T.C. Memo. 1999-348
UNITED STATES TAX COURT
DALE C. AND JACQUELINE L. HOLT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 187-98. Filed October 20, 1999.
Stephen D. Willey, for petitioner.
James F. Prothro, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PAJAK, Special Trial Judge: Respondent determined a
deficiency in petitioners' Federal income tax in the amount of
$6,748, together with an accuracy-related penalty under section
6662(a) in the amount of $1,350, for the taxable year 1995. All
section references are to the Internal Revenue Code in effect for
the year in issue.
On brief, respondent conceded that petitioners are not
liable for the accuracy-related penalty. Therefore, the only
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issue which the Court must decide is whether a disability
percentage rating issued by the Veterans' Administration entitles
petitioners to exclude any portion of a "length of service
military retirement pension" (service pension) under section
104(a)(4). If the exclusion is denied, then, due to the
resultant increase in income, petitioners' Schedule A limitation
must be adjusted by the amount of $234 in accordance with
respondent's determination in the notice of deficiency.
(Petitioners did not contest this issue at trial or on brief.)
FINDINGS OF FACT
Some of the facts in this case have been stipulated and are
so found. Petitioners resided in Arlington, Texas, at the time
they filed their petition. They filed a joint Federal income tax
return for 1995.
In 1987, petitioner Dale C. Holt (petitioner) retired from
the United States Air Force (Air Force) as a Colonel. Petitioner
served on active duty from January 1957 until August 1987. He
received a retirement pension for his length of service and not
for any disability.
After retirement, petitioner applied for nontaxable
disability benefits from the Veterans' Administration (VA).
Petitioner executed a VA form, Veteran's Application for
Compensation or Pension. In doing so, petitioner waived that
portion of his service pension from the Air Force which was equal
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to the compensation which might be awarded by the VA. This
waiver is required to prevent veterans from receiving double
benefits from both the VA and a branch of the military for the
same military service. The VA awarded petitioner an initial
disability rating of VA 10 percent for a chronic back ailment.
The VA percentage rating equals a dollar amount based on VA
charts. This service-connected disability rating was
subsequently increased to a VA 40 percent in 1995. In addition
to the back ailment, petitioner has degenerative arthritis and
spinal disk shrinkage with a bulging disk.
In 1995, petitioner received $45,847 in service pension pay
from the Air Force. The Defense Finance and Accounting Service
sent petitioner statements on which the $45,847 figure was
clearly labeled as taxable income. Petitioner also received
$5,926 from the VA for disability benefits. In a notice dated
September 28, 1988, from the VA, the VA stated that VA
compensation (disability benefits) is not taxable, but that
retirement pay (service pensions) which is based on age or length
of service is taxable.
On their 1995 return, petitioners reported total income of
$99,240. Apparently, petitioner's ailments did not prevent him
from working in 1995. Petitioner earned $25,015.74 from American
Airlines, Inc., $8,090 from Aviation Crew Training, Inc., and
$1,260 from American Trans Air., Inc.
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Petitioners excluded from gross income the full amount of
the VA disability benefits, $5,926, and $23,857 of the service
pension income. Petitioners utilized the following formula.
Petitioners took their gross retirement pay of $55,195 and
divided it by 75 percent to reach $75,593. This $75,593 was then
multiplied by the VA 40 percent determined disability to reach a
disability exclusion of $29,437. This amount was adjusted by
subtracting the amount of retirement pay that had been waived due
to VA disability benefits of $5,580. The resulting $23,857 was
characterized as an "adjusted exclusion" by petitioners.
Petitioners then subtracted the $23,857 from Form 1099-R taxable
income of $45,847 to reach a calculated "taxable" amount of
$21,990.
Respondent determined that the total taxable pension from
the Defense Finance and Accounting Service Cleveland Center was
$45,847, which is the amount reported on the Form 1099-R from
that source. Respondent also determined that petitioners
underreported their service pension by $23,857.
OPINION
Petitioners believe that they were entitled to exclude the
service pension payments from their income based on conferences
with Internal Revenue Service (IRS) personnel that occurred in
1992 or 1993. From those conversations, petitioners thought that
they could follow a "Sergeant Jones" example from IRS Publication
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17, Your Federal Income Tax (1976) (Publication 17) that was
distributed for the preparation of 1975 tax returns. In 1992,
petitioners amended their returns for 1989, 1990, and 1991 in
accordance with their beliefs. Thereafter, they filed each
year's return in the same manner. Until the 1995 taxable year,
the IRS accepted these computations. On the 1995 return,
petitioners continued their course of action, but, as noted,
respondent disallowed the exclusion of $23,857 from their gross
income.
