Gabriel v. Commissioner

T.C. Memo. 2000-328

UNITED STATES TAX COURT

RONALD J. AND LINDA GABRIEL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 25660-95. Filed October 20, 2000.

Arthur I. Fixler, for petitioners.

Carmino J. Santaniello, for respondent.

MEMORANDUM OPINION

GOLDBERG, Special Trial Judge: This case was assigned

pursuant to the provisions of section 7443A(b)(3) and Rules 180,

181, and 182. This matter is before the Court on Respondent's

Motion for Summary Judgment filed pursuant to Rule 121. 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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Respondent determined a deficiency in petitioners’ Federal

income tax in the amount of $5,612 for the taxable year 1992.

The sole issue for decision is whether pension payments of

$20,514 are excludable from gross income for the 1992 taxable

year under section 104(a)(1) or section 1.104-1(b), Income Tax

Regs.

At the time of filing the petition, petitioners resided in

Wickford, Rhode Island. Petitioners are husband and wife.

References to petitioner are to Ronald J. Gabriel.

Petitioner began working as a firefighter with the city of

Cranston (the city), Rhode Island, in approximately 1973.

Petitioner received several promotions throughout his career and

ultimately rose to the rank of lieutenant. During his employment

with the city, petitioner was a member of the International

Association of Firefighters, Local 1363 (the union), and was

covered by a collective bargaining agreement between the city and

the union.

On February 1, 1983, petitioner was placed on occupational

injury leave because of a heart problem. On November 4, 1983,

petitioner’s physician, Dr. Ronald M. Gilman, wrote a letter to

Ronald Jones (Chief Jones), Chief of the Cranston Fire

Department, advising him that petitioner would not be able to

return to duty because of his heart condition. Accordingly, on

December 13, 1983, Chief Jones recommended to Mayor Edward D.
 - 3 -

DiPrete that petitioner be placed on a disability pension.

Petitioner retired from the Cranston Fire Department in January

1984.

At the time of his retirement, petitioner, who was not 55

years old and was a member of the city’s permanent fire

department, was entitled to a pension equal to 50 percent of his

annual salary under Cranston City Code Section 10-12 (section 10-

12), payable from the firemen’s pension fund. In 1984, section

10-12 did not distinguish between occupational injuries and

nonoccupational injuries.

As a member of the union, petitioner was also entitled, in

the alternative, to apply for disability benefits under section

24.4 of the collective bargaining agreement covering the period

July 1, 1983, through June 30, 1984, which provided that if a

fireman is “disabled from performing his regular duties as a

fireman because of a heart condition * * * it shall be

conclusively presumed that such disability is attributable to his

employment as a member of the Fire Department”. The record does

not state which plan petitioner claimed disability payments

under, that is section 10-12 or section 24.4.

On June 28, 1999, the Cranston City Council (the city

council) amended section 10-12 to provide for both occupational

and nonoccupational disability payments equal to 66-2/3 percent

and 50 percent of the retiree’s total annual compensation,
 - 4 -

respectively. According to the language of amended section 10-

12, A.4., occupational disability payments paid under the statute

“shall be considered to be paid in lieu of Worker’s Compensation

benefits.” In addition, second paragraph J of amended section

10-12 allows prior retirees to apply for recertification of

pension benefits and for the retroactive redesignation of pension

payments already received as payments for occupational disability

received “in lieu of Worker’s Compensation”. Section 10-12 was

further amended on November 22, 1999, by adding Paragraph L,

entitled “Retroactive Redesignation of Certain Disability

Pensions”, which permitted retired firefighters to “redesignate

benefits as occupational disability.” On January 26, 2000,

petitioner requested a recertification of his benefits as

payments for an occupational injury under the amended local

ordinance. Filed with petitioner’s request for recertification

was a letter dated January 29, 2000, from petitioner’s physician,

Henry E. Black, M.D. FACC. On February 28, 2000, the Cranston

city council approved petitioner’s request for recertification.

Petitioner then applied to have his recertified disability

pension amounts retroactively applied to the years 1992 through

1998. On March 27, 2000, petitioner’s request for retroactive

redesignation of pension benefits received in years 1992 through

1998 was unanimously approved at a regular meeting of the

Cranston city council.
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On their 1992 Federal income tax return, petitioners

reported total pension and annuity income in the amount of

$22,010, of which they included $1,496 in their gross income for

that year.

