Picard v. Commissioner

T.C. Memo. 1997-320

UNITED STATES TAX COURT

JAMES A. PICARD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2768-95. Filed July 9, 1997.

Martin J. Tierney and D. Dewey Watson, for petitioner.

Kevin G. Croke, for respondent.

MEMORANDUM OPINION

GALE, Judge: Respondent determined a deficiency of $3,169

in petitioner's 1992 Federal income tax and an addition to tax

pursuant to section 6651(a)1 of $782.25. This case was submitted

1
Unless otherwise noted, all 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
(continued...)
 - 2 -

to the Court fully stipulated pursuant to Rule 122. After

concessions,2 the remaining issue for decision is whether

payments made to petitioner by the City of Oakland during the

year in issue pursuant to the Oakland City Charter's retirement

provisions for public safety employees are excludable from gross

income under section 104(a)(1). We hold that the payments in

question are not excludable.

The Court bases its findings of fact on the stipulation of

facts and attached exhibits, which are incorporated herein by

this reference. Petitioner resided in Klamath Falls, Oregon, at

the time he filed the petition. Petitioner was born on June 15,

1940. He commenced employment as a member of the Police

Department of the City of Oakland, California, on October 31,

1966. He served on active duty until February 16, 1969, on which

date he suffered injuries that occurred while he was engaged in

the performance of his duties. Effective April 1, 1972,

petitioner was retired for disability by reason of these

injuries, by action of the Oakland Police and Fire Retirement

Board (the Board), which found petitioner's disability to be

service connected. As a result of the Board's action, effective

1
(...continued)
Procedure.
2
The parties have stipulated that petitioner is not liable
for the addition to tax pursuant to sec. 6651(a).
 - 3 -

April 25, 1972, petitioner became qualified for and began

receiving a disability retirement allowance in lieu of permanent

workmen's compensation.

Petitioner's disability retirement allowance was provided

pursuant to the provisions of Article XXVI of the Charter of the

City of Oakland (Oakland Charter). The Oakland Charter

establishes a retirement system for members of the Oakland Police

and Fire Departments, which provides both for retirement incident

to the completion of specified years of service (service

retirement) and for retirement incident to disability caused by

injury in the performance of duty (disability retirement).3

Section 2610(a) of the Oakland Charter provides for such

disability retirement, and the payments to petitioner at issue in

this case were awarded under that section.

Pursuant to section 2610(a) of the Charter, the retirement

allowance provided to a disabled member of the Police Department

depends upon whether or not he is qualified for service

retirement (as established under section 2608 of the Charter) at

the time of his disability retirement. If the member is

qualified for service retirement, his disability retirement

allowance is computed under section 2608 of the Charter, which

sets out the rules and formulas for service retirement generally.

3
The Charter also provides for retirement for disability not
incurred in the performance of duty and for various death
benefits, but those provisions are not involved in this case.
 - 4 -

If he is not qualified for service retirement, section 2610(a) of

the Charter provides that the disabled member's disability

retirement allowance is initially set at 75 percent of the

compensation attached to his average rank during the 1 year

immediately preceding retirement (1-year average compensation).

This "75-percent" retirement allowance is paid

until the date upon which said member would have completed
twenty-five (25) years of service and qualified for service
retirement had such member rendered service without
interruption, and on and after said date said retirement
allowance shall be equal to the retirement allowance said
member would have received if retired for service on said
date, based on the compensation attached to the average rank
held during the one (1) year next preceding retirement.
* * * [Oakland Charter sec. 2610(a).4]

Section 2608 of the Oakland Charter, governing service

retirement, generally provides for a retirement allowance equal

to 50 percent of the compensation attached to the average rank

held during the 3 years immediately preceding retirement (3-year

average compensation) for members of the Police and Fire

Departments with 25 years of service, or 20 years of service if

they have reached age 55.5

4
The text of Oakland Charter sec. 2610(a) is reproduced in
the appendix to this opinion.
5
Greater percentages are provided for those who exceed the
foregoing thresholds, and lesser percentages are provided for
those who do not meet the thresholds but have at least 10 years
of service. Members with more than 10 but less than 20 years of
(continued...)
 - 5 -

