T.C. Memo. 1996-405
UNITED STATES TAX COURT
LAWRENCE L. AND KATHLEEN J. KELTER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6209-95. Filed September 3, 1996.
P sustained work-related injuries to his hands.
For that reason, the pension plan of which P was a
member distributed to P 100 percent of his accrued plan
benefit. R determined a deficiency in income tax based
on Ps' failure to include that distribution in gross
income. Ps argue that the distributions are excludable
from gross income under sec. 105(c), I.R.C.
Held: The distributions are not excludable from
gross income under sec. 105(c), I.R.C., because the
amount of the distribution was not computed with
reference to the nature of the injuries sustained by P.
John F. Daniels III, for petitioners.
Katherine Holmes Ankeny, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: By notice of deficiency dated January 27,
1995, respondent determined deficiencies of $190,189 and $45,127
in petitioners’ Federal income tax liabilities for 1989 and 1990,
respectively. The only question for decision is whether certain
pension plan distributions that petitioner Lawrence L. Kelter
received in 1989 and 1990 are includable in gross income. Unless
otherwise noted, all section references are to the Internal
Revenue Code in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some facts have been stipulated and are so found. The
stipulation of facts filed by the parties and accompanying
exhibits are incorporated herein by this reference. Petitioners
resided in Scottsdale, Arizona, at the time the petition in this
case was filed.
Dr. Kelter
Petitioner Lawrence L. Kelter (hereafter, petitioner) is a
dentist. In 1987, petitioner began suffering from bilateral
carpel tunnel syndrome. Thereafter, in 1987, 1988, and 1989,
petitioner underwent several surgeries in order to alleviate his
pain and suffering therefrom. The surgeries were unsuccessful in
relieving petitioner’s pain. In 1987, petitioner ceased the
practice of dentistry.
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The Pension Plan
Petitioner had carried on his dental practice as an employee
of Kelter Professional Corp. (the corporation). Petitioner was
the sole officer, director, and shareholder of the corporation.
On December 31, 1984, the corporation adopted the “Kelter
Professional Corporation Restated Pension Plan No. Two” (the
Plan), a defined benefit plan. Section 9.3 of the Plan is
entitled “Disability”, and provides:
A participant who becomes totally and permanently
disabled prior to his Normal Retirement Date shall be
vested one hundred percent (100%) in his Accrued
Benefit. The determination of the Committee based upon
competent medical advice which shall include the
opinion of a licensed physician shall be final as to
whether any Participant is totally and permanently
disabled within the meaning of this paragraph. * * *
Benefits payable under this Section 9.3 shall be deemed
made from a disability plan maintained by the Employer
pursuant to Sections 105(c) and 105(e) of the Code.
The “Committee” specified in section 9.3 of the Plan (the
Committee) consisted only of petitioner and his wife. As defined
by the Committee, the term “totally and permanently disabled”
meant that the participant would be unable to do any job. The
term “Accrued Benefit” is defined in the Plan to mean, “at any
time the monthly retirement benefit to which a Participant is
entitled * * * [subject to certain limitations] commencing at his
Normal Retirement Date based upon his number of Years of
Participation to the date of determination.”
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In 1989 and 1990, petitioner received distributions pursuant
to the Plan of $654,964 and $136,749, respectively (collectively,
the plan distributions). The plan distributions equaled
100 percent of petitioner’s accrued benefits under the Plan.
Petitioner did not report the plan distributions as items of
gross income on petitioners’ joint 1989 and 1990 Federal income
tax returns.
There were no writings concerning any determination by the
Committee that petitioner was totally and permanently disabled.
The Committee determined that petitioner was totally and
permanently disabled on or about November 7, 1989.
On February 20, 1986, the corporation had filed with the
Internal Revenue Service a Form 5300, Application for
Determination for Defined Benefit Plan For Pension Plans Other
Than Money Purchase Plans. On June 2, 1987, the Internal Revenue
Service issued a favorable determination letter (the
determination letter).
OPINION
I. Introduction
The only question we must decide is whether the plan
distributions constitute items of gross income to petitioner.
