T.C. Memo. 1997-277
UNITED STATES TAX COURT
MARGARET M. MERKER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26855-95. Filed June 18, 1997.
Margaret M. Merker, pro se.
Marjory A. Gilbert, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
POWELL, Special Trial Judge: This case was assigned
pursuant to the provisions of section 7443A(b)(3) and Rules 180,
181, and 182.1
1
Unless otherwise indicated, 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.
- 2 -
Respondent determined deficiencies in petitioner's Federal
income taxes for the taxable years 1992 and 1993 in the amounts
of $799 and $791, respectively. Respondent also determined
additions to tax pursuant to section 6651(a) in the respective
amounts of $199.75 and $197.75. Petitioner resided in Chicago,
Illinois, at the time she filed her petition.
After concessions,2 the primary issue is whether amounts
received by petitioner as a disability retirement annuity under
the Federal Employees' Retirement System (FERS)3 are excludable
from gross income for the years in issue.
FINDINGS OF FACT
Petitioner worked in a distribution center for the U.S.
Postal Service (Postal Service) from August 1984 to October 1990.
As a result of the inhalation of dust emanating from the postal
machines petitioner developed severe asthma or "occupational
2
Respondent concedes that for the taxable years 1992 and 1993
(1) petitioner is not liable for the additions to tax under sec.
6651(a) due to petitioner's reliance on the erroneous advice of
the U.S. Office of Personnel Management, discussed infra; (2)
petitioner is entitled to credits for the permanently and totally
disabled pursuant to sec. 22 in the amounts of $472 and $463,
respectively; and (3) if the FERS disability retirement annuity
is not subject to Federal income tax, petitioner was not required
to file Federal income tax returns. Petitioner concedes that the
interest and dividends described in the notice of deficiency
constitute taxable income.
3
Congress created the Federal Employees' Retirement System,
the successor to the Civil Service Retirement System, with the
enactment of the Federal Employees' Retirement System Act of
1986, Pub. L. 99-335, 100 Stat. 514, codified as amended at 5
U.S.C. secs. 8401-8479 (1994).
- 3 -
disease". To compound petitioner's medical problems, petitioner
was injured when she fell while on the job. Petitioner has
severe arthritis, has had one knee replaced, and, as of the date
of trial, was scheduled for surgery to replace her other knee.
These maladies have left petitioner completely and permanently
disabled. In October 1990, at the age of 54, petitioner retired
from the Postal Service due to her disability. Petitioner
subsequently began receiving a FERS disability retirement annuity
(disability annuity). Petitioner received disability annuity
payments during 1992 and 1993 in the amounts of $10,954 and
$11,182, respectively.
Petitioner was told by the U.S. Office of Personnel
Management (OPM) that her disability annuity was not subject to
Federal income tax. No Federal income tax was withheld from the
payments. As a result of the advice from OPM petitioner did not
file Federal income tax returns for the taxable years 1992, 1993,
or 1994.
Respondent issued a notice of deficiency for the taxable
years 1992 and 1993. In the notice of deficiency respondent
determined that petitioner failed to report the disability
annuity payments, as well as interest and dividend income in the
amounts of $258 and $149, respectively, as gross income for the
taxable years 1992 and 1993. As of the date of trial, no notice
- 4 -
of deficiency had been issued to petitioner for the 1994 taxable
year.
- 5 -
OPINION
Petitioner's brief does not directly address the taxability
of the disability annuity but rather expresses petitioner's
frustration and anger at the U.S. Government. Her various
statements, requests, and arguments reflect these feelings. This
Court is a court of limited jurisdiction. See sec. 7442; Wilt v.
Commissioner, 60 T.C. 977, 978 (1973). Our jurisdiction to
redetermine a deficiency is dependent on the issuance of a valid
notice of deficiency. Sec. 6213(a); Rule 13(a); Estate of
Bartels v. Commissioner, 106 T.C. 430, 435 (1996); Levitt v.
Commissioner, 97 T.C. 437, 441 (1991). Our jurisdiction does not
extend to settling employment disputes with various departments
and agencies of the United States. See sec. 7442; Steines v.
Commissioner, T.C. Memo. 1991-588, affd. without published
opinion 12 F.3d 1101 (7th Cir. 1993). The issue over which we
have jurisdiction is whether petitioner's FERS disability annuity
payments, or any portion thereof, are excludable from gross
income.4
Section 61(a) defines gross income broadly as "all income
from whatever source derived". The Supreme Court "has given a
liberal construction to this broad phraseology in recognition of
4
Petitioner's petition also sought to bring her 1994 taxable
year before the Court. Since no notice of deficiency has been
issued for petitioner's 1994 taxable year, we lack jurisdiction
over petitioner's 1994 taxable year. Estate of Bartels v.
