T.C. Summary Opinion 2003-81
UNITED STATES TAX COURT
WESLEY T. AND RUTH T. ENLOE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14031-01S. Filed June 19, 2003.
William J. Bergner, for petitioners.
Harriet E. Downs, for respondent.
DEAN, Special Trial Judge: This case was heard under the
provisions of section 7463 of the Internal Revenue Code as in
effect at the time the petition was filed. Unless otherwise
indicated, all subsequent section references are to the Internal
Revenue Code in effect for the year at issue. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority.
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Respondent determined a deficiency in petitioners' Federal
income tax of $4,223 for 1999. The issue for decision is whether
petitioners may exclude from income pension payments received by
Wesley T. Enloe (petitioner). Whether petitioners must also
include in income Social Security benefits received by petitioner
is a computational matter that will be resolved by the decision
of the Court on the exclusion of pension income issue.
The stipulated facts and exhibits received into evidence are
incorporated herein by reference. At the time the petition in
this case was filed, petitioners resided in Oklahoma City,
Oklahoma.
Background
Petitioner was for many years employed by Chicago Bridge &
Iron (Iron) as either a boilermaker or a welder. In April of
1992 petitioner sustained injuries to his right eye, forehead,
nose, and spine when he was struck on the head by a dropped sheet
of plywood. He was found permanently partially disabled by the
California Worker's Compensation Appeals Board (Board). The
Board determined petitioner to be 17-1/2 percent permanently
disabled due to the neck injury.
On April 1, 1996, petitioner filed an application for
disability insurance benefits with the Social Security
Administration (SSA) alleging that he had been unable to work
since 1995 due to his neck injury and also due to obstructive
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airway disease. On May 29, 1997, the SSA administrative law
judge determined that petitioner was entitled to Social Security
disability insurance benefits. He was then 58 years old.
Under a collective bargaining agreement between Iron and the
Boilermaker-Blacksmith International Union, petitioner was a
beneficiary of the Boilermaker-Blacksmith National Pension Trust
(Pension Trust). The Pension Trust adopted a plan denominated
the "pension plan" that was funded by amounts paid to the trust
for the employees by their employer. Under the pension plan,
beneficiaries could qualify for four types of pensions, an "age
pension", an early retirement pension, a disability pension, and
a "vested pension".
Under the plan, to qualify for an "age pension" the employee
must be 65 or older and have at least 1,000 hours of work in
"Covered Employment" without a permanent break in covered
employment. The age pension could be made up of three
components, the "basic pension", the "regular past service
pension", and the "special past service pension". The monthly
amount of the "basic pension" is computed as 46.75 percent of the
total contributions made to the plan on behalf of the employee
divided by 12. If the employee has at least 15 years of "Pension
Credit", he can receive an additional "regular past service
pension", a monthly amount based on the number of years of
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service. If the employee has less than 15 years of pension
credit, he may qualify for a "special past service pension".
To qualify for a disability pension under the plan, the
employee must: (a) Have at least 1,000 hours of work in "Covered
Employment" without a permanent break in covered employment; and
(b) be totally disabled and awarded a Social Security or Railroad
Retirement Disability Benefit before age 65. If the employee
qualifies for the disability pension, the amount of the
disability pension "is calculated in the same way as the Age
Pension." (Emphasis added.) Under the plan, "When a Disability
Pensioner reaches age 65, pension benefits will automatically
become an Age Pension". Petitioner was determined to be totally
disabled under the pension plan and to be qualified for a
disability pension.
During 1999, petitioner received pension payments of
$20,115. The Pension reported the pension payments as income on
Form 1099-R, Distributions From Pensions, Annuities, Retirement
or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Federal
income tax of $127.04 was withheld from the pension
distributions.
Petitioners reported "Total pensions and annuities" of
$20,116 on line 16a of their Federal income tax return but line
16b of the return, "Taxable amount", was left blank. Petitioners
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reported Social Security benefits of $15,498 on line 20a of the
return but line 20b, "Taxable amount", was left blank.
The Commissioner issued a notice of deficiency determining
that petitioners received in 1999 taxable pension and annuity
income of $20,115 and taxable Social Security income of $9,748.
Discussion
Petitioners do not deny that they received the pension and
Social Security payments. Petitioners argue, however, that the
pension distributions are amounts received through accident or
health insurance that are excludable from income under section
105(c). Petitioners argue further that if the pension
distributions are excluded, the Social Security payments are not
taxable under section 86 because their joint income is less than
$32,000. Because the Court decides this case without regard to
the burden of proof, section 7491 is inapplicable.
Gross income includes all income from whatever source
derived, unless specifically excluded from income under the
exclusion provisions of the Internal Revenue Code. Secs. 61,
101-139. Section 61 specifically lists "pensions" as a source of
gross income. Sec. 61(a)(11); sec. 1.61-11, Income Tax Regs.