In the notice of deficiency, respondent determined that no

portion of petitioner’s pension for the 1992 taxable year was

excludable from gross income and increased petitioners’ 1992

taxable income in the amount of $20,514.1 Respondent also made

computational adjustments to petitioners’ Schedule A itemized

medical and dental expense deductions which increased

petitioners’ taxable income an additional $1,538.58 for 1992.

Respondent filed a motion for summary judgment with this

Court, together with supporting documents, on November 15, 1999.

By Order dated November 17, 1999, the Court calendared the motion

for hearing on February 14, 2000, and ordered petitioners to file

an objection to Respondent’s Motion for Summary Judgment on or

before January 7, 2000. Petitioners timely filed an objection to

Respondent’s Motion for Summary Judgment, together with

supporting documents. When the case was called for hearing on

1
This amount was calculated by the difference between
$22,010 and $1,496 which was reported as gross income in their
1992 tax return.
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February 14, 2000, respondent and counsel for petitioners

appeared and were heard. Petitioners orally moved for a summary

judgment in their favor.

Summary Judgment

Pursuant to Rule 121(b), a summary adjudication may be made

“if the pleadings, answers to interrogatories, depositions,

admissions, and any other acceptable materials, together with the

affidavits, if any, show that there is no genuine issue as to any

material fact, and that a decision may be rendered as a matter of

law.” The party opposing the motion cannot rest upon the

allegations or denials in his pleadings, but must “set forth

specific facts showing that there is a genuine issue for trial.”

Rule 121(d). The moving party bears the burden of proving that

there is no genuine issue of material fact, and factual

inferences will be read in a manner most favorable to the party

opposing summary judgment. See Jacklin v. Commissioner, 79 T.C.

340, 344 (1982). There is no genuine issue as to any material

fact with respect to the specific legal issue before us; thus,

this matter is ripe for judgment on the issue as a matter of law.

See Rule 121(d).

Respondent contends that petitioners may not exclude pension

payment amounts received from the city during the year in issue

from gross income because the amounts were not received under a

worker’s compensation act pursuant to section 104(a)(1), or a
 - 7 -

statute in the nature of a worker’s compensation act pursuant to

section 1.104-1(b), Income Tax Regs.

Petitioners contend that petitioner received disability

pension amounts from the city in accordance with section

104(a)(1) in 1992, or, in the alternative, that amended section

10-12 allows petitioner’s previously received disability pension

amounts to be retroactively redesignated and excluded from gross

income during the year in issue pursuant to section 104(a)(1).

We examine each of petitioners’ contentions in turn.

Section 104(a)(1) and Section 1.104-1(b), Income Tax Regs.

Section 61(a) provides that gross income includes all income

from whatever source derived. Certain income, however, may be

specifically excluded from gross income. See sec. 61(b).

Under section 104(a)(1), worker’s compensation amounts are

excluded from gross income. However, such exclusions have been

“strictly construed so as to conform with the general rule that

all income is taxable unless it is specifically excluded.”

McDowell v. Commissioner, T.C. Memo. 1997-500; see Kane v. United

States, 43 F.3d 1446,1449, 1451 (Fed. Cir. 1994); Take v.

Commissioner, 804 F.2d 553, 558 (9th Cir. 1986), affg. 82 T.C.

630 (1984).

Section 104(a)(1) excludes from gross income “amounts

received under workmen's compensation acts as compensation for

personal injuries or sickness”. Section 1.104-1(b), Income Tax
 - 8 -

Regs., interprets section 104(a)(1) to exempt amounts received

under a worker's compensation act, or 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.”

In this case, the record does not reflect whether petitioner

received his disability payments under section 10-12 of the

Cranston City Code or section 24.4 of the collective bargaining

agreement between the city and the union. We therefore examine

both section 10-12 and section 24.4 to decide whether

petitioner’s disability payments are excludable from gross income

pursuant to section 104(a)(1) or section 1.104-1(b), Income Tax

Regs.