"Years of service" for purposes of section 2608 of the

Charter are computed under section 2609 of the Charter, which

counts as service, inter alia, "time during and for which said

member received compensation as a member of the Police or Fire

Department * * *, including all such time said member was unable

to perform his duties by reason of injury or sickness from any

cause."6

Pursuant to Oakland Charter section 2610(a), the disability

retirement allowance that petitioner began receiving was equal to

75 percent of 1-year average compensation, since petitioner was

not qualified for service retirement under section 2608 of the

Charter at the time he was retired for disability. Petitioner

received an allowance so computed until October 31, 1991, the

date on which he would have completed 25 years of service and

qualified for service retirement if he had rendered service

without interruption from the date he commenced employment as a

member of the Police Department. On October 31, 1991,

petitioner's disability retirement allowance was recomputed,

5
(...continued)
service cannot, in any event, begin receiving their retirement
allowances until the date which is 25 years after the date they
commenced employment. Members with less than 10 years of service
generally cannot qualify for service retirement.
The text of Oakland Charter sec. 2608 is reproduced in the
appendix.
6
The text of Oakland Charter sec. 2609 is reproduced in the
appendix.
 - 6 -

pursuant to the terms of section 2610(a) of the Charter, from 75

to 50 percent of 1-year average compensation. This recomputed

amount was equal to the amount petitioner would have received if

he had served without interruption for 25 years and retired for

service on that date, with one modification: the compensation

base to which the 50-percent allowance was applied was 1-year

average compensation rather than the 3-year average compensation

utilized in computing "regular" service retirement allowances

under Oakland Charter section 2608.

The parties have stipulated that the amounts received prior

to October 31, 1991, are excludable under section 104(a)(1). The

parties have also stipulated that petitioner did not receive any

service credit under section 2609 of the Oakland Charter for the

time during which he received a disability retirement allowance

pursuant to section 2610(a) of the Charter.

During the year in issue, petitioner received payments

totaling $27,007 from the City of Oakland, awarded pursuant to

section 2610(a) of the Charter. The parties have stipulated that

the only issue for decision is whether those payments are

excludable from gross income as disability payments under section

104(a)(1).

The Internal Revenue Code defines “gross income” as follows:

"Except as otherwise provided in this subtitle, gross income

means all income from whatever source derived". Sec. 61(a). One
 - 7 -

of the aforementioned exceptions is contained in section 104,

which excludes from gross income certain compensation for

injuries or sickness. Section 104(a)(1) provides:

SEC. 104(a). In General.--Except in the case of amounts
attributable to (and not in excess of) deductions allowed
under section 213 (relating to medical, etc., expenses) for
any prior taxable year, gross income does not include--

(1) amounts received under workmen's compensation
acts as compensation for personal injuries or sickness
* * *

The regulations further provide that the exclusion under section

104(a)(1) applies in the case of amounts received "under a

statute in the nature of a workmen's compensation act which

provides compensation to employees for personal injuries or

sickness incurred in the course of employment." Sec. 1.104-1(b),

Income Tax Regs. Whether a statute is in the nature of workmen's

compensation depends upon whether payments under the statute are

made because of injuries sustained in the line of duty. Dyer v.

Commissioner, 71 T.C. 560, 562 (1979). Finally, of most

significance to the issue in this case, the regulations under

section 104 limit the scope of the exclusion under section

104(a)(1) as follows:

section 104(a)(1) does not apply to a retirement pension or
annuity to the extent that it is determined by reference to
the employee's age or length of service, * * * even though
the employee's retirement is occasioned by an occupational
injury or sickness. [Sec. 1.104-1(b), Income Tax Regs.]

Respondent does not dispute that the injuries suffered by

petitioner were sustained in the line of duty and indeed has
 - 8 -

conceded that the section 104(a)(1) exclusion covers the payments

received by petitioner from the time he was retired for

disability until October 31, 1991, the date the payments were

recomputed pursuant to the provisions of the Oakland Charter.

Respondent contends, however, that the recomputed payments

received after October 31, 1991, are not excludable under section

104(a)(1) by virtue of the exception to the applicability of that

section provided in section 1.104-1(b), Income Tax Regs., for "a

retirement pension or annuity to the extent that it is determined

by reference to the employee's * * * length of service".

