

pension. If a veteran who is eligible to 

elect Improved pension has a spouse 

who is also a veteran who is eligible to 

elect Improved pension, neither veteran 

may receive Improved pension unless 

both elect to receive it. 

(d) If a beneficiary does not elect 

Improved pension. If a pension 

beneficiary who is eligible to elect 

Improved pension does not do so, VA 

will continue to pay that beneficiary 

old-law pension or section 306 pension 

at the monthly rate in effect on 

December 31, 1978, unless that rate 

must be reduced or discontinued under 

§ 5.470 or another regulation in this 

part.

(Authority: Sec. 306(a) and (b), Pub. L. 95–

588, 92 Stat. 2508)

§ 5.462 Right of surviving spouses 

receiving Spanish-American War death 

pension to elect improved death pension. 

A surviving spouse who is receiving 

Spanish-American War death pension 

may elect to receive Improved death 

pension instead. Paragraph (b) of 

§ 5.461, concerning finality of elections, 

applies to surviving spouses of SpanishAmerican War veterans. Once the 

election is final, the surviving spouse 

has no right to receive SpanishAmerican War death pension again. 

Surviving spouse beneficiaries of 

Spanish-American War death pension 

who do not elect Improved pension will 

continue to receive Spanish-American 

War death pension.

(Authority: 38 U.S.C. 1536).

§ 5.463 Effective dates of improved 

pension elections. 

An election to receive improved 

pension will be effective the date VA 

receives the election.

(Authority: Sec. 306(d), Pub. L. 95–588, 92 

Stat. 2508)

§ 5.464 Multiple pension awards not 

payable.

If a veteran is entitled to improved 

pension on the basis of his or her own 

service and is also entitled to pension 

under any other VA pension program 

based on another person’s service, VA 

will pay only the greater benefit.

(Authority: 38 U.S.C. 1521(i)).

§§ 5.465 through 5.469 [Reserved] 

Continuing Entitlement to Old-Law or 

Section 306 Pension: Veterans and 

Survivors

§ 5.470 Reasons for discontinuing or 

reducing section 306 or old-law pension. 

(a) Discontinuances. Section 306 or 

old-law pension will be discontinued 

for any one of the following reasons: 

(1) A veteran pension beneficiary 

ceases to be permanently and totally 

disabled. 

(2) A surviving spouse pension 

beneficiary no longer meets the 

definition of ‘‘surviving spouse’’ as 

provided in § 3.50 of this chapter. 

(3) A child pension beneficiary no 

longer meets the definition of ‘‘child,’’

as provided in § 3.57 of this chapter. 

(4) A pension beneficiary’s income 

exceeds the annual income limit. 

(5) A section 306 pension beneficiary 

has a net worth of such value that it is 

reasonable that some part of it be 

consumed for the beneficiary’s 

maintenance. Evaluation of net worth 

will be made under § 5.476, ‘‘Net worth 

for section 306 pension only.’’

(b) Finality of discontinuance.

Discontinuance of section 306 or oldlaw pension for one of the reasons listed 

in paragraph (a) of this section means 

that a pension beneficiary is no longer 

entitled to receive section 306 or oldlaw pension benefits. Any new 

entitlement that may be established 

would be to improved pension. 

(c) Reduction and finality of 

reduction. If a beneficiary of section 306 

or old-law pension loses a dependent 

who was established before December 

31, 1978, VA must reduce such pension 

by the additional amount payable based 

on the existence of the dependent. Such 

reductions are final and rates do not 

increase. VA must discontinue pension 

as provided in paragraph (a)(4) of this 

section if a veteran or surviving spouse 

no longer has any dependents and his 

or her annual income exceeds the 

annual income limit for a veteran or 

surviving spouse alone.

(Authority: Sec. 306, Pub. L. 95–588, 92 Stat. 

2508)

§ 5.471 Annual income limits and rates for 

section 306 and old-law pension. 