Prior to amendment, the pertinent parts of section 10-12, in

effect when petitioner retired in January 1984, provided as

follows:

Whenever an officer or member of the permanent
fire department who has not attained fifty-five years
of age shall become unfit to perform active duty by
reason of physical infirmity or other causes, such
officer or member upon the recommendation in writing of
the mayor, may, in the discretion of the city council
by a majority vote of the city council, be retired from
active service and placed on the pension list, and when
so retired he shall be paid annually from the firemen’s
pension fund in equal monthly payments until his fifty-
fifth birthday a sum equal to one-half of his annual
salary as defined in subsection (c) of the preceding
section.
 - 9 -

Upon attaining fifty-five years of age, such
officer or member so retired shall be paid annually for
the remainder of his life in equal monthly
installments, a sum equal to fifty-five percent of his
annual salary.
As is clear from its language, section 10-12 did not

distinguish between work-related injuries and nonwork-related

injuries. A disabled firefighter who was unable to perform his

duties was eligible for disability benefits regardless of the

cause of such disability. A statute is not considered to be in

the nature of a worker’s compensation act if it allows for

disability payments for any reason other than on-the-job

injuries. See Haar v. Commissioner, 78 T.C. 864, 868 (1982),

affd. per curiam 709 F.2d 1206 (8th Cir. 1983); McDowell v.

Commissioner, supra.

Since section 10-12 provides disability pension payments to

all firefighters who “become unfit to perform active duty by

reason of physical infirmity or other causes” and does not

distinguish between injuries which are work-related and nonwork-

related, it is not in the nature of a workers' compensation act

as required by section 104(a)(1). See Brooks v. Commissioner,

T.C. Memo. 1997-568.

We now turn to section 24.4, which provides as follows:

Section 24.4 - PRESUMPTION OF DISABILITY
In any case where an employee covered by this Agreement
is disabled from performing his regular duties as a
fireman because of heart condition, respiratory
ailment, hypertension or from any condition derived
from hypertension, it shall be conclusively presumed
 - 10 -

that such disability is attributable to his employment
as a member of the Fire Department, and he shall be
entitled to all of the benefits provided for in Section
45-19-1 of the General Laws of Rhode Island, 1956, as
amended, and none of said period of disability shall be
deducted from his sick leave entitlement, nor from any
other leave entitlement to which said employee may be
entitled under any other terms or conditions of this
Agreement.

Petitioners have not alleged that section 24.4, itself,

qualifies as a statute, and, indeed, we find that it does not.

See Rutter v. Commissioner, 760 F.2d 466, 468 (2d Cir. 1985)

(labor contract does not qualify as a “statute” within the

meaning of section 1.104-1(b), Income Tax Regs), affg. T.C. Memo.

1984-525; Brooks v. Commissioner, supra; McDowell v.

Commissioner, supra.

Since section 24.4 is not a worker’s compensation act, and

is not a statute in the nature of a workmen's compensation act as

required by section 1.104-1(b), Income Tax Regs., payments

received under section 24.4 are not exempt from gross income

pursuant to section 104(a)(1). In addition, like section 10-12,

section 24.4 also fails to distinguish between work-related

injuries and nonwork-related injuries as required by section

104(a)(1). The conclusive presumption in section 24.4 that a

disabling heart condition is work-related fails to satisfy the

requirements of section 104(a)(1) in that respect. See, e.g.,

Take v. Commissioner, supra; Green v. Commissioner, T.C. Memo.

1994-264, affd. 60 F.3d 142 (2d Cir. 1995).
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Retroactive Effect of Amended Section 10-12

In the alternative, petitioners contend that section 10-12,

as amended in 1999, allows disability pension amounts previously

received by petitioner to be retroactively redesignated by the

city council as payment for an occupational disability and thus

excluded from gross income pursuant to section 104(a)(1).

Section 10-12, as amended in 1999, contains the following

recertification procedure for prior retirees:

L. RETROACTIVE REDESIGNATION OF CERTAIN
DISABILITY PENSIONS

1. Any member/retiree who qualifies for and elects to
apply under 10-12K for recertification for occupational
disability retirement may, at his or her separate
election as provided herein, apply for retroactive
redesignation of prior disability pension benefits as
an occupational disability pension, as defined in 10-
12A, subject to the following limitations and
conditions:

a) no additional pension benefits will be payable
by the City if the retroactive designation is
approved;

b) The retroactive redesignation will apply to
disability pension benefits paid to the retiree
in calendar years 1992 through 1998 inclusive.