Petitioners argue that the VA 40 percent disability rating
gives them the opportunity under section 104(a)(4) to exclude
from their service pension an amount based on the 40 percent
disability rating for injuries resulting from active service in
the armed forces. Petitioners also assert that since they relied
on advice from IRS personnel who directed them to use Publication
17, respondent should not be allowed now to change position
regarding petitioners' use of this computation method.
Respondent's position is that service pensions based on length of
service are not excludable from gross income under section
104(a)(4).
Section 104(a)(4) provides an exclusion from gross income
for amounts received as a pension, annuity, or similar allowance
for personal injuries or sickness resulting from active service
in the armed forces of any country. Under section 104(b),
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section 104(a)(4) will not apply to an individual unless one of
four criteria is satisfied. One criterion is that the individual
be a member of an organization referred to in section 104(a)(4)
on or before September 24, 1975. Sec. 104(b)(2)(B). Because
petitioner was a member of the Air Force on September 24, 1975,
he meets that criterion. However, section 104(a)(4) applies only
to payments received for personal injuries or sickness.
Petitioner has the burden of proving that the pension
payments that he received were for a disability incurred during
his active service in the military. Scarce v. Commissioner, 17
T.C. 830, 833 (1951). As the Court there stated: "Retirement
pay for length of service is not exempt from taxation." Id.
Petitioner's Air Force record clearly states that his
retirement was based on years of service, not on disability. The
record contains no evidence that petitioner was on a disability
pension. Petitioner has attempted to use the VA disability
rating to justify his position that he could have received a
"disability retirement pension" at the time of his retirement.
Petitioner's argument is not supported by the evidence in the
record. This Court has previously considered similar arguments
and has ruled that payments under service pensions should be
included in income regardless of the existence of a VA disability
determination. Lambert v. Commissioner, 49 T.C. 57 (1967);
Sidoran v. Commissioner, T.C. Memo. 1979-56, affd. 640 F.2d 231
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(9th Cir. 1981). In these cases, we held that a VA disability
determination does not prove that a portion of a pension is
received for injuries sustained during active service. Moreover,
the VA percentage of disability determination and petitioner's
subsequent election have already resulted in a specific benefit
which was excluded from petitioners' income.
Petitioners cited McNair v. Commissioner, 250 F.2d 147 (4th
Cir. 1957), revg. 26 T.C. 1221 (1956), and Prince v. United
States, 127 Ct. Cl. 612, 119 F. Supp. 421 (1954). Both cases
involved veterans who retired from active duty and received
service pensions. However, those veterans were then recalled to
active duty and subsequently found to be incapable of remaining
on active duty due to service-connected injuries. In the instant
case, petitioner was not recalled to active duty after his
retirement, nor was he ever found to be incapable of remaining on
active duty due to his injuries. Therefore, these cases are not
controlling.
Petitioners also relied on Rev. Rul. 78-161, 1978-1 C.B. 31,
and the "Sergeant Jones" example from an outdated IRS Publication
17 as authority for their treatment of the service pension
income. Rev. Rul. 78-161 is inapplicable on its face since it
relates to a retroactive VA disability rating, which is not
involved in the present case. Rather, petitioners are trying to
exclude an amount in excess of the amount allowed by the VA.
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Furthermore, publication 17 clearly states that service
pension payments based on age or length of service are taxable.
It also states that disability retirement pensions based on
percentage of disability are excluded from gross income. The
"Sergeant Jones" example in Publication 17 is inapplicable to
petitioners. That example involves disability retirement pay and
in no way supports petitioners' position. Even if the example in
Publication 17 were applicable, IRS publications are only guides
for taxpayers; statutes, regulations, and judicial decisions will
govern. Zimmerman v. Commissioner, 71 T.C. 367, 371 (1978),
affd. without published opinion 614 F.2d 1294 (2d Cir. 1979);
French v. Commissioner, T.C. Memo. 1991-417.
Petitioners' final argument is that respondent should not be
allowed to change the treatment of the service pension, because
petitioners relied on advice from IRS personnel and were
previously allowed the exclusions. Unfortunately for
petitioners, respondent is not precluded from correcting mistakes
made in the interpretation of the law. Neri v. Commissioner, 54
T.C. 767, 772 (1970).
To the extent that any of petitioners' other arguments were
not addressed by this Court, we have considered them and find
them to be without merit.
Because a VA disability determination does not convert a
service pension into a disability pension, we find that
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petitioner did not receive his service pension for personal
injuries sustained in the course of active duty in the Air Force.
Accordingly, we sustain respondent's determination that the
service pension is taxable to petitioners in its entirety.
Decision will be entered for
respondent as to the deficiency,
and for petitioners as to the
penalty.