T.C. Memo. 1999-271
UNITED STATES TAX COURT
JON L. STOLTE AND ESTHER J. STOLTE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22988-97. Filed August 12, 1999.
Robert C. Zack and Eric T. Weiss, for petitioners.
Alexandra E. Nicholaides, for respondent.
MEMORANDUM OPINION
LARO, Judge: Petitioners petitioned the Court on November
26, 1997, to redetermine respondent's determination of
deficiencies in petitioners' Federal income tax for 1987 through
1990. By notice of deficiency dated September 3, 1997,
respondent determined petitioners had unreported income resulting
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from payments petitioner Jon L. Stolte1 received under two
disability policies. The resulting deficiencies in income tax,
additions to tax, and penalties are as follows:
Additions to Tax Penalty
Year Deficiency Sec. 6653(a) Sec. 6661 Sec. 6662
1987 $12,472 $624 $3,118
1988 5,371 269 1,343
1989 6,274 $1,255
1990 6,263 1,253
After concessions by petitioners, the sole issue for
decision is whether certain payments received by petitioner may
be excluded from petitioners' gross income under section 105(c).
We hold they may.
Unless otherwise stated, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Background
Some of the facts are stipulated and are so found.
Petitioners resided in Bloomfield Hills, Michigan, when they
filed their petition. Petitioner is 64 years old and received
his license as a medical doctor in 1972. Petitioner practiced
medicine as an employee of his wholly owned corporation, Jon L.
Stolte, M.D.P.C. (P.C.), from 1972 through 1990. During most of
1
All singular references to petitioner are to petitioner Jon
L. Stolte unless otherwise indicated. Petitioner Esther J.
Stolte is a party to this proceeding due to filing a joint
Federal income tax return with petitioner.
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his career, he specialized in general surgery but also practiced
general medicine. Petitioner served as deputy medical examiner
for the county from 1972 to 1993, where his duties included
examining deceased bodies and signing death certificates.
In the early 1970's, the P.C. purchased two disability
policies for petitioner and paid all premiums on behalf of
petitioner. One policy was issued by the Monarch Life Insurance
Company ("Monarch policy"), which policy provided generally five
different benefit payments based on the type of disability:
Disability Payment
(1) Blindness, loss of
2 extremities2 $60,000
(2) Loss of sight, speech,
hearing or 2
extremities $2,500/month for life
(3) Total disability from transplant $2,500/month for up
to 6 months
2
The Monarch Policy provided that if petitioner had a
sickness or injury that resulted in total and irrevocable loss of
the use of both hands, both feet, or a hand and a foot, through
severance or otherwise, then, in addition to other benefits
payable, petitioner would receive the $60,000 benefit. This
benefit was payable even if petitioner could still engage in his
regular occupation and even if he did not require regular
attendance of a physician.
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(4) Total disability before age 50;
from sickness $2,500/month for life,
from ages 50-65,minimum
$60,000 or $2,500/month,
whichever is greater
(5) Total disability before age 65,
from accident $2,500/month for life,
after age 65, $60,000
The $2,500 per month figure was fixed as of the time the policy
was issued except that it may be adjusted by a cost-of-living
factor. Under the Monarch policy, total disability is defined as
a sickness or injury requiring regular attendance of a licensed
physician, and benefits are payable as long as petitioner is
unable to engage in his regular profession as a general surgeon.
The Monarch policy contemplates that petitioner is allowed to
train for or engage in any other occupation or profession.
The other policy was a group hospital indemnity policy
issued by the Provident Life and Accident Insurance Company
(Provident policy), which policy provided for payments under the
circumstances set forth in the policy which payments varied with
the type of illness or disability.
In the early 1980's petitioner suffered from extreme
fatigue, recurrent abdominal pain, and flulike symptoms which
were ultimately diagnosed as chronic fatigue syndrome. In 1986,
petitioner was diagnosed with a cancerous disease of the lymph
glands commonly known as Hodgkin's Disease. Petitioner began
receiving chemotherapy, which continued for approximately 8
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months. During chemotherapy, petitioner underwent two surgeries
for an obstruction of the bowel. Petitioner's cancer is in
remission, but the chemotherapy immediately caused petitioner to
suffer peripheral nerve damage in his hands, legs, and feet known
as polyneuropathy. Petitioner experienced and continues to
experience numbness, weakness, and quivering of the muscles in
his hands, legs, and feet. This condition has led to atrophy of
the muscles and permanent nerve damage. Petitioner experiences
burning in his hands and feet and is unable to stand for extended
periods or grasp and hold objects. During 1988, the severity of
this condition caused petitioner to fall and break his hip.