(a) Where to find the annual income 

limits and pension rates. When annual 

income limits are adjusted as provided 

in paragraph (b) of this section, VA will 

publish the new limits in the ‘‘Notices’’

section of the Federal Register. Current 

and historical annual income limits and 

historical pension rates for old-law and 

section 306 pension can be found on the 

Internet at http://www.va.gov or are 

available from any Veterans’ Service 

Center. 

(b) When annual income limits are 

adjusted. Whenever there is a cost-ofliving increase in Social Security benefit 

amounts under the Federal Old-Age, 

Survivors, and Disability Insurance 

Benefits section of the Social Security 

Act (42 U.S.C. 415(i)), VA will increase 

the following by the same percentage 

effective the same date: 

(1) The annual income limits 

applicable to continued receipt of 

section 306 and old-law pension. 

(2) The dollar amount of a veteran’s 

spouse’s income that may be excluded 

in determining the income of a veteran 

for section 306 pension purposes.

(Authority: Sec. 306, Pub. L. 95–588, 92 Stat. 

2508)

§ 5.472 Evaluation of income for section 

306 and old-law pension. 

(a) Purpose and scope. This section 

provides rules for determining how to 

count income for section 306 and oldlaw pension purposes. This section also 

applies to counting spousal income for 

section 306 pension purposes when 

spousal income is included as the 

veteran’s income.

(b) Countable income. (1) All 

payments included. VA counts all 

payments of any kind from any source 

in determining the income of a pension 

beneficiary, except payments that are 

not counted under an exclusion 

provided in this section or § 5.473. 

(2) ‘‘Payments’’ defined. For purposes 

of this section, ‘‘payments’’ are cash and 

cash equivalents (such as goods and 

other negotiable instruments) and 

include the fair market value of personal 

services, goods, or room and board a 

beneficiary receives in lieu of other 

forms of payment. 

(i) For section 306 pension purposes, 

VA counts as income retirement benefits 

77590 Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 

(pension or retirement payments) that 

have been waived. 

(ii) For old-law pension purposes, 

‘‘payments’’ do not include retirement 

benefits from the following sources that 

have been waived pursuant to Federal 

statutes: 

(A) Civil Service Retirement and 

Disability Fund. 

(B) Railroad Retirement Board. 

(C) District of Columbia (paid to 

firemen, policemen, or public school 

teachers). 

(D) Former United States Lighthouse 

Service. 

(3) Countable income is rounded 

down. VA rounds countable income 

down to the nearest whole dollar. For 

section 306 pension, VA rounds down 

after subtracting any authorized 

deductible expenses specified in 

§ 5.474. 

(4) Income considered for year of 

receipt. VA computes income for the 

calendar year in which it is received 

and considers income for the full 

calendar year. However, when VA 

discontinues section 306 or old-law 

pension awards based on income that 

exceeds the limit, it does so effective 

January 1 of the following calendar year 

as provided in § 5.477. 

(c) Deductions from specific income 

sources. (1) Expenses of a business or 

profession. Necessary business 

operating expenses such as the cost of 

goods sold and payments for rent, taxes, 

upkeep, repairs, and replacements are 

deductible from income from a business 

or profession. Depreciation is not a 

deductible expense. Losses sustained in 

operating a business or profession may 

not be deducted from income from any 

other source. For purposes of this 

section, ‘‘business’’ includes the 

operation of a farm and transactions 

involving investment property. 

(2) Expenses associated with 

disability, accident, or health insurance 

recoveries. Medical, legal, or other 

expenses incident to the insured injury 

or illness are deductible from sums 

recovered under disability, accident, or 

health insurance. However, the same 

medical expenses cannot then be 

deducted as unusual medical expenses 

under § 5.474. 

(3) Salary deductions and employer 

contributions. Income from a salary is 

not determined by ‘‘take-home’’ pay. 

The salary counted as income is the 

gross salary without any deductions. An 

employer’s contributions to health and 

hospitalization plans are not included 

in gross salary.

