T.C. Summary Opinion 2007-110
UNITED STATES TAX COURT
MILLARD D. AND MARJORIE C. THOMAS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 22366-04S, 11333-05S. Filed June 28, 2007.
Millard D. and Marjorie C. Thomas, pro se.
Daniel N. Price, for respondent.
WHERRY, Judge: These consolidated cases arise from
petitions for judicial review of notices of deficiency. They
were heard pursuant to the provisions of section 7463 of the
Internal Revenue Code in effect when the petitions were filed.1
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
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Pursuant to section 7463(b), the decisions to be entered are not
reviewable by any other court, and this opinion shall not be
treated as precedent for any other case. The issue for decision
is whether disability pension benefits are excludable from
petitioners’ gross income pursuant to section 105(c) for taxable
years 2002 and 2003.
Background
Some of the facts have been stipulated by the parties. The
stipulations, with accompanying exhibits, are incorporated herein
by this reference. At the time the petition for docket No.
22366-04S was filed, petitioners resided in Santa Fe, New Mexico.
By the time the petition for docket No. 11333-05S was filed,
petitioners resided in El Paso, Texas.
Petitioner, Millard Thomas (Mr. Thomas), was employed by
Stone Container Corp. (Stone Container) and its predecessors from
1970 to 1995. In 1995, Mr. Thomas applied for disability pension
benefits from Pace Industry Union-Management Pension Fund
(PIUMPF).2 These benefits were granted in 1996. Mr. Thomas’s
disability consists of lower back pain caused by degenerative
disk disease, and leg pain caused by chronic varicose veins. His
leg disability was apparently the result of a work-related injury
2
Some exhibits refer to the “Paper Industry Union-Management
Pension Fund” rather than to “Pace”. “Pace” is an acronym for
“Paper, Allied Industries, Chemical and Energy Workers’ Union
International,” and the two titles apparently refer to one and
the same pension plan or pension fund.
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that became a chronic condition. Photographs provided by
petitioners confirm that Mr. Thomas’s injured leg is severely
disfigured.
Pace Industry Union-Management Pension Plan (PIUMPP),
Article IV, Section 11, ELIGIBILITY FOR DISABILITY PENSION,
provides:
(a) Eligibility. A Participant shall be entitled to
retire on a Disability Pension if he meets all of the
following conditions:
(i) He becomes totally and permanently disabled as
defined in Section (b) below while working in Covered
Employment,[3] and
(ii) For Program A, B, and C Covered Employees, he has
accumulated at least 10 years of Pension Credit with at
least 2 quarters of Future Service Credit at the time
the total and permanent disability commences.
(iii) For Program D, E, and F Covered Employees, he has
accumulated at least 5 years of Pension Credit with at
least 2 quarters of Future Service Credit at the time
the total and permanent disability commences.
Mr. Thomas was a Program A Covered Employee. PIUMPP Article IV,
Section 12, AMOUNT AND COMMENCEMENT OF DISABILITY BENEFIT,
provides:
3
PIUMPP sec. (b) provides in pertinent part:
Definition Of Total and Permanent Disability. A
Participant shall be deemed totally and permanently
disabled if, on the basis of medical evidence
satisfactory to the Trustees, he is found to be totally
and permanently unable, as a result of bodily injury or
disease, to perform work in a position within the
collective bargaining unit of the Employer with which
he was last employed and to which he is contractually
entitled. * * *
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(a) Amount. The monthly amount of the Disability
Pension shall be the amount of Regular Pension to which
the Participant would be entitled if he had attained
his Normal Retirement Age at the time his Disability
Pensions starts, based on -
(i) the number of full and fractional years of
Pension Credit accrued by him on the last day for which
the Employer was obligated to make contributions to the
Fund on behalf of such Participant, and
(ii) the Benefit Level in effect on the last day
for which the Employer was obligated to make
contributions to the Fund on behalf of such
Participant.[4]
A document entitled PIUMPF - CALCULATIONS, dated May 16,
1996, provided that Mr. Thomas was almost 52 years old when he
retired, and that he worked for Stone Container and its
predecessors for 25.75 years. The document shows an “Age
Reduction %” of “60.0% on 52 Years 0 Months”. According to the
document, Mr. Thomas’s “Benefit Level” was “$483 under Plan Type
‘A’”. The document estimates Mr. Thomas’s disability pension
benefits to total $498 per month.
