T.C. Summary Opinion 2001-136
UNITED STATES TAX COURT
D. LLOYD AND BETTY THOMAS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3672-00S. Filed September 5, 2001.
D. Lloyd and Betty Thomas, pro sese.
Elizabeth Owen, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time that the petition was filed.1 The decision to
be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
1
All subsequent section references are to the Internal
Revenue Code in effect for 1997, the taxable year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
- 2 -
Respondent determined a deficiency in petitioners’ Federal
income tax for 1997 in the amount of $1,564.
After concessions by the parties,2 the issues for decision
are as follows:
(1) Whether petitioners may exclude from gross income
disability benefits received by petitioner D. Lloyd Thomas. We
hold that petitioners may exclude such benefits.
(2) Whether petitioners received interest on an overpayment
of income tax for 1993. We hold that petitioners received such
interest.
Background
Some of the facts have been stipulated, and they are so
found. Petitioners resided in Copperas Cove, Texas, at the time
that their petition was filed with the Court.
At all relevant times, petitioners utilized the cash
receipts and disbursements method of accounting in computing
their taxable income. See sec. 446(c)(1).
2
Petitioners concede that in 1997 they were credited with
interest on overpayments of income tax for 1992, 1994, and 1995
in the amounts of $49.86, $161.84, and $7.03, respectively, as
determined by respondent in the notice of deficiency.
Respondent concedes that the deficiency determined in the
notice of deficiency ($1,564) is overstated because of a
computational error and that the correct amount of the deficiency
is $1,451.
The parties agree that adjustments to petitioners’ IRA
deduction and Schedule A deductions are computational matters,
the resolution of which depends on our disposition of the two
disputed issues identified above.
- 3 -
A. Disability Benefits
Petitioner D. Lloyd Thomas (petitioner) was employed by the
Texas Department of Criminal Justice as an associate clinical
psychologist from August 1994 through February 1999.
In or about February 1997, petitioner suffered a herniated
disk. Petitioner’s injury was sufficiently severe as to require
bed rest and home confinement for a continuous period of time
that extended through July 1997.
During the first 2 months of his 6-month absence from work,
petitioner utilized his accumulated sick leave and annual leave.
After exhausting his leave, petitioner began receiving disability
benefits. For the period from April 2 through July 30, 1997,
petitioner received disability benefits in the amount of $4,964.
Petitioner received disability benefits pursuant to a plan
of disability insurance that was sponsored by his employer.
However, the premiums for such insurance were paid solely by
petitioner with after-tax dollars. In this regard, petitioner
specifically elected, in August 1994, not to pay the premiums for
disability insurance with pre-tax dollars pursuant to “premium
conversion”. This election remained in effect throughout 1997.
Petitioners did not report on their Federal income tax
return the disability benefits received by petitioner in 1997.
In the notice of deficiency, respondent determined that such
benefits were includable in petitioners’ gross income for the
- 4 -
year in issue.
B. Interest Income
Petitioners overpaid their income tax for 1993. After a
portion of the overpayment was apparently paid to another Federal
agency, see sec. 6402(d), a balance of $1,077.98 remained as a
credit in petitioners’ account. Of this amount, $726.39 was
subsequently applied against petitioners’ Federal income tax
liability for 1996, thereby leaving a balance of $351.59. In
this regard, petitioners received a notice from respondent dated
October 6, 1997, explaining how respondent applied the
overpayment. This notice stated, in part, as follows:
How We Applied Your Overpayment
Amount Of Overpaid Tax On Your Return . . . . . $1,077.98
Amount Of Interest You Earned on Overpayment. . $.00
Total Amount Due You . . . . . . . . . . . . . $1,077.98
Total Amount Applied . . . . . . . . . . . . . $726.39
Amount You Will Receive As A Refund . . . . . . $351.59
(Any Interest Due You Will Be Added)
On or about October 6, 1997, respondent issued a refund
check to petitioners in the amount of $663.43. This amount
consisted of tax in the amount of $351.59 and interest in the
amount of $311.84.3
3
Respondent’s transcript of petitioner’s account for 1993
shows that petitioners were credited with interest on the
overpayment for 1993 as follows:
(continued...)