Commissioner, 106 T.C. 430 (1996).
- 6 -
the intention of Congress to tax all gains except those
specifically exempted." Commissioner v. Glenshaw Glass Co., 348
U.S. 426, 430 (1955). Exclusions from income are matters of
legislative grace and are construed narrowly. Commissioner v.
Schleier, 515 U.S. ___, , 115 S. Ct. 2159, 2163 (1995);
Mostowy v. United States, 966 F.2d 668, 671 (Fed. Cir. 1992). A
taxpayer seeking a deduction or exclusion "must be able to point
to an applicable statute and show that he comes within its
terms." New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934); Commissioner v. Schleier, supra.
Generally, section 72(b) excludes from gross income any
amount received as an annuity under an annuity, endowment, or
life insurance contract to the extent such an amount is
attributable to the taxpayer's investment in the contract.
Section 1.72-15(b), Income Tax Regs., provides that, as a general
rule, section 72 does not apply to any amount received as an
accident or health benefit.
Section 104(a) excludes from gross income any amounts
described in paragraphs (1) through (5) of that section.
Paragraphs (4) and (5) of section 104(a) are, on their face,
inapplicable to the facts before us, and we focus our attention
on the remaining paragraphs.5 In addition, section 105(a)
5
Sec. 104(a)(4) applies to taxpayers that have served in the
armed forces or certain other organizations with which petitioner
(continued...)
- 7 -
includes in gross income certain amounts received under accident
and health plans.
Section 104(a)(1)
Section 104(a)(1) excludes from gross income "amounts
received under workmen's compensation acts as compensation for
personal injuries or sickness". To meet the definition of
"workmen's compensation acts" for purposes of section 104(a)(1)
the statute in issue must require, as a precondition to
eligibility for benefits, that the injury be incurred in the
course of employment. Take v. Commissioner, 804 F.2d 553, 557
(9th Cir. 1986), affg. 82 T.C. 630, 634 (1984); Haar v.
Commissioner, 78 T.C. 864, 868 (1982), affd. per curiam 709 F.2d
1206 (8th Cir. 1983). The relevant inquiry is into the nature of
the statute pursuant to which the payment is made and not the
source of the particular taxpayer's injury. Smelley v. United
States, 806 F. Supp. 932, 935 (N.D. Ala. 1992), affd. per curiam
3 F.3d 389 (11th Cir. 1993). Thus, if the statute does not
qualify, the fact that the taxpayer's injury was in fact work
related is irrelevant. Id.
Eligibility for disability retirement benefits under FERS is
dependent on completion of 18 months of creditable civilian
5
(...continued)
has had no affiliation. Sec. 104(a)(5) applies to victims of
terrorist attacks. Petitioner does not purport to be the victim
of a terrorist attack.
- 8 -
service and a determination of disability. 5 U.S.C. sec.
8451(a)(1)(A) (1994). Disability is defined in 5 U.S.C. sec.
8451(a)(1)(B) (1994), which provides:
For purposes of this subsection, an employee shall be
considered disabled only if the employee is found by the
Office [OPM] to be unable, because of disease or injury, to
render useful and efficient service in the employee's
position.
Under this statute a taxpayer's disability, and thus eligibility
for benefits, depends upon the ability to perform the tasks
required by the employment, not the place of injury.
Petitioner's disability annuity payments were made pursuant to 5
U.S.C. section 8451(a)(1). Because that section does not
distinguish between injuries occurring on the job or elsewhere,
section 104(a)(1) does not exclude the disability annuity
payments received by petitioner from gross income. See Haar v.
Commissioner, supra at 866-868 (holding that similar wording in 5
U.S.C. sec. 8331(6), relating to the Civil Service Retirement
System, did not distinguish between injuries occurring on and off
the job).6
Section 104(a)(2)
Section 104(a)(2) excludes from gross income "the amount of
any damages received (whether by suit or agreement and whether as
lump sums or as periodic payments) on account of personal
6
5 U.S.C. sec. 8331(6) was repealed by the Omnibus Budget
Reconciliation Act of 1980, Pub. L. 96-499, tit. IV, sec. 403(b),
94 Stat. 2606. Cf. 5 U.S.C. sec. 8337 (1994).
- 9 -
injuries or sickness". "The term 'damages received (whether by
suit or agreement)' means an amount received (other than
workmen's compensation) through prosecution of a legal suit or
action based upon tort or tort type rights, or through a
settlement agreement entered into in lieu of such prosecution."