Petitioners claim that the Plan was a dual purpose plan providing
both retirement and disability benefits and that the plan
distributions were disability payments excludable from gross
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income pursuant to section 105(c) and (e). Alternatively,
petitioners claim that, because of the determination letter,
respondent is precluded from challenging the qualification of the
Plan under section 105. Respondent challenges the qualification
of the Plan as an accident and health plan for employees under
section 105(e), claims that the plan distributions were not
computed with reference to the nature of the injury under section
105(c)(2), claims that the Plan distributions did not constitute
payments for the permanent loss or loss of use of a member or
function of the body under section 105(c)(1), and claims that
petitioners are not entitled to rely on the determination letter.
Because we agree with respondent that the plan distributions
were not computed with reference to the nature of the injury
under section 105(c)(2), we need not consider whether the Plan
qualifies as an accident and health plan for employees under
section 105(e) or whether Plan distributions constituted payments
for the permanent loss or loss of use of a member or function of
the body under section 105(c)(1). We also agree with respondent
that petitioners are unable to rely on the determination letter.
II. Applicable Law
A. The Statute
Section 105(a) provides the general rule that amounts
received by an employee through accident or health insurance for
personal injuries or sickness shall be included in gross income
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to the extent such amounts are attributable to employer
contributions that were not includable in the employee's gross
income. Section 105(e) provides that amounts received by an
employee from employer accident or health plans shall, for
purposes of sections 104 and 105, be treated as amounts received
from accident or health insurance.
Section 105(c) provides an exception to the general rule
contained in section 105(a):
(c) Payments Unrelated to Absence From Work.--
Gross income does not include amounts referred to in
subsection (a) to the extent such amounts--
(1) constitute payment for the permanent
loss or loss of use of a member or function
of the body, or the permanent disfigurement,
of the taxpayer, his spouse, or a dependent
(as defined in section 152), and
(2) are computed with reference to the
nature of the injury without regard to the
period the employee is absent from work.
Thus, among other requirements, in order for the plan
distributions to be excluded from gross income, the payments must
have been computed with reference to the nature of petitioner's
injuries without regard to the period petitioner was absent from
work.
B. Case Law
In Hines v. Commissioner, 72 T.C. 715 (1979), we were
concerned with an airline pilot who had suffered a heart attack
that, under both the rules of his employer and regulations
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promulgated by the Federal Aviation Administration, rendered him
ineligible for employment as an airline pilot. Under a loss of
license plan maintained by the pilot’s employer, because of his
medical incapacity, he became entitled to certain payments.
Under that plan, all medically incapacitated pilots received the
same yearly benefit. We determined that the payments received by
the pilot failed to satisfy the requirement of section 105(c)(2)
that payments be computed with reference to the nature of the
injury:
The benefits, however, do not vary according to the
type of injury received and a pilot who has a heart
attack is entitled to the same benefits as one who
suffers a mental breakdown or loses a limb. Thus, the
payments are not computed with reference to the nature
of the injury. [Id. at 720.]
We refused to accept the taxpayer’s argument that payment
for any injury that permanently robs an individual of his
principal means of livelihood should qualify for the section
105(c) exclusion. We stated:
We think that the overall scheme of section 105(c) is
aimed at providing tax relief to persons who suffer
serious, permanent physical injury and receive
compensation because of it. The fact that a person may
have also lost wages or suffered a diminution of
earning capacity because of the injury is irrelevant.
* * * [Id.; emphasis added.]
In Beisler v. Commissioner, 814 F.2d 1304 (9th Cir. 1987),
affg. T.C. Memo. 1985-25, the Court of Appeals for the Ninth
Circuit affirmed a decision of ours based on our finding that
line-of-duty disability payments received on account of a career-
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ending injury sustained by a professional football player were
not computed with reference to the nature of the football injury
he sustained. The player earned a specified benefit credit for
each season he played, which was not dependent on the nature of
the injuries sustained. If appealed, our decision in this case
is likely to go to the Court of Appeals for the Ninth Circuit.
In affirming our decision in the Beisler case, the Court of
Appeals for the Ninth Circuit said: “We conclude that benefit
payments, to be excludable from gross income under section
105(c), must be made under a plan that varies benefits according
to the type and severity of the injury incurred.” Id. at 1307.
Turning to the facts of the case before it, the Court of Appeals
for the Ninth Circuit said:
Mr. Beisler's benefit payments necessarily fail to
qualify for exclusion under section 105(c)(2). Rather
than computing benefit amounts with reference to the
type and severity of the injury, the NFL Plan, upon a
showing of substantial disablement, determines them
solely on the basis of the number of seasons played.
