T.C. Summary Opinion 2011-55
UNITED STATES TAX COURT
DUANE A. AND RACHEL A. BAKKEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13834-09S. Filed April 19, 2011.
Thomas C. Morrison, for petitioners.
Christopher C. Fawcett, for respondent.
GERBER, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed.1 Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court, and
this opinion shall not be treated as precedent for any other
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year under
consideration.
- 2 -
case. Respondent determined a $5,834 income tax deficiency and a
$1,167 section 6662(a) accuracy-related penalty for petitioners’
2006 taxable year. The issue remaining2 for our consideration is
whether the distributions received during 2006 by Duane A. Bakken
(petitioner) were excludable from gross income under section 104.
Background
Petitioners resided in Montana at the time their petition
was filed. Petitioner was born in 1937 and began employment as a
police officer for the city of Austin, Minnesota, on May 1, 1962.
On February 26, 1982, because of an injury he sustained in the
line of duty, petitioner became permanently disabled and unable
to perform his duties as a police officer. Petitioner’s injuries
occurred while he was en route to investigate a criminal act in
progress. Petitioner was a member of the Austin Policemen’s
Benefit Association (APBA), and on June 17, 1983, the APBA
approved his application for a disability pension. At the time
of his disability and when his pension was approved, petitioner
had completed 18 years, 6 months, and 11 days of service as a
2
At trial respondent conceded that petitioners are not
liable for a sec. 6662(a) accuracy-related penalty for their 2006
tax year.
- 3 -
police officer and was not qualified to retire.3 Under the APBA
plan disability benefits were calculated at a rate of 50 percent
of the base pay of an active first class patrolman who had
reached 50 years of age with 20 or more years of service. Under
the APBA plan active police officers were entitled to retire when
they had a combination of at least 20 years “of service as a
patrolman” and “after he has arrived at the age of fifty years or
more”. Under the APBA plan disabled police officers received the
same pay as a police officer who had qualified to retire, even if
the disabled officer did not have sufficient years of service to
retire.
For taxable years after petitioner reached age 50 (1987),
APBA began issuing Forms 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., reflecting that his distributions were taxable.
Effective January 1, 1994, Minnesota State statutes facilitated
the switch of the administration of the APBA to the Minnesota
Public Employees Retirement Association (MPERA). For the 2006
tax year MPERA issued petitioner a Form 1099-R reflecting that
his distributions totaling $41,652.72 were taxable.
3
On the basis of the date that petitioner began his service,
he would have had over 21 years of service at the time his
pension was approved. The difference is attributable to time
lost when he was unable to work because of other serious injuries
incurred in the line of duty.
- 4 -
At the time that MPERA took over the administration of the
APBA plan, petitioner remained under the terms of the APBA plan.
After MPERA took over the administration of the plan, they
offered both disability beneficiaries and retirees the
opportunity to elect a cost of living allowance (COLA) instead of
the existing plan’s increases based upon active police officers’
raises. Petitioner elected the COLA increases. Petitioner
otherwise remained under the terms of the APBA plan after his
election. Accordingly, from December 1, 1993, petitioner’s
benefits were based on 50 percent of the current pay of an active
first class patrolman under the ABPA plan as of December 1, 1993,
plus any COLA that accrued after that date.
Following his 50th birthday, when APBA began withholding
from his benefits, petitioner contacted APBA to inquire why they
had unilaterally decided to change his benefits status from
disability to retirement even though he had not qualified for
retirement under the APBA plan. Petitioner’s gross benefits did
not change when APBA began treating his disability benefits as
retirement benefits. If petitioner’s benefits were from
retirement, however, they would be subject to Federal income tax.
Accordingly, petitioner expressed his disagreement with this
change in treatment, as he continued to be disabled and was
unable to work. Petitioner explained to the APBA that it was his
disability that prevented him from completing sufficient service
- 5 -
as a patrolman to qualify for retirement from the police
department under the APBA plan. APBA, however, continued to
treat petitioner’s benefits as being for retirement and reported
to MPERA (when they began administering the APBA plan) that
petitioner’s benefits were attributable to retirement.
Initially, when he began receiving Forms 1099-R, petitioner
reported his benefits as taxable for Federal income tax purposes.
Sometime after 2001, however, petitioner learned from another
disabled Austin police officer that their disability benefits
should not have been classified as retirement benefits and that
the amounts received were not subject to Federal income tax.
Petitioner hired a tax professional, who filed refund claims for
all open years, including 1999 through 2001, and he received
refunds (without litigation or controversy) of the Federal income
tax paid for those years. Also, from that time forward,
including 2006, on the advice of his tax professional/return
preparer, petitioner did not report, as taxable, the benefits
received.