Sec. 1.104-1(c), Income Tax Regs. Thus, the exclusion must
derive from some sort of tort claim against the payor. Rickel v.
Commissioner, 900 F.2d 655, 658 (3d Cir. 1990), affg. in part and
revg. in part on other grounds 92 T.C. 510 (1989).
The Federal Employees' Compensation Act provides
compensation to Federal employees for work-related injuries. 5
U.S.C. secs. 8101-8151 (1994). The liability of the United
States or any instrumentality thereof, in or under any judicial
proceeding, civil action, workmen's compensation statute, or
Federal tort liability statute, is expressly limited to the
relief provided in the Federal Employees' Compensation Act. 5
U.S.C. sec. 8116(c). Petitioner, however, received her
disability annuity under 5 U.S.C. secs. 8451-8456 (1994). Since
the exclusive legal remedy for redress of petitioner's tort
claims against the Federal Government resulting from on the job
injuries is contained in the Federal Employees' Compensation Act,
it is axiomatic that petitioner's disability annuity, received
under a different set of statutes, must have been received for a
different purpose. See Flaherty v. Commissioner, T.C. Memo.
- 10 -
1987-61 (holding that an Internal Revenue Service employee's
disability retirement annuity payments received under the Civil
Service Retirement System were not excludable under section
104(a)(2) because the payments were intended to provide for the
physical and mental well-being of the employee and were not
damages from the settlement or prosecution of a legal suit); see
also Federal Employees' Retirement System Act of 1986, Pub. L.
99-335, sec. 100A, 100 Stat. 516 (listing the purposes of FERS,
none of which include compensation for tort type claims). Thus,
section 104(a)(2) does not apply here.
Sections 104(a)(3) and 105(a)
Section 104(a)(3) excludes from gross income amounts
received by an employee "through accident or health insurance for
personal injuries or sickness" except to the extent such amounts
are (A) attributable to contributions made by the employer which
were not includable in the gross income of the employee, or (B)
paid by the employer. Section 105(a) is essentially the mirror
image of section 104(a)(3), and, subject to two exceptions,
includes in the gross income of an employee amounts received
through accident or health insurance for personal injuries or
sickness to the extent such amounts are (A) attributable to
- 11 -
contributions by the employer which were not includable in the
gross income of the employee or (B) are paid by the employer.7
Section 105(b) provides an exclusion for amounts paid by an
employer to the taxpayer to reimburse the taxpayer for expenses
for medical care. Medical expense reimbursements are not at
issue in this case, so the exception in section 105(b) does not
apply. Section 105(c) excludes from gross income amounts paid by
an employer 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, and (2)
are computed with reference to the nature of the injury without
regard to the period the employee is absent from work. However,
section 105(c) applies to exclude payments from gross income only
if the plan or contract under which such payments are made varies
the amount of the payments according to the type and severity of
the injury suffered by the employee. Rosen v. United States, 829
F.2d 506, 509 (4th Cir. 1987); Beisler v. Commissioner, 814 F.2d
1304, 1307 (9th Cir. 1987), affg. en banc T.C. Memo. 1985-25.
7
Former sec. 105(d) provided a limited exclusion from gross
income for amounts received in lieu of wages prior to attaining
age 65 by completely disabled persons retired on disability.
Sec. 105(d) was repealed by sec. 122(b) of the Social Security
Amendments of 1983, Pub. L. 98-21, 97 Stat. 87, and replaced with
a credit for the permanently and totally disabled for years
beginning after Dec. 31, 1983, provided in sec. 37. Sec. 37 was
subsequently renumbered as sec. 22. Deficit Reduction Act of
1984, Pub. L. 98-369, sec. 471(c)(1), 98 Stat. 484, 826.
Respondent has conceded that petitioner is entitled to a credit
under sec. 22 for the years in issue. See supra note 2.
- 12 -
Under FERS, the computation of disability retirement annuity
payments does not vary with the nature of the injury; all
employees considered "disabled" receive benefits under a single
formula based on the employee's "average pay". 5 U.S.C. secs.
8451 and 8452. Accordingly, petitioner is not entitled to
exclude the disability annuity payments under section 105(c).
See Beisler v. Commissioner, supra at 1309.
Thus, we are left to consider the possibility of exclusion
under section 104(a)(3) or 72(b). To grant petitioner relief
from taxation under either section 104(a)(3) or 72(b), it is
necessary to determine the amount of the disability annuity
payments attributable to petitioner's contributions toward the
disability annuity as well as the percentage of the overall
contributions that this constitutes. While petitioner's
participation in FERS may require after-tax contributions, there
is no evidence of the amount of her after-tax FERS contributions.