Petitioner's condition has deteriorated rapidly since 1986,
leaving him frail and weak. His condition has been so
debilitating that he no longer lives a normal lifestyle and is
unable to enjoy most activities in which he previously engaged.
Petitioner's condition leaves him too exhausted to be productive
during his days, and he spends most of his time resting. His
prognosis is poor.
Since 1986, petitioner has been unable to practice as a
general surgeon due to the polyneuropathy he suffers. In 1987,
petitioner returned to work as a general practitioner on a very
limited basis, acting as a primary care doctor for a small number
of health maintenance organization patients and spending only a
few hours a week at his office. Petitioner continued working in
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this limited capacity throughout the years in issue and did a
small amount of medical consulting work. Petitioner's
polyneuropathy rendered him unable to drive, and he relied on his
wife for transportation. With her help, he was able to continue
his work as the deputy medical examiner. The P.C. reported gross
receipts from 1987 through 1990 ranging from $14,738 to $27,858.
These receipts represented payments from petitioner's various
medical services and largely related to amounts collected for
services rendered prior to 1987.
Petitioner received benefits under the Provident policy in
1987 and 1988 in the amounts of $12,500 and $2,800, respectively.
These amounts were calculated in accordance with the above table
and were based upon the specific type of injury suffered by
petitioner.3 Petitioner was considered disabled under the
Monarch policy from 1986 forward. He received benefits under the
Monarch policy in 1987, 1988, 1989, and 1990, in the amounts of
$34,320, $31,700, $35,640, and $35,640, respectively. These
amounts represented the maximum benefit of $2,500 per month.4
3
The daily indemnity amount for each day petitioner was
confined in the hospital due to cancer under the Provident policy
is 200 percent of $200 or $400 per day. In 1987, petitioner was
confined in a hospital for 31.25 days and in 1988 was confined
for 7 days.
4
The $2,500 figure was adjusted each year for a cost-of-
living factor.
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Petitioners did not report any of these disability payments
on their return for 1987, 1988, 1989, or 1990. Respondent
determined that the payments received by petitioner under the
Monarch policy and the Provident policy were includable in
income.
Discussion
We must decide whether petitioner, who suffers from a
debilitating physical condition, is eligible for the tax benefit
Congress intended to confer upon those whose quality of life has
been significantly lessened by a severe and permanent physical
injury. Petitioner contends that the disability payments at
issue are excludable from his gross income because: (1) They
constituted payment for the permanent loss or loss of use of a
member or function of the body, in that petitioner has
permanently lost the use of the function of his hands, feet, and
legs; and, (2) the payments were computed with reference to the
nature of the injury without regard to the period petitioner was
absent from work. Respondent, in contrast, argues the payments
received by petitioner under the Monarch policy do not satisfy
either of the conditions imposed by section 105(c); that the
payments received under the Provident policy do not satisfy the
first condition of section 105(c); and that the payments under
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both policies must, therefore, be included in petitioner’s gross
income.5 We disagree.
Section 105(a) provides in general that amounts received by
an employee under accident and health plans funded by the
employer are included in the employee’s gross income. Section
105(c), however, provides an exception to the general rule:
(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, * * * and
(2) are computed with reference to the
nature of the injury without regard to the
period the employee is absent from work.
As to the first element of section 105(c), injuries
encompassed by the statute fall into three categories: (1) The
permanent loss or loss of use of a member of the body; (2) the
permanent loss or loss of use of a function of the body; and (3)
permanent disfigurement. The third category is inapplicable
because it refers only to external bodily appearance. Petitioner
must fall under one of the first two categories to prevail.
Petitioner bears the burden of disproving respondent’s
5
With respect to the Provident policy the parties stipulate
and respondent concedes that the second element of sec. 105(c)
(relating to whether payments are based on the type of injury and
unrelated to absence from work) is satisfied.
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determination. See Rule 142(a); Welch v. Helvering, 290 U.S. 111
(1933).
Injuries included in the first two categories are described
in section 1.105-3, Income Tax Regs., which provides in pertinent
part:
For purposes of section 105(c), loss or loss of use of
a member or function of the body includes the loss or
loss of use of an appendage of the body, the loss of an
eye, the loss of substantially all of the vision of an
eye, and the loss of substantially all of the hearing
in one or both ears. * * *
The term "member" was intended to cover loss of extremities
such as arms, legs, or loss of bodily function. See Hines v.
