T.C. Memo. 1996-445
UNITED STATES TAX COURT
RONALD A. AND KELLIE J. WEIGELT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14989-95. Filed September 30, 1996.
Ronald A. and Kellie J. Weigelt, pro se.
Julie L. Payne, for respondent.
MEMORANDUM OPINION
DAWSON, Judge: This case was assigned to Special Trial Judge
Carleton D. Powell pursuant to section 7443A(b)(4) and Rules 180,
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181, and 183.1 The Court agrees with and adopts the opinion of
the Special Trial Judge which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
POWELL, Special Trial Judge: By notice of deficiency dated
May 25, 1995, respondent determined a deficiency in petitioners'
Federal income tax for the taxable year 1992 in the amount of
$1,348. At the time the petition was filed, petitioners resided
in Federal Way, Washington.
The issues are (1) whether petitioners are entitled to a
deduction for contributions made to Individual Retirement
Accounts (IRA's), and (2) whether petitioners are entitled to an
overpayment of income taxes paid on separation benefits received
from the U.S. Army (Army).
Petitioners timely filed a petition with this Court
disputing the disallowance of the IRA deduction and claiming an
overpayment in the amount of $17,103. The alleged overpayment
results from the inclusion of $70,070.60 in income that
petitioners contend is exempt from taxation under section
104(a)(4).
The facts concerning the $70,070.60 have their genesis in
the disintegration of the Soviet Union and the winding down of
1
Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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the Cold War. In 1980, Ronald A. Weigelt (petitioner) joined the
Army and, after completing Officer's Candidate School, was
commissioned an officer in the U.S. Army Reserves. Petitioner
had planned to make the Army a career. In 1990, the Army began a
reduction in force because of the changes in the international
situation. On September 30, 1992, petitioner was honorably
discharged from the Army and received a special separation
benefit (SSB payment) in the amount of $70,070.60.
Prior to his discharge, petitioner applied to the Department
of Veterans Affairs (DVA) for a disability pension. On January
11, 1994, the DVA notified petitioner by letter that he was
entitled to monthly disability compensation benefits commencing
November 1, 1992, December 1, 1992, and January 1, 1993, in the
respective amounts of $83, $85, and $87. The letter, however,
also informed him that
You have received a Special Separation Benefit (SSB)
payment of $70,070.60 from the Army. We must withhold
benefit payments until we recover that full amount. We
will then automatically begin monthly payments.
On their 1992 joint Federal income tax return, petitioners
reported the $70,070.60 SSB payment. Petitioners also claimed a
$4,000 deduction for two $2,000 IRA contributions. Upon
examination, respondent determined that petitioners had
unreported income from wages and interest in the respective
amounts of $153 and $83, and that the deduction claimed for the
IRA contributions was not allowable. While the 1992 return was
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being examined, petitioners filed an amended 1992 return omitting
the SSB payment from income. The amended return was treated as a
claim for refund and was denied by respondent. Petitioners do
not dispute the adjustments to the wage and interest income.
They do, however, contest the disallowance of the IRA
contributions deduction and contend that the SSB payment is
nontaxable, and, accordingly, they are entitled to an
overpayment. The parties agree that, if the SSB payment is
nontaxable, petitioners' adjusted gross income is $46,277.2
The issues raised both depend on the taxability of the SSB
payment. With regard to the IRA issue, under section 219(a) an
individual is allowed a deduction for qualified retirement
contributions. Section 219(g)(1), however, limits the deduction
where an individual or the individual's spouse is an "active
participant" for any part of the taxable year of certain pension
plans. An active participant includes a participant in "a plan
established for its employees by the United States". Sec.
219(g)(5)(A)(iii). Petitioner was an "active participant" during
1992. In the case of married individuals filing a joint return,
the deduction when one individual is an "active participant" is
reduced using a ratio determined by dividing the amount of the
taxpayers' adjusted gross income in excess of $40,000 by $10,000.
2
Adjusted gross income as reported ($112,111) plus
adjustments to income ($236) plus disallowed IRA contributions
deduction ($4,000) minus the SSB payment ($70,070).
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Sec. 219(g)(2) and (3). This results in the total disallowance
of the IRA deduction for filers of joint returns where the total
adjusted gross income exceeds $50,000. Felber v. Commissioner,
T.C. Memo. 1992-418, affd. without published opinion 998 F.2d
1018 (8th Cir. 1993). If the $70,070.60 SSB payment is
includable in petitioners' gross income, no deduction would be
allowed for the IRA contributions. Accordingly, we now turn to
that issue.
The SSB payment was made under 10 U.S.C. sec. 1174(c) and
(d) (1994). Under these provisions, a Reserve Officer who has
completed more than 5 years of active service and is
involuntarily discharged is entitled to a lump-sum separation
payment equal to the product of the total years of active service
times the monthly basic pay at the time of the discharge
multiplied by 12.
Section 61(a) provides that gross income means "all income
from whatever source derived". Unless Congress specifically
exempts certain income from inclusion, the broad language of
section 61(a) requires its inclusion. Commissioner v. Glenshaw
Glass Co., 348 U.S. 426, 430 (1955). The broad reach of section
61(a), therefore, would include the SSB payment in gross income.