(d) Income-producing property and 

income from property sales. (1) Scope. 

This paragraph (d) provides rules for 

determining whether income from 

income-producing property and 

property sales should be counted as a 

pension beneficiary’s income. The 

provisions of this paragraph (d) apply to 

all property, real or personal, in which 

a pension beneficiary has an interest, 

whether acquired through purchase, 

bequest, or inheritance. 

(2) Proof of ownership. In determining 

whether to count income from real or 

personal property or property sales, VA 

will consider the terms of the recorded 

deed or other evidence of title. In the 

absence of evidence showing otherwise, 

VA will accept the beneficiary’s 

statement as proof of the terms of 

ownership. 

(3) Transfer of ownership with 

retention of income. If a pension 

beneficiary transfers ownership of 

property to another person or legal 

entity, but retains the right to income, 

the income will be counted. 

(4) Income from jointly-owned 

property. If a pension beneficiary owns 

property jointly with others, including 

partnership property, each person will 

be considered as receiving an equal 

share of the income from that property 

in the absence of evidence showing 

otherwise. 

(5) Property sales for old-law pension. 

(i) Unless it is the beneficiary’s 

principal residence, net profit from the 

sale of real or personal property counts 

as income for old-law pension. 

(ii) In determining net profit from the 

sale of property owned prior to the date 

of entitlement, VA will compare the 

value of the property at the time 

entitlement began with the selling price. 

(iii) If payments are received in 

installments, the entire amount of 

installment payments received 

(including principal and interest) will 

be excluded until the total of 

installments received is equal to the cost 

of the residence, or if paragraph 

(d)(5)(ii) of this section applies, equal to 

the value of the property on the date 

pension entitlement was established. 

The entire amount of any installment 

received thereafter will be counted as 

income. 

(6) Profit from sale of principal 

residence for old-law pension. (i) Net 

profit realized from the sale of an oldlaw pension beneficiary’s principal 

residence is not counted to the extent 

that it is applied to the purchase price 

of a subsequent principal residence for 

the beneficiary in either the calendar 

year of the sale or the following year. 

(ii) This exclusion does not apply 

where the net profit is applied to the 

price of a home purchased earlier than 

the calendar year preceding the calendar 

year of the sale of the old residence. 

(iii) To qualify for this exclusion, the 

application of the net profit from the 

sale of the old residence to the purchase 

of the replacement residence must be 

reported to VA within one year 

following the date it was so applied. 

(7) Profit from sale of non-business 

property for section 306 pension. Profit 

realized from the disposition of real or 

personal property other than in the 

course of a business does not count for 

section 306 pension. However, amounts 

received in excess of the sales price, 

such as interest payments, count as 

income. If payments are received in 

installments, the entire amount of 

installment payments (including 

principal and interest) are excluded 

until the total amount received equals 

the sales price. The entire amount of 

any installment received thereafter 

counts as income. 

(e) VA benefits. (1) Old-law pension. 

All VA benefits are excluded for old-law 

pension. 

(2) Section 306 pension. Only the 

following VA benefits count as income 

for section 306 pension: 

(i) Subsistence allowance (38 U.S.C. 

Ch. 31). 

(ii) Special allowance under 38 U.S.C. 

1312(a). 

(iii) Accrued benefits, unless paid as 

a reimbursement. 

(iv) World War I adjusted 

compensation. 

(f) Income exclusions for section 306 

or old-law pension. VA will not count 

payments from the sources listed in this 

paragraph (f) when calculating income 

for section 306 or old-law pension. 

Paragraph (g) of this section provides 

additional exclusions for section 306 

pension. 

(1) Maintenance. The value of 

maintenance furnished by a relative, 

friend, or a civic or governmental 

charitable organization, including 

money paid to an institution for the care 

of the beneficiary due to impaired 

health or advanced age. However, if the 

maintenance is paid to the beneficiary 

and excluded under this provision, VA 

cannot also deduct it as an unusual 

medical expense under § 5.474.