4
The PIUMPF Summary Plan Description, Section X, further
provides under the heading FINANCIAL INFORMATION that “The
contributions to the Plan are made by the employers in accordance
with their collective bargaining agreements with the PACE
International Union, AFL-CIO, and other unions, and are reflected
in the Fund’s Standard Form of Participation Agreements.” The
record does not reflect that Mr. Thomas paid premiums for the
disability pension plan or that premiums paid by Stone Container
were includable in Mr. Thomas’s gross income. Accordingly,
Mr. Thomas’s disability pension benefits are not excludable from
gross income pursuant to sec. 72(b) or 104(a)(3). See sec.
72(f); sec. 1.72-15(c)(2), Income Tax Regs.
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Mr. Thomas’s Notice of Pension Award, dated May 22, 1996,
provided that Mr. Thomas was entitled to a monthly benefit level
of $483, and was awarded a monthly disability pension of $498,
retroactive to March 1, 1996, which was the “Effective Date”.
Petitioners have never included Mr. Thomas’s disability
pension in their gross income. In 1999, respondent examined Mr.
Thomas’s Federal income tax return and accepted his position that
his disability pension benefits were nontaxable.5 In both 2002
and 2003, Mr. Thomas received $5,976 in disability pension
benefits, which respondent now contends are includable in
petitioners’ gross income.
5
In Megibow v. Commissioner, T.C. Memo. 2004-41, affd. 161
Fed. Appx. 98 (2d Cir. 2005), this Court observed:
From a legal standpoint, income taxes are levied
on an annual basis, such that each year represents a
new liability and a separate cause of action.
Commissioner v. Sunnen, 333 U.S. 591, 598-600 (1948);
Fla. Peach Corp. v. Commissioner, 90 T.C. [678] 682
[(1988)]. Given this principle, collateral estoppel
would not operate to establish entitlement to
deductions in one year based merely on an allowance of
similar deductions in a different year or years. See
Barmes v. Commissioner, T.C. Memo. 2001-155 (rejecting
attempts to apply collateral estoppel to depreciation
deductions based on a prior litigated tax year), affd.
89 AFTR 2d 2002-2249, 2002-1 USTC par. 50,312 (7th Cir.
2002); see also Adolph Coors Co. v. Commissioner, 519
F.2d 1280, 1283 (10th Cir. 1975) (rejecting an attempt
to apply collateral estoppel even though the exact
issue was raised in a prior Tax Court proceeding but,
because the Commissioner abandoned the issue during the
litigation, no judicial determination or findings were
made), affg. 60 T.C. 368 (1973).
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Respondent issued a notice of deficiency on November 8,
2004, for the taxable year 2002, and on May 23, 2005, for the
taxable year 2003, showing deficiencies of $851 and $893,
respectively. In response to each notice of deficiency,
petitioners filed a petition with this Court in a timely manner.
These cases were consolidated for trial and briefing, and a trial
was held on February 7, 2006, in El Paso, Texas.
Discussion
As a general rule, the Commissioner’s determination of a
taxpayer’s liability in the notice of deficiency is presumed
correct and the taxpayer bears the burden of proving that the
determination is improper. See Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). However, pursuant to section
7491(a)(1), the burden of proof on factual issues that affect the
taxpayer’s tax liability may be shifted to the Commissioner where
the “taxpayer introduces credible evidence with respect to * * *
such issue”. The burden will shift only if the taxpayer has,
inter alia, complied with substantiation requirements pursuant to
the Internal Revenue Code and “cooperated with reasonable
requests by the Secretary for witnesses, information, documents,
meetings, and interviews”. Sec. 7491(a)(2). Here, the parties
agree on the facts. The sole issue for decision is a legal
issue, and, therefore, section 7491 does not affect the result in
these cases.
