T.C. Summary Opinion 2001-102
UNITED STATES TAX COURT
JAMES K. AND PATRICIA J. GOODCHILD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1254-00S. Filed July 5, 2001.
Bruce N. Crawford, for petitioners.
Melissa J. Hedtke, for respondent.
PAJAK, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent 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 of $2,666 in petitioners’
1997 Federal income tax. Due to the manner in which petitioners
presented their case, the sole issue we must decide is whether
petitioners are entitled to exclude disability benefits from
income under section 105(c).
This case was submitted fully stipulated pursuant to Rule
122. The limited facts stipulated are so found. Petitioners
resided in Maple Grove, Minnesota, at the time their petition was
filed.
It was determined that petitioner James K. Goodchild
(petitioner) had Crohn’s disease, arthritis in both knees, and
job-related stress. Respondent conceded that petitioner’s
medical condition prevented him from continuing as a senior
broadcast technician at the University of Minnesota. Petitioner
began receiving a disability benefit from the Minnesota State
Retirement System in April 1997.
During 1997, petitioners received $12,873 from the Minnesota
State Retirement System. The Minnesota State Retirement System
provided petitioners with a Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., for that amount. During 1997,
petitioners received $6,030 from the Social Security
Administration. The Social Security Administration provided
petitioners with a Form 1099-SSA for that amount.
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Respondent determined that petitioners did not report
pension income in the amount of $12,873. Respondent also
determined that petitioners did not report as income taxable
benefits of $5,126 from the $6,030 paid to petitioners by the
Social Security Administration. Petitioners take the position
that the Social Security benefits are subsumed in the section
105(c) exclusion issue.
Both parties argued the case based on the applicability of
section 105(c). Petitioners argue that they are entitled to an
exclusion of the disability payments under section 105(c).
Respondent’s position is that section 105(c) does not apply under
the facts in this case for a number of reasons.
Initially, we find it unnecessary to decide whether the
Minnesota State Retirement System qualifies as a health or
accident plan because petitioners cannot satisfy one of the
requirements under section 105(c).
Pursuant to section 105(a), payments received by an employee
under an employer-provided accident or health insurance plan for
personal injuries or sickness are generally includable in the
employee’s income. However, section 105(c) grants an exception
under which such payments may be excluded from an employee’s
gross income if the requirements of section 105(c) are met.
Section 105(c) provides that:
SEC. 105(c). Payments Unrelated to Absence From Work.–-
Gross income does not include amounts referred to in
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subsection (a) to the extent such amounts–
(1) constitutes payment for the permanent loss or
loss of use of a member or function of the body, or the
permanent disfigurement, of the taxpayer, his spouse,
or a dependent (as defined in section 152), and
(2) are computed with reference to the nature of the
injury without regard to the period the employee is
absent from work.
Thus, a necessary predicate for exclusion under section 105(c) is
that the amounts are computed “without regard to the period the
employee is absent from work.” Armstrong v. Commissioner, T.C.
Memo. 1993-579.
The Minnesota State Retirement System provides that
disability payments are to be made to employees found to be
“totally and permanently disabled”. Minn. Stat. sec. 352.113
subdiv. 1, sec. 352.01 subdiv. 22 (2001). The statute defines
total and permanent disability as the employee’s “inability to
engage in any substantial gainful activity by reason of any
medically determinable physical * * * impairment that has existed
or is expected to continue for a period of at least one year.”
Minn. Stat. sec. 352.01 subdiv. 17 (2001). The statute goes on
to provide that if “the employee is no longer permanently and
totally disabled, or is engaged in or can engage in a gainful
occupation, payments of the disability benefit by the fund must
be discontinued.” Minn. Stat. sec. 352.113 subdiv. 6 (2001).
Thus, the disability payments under the Minnesota State
Retirement System cover only the period of time during which an
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employee has to be absent from work. Such payments are promptly
discontinued if and when an employee becomes able to work again.
The disability payments from the Minnesota State Retirement
System are computed with regard to the period the employee was
absent from work. The critical requirement for exclusion under
section 105(c) that the payments must be “computed * * * without
regard to the period the employee is absent from work” is not
satisfied. Armstrong v. Commissioner, supra.
Section 105(c) does not apply in this case. The payments
from the Minnesota State Retirement System are taxable under
section 61(a)(11). The payments from the Social Security
Administration are taxable under section 86. We sustain
respondent’s determination.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.