(2) Survivor benefit annuity.

Annuities paid by the Department of 

Defense under the authority of section 

653, Public Law 100–456, 102 Stat. 

1991, to qualified surviving spouses of 

veterans who died before November 1, 

1953. 

(3) Death gratuity. Death gratuity 

payments under 10 U.S.C. 1475 through 

1480. 

(4) State service bonuses. Payments of 

a bonus or similar cash gratuity by any 

State based upon service in the Armed 

Forces. 

Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 77591

(5) Payment for civic obligations.

Payments received for performance of 

jury duty or other obligatory civic 

duties. 

(6) Fire loss reimbursement. Proceeds 

from fire insurance. 

(7) Certain life insurance payments.

Payments under policies of 

Servicemembers’ Group Life Insurance, 

United States Government Life 

Insurance, Veterans’ Group Life 

Insurance, or National Service Life 

Insurance. 

(8) Rental value of beneficiary’s 

property. The rental value of a 

beneficiary’s use of his or her own real 

property, such as the rental value of the 

beneficiary’s personal residence. 

(9) Increased inventory value of a 

business. The value of an increase of 

stock inventory of a business. 

(10) Commercial insurance dividends.

Dividends from commercial insurance. 

(11) Employer contributions for 

retired employees. Contributions a 

public or private employer makes to 

either of the following: 

(i) Public or private health or 

hospitalization plan for a retired 

employee. 

(ii) Retired employee as 

reimbursement for premiums for 

supplementary medical insurance 

benefits under the Social Security 

program. 

(12) Income from retirement plans 

and similar plans and programs. Ten 

percent of the amount of payments 

under public or private retirement, 

annuity, endowment, or similar plans. 

This includes, but is not limited to, 

payments under or for any of the 

following: 

(i) Annuities or endowments paid 

under a Federal, State, municipal, or 

private business or industrial plan. 

(ii) Old age and survivor’s insurance 

and disability insurance under title II of 

the Social Security Act. 

(iii) Retirement benefits received from 

the Railroad Retirement Board. 

However, if the beneficiary is a veteran 

receiving old-law pension, payments 

from this source do not count at all. 

(iv) Payments for permanent and total 

disability or death received from the 

Office of Workers’ Compensation 

Programs of the United States 

Department of Labor, the Social Security 

Administration, or the Railroad 

Retirement Board, or pursuant to any 

worker’s compensation or employer’s 

liability statute, including damages 

collected incident to a tort suit under an 

employer’s liability law of the United 

States or a political subdivision of the 

United States. This 10-percent exclusion 

applies after the income from the 

specified payments is reduced by the 

deductions described in paragraph (c)(3) 

of this section. 

(v) The proceeds of commercial 

annuity, endowment, or life insurance.

(vi) The proceeds of disability, 

accident, or health insurance. This 10-

percent exclusion applies after the 

income from the specified payments is 

reduced by the deductions described in 

paragraph (c)(3) of this section. 

(13) Other payments. Other payments 

listed in [regulation that will be 

published in a future Notice of Proposed 

Rulemaking]. 

(g) Additional income exclusions for 

section 306 pension. In addition to the 

payments listed in paragraph (f) of this 

section, VA will exclude payments from 

the following sources as income for 

section 306 pension: 

(1) Donations received. Donations 

from public or private relief or welfare 

organizations, including benefits 

received under noncontributory 

programs such as Supplemental 

Security Income payments. 

(2) Social Security death payments.

Lump sum death payments under title 

II of the Social Security Act. 

(3) Money acquired from joint 

accounts because of death. Money that 

a death pension beneficiary acquires 

because of the death of a co-owner of a 

joint account in a bank or similar 

institution. 

(h) Donations received for old-law 

pension. If an old-law pension 

beneficiary receives additional 

donations from public or private relief 

organizations for members of his or her 

family, these additional allowances may 

not be divided per member of the family 

in determining the pension beneficiary’s 

income. The entire payment is counted 

as income.