- 5 -
Petitioners reported no interest income on their 1997
Federal income tax return. Respondent determined that
petitioners received interest in 1997 in the amount of $311.84 on
their overpayment of income tax for 1993.
Discussion
A. Disability Benefits
As a general rule, section 104(a)(3) excludes from an
employee's gross income amounts received through accident or
health insurance for personal injuries or sickness. However, the
section provides an exception for amounts received by an employee
to the extent such amounts either are paid by the employer or are
attributable to employer contributions that were not includable
in the employee's gross income.4
Section 105(a) coordinates with section 104. Rabideau v.
Commissioner, T.C. Memo. 1997-230. As a general rule, section
105(a) provides that amounts received by an employee through
3
(...continued)
Date Amount
4/15/97 $196.41
8/25/97 0.04
10/6/97 115.39
311.84
4
See Trappey v. Commissioner, 34 T.C. 407 (1960)
(disability income is received through accident or health
insurance for personal injuries or sickness within the meaning of
sec. 104(a)(3)); see also sec. 105(e)(1) (for purposes of secs.
104 and 105, amounts received under an accident or health plan
for employees are treated as amounts received through accident or
health insurance); Chernik v. Commissioner, T.C. Memo. 1999-313.
- 6 -
accident or health insurance for personal injuries or sickness
shall be included in gross income to the extent such amounts are
either paid by the employer or are attributable to contributions
by the employer that were not included in the employee's gross
income.
At trial, we had the opportunity to observe petitioner,
evaluate his demeanor, and assess his credibility. We found
petitioner to be a credible witness, and we have no reason to
question his veracity. Petitioner's testimony provides the
evidentiary basis for our finding that petitioner specifically
elected, in August 1994, not to pay the premiums for his
disability insurance with pre-tax dollars pursuant to “premium
conversion”.
On brief, respondent states as follows:
The determinative factual issue in this case is
whether the premiums were contributed by petitioner on
a pre-tax or after-tax basis. If they were paid out of
pre-tax monies as respondent contends, then the
disability benefits received by petitioner would be
taxable. If, on the other hand, the disability
insurance premiums were paid out of after-tax dollars
as petitioners contend, then the disability benefits
received by petitioner would not be taxable.
In view of our finding that petitioner paid the premiums for
his disability insurance with after-tax dollars, we hold that the
disability benefits received by petitioner in 1997 are excludable
from gross income for that year. Sec. 104(a)(3). Accordingly,
respondent’s determination to the contrary is not sustained.
- 7 -
B. Interest Income
Petitioners admitted at trial that they received a refund
check from respondent in 1997 and that such check pertained to
the taxable year 1993. However, petitioners contend that they
did not receive any interest. In this regard, petitioners rely
on that part of the respondent’s notice dated October 6, 1997,
stating: “Amount Of Interest You Earned on Overpayment ...
$.00". According to petitioners, this statement demonstrates
that they neither received nor were credited with any interest on
their 1993 overpayment of income tax. We disagree.
Petitioners read the notice dated October 6, 1997,
myopically. That notice clearly states that in addition to the
$351.59 of tax that petitioners would receive as a refund, “Any
Interest Due You Will Be Added”. In that regard, the record
clearly demonstrates that respondent did, in fact, “add” interest
to petitioners’ refund, specifically $311.84, which was part of
the $663.43 check that was issued on or about October 6, 1997.
Accordingly, we hold that petitioners failed to report interest
income in the amount of $311.84. Respondent’s determination is
sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
- 8 -
In order to give effect to our disposition of the disputed
issues, as well as the parties’ concessions,
Decision will be entered
under Rule 155.