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Section 61(a) defines gross income as “all income from
whatever source derived, including * * * (11) Pensions”, unless
otherwise provided. Section 105(a) provides that amounts
received by an employee through accident or health insurance for
personal injuries or sickness shall be included in gross income
to the extent that such amounts are (1) attributable to employer
contributions that were not includable in the employee’s gross
income, or (2) were paid by the employer. Section 105(c)
provides an exception to the general rule in section 105(a):
Gross income does not include amounts referred to in
subsection (a) to the extent such amounts --
(1) constitute 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.
In order to qualify for the section 105(c) exception, the
payments to Mr. Thomas must satisfy both of these requirements.
The Court finds that the payments to Mr. Thomas fail section
105(c)(2); therefore, the Court need not, and does not, decide
whether the payments to Mr. Thomas satisfy section 105(c)(1).
Section 105(c)(2) itself has two requirements that must be
satisfied: (1) The payments to the taxpayer must be computed
with reference to the nature of the injury; and (2) the payments
must be computed without regard to the period the taxpayer is
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absent from work. See Hines v. Commissioner, 72 T.C. 715, 720
(1979). “Payments from a disability plan do not qualify for the
section 105(c)(2) exclusion if the payments are the same
regardless of the nature and severity of the particular injuries
causing the disability.” Hayden v. Commissioner, T.C. Memo.
2003-184 (citing Hines v. Commissioner, supra), affd. 127 Fed.
Appx. 975 (9th Cir. 2005). The Court must conclude that the
payments to Mr. Thomas fail the first requirement of section
105(c)(2) because Mr. Thomas’s disability pension benefits were
calculated based on his age and years of employment with Stone
Container, and were unaffected by the nature and severity of his
disability.
PIUMPP disability pension benefits are available only to
employees that meet a minimum term of employment. The PIUMPP
clearly provides that the amount of disability pension benefits
an employee is entitled to receive is based on the employee’s
years of employment. Mr. Thomas’s Notice of Pension Award, and
calculations of his benefits, show that his $498 monthly payments
were based on his age at the time of his disability and his 25.75
years of employment. Although Mr. Thomas’s disability triggered
his entitlement to receive disability pension benefits, the
amount of his monthly benefits was determined by his age and
duration of employment, not by the nature and severity of his
disability.
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The evidence at trial clearly shows that petitioners have
admirably worked very hard, under difficult circumstances, to
support themselves and their family and to pay their taxes on
limited income due to Mr. Thomas’s disability. However, given
the clear language of the applicable statutes, the Court
concludes that Mr. Thomas’s disability pension benefits are
taxable. Accordingly, the Court sustains the deficiencies
determined by respondent for the 2002 and 2003 taxable years.
In their brief, petitioners argued that if they were
ultimately found liable for the deficiencies, then interest
should be abated because respondent previously agreed with them,
at the time of the 1999 audit, that Mr. Thomas’s disability
pension benefits were nontaxable. Pursuant to section
6404(e)(1), the Commissioner may abate part or all of an
assessment of interest on any deficiency or payment of income
tax. Abatement may be granted to the extent that any tax
deficiency or delay in payment is attributable to unreasonable
erroneous or dilatory performance of a ministerial or managerial
act by an officer or employee of the IRS acting in his or her
official capacity.
This Court lacks jurisdiction over petitioners’ abatement
request. Generally, a taxpayer must first file with the
Commissioner Form 843, Claim for Refund and Request for
Abatement. See sec. 301.6404-1(c), Proced. & Admin. Regs. If
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the taxpayer’s request for abatement of interest is denied, then
the taxpayer may petition this Court to review the Secretary’s
exercise of his discretion, whether or not to abate interest.
See sec. 6404(h).
The Court has considered all of petitioners’ contentions,
arguments, requests, and statements. To the extent not discussed
herein, we conclude that they are meritless, moot, or irrelevant.
To reflect the foregoing,
Decisions will be entered
for respondent.