(Authority: Sec. 306, Pub. L. 95–588, 92 Stat. 

2508)

§ 5.473 Counting a dependent’s income for 

section 306 and old-law pension. 

(a) Veteran awards for old-law 

pension. VA excludes the separate 

income of a veteran’s spouse or child in 

computing income for veteran old-law 

pension beneficiaries. 

(b) Veteran awards for section 306 

pension. (1) Child’s income. VA 

excludes the separate income of a 

veteran’s child in computing income for 

veteran section 306 pension 

beneficiaries. 

(2) Spousal income. (i) VA 

presumptions concerning spousal 

income. For section 306 pension 

purposes, if a veteran and his or her 

spouse live together, VA presumes—

(A) That the spouse’s income is 

available to the veteran. The veteran 

may rebut this presumption by 

submitting evidence showing that all or 

part of the spouse’s income is not 

available. 

(B) That counting the spouse’s income 

would not cause the veteran hardship. 

The veteran may rebut this presumption 

by submitting evidence showing that 

there are expenses beyond the usual 

family requirements. Examples of such 

expenses include special training for a 

handicapped child and expenses for the 

prolonged illness of a family member. 

However, if the spouse’s income is 

excluded because it is needed to pay for 

unusual medical expenses, the same 

medical expenses cannot be deducted as 

unusual medical expenses under 

§ 5.474(b). 

(ii) Spousal income exclusions.

Unless excluded under paragraph 

(b)(2)(i) of this section, the veteran’s 

income includes his or her spouse’s 

income for section 306 pension 

purposes. However, VA will exclude 

from the veteran’s income the greater of 

the following two amounts: 

(A) The amount of the spousal income 

exclusion specified in Public Law 95–

588, section 306(a)(2)(B) (as increased 

by amounts published in the ‘‘Notices’’

section of the Federal Register). 

(B) All of the spouse’s earned income. 

(c) Surviving spouse awards for 

section 306 or old-law pension. (1) 

Veteran’s child not in surviving spouse’s 

custody. For section 306 or old-law 

pension purposes, if a deceased veteran 

is survived by a spouse and a child, the 

annual income limits for a surviving 

spouse and child apply even if the child 

is not the surviving spouse’s child and 

not in the surviving spouse’s legal 

custody. 

(2) When a child’s separate income is 

excluded. (i) VA will not count a child’s 

or children’s separate income as part of 

the surviving spouse’s income if it is 

paid to the child, regardless of who has 

legal custody of the child. 

(ii) If the child’s income is paid or 

given to the surviving spouse, VA will 

only count as much of the child’s 

income as remains after deducting the 

child’s living expenses.

(d) Child awards. (1) Old-law pension.

Earned income of child beneficiaries 

counts as income for old-law pension. 

(2) Section 306 pension. Earned 

income of child beneficiaries is 

excluded for section 306 pension.

(Authority: Sec. 306, Pub. L. 95–588, 92 Stat. 

2508)

§ 5.474 Deductible expenses for section 

306 pension only. 

(a) Scope. This section applies to 

section 306 pension only. Because 

section 306 pension rates cannot 

increase, deductible expenses paid after 

77592 Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 

December 31, 1978, can only be 

deducted from a pension beneficiary’s 

income to keep the income within the 

annual income limit and continue 

entitlement to section 306 pension. 

(b) Unusual medical expenses. (1) 

Application. (i) Family members. For 

section 306 pension purposes, a family 

member is a relative of the beneficiary 

who is a member of the beneficiary’s 

household whom the beneficiary has a 

moral or legal obligation to support. 

This includes relatives who are 

physically absent from the household 

for a temporary purpose or for reasons 

beyond their control. 