The fact that the NFL Plan compensates only the most
severe permanent injuries (those subsumed under the
term "substantial disablement") does not cure this
section 105(c)(2) defect. * * * The plan makes no
attempt to distinguish among the various "substantial
disablements," even though the types and severity of
these injuries can vary greatly. The NFL Plan thus
does not compute the amount of its disability payments
with reference to the nature of the injury. [Id. at
1309; emphasis added.]
III. Discussion
The payments in question here (the plan distributions)
equaled 100 percent of petitioner’s accrued benefits under the
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Plan. Petitioners claim that the plan distributions were made
under section 9.3 of the Plan on account of petitioner becoming
totally and permanently disabled. The Plan contains no
definition of the term “totally and permanently disabled”,
although the Committee, which consisted of petitioner and his
wife, determined that the term meant that a Plan participant
would be unable to do any job.
The cases cited previously, Beisler v. Commissioner, supra
and Hines v. Commissioner, supra, suggest that, to satisfy the
computed-with-reference-to-the-nature-of-the-injury requirement
of section 105(c)(2), an employee health or accident plan must
provide at least two levels of benefits, with the difference in
entitlement at each level keyed to the nature (severity) of the
injury compensated at that level. Whether a plan that has only
one level of benefit, keyed to truly the severest of injuries
(e.g., loss of all limbs or irreversible coma), would qualify is
unclear. See Beisler v. Commissioner, supra at 1308 n.3. We
need not deal with that theoretical possibility, however,
because, although here there was only one level of benefit
specified in the Plan (for total and permanent disability), we
are unconvinced that the term “total and permanent disability”,
as used in section 9.3 of the Plan, encompassed injuries of only
the truly severest kind.
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The Committee determined that petitioner was totally and
permanently disabled in November 1989. Petitioners propose that
we find that such determination by the Committee was based on
competent medical advice, “which included [the advice] of
Dr. Sterusky, Dr. Moote, Dr. Butzine and Dr. Cofield.” In
support of that proposed finding, however, petitioners have
failed to cite us to specific testimony or documents in the
record that would constitute such medical advice.
A letter from Dr. Sterusky, dated May 25, 1988, states that
petitioner “is permanently and totally disabled to practice
dentistry”. (Emphasis added.) Dr. Sterusky’s office notes from
October 12, 1989, express the conclusion that petitioner’s
medical condition is stationary and that he has a 10 percent
permanent impairment of both the right and left upper
extremities. Dr. Sterusky’s office notes from May 15, 1990,
state his belief that petitioner could drive, could work as a
dental equipment salesman or dental technologist instructor, or
could do dental bill auditing.
A letter from Dr. Moote dated June 14, 1988, states that
petitioner will never be able to practice dentistry on account of
his problems with his upper extremities. Petitioners have
submitted Dr. Moote’s expert witness report dated January 19,
1996. Although Dr. Moote’s expert testimony is that petitioner’s
injuries preclude him from employment other than dentistry, that
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testimony is contradicted by statements that Dr. Moote made
earlier, on eight occasions from 1990 through 1992 in documents
entitled “Attending Physician’s Statements”. In those
statements, Dr. Moote gives the prognosis that petitioner is not
totally disabled from performing work other than dentistry. He
states that petitioner is incapable of performing those duties of
his job (dentistry) that required using his hands to grip or
required bending his wrists. Dr. Moote has failed to convince us
that petitioner is disabled beyond being disabled for the
practice of dentistry or occupations requiring similar motor
skills. Moreover, petitioners have failed to convince us that,
in November 1989, the Committee was in receipt of advice from
Dr. Moote that petitioner’s injuries precluded him from all
employment.
Dr. Cofield is the consulting psychologist who evaluated
petitioner on January 11, 1988. He found very significant
elevations on clinical scales measuring, among other things,
hypochondria, hysteria, and depression. His evaluation states
that, if petitioner’s condition were not checked, it could “lead
to chronic unemployment and many unproductive years.” Among
other things, Dr. Cofield suggested personal and vocational
counseling to assist petitioner in setting future goals and
making reasonable plans. In his evaluation, Dr. Cofield did not
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state that petitioner’s psychological condition made him
presently unemployable.