Therefore, we must decide whether the "length of service" proviso

in the regulations precludes exclusion under the circumstances

presented in this case, where disability payments initially

excludable under section 104(a)(1) are subsequently recomputed,

as of the date when petitioner would have qualified for service

retirement if he had continued work uninterrupted, and as so

recomputed the payments approximate the service retirement

benefit that petitioner would have received if he had in fact

continued working until that date.7

7
We note that petitioner has not challenged the validity of
sec. 1.104-1(b), Income Tax Regs. This Court has previously
upheld the validity of the regulation in Wiedmaier v.
Commissioner, T.C. Memo. 1984-540, and was expressly affirmed in
that regard in Wiedmaier v. Commissioner, 774 F.2d 109 (6th Cir.
1985).
 - 9 -

This Court has previously considered similar issues in two

memorandum opinions, Wiedmaier v. Commissioner, T.C. Memo. 1984-

540, affd. 774 F.2d 109 (6th Cir. 1985), and Mabry v.

Commissioner, T.C. Memo. 1985-328. Both cases involved initial

payments to disability retirees conceded to be excludable under

section 104(a)(1) that were subsequently recomputed, on the date

when the taxpayers would have qualified for service retirement if

they had continued work uninterrupted, to substantially

approximate the amount of the service retirement benefit for

which the taxpayers would have qualified if they had retired

based on years of service on that date. In both cases the Court

concluded that the recomputed payments were ineligible for

exclusion under section 104(a)(1), by virtue of section 1.104-

1(b), Income Tax Regs.

Wiedmaier involved payments made under the Policemen and

Firemen Retirement System incorporated in the Charter of the City

of Detroit (Detroit Charter). Like the Oakland Charter at issue

in this case, the Detroit Charter provided an integrated plan of

disability and service retirement for members of the city police

and fire departments. The Detroit Charter further resembled the

Oakland Charter in three important respects: (i) Members

qualified for service retirement at the time they were retired

for disability were accorded retirement benefits computed under

the service retirement provisions of the Charter; (ii) members
 - 10 -

not qualified for service retirement at the time they were

retired for disability were accorded a fixed percentage (66-2/3

percent) of their final compensation until the date upon which

they would have qualified for service retirement if they had

continued work uninterrupted; and (iii) on that date, such

members' retirement allowance was recomputed in conformance with

the terms of the service retirement provisions of the Charter,

treating time spent on disability as equivalent to time spent in

active service.

The taxpayer in Wiedmaier was a Detroit firefighter who was

retired for an employment-connected disability on June 6, 1977,

approximately 10 months prior to qualifying for service

retirement. Under the Detroit Charter, the taxpayer therefore

initially received payments equal to 66-2/3 percent of his final

compensation until March 30, 1978, the date on which he reached

25 years of service, treating both time actually working and time

spent on disability as equivalent service for this purpose, as

provided in the Charter. On March 30, 1978, and thereafter,

payments to the taxpayer were computed under the service

retirement provisions of the Charter, likewise treating time

working and time on disability as equivalent service, with the

result that the payments were reduced from 66-2/3 percent of

final compensation to 50 percent of average compensation during

the 5 years preceding retirement. The Court concluded that the
 - 11 -

recomputed payments were no longer excludable under section

104(a)(1) because they "were computed only with reference to

* * * [the taxpayer's] length of service." Wiedmaier v.

Commissioner, supra. The Court reasoned:

Section 104(a)(1) excludes disability payments, not pension
payments from income. Section 1.104-1(b), Income Tax Regs.,
acts to prevent pension payments that are disguised as
disability payments from being excluded under section
104(a)(1). If a retirement provision is meant to compensate
employees for their disability and not for their creditable
service, then payments are computed with regard to the
injured employee's disability, not with regard to the number
of years that the employee has worked for the organization.
* * * [Id.]