To be sure, Congress may exempt types of income from taxation.
However, "exemption from taxation must be clearly made out" and
not rest on "doubt or ambiguity". Bank of Commerce v. Tennessee,
161 U.S. 134, 146 (1896), on rehearing 163 U.S. 416, 423 (1896).
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An exemption "cannot rest upon mere implications." United States
v. Stewart, 311 U.S. 60, 71 (1940); see also United States v.
Wells Fargo Bank, 485 U.S. 351, 355-356 (1988).
Section 104(a)(4) excludes from income "amounts received as
a pension * * * for personal injuries or sickness resulting from
active service in the armed forces". The parties agree that with
respect to the disability compensation received from the DVA,
those payments would be exempt under section 104(a)(4). The SSB
payment, however, was not made for personal injury or sickness.
The payment was made under 10 U.S.C. sec. 1174(c) because of
petitioner's separation from active service prior to normal
retirement, and was based, in part, on his years of active
service. There are two distinct potential sources for the
payment--the SSB payment and the DVA disability compensation.
10 U.S.C. sec. 1174(h)(2) provides, however, that
A member [of the armed forces] who has received
separation pay under this section * * * based on
service in the armed forces shall not be deprived, by
reason of his receipt of such separation pay * * * of
any disability compensation to which he is entitled
under the laws administered by the Department of
Veterans Affairs, but there shall be deducted from that
disability compensation an amount equal to the total
amount of separation pay * * * received. [10 U.S.C.
sec. 1174(h)(2).]
Petitioner does not dispute that normally the SSB payment
would be includable in gross income. See Felman v. Commissioner,
49 T.C. 599 (1968); Woolard v. Commissioner, 47 T.C. 274 (1966).
On the other hand, petitioner argues that since he in effect is
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required to repay that amount from the nontaxable DVA disability
compensation, the SSB payment should also be treated as
nontaxable.
This same issue was before the Court in Berger v.
Commissioner, 76 T.C. 687 (1981). Berger involved 10 U.S.C. sec.
687, Pub. L. 89-718, sec. 6, 80 Stat. 1115, 1116 (1966) (repealed
by Pub. L. 96-513, sec. 109(a), 94 Stat. 2870 (1980)). That
section provided that a member of the reserves who was
involuntarily released from active duty was entitled to
readjustment pay based on his years of service. If, however, the
member was entitled under repealed 10 U.S.C. sec. 687(b)(6) to
disability compensation from the DVA (then known as the Veteran's
Administration), an "amount equal to 75 percent of the
readjustment payment is deducted from the disability
compensation." In Berger, as here, the taxpayer argued that the
readjustment pay he received should be reclassified as disability
compensation excludable from income under section 104(a)(4).
Berger v. Commissioner, supra at 689. In rejecting that
argument, the Court noted that
The legislative history reveals the congressional
awareness of the plight of servicemen who have been
involuntarily released from active duty, and, who
* * * are immediately entitled to both a lump-sum
readjustment payment and disability compensation.
* * * Congress provided that these veterans would
receive readjustment pay and that upon subsequent
confirmation of entitlement to disability compensation,
the readjustment pay in essence would be repaid to the
Government by a deduction from the disability
compensation * * *
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* * * * * * *
Congress could have enacted a law which would have
allowed the immediate exclusion of readjustment
payments from taxation * * *. However, Congress did
not choose to have the lump-sum readjustment payments
treated in this manner. Congress deliberately
determined that a veteran covered by 10 U.S.C. sec.
687(b)(6) would be permitted to receive Veterans'
Administration disability compensation upon restoring
to the Government that 75-percent portion of the
readjustment payment * * *. [Id. at 693-694.]
The repealed section 687 of title 10 would appear to be the
lineal ancestor of 10 U.S.C. sec. 1174. While 10 U.S.C. sec.
1174(h)(2) mandates a 100-percent recovery of the SSB payment
before petitioner would receive the DVA disability compensation,
in substance the two provisions are the same. Congress could
have provided that the SSB payment received under 10 U.S.C. sec.
1174(c) was nontaxable to the extent it was subject to recoupment
under 10 U.S.C. sec. 1174(h)(2). We have searched the statutory
language and the legislative history of 10 U.S.C. sec. 1174 and
find no indication that Congress intended that an SSB payment
would be tax exempt under these circumstances. See H. Rept. 96-
1462 (1980). In sum, Congress did not provide for such an
exemption, and we cannot infer one. See Palm v. United States,
904 F. Supp. 1312 (M.D. Ala. 1995).3
3
Contrary to petitioners' argument, Strickland v.
Commissioner, 540 F.2d 1196 (4th Cir. 1976), is inapposite. That
case concerned the tax treatment of retirement pay and the
retroactive granting of increased disability compensation.
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Because the $70,070.60 SSB payment was properly included in
petitioners' 1992 income, petitioners' adjusted gross income
exceeds $50,000. Accordingly, the $4,000 deduction for the IRA
contributions is not allowable under section 219(g).
To reflect the foregoing,
Decision will be entered
for respondent.