T.C. Memo. 2000-160
UNITED STATES TAX COURT
ASA EUGENE PEARSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15981-98. Filed May 18, 2000.
Asa Eugene Pearson, pro se.
George E. Gasper, for respondent
MEMORANDUM OPINION
GOLDBERG, Special Trial Judge: Respondent determined a
deficiency in petitioner’s Federal income tax of $1,453 for the
taxable year 1995. 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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After a concession,1 the issue for determination is whether
disability payments received by petitioner in 1995 are includable
in gross income.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of filing the
petition, petitioner resided in Fort Worth, Texas.
In 1972, petitioner began working for General Motors
Corporation (General Motors) at its Arlington, Texas, assembly
plant. As an employee, petitioner was included in General
Motors’ long-term disability plan (the disability plan) which
General Motors funded through Metropolitan Life Insurance Company
(MetLife). General Motors paid all the policy premiums and did
not deduct the cost of the premiums from employee wages.
Because of the repetitious nature of the work and other
stressful situations at the plant, petitioner began to suffer
from severe depression which affected his ability to work. By
1985, his condition worsened, and petitioner was on sick leave
for most of the year.
1
At trial, petitioner failed to offer any evidence,
whatsoever, contesting the Commissioner’s determination in the
notice of deficiency that he failed to report income from General
Motors of $72 for the 1995 taxable year. Accordingly, petitioner
is deemed to have conceded the issue. See Rules 149(b), 142(a).
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On January, 1, 1986, petitioner retired from General Motors
and began receiving monthly disability benefits. Petitioner
received his retirement and his disability benefits in two
separate monthly checks. Petitioner received one check from
General Motors and one check directly from MetLife. The payments
petitioner received from MetLife were payments made under the
disability plan and were based on the number of years petitioner
was employed by General Motors.
Though petitioner initially included his disability benefit
payments received from MetLife in gross income on his Federal
income tax returns, on advice of a tax preparer, petitioner filed
a Form 1040X, Amended U.S. Individual Income Tax Return, for the
1987 taxable year and reported the MetLife payments as nontaxable
disability income pursuant to sections 105(c)(1), 105(c)(2), and
section 1.105-3, Income Tax Regs., and requested a refund for
excess income tax withholding.
The Internal Revenue Service (IRS) allowed the requested
amounts as overpayments that it offset against outstanding income
tax liabilities. Petitioner continued to request a refund for
excess income tax withholding for every taxable year from 1987,
up to, and including, the year in issue. Once petitioner’s
income tax liabilities were paid in full, the IRS refunded the
balance of the claimed excess withholding for tax years up to,
and including, 1995.
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Petitioner testified that sometime after 1991 an IRS
representative told him to stop reporting the MetLife payments on
his Federal income tax return because the payments constituted
nontaxable income. In accordance with the advice he purportedly
received from the IRS, petitioner stopped reporting the payments
from MetLife.
In 1996, petitioner received a Form W-2, Wage and Tax
Statement, from MetLife reporting the amount he had received from
MetLife for the 1995 taxable year. Petitioner did not report the
1995 payments from MetLife and did not attach the Form W-2 he
received from MetLife to his 1995 return.
In the notice of deficiency, respondent determined that
petitioner failed to report $72 of taxable wages from General
Motors in 1995, and further determined that petitioner should
have included $9,633, the entire amount of MetLife’s 1995
payments to petitioner, in gross income under section 105(a) for
the 1995 taxable year.
Gross income does not include amounts received through
accident or health insurance for personal injuries or sickness to
the extent such amounts are: (1) Attributable to contributions
by the employer which were includable in the gross income of the
employee, or (2) paid for by the employee. See sec. 104(a)(3).
Section 105(a) provides, however, that amounts received by
an employee through accident or health insurance are includable
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in the gross income of the employee to the extent such amounts
are: (1) Attributable to contributions by the employer which
were not includable in the gross income of the employee, or (2)
paid by the employer.
Petitioner concedes that the disability insurance premiums
were paid by General Motors and that he did not include those
premiums in his gross income but contends that the 1995 payments
from MetLife were disability payments pursuant to section 105(c),
and, therefore, excludable from gross income.
Section 105(c) provides as follows:
SEC. 105(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.
In order to qualify for the section 105(c) exception, the
payments to petitioner must satisfy both paragraphs (1) and (2)
of section 105(c). Section 105(c)(2) itself has two parts that
must be satisfied: (1) The payments to the taxpayer must be
computed with reference to the nature of the injury, and (2) the
payments must be computed without regard to the period the
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taxpayer is absent from work. With respect to the first part of
section 105(c)(2), Rosen v. United States, 829 F.2d 506, 509 (4th
Cir. 1987), states as follows:
A review of the cases indicates that for payments to be
excludible from income under section 105(c), the instrument
or agreement under which the amounts are paid must itself
provide specificity as to the permanent loss or injury
suffered and the corresponding amount of payments to be
provided. * * * exclusion is permitted only under plans
which vary benefits to reflect the particular loss of bodily
function. * * *
Petitioner has been unable to establish that the disability
plan payments he received from MetLife comport with the
requirements of section 105(c). Indeed, petitioner concedes that
the monthly payments from MetLife are computed based on the
number of years of credited service petitioner had at General
Motors and not with regard to any injury as required by section
105(c)(2).
On the basis of the record, we find that the disability plan
payments petitioner received from MetLife are not excludable from
gross income pursuant to section 105(c). Since we find that on
the basis of the record the disability payments fail to satisfy
section 105(c)(2), we need not decide whether they satisfy
section 105(c)(1).
In the alternative, petitioner contends that even if we find
that the disability payments are not excludable from gross income
pursuant to section 105(c), the disability plan payments are part
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of a wage continuation plan and are therefore nontaxable pursuant
to section 105(d).
Pursuant to section 105(d), during years for which it was in
effect, payments made under wage continuation plans could be
excluded from gross income under certain conditions. Section
105(d), however, was repealed, effective for taxable years after
1983 by the Social Security Act Amendments of 1983, Pub. L.
98-21, sec. 122(b), 97 Stat. 85.
Finally, petitioner contends that the IRS refunded his taxes
for prior years after he filed an amended return in 1987 and that
by such action the IRS implicitly recognized that the MetLife
payments were nontaxable. We do not agree. Petitioner has
failed to establish the reason for refunds he received in prior
years. However, it is well established that even if petitioner
had presented proof that respondent may have overlooked or
accepted the tax treatment of certain items in previous years,
respondent is not precluded from correcting that error in
subsequent years with respect to the same taxpayer. See Rose v.
Commissioner, 55 T.C. 28, 32 (1970).
At the conclusion of the trial, the Court instructed
respondent to contact MetLife in order to get an accurate
accounting of disability benefits paid to petitioner during the
1995 taxable year. In an apparent answer to respondent’s query,
MetLife sent petitioner a Form W-2c, Statement of Corrected
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Income and Tax Amounts, for the 1995 taxable year, which reported
that petitioner had received only $8,257.08 in disability
payments and not $9,633.26 as stated on the previously issued
1995 Form W-2. Accordingly, we find that petitioner received
$8,257.08 from MetLife and hold that such amount is taxable
income pursuant to section 105(a).
To reflect the foregoing,
Decision will be entered
under Rule 155.