Commissioner, 72 T.C. 715 (1979). Regarding loss of bodily
"function", we look to whether petitioner's condition has left
him effectively without the use of his hands, legs, and feet, as
opposed to whether his use is partially impaired. See Hines v.
Commissioner, supra. In Hines v. Commissioner, supra, we
considered the application of section 105(c) to a pilot who
suffered a heart attack and lost the use of a portion of his
heart. The taxpayer was barred by FAA regulations from returning
to his employment. We considered the function of the heart as a
circulatory organ and concluded "petitioner's heart is now
functioning normally in that respect" and that "petitioner is now
leading a normal life and he may well live out a normal life span
in spite of increased risk." Hines v. Commissioner, supra at
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719. We held the injury to the taxpayer’s heart was not the loss
of a body function and was not of the type envisaged by section
105(c)(1).
The facts of this case are materially distinguishable from
those in Hines, and we hold the impairment petitioner suffers in
his hands, legs, and feet due to polyneuropathy is tantamount to
the loss of a member or a body function within the meaning of
section 105(c). Unlike the taxpayer's heart in Hines,
petitioner's arms, legs, and feet have not functioned normally
since he began chemotherapy. Petitioner's hands and legs fail
him frequently and unexpectedly, and he can barely hold objects
or stand for any significant period of time. We find the
negative impact on petitioner's quality of life to be of such a
degree as rises to the level of severity contemplated by Congress
in section 105(c).6
Respondent argues petitioner has merely lost his ability to
function as a general surgeon and that loss of earning capacity
is not equivalent to loss of a body function. See Hines v.
Commissioner, supra; West v. Commissioner, T.C. Memo. 1992-617.
While we agree with this legal proposition, we disagree with
6
In Hines v. Commissioner, 72 T.C. 715, 718-719 (1979), we
recognized the Congressional intent of sec. 105(c) "was to
provide a tax benefit to one who receives a severe physical
injury which permanently and significantly lessens the quality of
life which he had enjoyed prior to the injury."
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respondent's analysis of the facts. We listened to petitioner's
credible testimony about his condition from 1986 forward and
reviewed documentary evidence of petitioner's condition, which
evidence included several letters from physicians who examined
petitioner at relevant times.7 We are convinced that
petitioner's condition is severe and permanent and has left him
without functional use of his hands, legs and feet. Petitioner's
polyneuropathy robbed him not only of his ability to function as
a general surgeon but also of his ability to lead the life he
enjoyed before his condition. See, e.g., Maller v. Commissioner,
T.C. Memo. 1984-614 (wherein the parties stipulated loss of sight
was loss of a body function); Berner v. United States, 81-2 USTC
par. 9733 (W.D. Pa. 1981) (wherein taxpayer's loss of virtually
all respiratory function was loss of a body function).
Petitioner has satisfied the first element of section 105(c).
The parties stipulated the second element of section 105(c)
for the Provident policy. Regarding the Monarch policy,
the payments must be computed with regard to the nature of the
injury and must not be computed with regard to the period the
employee is absent from work. See sec. 105(c)(2); Hines v.
7
We also observed petitioner at trial and noted his weak
condition and difficulty moving around. While the trial was
several years after the years in issue, we conclude based upon
this record that petitioner's condition was substantially similar
during the years in issue.
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Commissioner, supra; Berman v. Commissioner, T.C. Memo. 1989-654,
affd. 925 F.2d 936 (6th Cir. 1991). The Monarch policy provides
at least five different payment categories based upon the type of
injury suffered. It is not related to the period of time
petitioner is absent from work as the policy contemplates that
petitioner may engage in any employment or occupation while
disabled as a general surgeon. The facts of this case are
distinguishable from those cited by respondent. See, e.g., West
v. Commissioner, supra (benefits determined by years of "benefit
credit"); Berman v. Commissioner, supra (benefits determined by
salary and years of service); Beisler v. Commissioner, T.C.
Memo. 1985-25, affd. 814 F.2d 1304 (9th Cir. 1987) (benefits
determined solely by reference to years in the NFL). We hold
petitioner has satisfied the second element of section 105(c) for
the Monarch policy.
In reaching our holdings herein, we have considered each
argument made by the parties, and, to the extent not discussed
above, find those arguments to be irrelevant or without merit.
Due to concessions of the parties,
Decision will be entered
under Rule 155.