Generally, any amount distributed to a distributee by an
employees trust is taxable to the distributee in the taxable year
of the distribution under section 72. Sec. 402(a) and (b).
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Amounts received by an employee under accident or health
insurance funded by the employer are generally also includable in
a taxpayer's income. Sec. 105(a). Section 105(c), however,
permits the exclusion from gross income of payments from accident
or health insurance if the following two requirements are met:
(1) The payments are for the permanent loss or loss of use of a
member or function of the body, or permanent disfigurement, of
the taxpayer, his spouse, or a dependent; and (2) the payments
are computed with reference to the nature of the injury without
regard to the period the employee is absent from work. Amounts
received through an accident or health plan are generally equated
with amounts received through accident or health insurance. Sec.
105(e).
For petitioners to properly exclude their pension
distributions from income, they must first show that the amounts
petitioner received were received through accident or health
insurance or through an employee's accident or health plan for
personal injury or sickness. See sec. 105(a), (e)(1); sec.
1.105-5(a), Income Tax Regs. They must also prove that the
amounts constituted payment for the permanent loss or loss of use
of a member or function of petitioner's body under section
105(c)(1). And, finally, they must demonstrate that the amount
of the payments was "computed with reference to the nature of the
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injury without regard to the period * * * [he was] absent from
work." Sec. 105(c)(2).
Since the plan in this case is plainly labeled a "pension
plan", petitioners must argue that it serves a dual capacity as
an accident or health plan as well. The regulations permit a
dual function. See sec. 1.401-1(b)(1)(ii), Income Tax Regs.
Generally, pension plans and accident or health plans serve
different purposes. Pension plans are designed to provide an
employee with predetermined fixed payments over a period of
years, usually for life. Sec. 1.401-1(b)(1), Income Tax Regs.
The amounts of pension payments are usually measured by such
factors as the length of the employee's service with the employer
and the compensation received by the employee. Id. On the other
hand, accident or health plans are designed to provide payments
to employees in the event of illness or injury and are not based
on the employee's compensation and length of service.
In order to show that petitioner's pension plan was a dual
purpose plan, and falls within section 105(a), petitioners must
show that the plan was intended to provide accident or health
benefits. Berman v. Commissioner, 925 F.2d 936, 939 (6th Cir.
1991), affg. T.C. Memo. 1989-654; Estate of Hall v. Commissioner,
T.C. Memo. 1996-93, affd. without published opinion 103 F.3d 112
(3d Cir. 1996).
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Ordinarily, a plan intended to provide accident or health
coverage will contain certain indicia reflecting that purpose. A
plan might state that its purpose is to qualify as an accident or
health plan within the meaning of the Internal Revenue Code and
that the benefits payable under the plan are eligible for income
tax exclusion. Under an accident or health plan, it might be
specified that the benefits payable are those amounts incurred
for medical care in the event of personal injury or sickness.
The plan might also specify that the benefits payable are limited
to amounts incurred for medical care in the event of personal
injury or sickness and provide for the specific reimbursement of
such expenses. A plan might also allow an employee to be
compensated for specific injuries or illnesses, such as the loss
of use of an arm or leg. Although these and similar provisions
are not prerequisites to the existence of an accident or health
plan, their absence plainly militates against a finding that a
pension plan serves a dual purpose. See Berman v. Commissioner,
supra; Caplin v. United States, 718 F.2d 544, 549 (2d Cir. 1983);
Estate of Hall v. Commissioner, supra. None of the expected
provisions are found in petitioner's pension plan. Petitioners
also failed to produce any evidence of any accident or health
claim's ever having been made or paid under the pension plan.
This is strong evidence against the existence of a dual purpose.
Berman v. Commissioner, supra.
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In addition, the terms of the pension plan demonstrate that
petitioner's benefits were computed solely on the basis of his
length of service and salary and not on the basis of his
disability. Therefore, the conditions of section 105(c)(2) are
not met. See Hines v. Commissioner, 72 T.C. 715, 720 (1979)
(denying section 105(c) treatment to incapacitated pilot where
the amount of the distribution was not based on the nature of his
injury); see also Gordon v. Commissioner, 88 T.C. 630, 640-641
(1987); Laverty v. Commissioner, 61 T.C. 160, 167 (1973), affd.
per curiam 523 F.2d 479 (9th Cir. 1975).
The Court finds that petitioner received pension payments
and did not receive payments from an accident or health plan or
through an accident or health insurance agreement. The Court
further finds that even if the pension plan did operate as an
accident or health plan, or accident or health insurance, the
payments to petitioner were not computed with reference to the
nature of his injury.
Respondent's determination that petitioners must include in
income the pension payments and Social Security disability
payments made to petitioner is sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.