* * * * * * *

3. Action on Request for Retroactive Redesignation:
Before the city council can act on a request for
retroactive redesignation, the [city council] first
must approve and authorize the member/retiree’s request
for recertification for occupational disability pension
under 10-12K. Once the request for recertification is
approved and authorized, the [city council] will
determine whether the request for retroactive
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redesignation should be approved, based on all
information available in the recertification (10-12K)
request. A majority vote of the [city council] will
approve and authorize the request for retroactive
redesignation.

4. Once approved by the [city council], a request for
retroactive redesignation is irrevocable by the
member/retiree.

* * * * * * *

6. An election to request retroactive redesignation
of certain disability pensions must be submitted to the
Chief of the Fire Department on or before March 31,
2000.

7. * * * It is the intent that such payments would be
deemed to have been paid in lieu of Worker’s
Compensation and thus afford non-taxable status to the
benefits paid. The City of Cranston, however, makes no
warranties that the Internal Revenue Service or any
other taxing jurisdiction will abide by such
retroactive redesignation.

In January of 2000, after respondent had filed the motion

for summary judgment herein, petitioner applied for

recertification and retroactive redesignation of disability

payments as occupational disability payments pursuant to amended

section 10-12. On March 27, 2000, his application was approved

by unanimous vote of the city council of Cranston.

Respondent contends that the taxation of income received by

petitioner in 1992 should not be governed by an amendment to

section 10-12 enacted in 1999, nor by a certification procedure
 - 13 -

that did not begin until 2000, after the filing of respondent’s

motion for summary judgment. We agree with respondent.2

Section 10-12, as amended in 1999, unlike the version of

that statute in effect before such amendment, distinguishes

between work-related injuries and nonwork-related injuries, which

is necessary to qualify as a worker’s compensation statute under

section 104(a)(1) and section 1.104-1(b), Income Tax Regs.

Respondent does not dispute that benefits received for

occupational disability pursuant to section 10-12, as amended in

1999, fall under the section 104(a)(1) exemption if the benefits

are paid for a period that postdates the amendment.

Therefore, our discussion now turns on the retroactive

effect, if any, of amended section 10-12 on payments previously

received by petitioner.

It is a long-standing tenet that “state law creates legal

interests but the federal statute determines when and how they

shall be taxed.” Burnet v. Harmel, 287 U.S. 103, 110 (1932); see

United States v. Mitchell, 403 U.S. 190, 197 (1971); Helvering v.

Stuart, 317 U.S. 154, 162 (1942); Morgan v. Commissioner, 309

U.S. 78, 80-81 (1940).

2
The validity and application of an amended local
ordinance did come before this Court in Levesque v. Commissioner,
T.C. Memo. 1999-57, and McDowell v. Commissioner, T.C. Memo.
1997-500; however, the issue was not fully addressed and the
cases did not decide whether to give the amendment retroactive
effect for Federal tax purposes.
 - 14 -

Giving retroactive effect to a statute has been held

appropriate where “the statute does not have the effect of

impairing the obligation of a contract and is not destructive of

vested rights.” Estate of Ridenour v. Commissioner, 36 F.3d 332,

335 (4th Cir. 1994), affg. T.C. Memo. 1993-41. In Estate of

Ridenour, a Virginia statute permitting a gifting power to be

exercised under power of attorney was held to have retroactive

effect for Federal gift tax purposes. The Court of Appeals

reasoned that the Virginia statute merely clarified that a court

may infer a gift power in appropriate circumstances even though

no such power is set forth explicitly in the text of the power of

attorney. The Court of Appeals concluded, as did the Tax Court,

that the statute neither impaired contractual obligations nor

destroyed vested rights which existed prior to the enactment of

the statute. See id. at 335.

However, where a nunc pro tunc modification of a State court

decree provided for retroactive increases in alimony, it was

generally deemed ineffective for Federal income tax purposes.

See Torkoglu v. Commissioner, 36 T.C. 552, 555 (1961); Segal v.

Commissioner, 36 T.C. 148 (1961); Van Vlaanderen v. Commissioner,

10 T.C. 706 (1948), affd. 175 F.2d 389 (3d Cir. 1949); Daine v.

Commissioner, 9 T.C. 47 (1947), affd. 168 F.2d 449, 451-452 (2d

Cir. 1948); Blanchard v. Commissioner, 424 F. Supp. 916 (D. Md.