(ii) Unusual medical expenses. For 

purposes of this section, ‘‘unusual 

medical expenses’’ means unreimbursed 

medical expenses above 5 percent of 

annual income. However, if annual 

income includes retirement plan 

income, VA will calculate the 5 percent 

before applying the 10 percent 

exclusion under § 5.472(f)(11). For 

medical expenses that VA will deduct, 

see [regulation that will be published in 

a future Notice of Proposed 

Rulemaking]. 

(2) Veteran or surviving spouse 

awards. VA will deduct amounts paid 

by a veteran or surviving spouse for the 

veteran’s or surviving spouse’s own 

unusual medical expenses and those of 

family members. 

(3) Child awards. VA will deduct 

amounts paid by a child pension 

beneficiary for his or her own unusual 

medical expenses and those of the 

child’s parent, brothers, and sisters. 

(4) When expenses are deducted. VA 

will deduct unusual medical expenses 

from income for the calendar year in 

which they were paid regardless of 

when the expenses were incurred. 

(5) Proof of expenses. VA will accept 

the pension beneficiary’s statement as 

proof of the amount and nature of such 

medical expenses, the date of payment, 

and the identity of the creditor, unless 

circumstances create doubt as to the 

statement’s credibility. 

(6) Estimates of expenses for future 

benefit periods. VA will project 

anticipated medical expenses based on 

a clear and reasonable expectation that 

they will continue. See § 3.660(a) of this 

chapter (concerning the beneficiary’s 

responsibility to inform VA concerning 

income changes). 

(c) Final expenses. (1) Definition.

Final expenses are amounts paid for the 

expenses of a deceased person’s last 

illness and burial. The same expense 

cannot be deducted as both a final 

expense and an unusual medical 

expense under paragraph (a) of this 

section. 

(2) Final expenses paid by the 

veteran. VA will deduct from a veteran’s 

income the final expenses the veteran 

pays for his or her spouse or child. 

(3) Final expenses paid by a surviving 

spouse. VA will deduct from a surviving 

spouse’s income the final expenses the 

surviving spouse pays for the veteran’s 

child. 

(4) Proof of expenses. VA will accept 

as proof of expenses deductible under 

paragraph (c) of this section the pension 

beneficiary’s statement as to the amount 

and nature of each expense, the date of 

payment, and identity of the creditor 

unless the circumstances create doubt as 

to the credibility of the statement. 

(5) When expenses are deducted.

Expenses deductible under paragraph 

(c) of this section are deductible for the 

year in which they were paid. However, 

if such expenses were paid during the 

year following the year the spouse, 

surviving spouse, or child died, the 

expenses may be deducted for the year 

the expenses were paid or the year of 

death, whichever is to the beneficiary’s 

advantage. 

(d) Prepayment on real property 

mortgage after death of spouse. (1) 

Section 306 veteran pension 

beneficiaries only. If a veteran who is 

receiving section 306 pension makes a 

pre-payment on a mortgage or similar 

type security instrument on real 

property after the death of his or her 

spouse, VA will deduct the amount of 

the pre-payment from the veteran’s 

income. The real property must have 

been the principal residence of the 

veteran and spouse, and the mortgage or 

security instrument must have existed 

when the veteran’s spouse died.

(2) Time limit of pre-payment. The 

pre-payment described in paragraph 

(d)(1) of this section must be made after 

the spouse’s death but before the end of 

the year following the year of death. VA 

will deduct the amount of the prepayment from the veteran’s income for 

the year of death or the year after death, 

whichever is to the veteran’s advantage.

(Authority: Sec. 306, Pub. L. 95–588, 92 Stat. 

2508)

§ 5.475 Gaining or losing a dependent for 

section 306 and old-law pension. 

(a) Pension beneficiary gains a 

dependent. (1) Section 306 or old-law 

pension. If a section 306 or old-law 

pension beneficiary gains a dependent, 

VA will determine if a higher annual 

income limit applies. A higher limit 

applies if the beneficiary previously had 

no dependents. 

(2) Veteran receiving section 306 

pension gains a spouse who has income. 