Discussion
The parties agree that petitioner’s benefits were not
taxable before his 50th birthday. Respondent, however, contends
that following petitioner’s 50th birthday, his benefits became
taxable. Conversely, petitioner contends that from the first day
- 6 -
of his disability, his benefits were excludable under section 104
because of his disability.
Section 104(a)(1) permits the exclusion from gross income of
amounts received under worker’s compensation acts as compensation
for personal injuries. In particular, section 1.104-1(b), Income
Tax Regs., limits the section 104(a)(1) exclusion to certain
benefits. That regulation specifies that the section 104(a)(1)
exclusion does not apply to benefits “to the extent that [they
are] determined by reference to the employee’s age or length of
service”. The parties also agree that petitioner’s benefits
would not be taxable if they are found to be for disability
rather than retirement.
Respondent relies on Minnesota law, Minn. Stat. Ann. sec.
423A.11 (West 2008), and has argued that petitioner’s benefits
are required to be treated as received for retirement; i.e.,
based on his age and length of service. In Tateosian v.
Commissioner, T.C. Memo. 2008-101, we held that “Because Minn.
Stat. Ann. sec. 423A.11 ‘terminated’ * * * [the taxpayer’s]
disability benefits and deemed him a service pensioner, his
payments could no longer be characterized as compensation for
personal injuries under a statute in the nature of a worker’s
compensation act.” (Emphasis added.) Unlike Tateosian, however,
petitioner’s case would have been appealable to the Court of
- 7 -
Appeals for the Ninth Circuit.4 In Picard v. Commissioner, 165
F.3d 744 (9th Cir. 1999), revg. T.C. Memo. 1997-320, the Court of
Appeals reversed our decision and held that the taxpayer had
received disability retirement (as opposed to service retirement)
benefits because his benefits could not be determined by
reference to his age or length of service. The Court of Appeals
explained:
Picard’s benefits * * * could not be determined by
reference to his age or length of service. The Tax
Court attempted to reconcile this apparent distinction
by determining that, in Picard’s case, as in Mabry [v.
Commissioner, T.C. Memo. 1985-328], the Plan “deem[s]
time spent on disability as equivalent to time spent
actively working, and counting both in setting the date
when a disabled employee was treated as if he had taken
service retirement, with a corresponding adjustment to
his retirement payments.” Picard, T.C. Memo. 1997-320
(emphasis in original).
This attempted distinction misapplies the facts of
this case. As Mabry notes, the fundamental question in
determining whether benefits are excludable under
§ 104(a)(1) is “upon what basis were the retirement payments
in question paid?” Mabry, T.C. Memo 1985-328. The
taxpayers in Mabry and Wiedmaier [v. Commissioner, T.C.
Memo. 1984-540, affd. 774 F.2d 109 (6th Cir. 1985)], at the
time their benefits were reduced, qualified for regular
service retirement, regardless of their continued
disability. Picard, on the other hand, qualified only for
disability-retirement benefits. Had Picard become “able”
just one day before his benefit reduction, he would have
qualified for neither service nor disability retirement
benefits. To hold in favor of the Commissioner in this
case, we would have to do something that neither Mabry nor
Wiedmaier do--namely, hold that benefits are determined by
4
Although under sec. 7463(b) this case is not appealable, we
afford petitioners the same result that they would have obtained
in their particular appellate circuit, which in this case is the
Court of Appeals for the Ninth Circuit.
- 8 -
reference to length of service even though a beneficiary
would not qualify for a nondisability-based retirement. The
facts of this case do not permit such a holding.
[Id. at 746.]
Petitioner’s benefits also cannot be determined by reference
to his age or length of service. When he reached age 50,
petitioner had completed less than 20 years of service. APBA,
pursuant to Minn. Stat. Ann. sec. 423A.11, deemed him a service
retiree only after taking into consideration the number of years
he had received disability benefits. As in Picard v.
Commissioner, supra, this did not transform petitioner’s benefits
into service retirement benefits, as Minn. Stat. Ann. sec.
423A.11 merely recomputed the amount of disability benefits to
which he was entitled. See Minn. Stat. Ann. sec. 423A.11,
subdiv. 2 (titled “Amount of disability benefit recomputed as a
service pension” (emphasis added)); Act of March 23, 1982, ch.
610, 1982 Minn. Laws 1458, 1458 (“providing for the recomputation
of a disability benefit as a service pension upon the attainment
of a certain age” (emphasis added)).
Under Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445
F.2d 985 (10th Cir. 1971), we follow the Court of Appeals’
decision in Picard v. Commissioner, supra, and hold that
petitioner’s benefits continue to be attributable to his
disability and that he is entitled, under section 104, to exclude
his pension distributions from income for 2006.
- 9 -
To reflect the foregoing and considering respondent’s
concession,
Decision will be entered
for petitioners.