1976).
 - 15 -

An exception to the above rule exists where the modification

is based on a showing "that the original decree did not correctly

state the divorce court's determination at the time of its

entry.” Johnson v. Commissioner, 45 T.C. 530, 533 (1966); see

Vargason v. Commissioner, 22 T.C. 100 (1954); Sklar v.

Commissioner, 21 T.C. 349 (1953). Thus, recognition for Federal

tax purposes of certain property rights retroactively conferred

at the State or local level is not absolute.

In the case before us, petitioner attempts to apply a city

ordinance whose sole purpose was to change retroactively the tax

status of the payments received by petitioner. Notably, section

10-12, as amended in 1999, does not permit the payment of

additional pension amounts when a request for retroactive

redesignation is granted. Thus the distinction drawn by the

amended ordinance as between nonoccupational injuries, for which

disability payments would be measured by 50 percent of salary,

and occupational injuries, for which the measure would be 66-2/3

percent, operated with prospective effect only. Petitioner

received no extra benefits for the years 1992 through 1998 as a

result of the city’s recharacterization of his status.

The city council’s intent in providing for the retroactive

redesignation of a disability pension is made clear in the

language of the ordinance: to “provide disability retirees with

an opportunity to redesignate benefits as occupational disability
 - 16 -

benefits”, and to have such payments “deemed to have been paid in

lieu of Worker’s Compensation” and thus afford nontaxable status

to the benefits paid. Finally, the city council makes “no

warranties that the Internal Revenue Service or any other taxing

jurisdiction will abide by such retroactive redesignation.”

This case is distinguishable from Strickland v.

Commissioner, 540 F.2d 1196 (4th Cir. 1976), revg. T.C. Memo.

1974-188, cited by petitioner. Strickland involved an award of

service-connected disability benefits by the Veteran’s

Administration (VA). The Court of Appeals for the Fourth Circuit

held that a retired veteran of the Army awarded such disability

payments was entitled to an exclusion from gross income under

section 104(a)(4) and 38 U.S.C. section 3101.3 Unlike this case,

Strickland discussed the effect of a Federal law, namely 38

U.S.C. section 3010, which the Court of Appeals held, clearly

contemplated retroactive disability awards in that it permitted

the date of application for such an award to be treated as the

“effective date” of the award itself. The period of

3
Title 38 U.S.C. sec. 3101(a) provides: Payments of
benefits due or to become due under any law administered by the
Veterans Administration shall be exempt from taxation.”

Title 38 U.S.C. sec. 3101 has been reorganized and
renumbered pursuant to the Department of Veterans Health Care
Personnel Act of 1991, Pub. L. 102-40, 105 Stat. 187 (1991), and
the Department of Veterans Affairs Certification Act, Pub. L.
102-83, 105 Stat. 378 (1991) (codified at 38 U.S.C. sec. 5301
(1999)).
 - 17 -

retroactivity allowed for income tax purposes in that case was 9

to 10 months, coinciding with the interval between the veteran’s

filing and the VA’s granting his application for the disability

benefits.

In the present case petitioner applied to the city council

on January 26, 2000, for recertification of his benefits and the

application received final approval the following March 27.

There is no dispute presented over the characterization of

payments received during the 2-month interim. Rather,

petitioner, by relying on section 10-12, as amended in 1999,

attempts to recharacterize income received by petitioner in 1992,

at least 7 years before. The sole purpose of amended section 10-

12 paragraph L, allowing for recertification and redesignation of

disability benefits, is to afford a favorable treatment for

Federal income tax purposes. We conclude that section 10-12, as

amended in 1999, does not grant retroactive effect for Federal

tax purposes to the benefits petitioner received in 1992.

Conclusion

This matter is before the Court on cross-motions for summary

judgment. The only question raised by this action is a question

of law; namely, whether a disability pension amount received

during 1992 by petitioner under section 10-12 of the Cranston

City Code or the collective bargain agreement should be

considered taxable income to him. We hold that the amount
 - 18 -

received by petitioner in 1992 is not derived under a “workmen’s

compensation act” under section 104(a)(1) and thus not excludable

from gross income.

We have considered all of the other arguments made by

petitioners, and, to the extent we have not addressed them, find

them to be without merit.

Accordingly, for the reasons stated above, the Court denies

petitioners’ cross-motion for summary judgment and grants summary

judgment in favor of respondent.

To reflect the foregoing,

An appropriate order and decision

will be entered.