Mabry v. Commissioner, supra, involved payments under the

same provisions of the Oakland Charter as are at issue in this

case, with one modification noted below. The taxpayer in Mabry

was a member of the Oakland Fire Department retired for an

employment-connected disability on July 1, 1960, prior to

qualifying for service retirement. Accordingly, pursuant to

section 2610(a) of the Oakland Charter, the taxpayer commenced

receiving payments on that date equal to 75 percent of 1-year

average compensation. Approximately 3 months later, on September

27, 1960, the taxpayer turned 55 and, since he had 22 years of

service, became qualified for service retirement,8 treating time

8
The version of sec. 2610(a) of the Oakland Charter
applicable to the year at issue in this case requires the 75-
percent payments to be recomputed on the date when the member
"would have completed twenty-five (25) years of service and
(continued...)
 - 12 -

spent on disability as equivalent to time spent working for this

purpose. Pursuant to the terms of section 2610(a) of the

Charter, the taxpayer's disability retirement allowance was then

recomputed as if he had taken service retirement on September 27,

1960. As a result, his payments were reduced from 75 percent to

50 percent of 1-year average compensation.

In Mabry, we interpreted section 1.104-1(b), Income Tax

Regs., as follows:

In conformity with * * * [section 1.104-1(b), Income
Tax Regs.], we and other courts have consistently held that,
in order to be excludable under the provisions of section
104(a)(1), retirement pensions or payments may not be based
upon any factor other than disability and, where payments
are based upon any other factor, such as age or length of
service on the job, the retirement plan in question will not
qualify as similar to workmen's compensation acts within the
meaning of section 104. [Citations omitted.]

Relying on Wiedmaier v. Commissioner, T.C. Memo. 1984-540, we

concluded in Mabry v. Commissioner, T.C. Memo. 1985-328, that the

recomputed payments were not excludable under section 104(a)(1),

based on section 1.104-1(b), Income Tax Regs., reasoning that

8
(...continued)
qualified for service retirement" had such member rendered
service without interruption. The version of sec. 2610(a) of the
Charter applicable in Mabry v. Commissioner, T.C. Memo. 1985-328,
required the recomputation when the member (merely) "would have
qualified for service retirement". Consequently, since a member
could qualify for service retirement either with 25 years of
service or with 20 years if he had attained age 55, the Mabry
version of sec. 2610(a) of the Charter resulted in a
recomputation at the 22-year mark when the taxpayer turned 55.
 - 13 -

after the recomputation the taxpayer "was no longer being paid

purely on the basis of his disability, but started to receive new

and different payments based upon his age and years of service".

Id.

Wiedmaier v. Commissioner, supra, Mabry v. Commissioner,

supra, and the instant case involve substantially similar

arrangements wherein disability retirement payments that are

initially excludable under section 104(a)(1) are subsequently

recomputed on the date when the disabled employee would have

qualified for service retirement if he had continued work

uninterrupted. The recomputed payments are set at the (reduced)

amount that the employee would have received if he had taken

service retirement on that date, treating the time actually

working and the time spent on disability as equivalent for this

purpose. We concluded in Wiedmaier and Mabry that the payments

resulting from such a recomputation were "determined by reference

to the employee's age or length of service" within the meaning of

section 1.104-1(b), Income Tax Regs., and our opinion in

Wiedmaier was affirmed by the Court of Appeals for the Sixth

Circuit. Wiedmaier v. Commissioner, 774 F.2d 109 (6th Cir.

1985). We see no reason for a different result here.

Petitioner argues that Wiedmaier and Mabry are

distinguishable because the taxpayers therein received formal

service credit for time spent on disability under the municipal
 - 14 -

charter terms at issue in those cases, whereas it has been

stipulated in the instant case that petitioner did not receive

any service credit under section 2609 of the Oakland Charter

during the time that he received a disability retirement

allowance. Moreover, petitioner argues, because the taxpayers in

the two prior cases got service credit, their payments actually

converted under the charter terms from disability retirement to

service retirement payments at the time of recomputation, whereas

his did not.9 In petitioner's view, it is the formal crediting

of time spent on disability as "service" under the charters'

