T.C. Summary Opinion 2007-87
UNITED STATES TAX COURT
SANDREA MARYANN AND ROBERT MAYNARD WOEHL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2735-05S. Filed May 29, 2007.
Glen L. Moss, for petitioners.
Stephanie M. Profitt, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Unless otherwise indicated,
all section references are to the Internal Revenue Code, and all
Rule references are to the Tax Court Rules of Practice and
Procedure. Pursuant to section 7463(b), the decision to be
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entered is not reviewable by any other court, and this opinion
shall not be treated as precedent for any other case.
Respondent determined for 2002 a deficiency of $4,627 in
petitioners’ Federal income tax. The sole issue for decision is
whether petitioner Sandrea Maryann Woehl properly excluded from
gross income under section 104(a)(1) a portion of her disability
retirement distributions received from the California Public
Employees’ Retirement System.
Background
The stipulation of facts and the exhibits received into
evidence are incorporated herein by reference. At the time the
petition in this case was filed, petitioners resided in Newark,
California.
Sandrea Maryann Woehl (petitioner) became employed as a
public safety dispatcher by the City of San Leandro Police
Department in March of 1972. Upon employment, petitioner became
a member of the California Public Employees’ Retirement System
(CalPERS).
As time progressed, petitioner developed diabetes. On
January 25, 2000, petitioner was placed on administrative leave
because of her illness. Petitioner subsequently sent an
application to CalPERS to request disability retirement, and she
underwent a medical examination to verify her eligibility.
Petitioner’s medical report noted that “job stress contributs
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[sic] to uncontrollable diabetes”. Petitioner retired and
received disability retirement benefits from CalPERS effective
August 1, 2000.
During 2002, petitioner received distributions of $49,639
from CalPERS (distributions). The distributions were not
designed to reimburse petitioner for any medical expenses. The
parties stipulated that the distributions were characterized as
disability retirement benefits based on petitioner’s diabetic
condition. The parties further stipulated that the distributions
were based on factors such as the length of her employment with
the City of San Leandro and the last position she held while
employed by the city.
CalPERS issued to petitioner a Form 1099-R, Distributions
from Pensions, Annuities, Retirement or Profit-Sharing Plans,
IRAs, Insurance Contracts, etc., for 2002. The Form 1099-R
reported that petitioner received in 2002 total distributions of
$49,638.68, consisting of a taxable amount of $48,725.72 and
employee contributions or insurance premiums of $912.96.
Petitioners filed for 2002 a joint Form 1040, U.S. Individual
Income Tax Return, reporting only half, or $24,819, of the total
distributions as taxable.
Petitioner currently has a proceeding pending before the
Worker’s Compensation Appeals Board in California challenging the
nature of the distributions.
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Respondent subsequently issued to petitioners a statutory
notice of deficiency determining that all the distributions,
except for the portion attributable to employee contributions or
insurance premiums, were taxable.
Discussion
The Commissioner’s determinations are presumed correct, and
generally taxpayers bear the burden of proving otherwise.1 Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Gross income includes all income from whatever source
derived, unless excludable by a specific provision of the
Internal Revenue Code. Sec. 61(a). The Supreme Court has held
that section 61 reflects Congress’s intent to use the full
measure of its taxing power. Helvering v. Clifford, 309 U.S.
331, 334 (1940). Therefore, statutes granting tax exemptions
should be strictly construed. Kane v. United States, 43 F.3d
1446, 1449 (Fed. Cir. 1994).
Section 104(a)(1) provides that gross income does not
include “amounts received under workmen’s compensation acts as
compensation for personal injuries or sickness”. The regulations
expand the scope of section 104(a)(1) to exclude also from gross
income amounts received under “a statute in the nature of a
1
Petitioner has not raised the issue of sec. 7491(a), which
shifts the burden of proof to the Commissioner in certain
situations. This Court concludes that sec. 7491 does not apply
because petitioner has not produced any evidence that establishes
the preconditions for its application.
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workmen’s compensation act which provides compensation to
employees for personal injuries or sickness incurred in the
course of employment.” Sec. 1.104-1(b), Income Tax Regs. The
regulations also provide that section 104(a)(1) “does not apply
to a retirement pension or annuity to the extent that it is
determined by reference to the employee’s age or length of
service, or the employee’s prior contributions, even though the
employee’s retirement is occasioned by an occupational injury or
sickness.” Sec. 1.104-1(b), Income Tax Regs.
Respondent argues that pursuant to section 1.104-1(b),
Income Tax Regs., the distributions are not excludable from gross
income under section 104(a)(1) because petitioner has stipulated
that the distributions in this case were determined with
reference to petitioner’s length of service. Respondent contends
that Benjamin v. Commissioner, T.C. Memo. 1993-575, is directly
on point.