Dr. Butzine did not testify, nor is any copy of any report
by him in the record. However, attached to Dr. Moote’s expert
testimony is a letter from Dr. Butzine to Aetna Commercial
claims, dated March 9, 1988, acknowledging Aetna’s request for
the results of a psychiatric evaluation done on petitioner
“regarding the issue of disability.” In that letter, Dr. Butzine
refuses to provide any information on the grounds that he
believed that his interview with petitioner was not to be used
for purposes of determining disability, and petitioner had made
him promise that he would not reveal that information to anyone
else. He states that the information he has “might well directly
relate to the issue of disability”. Petitioners did not show
that Dr. Butzine was unavailable to testify. We shall assume
that Dr. Butzine’s testimony would have been adverse to
petitioner. Wichita Terminal Elevator Co. v. Commissioner, 6
T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).
We are convinced that, in November 1989, when the Committee
determined that petitioner was totally and permanently disabled
within the meaning of section 9.3 of the Plan, petitioner was
disabled from the practice of dentistry. We are unconvinced,
however, that he was disabled from any employment, or that the
Plan required such total disability from any employment before
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benefits could be paid pursuant to section 9.3. The term “total
and permanent disability” is undefined in the Plan, and, contrary
to petitioner’s testimony as to what the Committee thought that
term meant, we believe that the Committee implemented the Plan by
allowing petitioner disability benefits on a showing that he was
disabled from the practice of dentistry without a showing that he
was disabled from any employment. We find that the Plan did not
vary the amount of benefit according to the type and severity of
the injury suffered by the employee, and that the Plan’s
requirement of total and permanent disability was satisfied on a
showing of disability to practice dentistry. Based on those
findings, the Plan failed to meet the requirements of section
105(c) that payments be computed with reference to the nature of
the injury. This case is similar to both Beisler v.
Commissioner, 814 F.2d 1304 (9th Cir. 1987), and Hines v.
Commissioner, 72 T.C. 715 (1979), and we are governed by the
results therein.
Petitioners argue that both this Court, in the Hines case,
and the Court of Appeals for the Ninth Circuit, in the Beisler
case, misconstrued section 105(c) in imposing a requirement that
benefits vary in accordance with the nature of the injury. In
petitioners’ view, it suffices that benefits are paid on account
of injury or sickness and without regard to the period the
employee is absent from work. Petitioners claim: “There is no
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basis to impose any requirement that a plan must vary payments in
accordance with the type of injury.” That is the same argument
that was made to the Court of Appeals for the Ninth Circuit in
the Beisler case. It was rejected by the Court of Appeals there,
814 F.2d. at 1308, and we reject it here. Like the Court of
Appeals, we have examined the legislative history of section
105(c). We believe that it is insufficient to satisfy the
section 105(c) requirements for exclusion that payments are made
without regard to absence from work and on account of injury or
sickness. We agree with the Court of Appeals, 814 F.2d at 1308,
that petitioners’ interpretation would make the nature-of-the-
injury language superfluous. Under petitioners’ interpretation,
section 105(c) would be satisfied if the Plan had been designed
to pay petitioner 100 percent of his Accrued Benefit (his
retirement benefit) if he had gone deaf in one ear. See section
1.105-3, Income Tax Regs. (loss of substantially all of the
hearing in one ear is considered loss of use of a function of the
body). We do not believe that result comports with Congress’
purpose in enacting the section 105(c) exclusion rule.
Finally, petitioners claim that, because of the
determination letter, respondent is precluded from challenging
the qualification of the plan under section 105. We disagree.
First, we are unconvinced that the corporation asked for a
determination with respect to section 105 or pointed out to the
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Internal Revenue Service that the Plan, clearly labeled a pension
plan, contained a section dealing with disability. Second, the
determination letter does not purport to deal with the taxability
to plan participants of distributions made under the plan.
Third, petitioners have failed to show any reliance on the
determination letter, that any such reliance would have been
reasonable, or that they were damaged on account of such
purported reliance. “Although the doctrines of estoppel and
quasi-estoppel are applicable against the Commissioner, it is
well established that these doctrines should be applied against
him with utmost caution and restraint.” Estate of Emerson v.
Commissioner, 67 T.C. 612, 617 (1977) (citations omitted). This
is not an occasion for such application. Furthermore, respondent
has done nothing to revoke her determination letter, and, even if
she had, petitioners have failed to show reliance or other
grounds to challenge such revocation.
IV. Conclusion
The plan distributions constitute gross income to
petitioner. Respondent’s determinations of deficiencies are
sustained.
Decision will be entered
for respondent.