9
Petitioner relies heavily on Boystel v. Commissioner, T.C.
Memo. 1961-146, to support his position that the retirement
payments after the 25th anniversary of his hire date could not
have converted to service retirement payments because he did not
receive credit for service while on disability. We do not
believe Boystel helps petitioner. In Boystel, the Commissioner
unsuccessfully challenged the sec. 104(a)(1) exclusion for
payments received in and after the 25th year following the year
of hire of a taxpayer who had been previously retired for, and
was receiving payments on account of, a job-connected disability.
The taxpayer had retired for disability prior to completing 25
years of (actual) service, the period necessary to qualify for
service retirement under the applicable police regulations. The
Commissioner sought to deny the sec. 104(a) exclusion for
payments received in 1955 (and thereafter), which was the year in
which the taxpayer would have completed 25 years of actual
service but for the disability retirement. However, Boystel did
not involve a recomputation of the payments at the 25-year mark,
and sec. 1.104-1(b), Income Tax Regs., was not considered or
cited in the case. The taxpayer was receiving the same payment
in the 25th year following his hire date (and thereafter) as that
initially awarded him when he had been retired for disability 8
years earlier. Thus, the challenged payments had not been
recomputed with reference to the period that the taxpayer was on
disability, and the Court had no occasion to consider the effect
of such a factor or the application of sec. 1.104-1(b), Income
Tax Regs.
 - 15 -

terms that resulted in the Court's conclusion in Wiedmaier and

Mabry that a payment based in part on time spent on disability

constituted a payment "determined by reference to * * * length of

service" within the meaning of section 1.104-1(b), Income Tax

Regs. Because petitioner did not receive service credit for the

time he spent on disability, he argues that the recomputation of

his retirement payments on the 25th anniversary of his date of

hire could not have been based on his length of service, because

in his view he did not have 25 years of service as that term

should be construed. The implication of petitioner's position is

that time spent on disability should not count as "service"

within the meaning of section 1.104-1(b), Income Tax Regs.,

unless the applicable workmen's compensation statute formally

designates it as such.

We believe petitioner construes Wiedmaier and Mabry too

narrowly. It is true that the Court in Mabry found, apparently

pursuant to the parties' stipulation, that time spent by the

taxpayer on disability was formally credited as service under

section 2609 of the Oakland Charter, and that as a consequence

the taxpayer's retirement payments converted on the recomputation

date from disability retirement payments under section 2610(a) of

the Charter to service retirement payments under section 2608 of

the Charter. The Wiedmaier opinion is at least susceptible of a
 - 16 -

similar reading.10 However, there is no indication that the

municipal charters' designation of time spent on disability as

"creditable service", or as eligible for service credit, was

dispositive in either prior case. Irrespective of the technical

labels, the charter provisions in both cases functioned the same

way, deeming time spent on disability as equivalent to time spent

actively working, and counting both in setting the date when a

disabled employee was treated as if he had taken service

retirement, with a corresponding adjustment to his retirement

payments. The charter provisions in the instant case are

functionally indistinguishable from the foregoing.11 The

10
The Wiedmaier opinion at times refers to disability time
and active working time collectively as "creditable service", the
Detroit Charter's formal designation of the employment periods
counted for purposes of retirement benefits. Arguably, this
suggests that the Charter's formal categorization mattered in the
Court's analysis. Elsewhere, however, the opinion refers to
disability and working time collectively as "length of service"
or as "the number of years the employee * * * worked for the
organization", suggesting that the equivalence of disability and
working time did not depend upon the Charter's formal labels.
11
Citing Givens v. Commissioner, 90 T.C. 1145 (1988),
petitioner argues that Oakland Charter sec. 2610(a)'s treatment
of a disability retiree "as if" he had taken service retirement
on the 25th anniversary of his hire does not mean that the
disability retirement allowance recomputed on that premise "is
determined by reference to the employee's age or length of
service" (quoting sec. 1.104-1(b), Income Tax Regs.). Givens
involved the question of whether certain payments were for job-
related injury, so that they qualified as workmen's compensation
within the meaning of sec. 104(a)(1). The amounts were paid
under a municipal workmen's compensation statute that offered as
compensation for job-related injury the same "sick leave"
benefits available to workers with non-job-related injury. (The
(continued...)
 - 17 -

difference is that time spent on disability was not formally

credited as "service". We do not believe this should matter. To

conclude otherwise would make the taxation of workmen's

compensation payments turn on mere labels employed in the

municipal charter.