If a veteran beneficiary of section 306 

pension gains a spouse who has 

countable income, VA will recompute 

the veteran’s income for the year in 

which the person became the veteran’s 

spouse. VA will then determine if the 

veteran is entitled to continued pension 

benefits or whether the recomputed 

income exceeds the annual income 

limit. VA makes the determination 

based on calendar-year income. 

However, VA will not count income that 

the spouse received or deduct any of the 

spouse’s expenses paid before the date 

the person became the veteran’s spouse 

for VA purposes. 

(b) Pension beneficiary loses 

dependent. (1) Loss of last dependent. 

When section 306 or old-law pension 

beneficiaries lose their last dependent, 

their annual income limit is lowered. 

When this occurs, VA must determine if 

the beneficiary is still entitled to 

pension based on the lowered income 

limit and recalculated income for the 

calendar year that the dependent was 

lost. 

(2) Computation of new rate if a 

dependent established on or before 

December 31, 1978. If a pension 

beneficiary loses a dependent and that 

dependent was established on or before 

December 31, 1978, VA will calculate a 

new pension rate. Because section 306 

and old-law pension rates are based on 

1978 income and number of 

dependents, VA calculates the new rate 

by removing the dependent and the 

dependent’s 1978 income, if any, and 

using the remaining 1978 income to 

determine the new rate. 

(i) If the recomputed rate is higher 

than the previous rate, VA will continue 

the previous rate. 

(ii) If the rate payable to a surviving 

spouse with one child is less than the 

rate payable for a child alone, the 

surviving spouse will be paid the child’s 

rate unless paragraph (b)(2)(i) of this 

section applies. 

(c) Section 306 pension and 

dependency of spouse. For section 306 

pension purposes, the December 31, 

1978, rates for a veteran with a spouse 

and the annual income limit for a 

veteran with a spouse apply as long as 

the veteran and spouse live together or 

if not living together, are not estranged. 

If they are estranged, the married rates 

and the annual income limit for a 

veteran with a spouse apply if the 

veteran is reasonably contributing to the 

spouse’s support. VA counts spousal 

income only if the annual income limit 

for a veteran with a spouse applies. VA 

bases its determination of ‘‘reasonable’’

contribution on all of the circumstances 

of the case, including a consideration of 

the veteran’s income and net worth and 

the spouse’s separate income and net 

Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / Proposed Rules 77593

worth. VA automatically considers the 

requirement of ‘‘reasonable’’

contribution met without further review 

if the spouse is receiving an 

apportionment under § 3.451 of this 

chapter.

(Authority: Sec. 306, Pub. L. 95–588, 92 Stat. 

2508)

§ 5.476 Net worth for section 306 pension 

only. 

(a) Definition. For purposes of 

determining continuing entitlement to 

section 306 pension, net worth means 

the market value, minus mortgages or 

other encumbrances, of all real and 

personal property the beneficiary owns. 

VA excludes the beneficiary’s dwelling 

(single-family unit), which also includes 

a reasonable lot area, and personal 

effects suitable to and consistent with 

the beneficiary’s reasonable mode of 

life. VA will evaluate a ‘‘reasonable lot 

area’’ by considering the typical size of 

lots in the area. If the person lives on 

a farm, VA will exclude the value of a 

reasonable lot area, including the 

residence area, and consider the rest of 

the farm as part of net worth.

(b) General. VA only considers the net 

worth of the veteran, surviving spouse, 

or child beneficiary. In determining 

whether property belongs to a pension 

beneficiary, VA will consider the terms 

of the recorded deed or other evidence 

of title. In the absence of such evidence, 

VA will accept the beneficiary’s 

statement as proof of the terms of 

ownership. 