In Benjamin, the taxpayer was an accountant employed by the
State of California who incurred a medical disability in the
course and scope of his employment. Benjamin v. Commissioner,
supra. The taxpayer was subsequently forced to retire, and
CalPERS determined that he was eligible for disability
retirement. Although the taxpayer reported the benefit payments
that he received from CalPERS on his return, he failed to include
them in his gross income. This Court relied on section 1.104-
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1(b), Income Tax Regs., and concluded that the benefits received
by the taxpayer in Benjamin were not excludable from gross income
because the benefits were made with reference to the taxpayer’s
length of service.
The Court agrees with respondent. Since petitioner
stipulated that the distributions were made with reference to her
length of service with the City of San Leandro, under section
1.104-1(b), Income Tax Regs., the distributions are not
excludable from gross income.
Petitioner argues that the distributions nevertheless
qualify for exclusion from gross income because they were made
under Cal. Govt. Code (West 2003), section 21151. Petitioner
contends that Cal. Govt. Code section 21151 is akin to a worker’s
compensation because it conditions eligibility for benefits on
the existence of a work-related injury or sickness, called
“industrial disability” under the California statute, without
regard to age or amount of service. “Industrial” in this context
means disability or death as a result of injury or disease
arising out of and in the course of employment. See Cal. Govt.
Code sec. 20046 (West 2003).
Cal. Govt. Code sec. 21151 (West 2003), in pertinent part,
provides:
Section 21151. Patrol, state safety, state
industrial, state peace officer/firefighter, or local
safety members; local or state miscellaneous members
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(a) any patrol, state safety, state industrial,
state peace officer/firefighter, or local safety member
incapacitated for the performance of duty as the result
of an industrial disability shall be retired for
disability, pursuant to this chapter, regardless of age
or amount of service.
Petitioner, however, has not provided any evidence to show
that the distributions were indeed made under Cal. Govt. Code
section 21151. Respondent contends that petitioner received the
distributions under Cal. Govt. Code sec. 21150 (West 2003) which
awards benefits with reference to the employee’s years of State
service.
Cal. Govt. Code section 21150, in pertinent part, provides:
Section 21150. Incapacitated member; state service
credit; specified election; eligibility
Any member incapacitated for the performance of
duty shall be retired for disability * * * if he or she
is credited with five years of state service * * *.
Petitioner acknowledges that in order for her to qualify for
benefits under Cal. Govt. Code section 21151, she must have an
“industrial disability”. In fact, petitioner has a proceeding
pending before the Worker’s Compensation Appeals Board in
California to challenge the State’s failure to consider the
distributions to have been made as a result of an industrial
injury. The board, however, has not issued a decision.
At trial, petitioner invited the Court to decide whether the
distributions were made as a result of an industrial injury.
Petitioner argues that to the extent that this Court finds that
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the distributions were paid on account of an industrial injury,
they are excludable from gross income under section 104(a)(1).
State law creates legal interests and rights; the Federal
revenue acts designate when and how interests or rights, so
created, shall be taxed. United States v. Mitchell, 403 U.S.
190, 197 (1971); see also Estate of Posner v. Commissioner, T.C.
Memo. 2004-112. The Form 1099-R issued by the State of
California is evidence that the State determined that
petitioner’s legal right to the distributions were not from an
industrial injury and that the distributions were made under Cal.
Govt. Code sec. 21150.
The Court’s duty is to ascertain when and how such legal
right, i.e., the distributions, will be taxed. See Morgan v.
Commissioner, 309 U.S. 78, 80 (1940). Petitioner has not offered
any evidence to show why the distributions are not of the type
that is taxable. Therefore, the distributions are includable in
her gross income. Sec. 61(a).
Petitioner also argues that under Kane v. United States, 43
F.3d 1446 (Fed. Cir. 1994), the California Employees’ Retirement
Law is in the nature of a workmen’s compensation act because it
is a “dual-purpose statute” that provides payment for both work-
related and non-work related disabilities. Petitioner’s
argument, however, is unpersuasive. Even if the California
Employees’ Retirement Law is a “dual purpose statute”, petitioner
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does not prevail because the Court has found that the
distributions were made under Cal. Govt. Code sec. 21150. In
other words, the distributions were not awarded solely as a
result of injury or sickness arising out of employment. See Kane
v. United States, supra at 1450.
Accordingly, this Court sustains respondent’s determination
that petitioners are not entitled to exclude any taxable portion
of the distributions from their gross income under section
104(a)(1).
To reflect the foregoing,
Decision will be entered
for respondent.