We also find unpersuasive petitioner's argument that his

post-October 31, 1991, payments did not, in contrast to those in

Mabry v. Commissioner, T.C. Memo. 1985-328, convert from

disability retirement payments under section 2610(a) of the

Oakland Charter to service retirement payments under section 2608

of the Charter. Even if made pursuant to the disability

retirement provisions of section 2610(a) of the Charter rather

11
(...continued)
statute provided that an employee could elect to receive, as
compensation for job-related injury, the same sick leave "to
which he would be entitled * * * if his injuries had not arisen
out of or in the course of his employment". Givens v.
Commissioner, supra at 1149.) We concluded that since the sick
leave payments were provided, under the statute's terms, as
compensation for job-related injury, they were received under a
workmen's compensation statute and excludable under sec.
104(a)(1). It did not matter that the payments were computed "as
if" non-job-related injury were being compensated.
Petitioner apparently would have us apply an analogous
principle in the instant case, namely, that it does not matter
that the payments to him after the 25th anniversary date of his
hire were computed "as if" he had taken service retirement (based
on his years of actual service and of "deemed" service while on
disability), so long as his retirement was for job-related
injury. We decline to do so. Givens was not concerned with sec.
1.104-1(b), Income Tax Regs., and that regulation makes clear
that an exclusion under sec. 104(a)(1) depends not only on
whether the payment was for job-related injury but also on
whether it was determined by reference to length of service.
 - 18 -

than the service retirement provisions of section 2608 of the

Charter, the payments must still pass muster under section 1.104-

1(b), Income Tax Regs. That regulation makes clear that even a

payment triggered by disability is subject to the proscription

against using length of service in computing the payment.

Section 1.104-1(b), Income Tax Regs., provides that the section

104(a)(1) exclusion does not apply to a retirement pension or

annuity to the extent that it is determined by age or length of

service "even though the employee's retirement is occasioned by

an occupational injury or sickness". (Emphasis supplied.) Even a

payment conceded to be occasioned by disability is not excludable

to the extent it is determined by reference to length of service.

Petitioner also cites various differences in the treatment

of "regular" service retirees under Oakland Charter section 2608

(that is, service retirees receiving benefits based on years of

actively working) and disability retirees whose payments are

recomputed under Oakland Charter section 2610(a) "as if" they

were service retirees. For example, Oakland Charter section 2608

retirees may, by working longer than 25 years, become eligible

for allowance percentages higher than 50 percent,12 whereas

Oakland Charter section 2610(a) disability retirees whose

allowance percentage is recomputed at 50 percent are never

12
See sec. 2608(e) of the Oakland Charter, reproduced in the
appendix.
 - 19 -

eligible for a higher rate. For an Oakland Charter section 2608

retiree, the compensation base to which the allowance percentage

is applied is 3-year average compensation, whereas for an Oakland

Charter section 2610(a) disability retiree receiving "quasi"

service retirement, the base is 1-year average compensation.13

We note that these differences also existed in Mabry, which

involved the same provisions of the Oakland Charter as are at

issue in this case (with one insignificant modification noted

previously14), and they did not affect the result therein. We

believe here as well that such differences are unimportant.

Disability retirees need not be treated identically to service

retirees in order for their allowance payments to be included in

income. It is sufficient if their disability allowance is

determined by reference to length of service, and we believe such

is the case with petitioner.

We conclude that "length of service" as used in the

regulation encompasses both time actively working and time spent

on disability when both are treated as equivalent in determining

retirement benefits, regardless of whether time spent on

13
Petitioner also argues that an Oakland Charter sec.
2610(a) retiree receiving "quasi" service retirement, unlike an
Oakland Charter sec. 2608 retiree, is theoretically subject to
recall and that there are differences in each category's
obligation to repay certain compensatory awards, which respondent
disputes.
14
See supra note 8.
 - 20 -

disability is formally designated as "service" under the

applicable workmen's compensation statute. As was the case in

Wiedmaier v. Commissioner, T.C. Memo. 1984-540, and Mabry v.

Commissioner, supra, the recomputation of petitioner's disability

retirement payments was a direct function of his date of hire.

We believe this feature is sufficiently connected to the concept

of "length of service" to bring the recomputed payments within

the proscription of section 1.104-1(b), Income Tax Regs., for

pensions "determined by reference to * * * length of service".

This interpretation is reinforced by the fact that the purpose of

the recomputation was to make petitioner's disability payments

approximate the pension payments provided to other employees

based on years of actual service. "Section 1.104-1(b), Income

Tax Regs., acts to prevent pension payments that are disguised as

disability payments from being excluded under section 104(a)(1)."