(c) How VA evaluates net worth. In 

determining whether some part of a 

beneficiary’s net worth should be used 

for his or her maintenance, VA 

considers the beneficiary’s income as 

determined under § 5.472, ‘‘Evaluation 

of income for section 306 and old-law 

pension,’’ along with all of the 

beneficiary’s living expenses. However, 

in considering the beneficiary’s living 

expenses, VA cannot consider expenses 

it excluded or deducted in determining 

income. In addition to these income and 

expense factors, VA will also consider 

the following factors: 

(1) The value of liquid assets and the 

value of other property the beneficiary 

can readily convert into cash. 

(2) The ability of the beneficiary to 

dispose of property if limited by 

community property laws. 

(3) The number of family members (as 

described in § 5.474(b)(1)(i)) who 

depend on the beneficiary for support. 

(4) The beneficiary’s average life 

expectancy, and the potential rate of 

depletion of the beneficiary’s net worth. 

(d) Statutory exclusions from net 

worth. Resources excluded by statute 

will not be considered part of the 

beneficiary’s net worth. For the list of 

resources excluded by statute, see 

[regulation that will be published in a 

future Notice of Proposed Rulemaking].

(Authority: Sec. 306, Pub. L. 95–588, 92 Stat. 

2508)

§ 5.477 Effective dates for section 306 and 

old-law pension reductions or 

discontinuances. 

(a) Reductions or discontinuances 

based on certain events. If required, VA 

will pay a reduced section 306 or oldlaw pension rate or discontinue benefits 

effective January 1 of the calendar year 

immediately following any of these 

events: 

(1) Marriage, annulment, divorce, or 

death. A beneficiary loses a dependent 

due to marriage, annulment, divorce, or 

death. 

(2) Increased income. The beneficiary 

receives increased income that could 

not reasonably have been anticipated 

based on the amount actually received 

from that source the previous year. 

(3) Increased net worth. The 

beneficiary’s net worth increases to the 

extent benefits must be discontinued 

(section 306 pension only). 

(b) General effective dates apply for 

other reasons. VA will use the general 

effective dates in §§ 3.500 through 3.503 

of this chapter for a discontinuance or 

reduction for any reason other than 

those stated in paragraph (a) of this 

section or in § 5.478(a).

(Authority: Sec. 306, Pub. L. 95–588, 92 Stat. 

2508)

§ 5.478 Time limit to establish continuing 

entitlement to section 306 or old-law 

pension. 

(a) Anticipated income appears to 

exceed income limit. If it appears that a 

section 306 or old-law pension 

beneficiary’s income for a calendar year 

will be higher than the annual income 

limit, VA will discontinue pension 

benefits for that year effective January 1 

of the following year, subject to 

paragraph (b) of this section. 

(b) Time limit for continuing 

entitlement. If VA discontinues pension 

benefits as described in paragraph (a) of 

this section because of the beneficiary’s 

anticipated income for a calendar year, 

the beneficiary can establish continuing 

entitlement by submitting evidence 

showing that income for the calendar 

year was below the annual income limit. 

The beneficiary must submit the 

evidence before the end of the calendar 

year that follows the year for which VA 

determined the income exceeded the 

limit. For example, if VA determines 

that a beneficiary’s income for 2005 

exceeds the income limit and 

discontinues pension benefits effective 

January 1, 2006, the beneficiary has up 

to and including December 31, 2006, to 

submit evidence such as deductible 

medical expenses or other information 

showing that 2005 income was within 

the 2005 income limit. 

(c) Finality of discontinuance. If a 

beneficiary does not submit income 

evidence as described in paragraph (b) 

of this section or if such evidence does 

not warrant continued benefits, the 

discontinuance described in paragraph 

(a) of this section is final. This means 

that the beneficiary is no longer entitled 

to receive section 306 or old-law 

pension benefits. Any new entitlement 

that may be established would be to 

Improved pension.

(Authority: 38 U.S.C. 5110(h))

§§ 5.479 through 5.499 [Reserved] 

[FR Doc. 04–28161 Filed 12–23–04; 8:45 am] 

BILLING CODE 8320–01–P