T.C. Memo. 2000-52
UNITED STATES TAX COURT
LARRY G. AND HELEN M. HORST, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Docket No. 11665-98. Filed February 18, 2000.
Larry G. and Helen M. Horst, pro se.
Bradley C. Plovan, for respondent.
MEMORANDUM OPINION
PANUTHOS, Chief Special Trial Judge: Respondent determined
a deficiency of $926 in petitioners’ Federal income tax for the
taxable year 1996. 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 issues for decision are: (1) Whether, and to what
extent, payments received by petitioner Larry G. Horst from the
Railroad Retirement Board in 1996 constitute taxable income; and
(2) whether petitioners failed to report taxable dividend and
interest income received in 1996. At the time of filing the
petition, petitioners resided in Sharpsburg, Maryland.
Background
Petitioner Larry G. Horst (petitioner) was employed by CSX
Transportation (CSX). On August 3, 1993, petitioner ceased work
with CSX due to injuries sustained in his employment. Petitioner
filed a claim for disability annuity payments with the U.S.
Railroad Retirement Board (RRB). Prior to 1996, petitioner
received interim payments totaling $9,492 pending resolution of
the claim. On July 1, 1996, petitioner was advised by the RRB
that he was entitled to receive an annuity. The monthly annuity
payments were classified by the RRB as follows:
Effective Date Tier I Tier II Total
2/1/94 $1,071 $185.10 $1,256.10
12/1/94 1,101 186.77 1,287.77
12/1/95 1,130 188.26 1,318.26
In 1996, petitioner received $34,341 ($43,833 less the
interim payments of $9,492) from the RRB. The annuity benefits
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were allocated as follows:
Date Tier I Tier II Total
1994 $10,710 $1,851 $12,561
1995 13,212 2,241 15,453
1996 13,560 2,259 15,819
Total $37,482 $6,351 $43,833
The RRB submitted Forms 1099-SSA and 1099-R to the Internal
Revenue Service (IRS) reporting that RRB paid Tier I and Tier II
benefits to petitioner in 1996 in the amounts of $37,482 and
$6,351, respectively. CSX submitted a Form 1099-DIV to the IRS
reporting that CSX paid $44 in dividends to petitioners in 1996,
and Hagerstown Trust submitted a Form 1099-INT to the IRS
reporting that Hagerstown Trust paid $21 in interest to
petitioners in 1996.
Petitioners did not report any of the above amounts on their
1996 Federal income tax return. In the notice of deficiency,
respondent determined that petitioners were required to report
(1) Tier I benefits in the amount of $1,572 and Tier II benefits
of $6,351 received from the RRB, and (2) dividend and interest
income, as noted above, received from CSX and Hagerstown Trust.
Discussion
I. RRB Payments
The first issue for decision is whether petitioners were
required to include in income $1,572 in Tier I benefits and
$6,351 in Tier II benefits received from the RRB in 1996. At
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trial, respondent conceded that $1,572 in Tier I benefits
represented payment for a disability and is, therefore,
nontaxable. With respect to the Tier II benefits, respondent
conceded that the 1996 taxable benefit should be reduced by
$1,375, an amount received by petitioner prior to 1996, and by
$782, an amount which represents petitioner’s contribution.
Therefore, respondent’s position at trial was that $4,194 of Tier
II benefits is taxable income in 1996. Petitioner did not
present any legal or factual argument in opposition to
respondent’s position.
Since 1974, benefits received by railroad retirees have been
divided into two programs, identified as Tier I and Tier II
benefits. Tier I benefits are essentially the equivalent of
Social Security benefits and are distributed in the same amount
as Social Security benefits. Tier I benefits are taxed under the
provisions of section 86. If, however, Tier I benefits are paid
as compensation for injuries or sickness, the payments are not
taxable pursuant to section 104. Tier II benefits, which are in
the nature of pension benefits, are taxed under the provisions of
section 72(r). See Ernzen v. United States, 875 F.2d 228 (9th
Cir. 1989); Wallers v. United States, 847 F.2d 1279 (7th Cir.
1988); Bradley v. Commissioner, T.C. Memo. 1991-578.
Analyzing the corresponding amounts of payments received by
petitioner, as listed above, we note that petitioner’s Tier II
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payments consist of 14.49 percent of the total amount received.
Applying this percentage to the amounts received by petitioner in
1996, we conclude petitioner received $4,976 in Tier II payments
($34,341 x 14.49% = $4,976). Subtracting from this amount $782
for contributions made by petitioner, we conclude petitioner
received $4,194 in taxable Tier II benefits in 1996, and
respondent is sustained on this issue to the extent of $4,194.
II. Dividend and Interest Income
The next issue for decision is whether petitioners were
required to include in income dividends and interest received in
1996. Gross income includes all income from whatever source
derived, including interest and dividends. See sec. 61(a)(4),
(7). It is not entirely clear from this record whether
petitioners dispute the omitted dividend and interest income
issue. Since no evidence was presented by petitioners, we
sustain respondent on this issue. See Rule 142(a).
To reflect the foregoing,
Decision will be entered
under Rule 155.