See 5 U.S.C. sec. 8422(a)(1) and (2) (1994). Accordingly, we are
unable to grant petitioner any relief under either section
104(a)(3) or 72(b).8
Petitioner claims that she is being persecuted for the
Government's mistake. In legal terms, this amounts to an
argument that respondent should be equitably estopped from
8
We need not decide, therefore, any questions concerning the
interrelationship or applicability of these two sections to the
disability annuity received by petitioner.
- 13 -
assessing the deficiencies against petitioner because OPM
provided petitioner with erroneous advice concerning the
taxability of her disability annuity payments. Even if we assume
that equitable estoppel can operate against the Government in
some circumstances, there is no basis for applying the concept
here. Cf. OPM v. Richmond, 496 U.S. 414, 420 (1990). The
traditional elements of estoppel are: (1) Misrepresentation by
the party against whom estoppel is asserted; (2) reasonable
reliance on that misrepresentation by the party asserting
estoppel; and (3) detriment to the party asserting estoppel.
Heckler v. Community Health Services, 467 U.S. 51, 59 (1984);
Kennedy v. United States, 965 F.2d 413, 417 (7th Cir. 1992).
Both the Heckler and Kennedy cases discussed the detriment
requirement. In Heckler v. Community Health Services, supra, the
Supreme Court described the "detriment" suffered as the inability
to retain money (medicare reimbursements) that should never have
been received in the first place. The Supreme Court stated:
this is not a case in which * * * [a party] has lost any
legal right, either vested or contingent, or suffered any
adverse change in its status. * * * Here * * * [the party]
lost no rights but merely was induced to do something which
could be corrected at a later time.
There is no doubt that * * * [the party] will be
adversely affected by the Government's recoupment of the
funds that it has already spent. It will surely have to
curtail its operations and may even be forced to seek relief
from its debts through bankruptcy. * * * [The party] may
need an extended period of repayment or other modifications
in the recoupment process if it is to continue to operate,
but questions concerning the Government's method of
enforcing collection are not before us. The question is
- 14 -
whether the Government has entirely forfeited its right to
the money. [Id. at 61-62; fn. refs. omitted.]
In Kennedy v. United States, supra, the Court of Appeals for
the Seventh Circuit held that the underpayment of taxes lawfully
owing did not constitute a detriment, relying on Heckler v.
Community Health Services, supra. The Court of Appeals for the
Seventh Circuit stated that "We do not believe the estoppel
doctrine should be used against the government when the estoppel
claimant's detriment is the loss of a windfall that could have
never been statutorily effectuated". Kennedy v. United States,
supra at 418-419; see also Thomas v. Commissioner, 92 T.C. 206,
227 (1989). Accordingly, petitioner is not entitled to relief
under the equitable estoppel doctrine.
Petitioner also demands a jury trial. In Mathes v.
Commissioner, 576 F.2d 70, 71-72 (5th Cir. 1978), affg. T.C.
Memo. 1977-220, the Court of Appeals for the Fifth Circuit
answered this demand by stating that:
The Seventh Amendment preserves the right to jury trial "in
suits at common law." Since there was no right of action at
common law against a sovereign, enforceable by jury trial or
otherwise, there is no constitutional right to a jury trial
in a suit against the United States. Thus, there is a right
to a jury trial in actions against the United States only if
a statute so provides. Congress has not so provided when
the taxpayer elects not to pay the assessment and sue for a
redetermination in the Tax Court. For a taxpayer to obtain
a trial by jury, he must pay the tax allegedly owed and sue
for a refund in [United States] district court. The law is
therefore clear that a taxpayer who elects to bring his suit
in the Tax Court has no right, statutory or constitutional,
to a trial by jury. [Citations omitted.]
- 15 -
Finally, in passing, petitioner has mentioned that she
incurred significant medical expenses. Section 213(a), subject
to certain limitations, allows taxpayers a deduction for medical
expenses that are not compensated for by insurance or otherwise.
However, petitioner has not introduced any evidence to establish
the amount of her medical expenses for the years in issue.
Accordingly, we are unable to grant petitioner any relief from
the determined deficiencies in the form of a deduction for
medical expenses.
We conclude that, except as provided in respondent's
concessions, petitioner is not entitled to any relief from the
determined deficiencies. We reach this decision with some
reluctance, but note, as did the Supreme Court in Federal Crop
Ins. Corp. v. Merrill, 332 U.S. 380, 386 (1947), that "The
circumstances of this case tempt one to read the [regulations]
[and statutes] * * * with charitable laxity. But not even the
temptations of a hard case can elude the clear meaning of the
[regulations] [and statutes]."
To reflect the foregoing,
Decision will be entered
under Rule 155.