Wiedmaier v. Commissioner, supra. Our conclusion is consistent

with the Court's prior holdings in Mabry and Wiedmaier. This

result also comports with the general rule that "Exemptions as

well as deductions are matters of legislative grace, and a

taxpayer seeking either must show that he comes squarely within

the terms of the law conferring the benefit sought." Newhall

Unitrust v. Commissioner, 104 T.C. 236, 247 (1995) (quoting

Nelson v. Commissioner, 30 T.C. 1151, 1154 (1958)). Accordingly,

the payments to petitioner during the year at issue were
 - 21 -

determined with reference to petitioner's "length of service"

within the meaning of section 1.104-1(b), Income Tax Regs., and

are therefore ineligible for the exclusion provided in section

104(a)(1).

Petitioner raises one final argument in his reply brief,

that the phrase "to the extent" in section 1.104-1(b), Income Tax

Regs., permits petitioner to exclude the disability allowance.

Petitioner relies on four revenue rulings: Rev. Rul. 72-44,

1972-1 C.B. 32; Rev. Rul. 80-44, 1980-1 C.B. 34; Rev. Rul. 85-

104, 1985-2 C.B. 52; and Rev. Rul. 85-105, 1985-2 C.B. 53. The

revenue rulings all involve situations where the employee was

paid a base percentage amount in the nature of worker's

compensation if retired for disability, and was paid additional

amounts, over and above the base amount, if the employee had a

sufficient number of years of service. The Revenue Rulings all

held that the base amount was excludable but that the amounts

over and above the base amount were includable because they were

determined by reference to length of service. In the instant

case, however, the allowance that petitioner received that was

not determined by reference to length of service (75 percent of

1-year average compensation) exceeded the allowance that was

determined by reference to length of service (50 percent of 1-

year average compensation). The revenue rulings, therefore, have

no relevance to this case. The payments received by petitioner
 - 22 -

after the recomputation were determined entirely by reference to

his length of service.

To reflect the foregoing,

Decision will be entered

under Rule 155.
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Appendix

Charter of the City of Oakland, Article XXVI, Sections 2608,
2609, and 2610(a)

Retirement for Service

Section 2608.
(a) Any member of the Police or Fire Department who
completes at least ten (10) years of service in the
aggregate (said service to be computed under Section
2609) may retire at his option on or after the twenty-
fifth (25th) anniversary of his date of employment.
Said member shall receive a retirement allowance equal
to twenty percent (20%) of the compensation attached to
the average rank held during the three (3) years
immediately preceding such retirement, plus an
additional allowance at the rate of two percent (2%)
for each additional year of service beyond ten (10)
years, not to exceed a period of an additional ten (10)
years.

(b) Any member of the Police or Fire Department who
completes at least twenty (20) years of service in the
aggregate (said service to be computed under Section
2609), regardless of age, may retire at his option.
Said member shall receive a retirement allowance equal
to forty percent (40%) of the compensation attached to
the average rank held during the three (3) years
immediately preceding such retirement, plus an
additional allowance at the rate of two percent (2%)
for each additional year of service beyond twenty (20)
years, not to exceed a period of an additional five (5)
years.

(c) Any member of the Police or Fire Department who
completes at least twenty-five (25) years of service in
the aggregate (said service to be computed under
Section 2609), regardless of age, or any member who
completes at least twenty (20) years of service in the
aggregate at or after attaining the age of fifty-five
(55) years, may retire for service at his option.

(d) Members shall be retired on the first day of the month
next following the attainment by them of the age of
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sixty-five (65) years. Any such member who attains the
age set forth in the preceding sentence as the
compulsory age of retirement during any twelve (12)
months, prior to the beginning of the twelve (12)
months, shall be retired on the first day of the twelve
(12) months.

(e) A member retired after meeting the requirements of
paragraphs (c) or (d) next preceding, shall receive a
retirement allowance equal to fifty percent (50%) of
the compensation attached to the average rank held
during the three (3) years immediately preceding such
retirement, plus an additional allowance at the rate of
one and two-thirds percent (1 2/3%) of said
compensation for each year of service rendered after
July 1, 1951, and after qualifying for service
retirement, not to exceed ten (10) years. A member
required to retire under paragraph (d) next preceding
before completing twenty (20) years of service in the
aggregate computed under Section 2609, shall receive a
retirement allowance which bears the same ratio to the
retirement allowance which said member would receive if
he were entitled to be credited with twenty (20) years
of service, as the service with which he is entitled to
be credited, bears to twenty (20) years.

(f) Upon the death of member after qualification for
service retirement, or after retirement for service or
because of disability, and if death shall result from
other cause than injury received in or illness caused
by the performance of duty, two-thirds (2/3) of the
retirement allowance to which the member would have
been entitled if he had retired for service at the time
of death, or two-thirds (2/3) of the retirement
allowance as it was at death, as the case may be, shall
be continued, regardless of the age of the surviving
widow, to the dependents of the member in the order of
succession as defined in Section 2612, provided that if
retirement was for injury received in or illness caused
by the performance of duty and if death occurs prior to
the date upon which the member would have qualified for
service retirement, the allowance continued shall be
reduced upon said date in the same manner as it would
have been reduced had the member not died.

(g) After having qualified for service retirement under the
provisions of paragraph (a) of this section, a member
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shall be entitled to retire at any time thereafter and
nothing shall deprive said member of said right.

(h) The age of a member which was accepted for appointment
to the Police or Fire Department shall be admissible in
evidence as prima facie proof of his age for retirement
purposes.

(i) If, at the date of retirement for service or
disability, said member has no wife, children or
dependent parents, who would qualify for the
continuance of the allowance after the death of said
member, or with respect to the portion of the allowance
which would not be continued, regardless of dependents,
a member retired under this Article may elect, before
the first payment of the retirement allowance is made,
to receive the actuarial equivalent of his allowance or
the portion which would not be continued, regardless of
dependents, as the case may be, partly in a lesser
amount to be received by him throughout his life, and
partly in other benefits payable after his death to
another person or persons, provided that such election
shall be subject to all of the conditions prescribed by
the Council to govern similar election by members of
the Oakland Municipal Employees' Retirement System.
(Amended by: Stats. June 1976.)

(j) The retirement allowances payable pursuant to this
section are subject to the limitations provided by
Section 2620. This subsection shall be null and void
and without further effect should the United States
Internal Revenue Code Section 415 be amended to exempt
municipal pension plans from the stated benefit
limitations. (Added by: Stats. November 1992.)

Time and Service to be Included

Section 2609. The following time and service shall be
included in the computation of the service to be credited to a
member for the purpose of qualification for retirement and death
benefits and for calculation of retirement benefits:

(1) Time during and for which said member received
compensation as a member of the Police or Fire Department prior
or subsequent to the effective date of this Article, including
all such time said member was unable to perform his duties by
reason of injury or sickness from any cause.
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(2) Time during which said member was absent by reason of
service with the armed forces of the United States either during
a war involving the United States as a belligerent, or in any
other National Emergency and for six (6) months thereafter and
who is not dishonorably discharged or released therefrom.

(3) Any police or fire service outside the limits of the
City of Oakland performed by a member of the Police or Fire
Department and under orders of a superior officer of such member,
shall be considered as city service and any disability or death
resulting therefrom shall be considered as received in and
arising out of the performance of duty.

Disability Retirement

Section 2610.
(a) Any member of the Police or Fire Department who is
incapacitated for the performance of duty by reason of
any injury received in, or illness caused by or arising
out of the performance of duty may be retired not
sooner than one (1) year after said member first became
incapacitated by reason of said injury or illness
unless the member requests and the Board grants earlier
retirement; and, if not qualified for service
retirement shall receive a retirement allowance equal
to seventy-five percent (75%) of the compensation
attached to the average rank held by such member during
one (1) year immediately preceding such retirement.
Such retirement allowance shall be paid until the date
upon which said member would have completed twenty-five
(25) years of service and qualified for service
retirement had such member rendered service without
interruption, and on and after said date said
retirement allowance shall be equal to the retirement
allowance said member would have received if retired
for service on said date, based on the compensation
attached to the average rank held during the one (1)
year next preceding retirement. If at the time of
retirement for disability, the member is qualified for
retirement for service, said member shall receive a
retirement allowance computed under the provisions of
Section 2608.