T.C. Memo. 2017-132
UNITED STATES TAX COURT
JACK HOWARD TAYLOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17349-15. Filed July 5, 2017.
P was a North Carolina fireman for over 24 years before retiring
on disability in 1991. At that time he began receiving from LGERS a
disability retirement allowance computed with reference to his age,
length of service, and average final compensation. In a later year he
also began receiving an FRSWPF pension. For 2012 P received
information returns from LGERS and FRSWPF showing taxable
distributions of $34,829 and $2,000, respectively, but reported only
$2,324 of taxable retirement income. For 2012 P also failed to report
as income certain distributions, an error he has since conceded.
Held: The LGERS and FRSWPF distributions are not excludable
from gross income as amounts received under workmen’s
compensation acts as compensation for injuries or sickness because
they are retirement pensions determined by reference to P’s age or
length of service, or his prior contributions. See sec. 1.104-1(b),
Income Tax Regs.
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[*2] Jack Howard Taylor, pro se.
Corey R. Clapper and Amy Dyar Seals, for respondent.
MEMORANDUM OPINION
LARO, Judge: This case arises out of respondent’s adjustments to
petitioner’s return for the 2012 taxable year. The case was submitted fully
stipulated for decision without trial. See Rule 122.1
Respondent determined a $3,806 deficiency in petitioner’s Federal income
tax for tax year 2012. Petitioner has conceded all adjustments, save for the
inclusion in taxable income of an additional $32,505 in benefits paid by the Local
Governmental Employees’ Retirement System of North Carolina (LGERS) and an
additional $2,000 in benefits paid by the North Carolina Firemen and Rescue
Squad Workers’ Pension Fund (FRSWPF).2
1
Unless otherwise indicated, section references are to the Internal Revenue
Code (Code) applicable for the relevant years. Rule references are to the Tax
Court Rules of Practice and Procedure.
2
LGERS reported total benefits paid of $35,153, with $34,829 taxable.
FRSWPF reported total benefits paid of $2,040, with $2,000 taxable. Petitioner
on his return reported only $2,324 of taxable retirement income, which respondent
treated in the notice of deficiency as allocable to the LGERS benefit.
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[*3] We decide whether respondent properly treated $34,829 paid by LGERS
and $2,000 paid by FRSWPF as taxable retirement income. We hold that he did.
Background
I. Overview
The parties submitted this case fully stipulated under Rule 122. The parties’
stipulation of facts is incorporated herein. Petitioner is a resident of Asheville,
North Carolina. This case is appealable to the Court of Appeals for the Fourth
Circuit absent stipulation of the parties to the contrary.
II. Petitioner’s Service as a Fireman and Subsequent Retirement
Petitioner was born in August 1944. He was hired by the City of Asheville
Fire Department on October 18, 1966. His last day of work was March 10, 1991,
and he retired on disability effective June 1, 1991, in his 24th year of service with
the department.
LGERS began paying petitioner a disability retirement allowance on June 1,
1991, which was computed with reference to his age, length of service, and
average final compensation before his disability retirement. At an unspecified
later date petitioner also began receiving a pension from FRSWPF. Petitioner
turned 60 in August 2004, whereupon, as he acknowledged on brief, LGERS sent
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[*4] him a letter notifying him that he was being transferred from disability
retirement to regular service retirement effective September 1, 2004.
III. Petitioner’s 2012 Retirement Benefits and Tax Return
For 2012 petitioner was paid $35,153 in retirement benefits by LGERS and
$2,040 in retirement benefits by FRSWPF. He was issued a Form 1099-R,
Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., by LGERS indicating that he had received $34,829 in
taxable retirement benefits during the 2012 tax year. Petitioner was also issued a
Form 1099-R by FRSWPF showing that he had received $2,000 in taxable
retirement benefits during the 2012 tax year. Box 7 of each Form 1099-R was
marked with the distribution code “7” indicating a normal distribution.
Petitioner timely filed a Form 1040, U.S. Individual Income Tax Return, for
the 2012 tax year. On his return petitioner reported $2,324 of taxable retirement
income for that year. Further, petitioner did not report any dividend income on the
return, notwithstanding the issuance to him of a Form 1099-DIV, Dividends and
Distributions, by National Financial Services, LLC, showing ordinary dividend
income of $892 and capital gain distributions of $226. Petitioner has since
conceded respondent’s adjustments related to these items of dividend income.
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[*5] IV. Notice of Deficiency and Petition
Respondent on April 6, 2015, issued a notice of deficiency to petitioner. In
the notice respondent made three adjustments relating to petitioner’s 2012 taxable
year: (1) increased taxable dividends from zero to $892; (2) increased “Schedule
D/capital gain dividends” from zero to $226; and (3) increased taxable retirement
income from $2,324 to $36,829. As noted above, petitioner has conceded the first
two adjustments. As to the third adjustment, respondent indicated that petitioner
received taxable retirement income from two payors. For the first, LGERS,
respondent identified $2,324 as shown on petitioner’s return and increased that
amount by $32,505 to arrive at the $34,829 of taxable income reported on the
Form 1099-R generated by LGERS. For the second, FRSWPF, respondent
identified zero as shown on petitioner’s return and increased that amount by
$2,000 to reflect the taxable income reported on the FRSWPF Form 1099-R.
The notice of deficiency specified that the last date to file a petition with
this Court was July 6, 2015. The petition was received by the Court and filed in
the morning of July 7, 2015. It was signed and dated by petitioner on July 5,
2015, and bore a postmark indicating that it was mailed by FedEx Standard
Overnight service on July 6, 2015. Since the petition was mailed timely using a
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[*6] designated private delivery service, see Notice 2015-38, 2015-21 I.R.B. 984,
it is treated as filed timely, see sec. 7502(a), (f).
Discussion
I. Overview
Generally, the Commissioner’s determination of a taxpayer’s liability for an
income tax deficiency is presumed to be correct, and the taxpayer bears the burden
of proving the determination improper by a preponderance of the evidence. See
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). We find that
petitioner has failed to establish that respondent’s determination of his tax liability
was incorrect. We need not address whether under section 7491(a) the burden of
proof has shifted from petitioner to respondent because there are no outstanding
factual issues relevant to ascertaining petitioner’s tax liability. The parties agree
on the salient facts and dispute only the legal question of the proper classification
of petitioner’s retirement income.
II. Includibility of Retirement Payments in Gross Income
Section 61(a) provides that unless a statutory exemption applies, “gross
income means all income from whatever source derived”. Pensions and retirement
allowances are included in gross income unless excluded by law. Sec. 61(a)(11);
sec. 1.61-11(a), Income Tax Regs. Any statutory exclusions from gross income
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[*7] must be construed narrowly. Commissioner v. Schleier, 515 U.S. 323, 328
(1995); see also Graves v. Commissioner, 89 T.C. 49, 51 (1987) (“[E]xemptions
and exclusions from taxable income should be construed narrowly, and the
taxpayers must bring themselves within the clear scope of the exclusions.”).
Under section 104(a)(1) gross income does not include amounts received
under workmen’s compensation acts as compensation for personal injuries or
sickness. This exclusion also applies to statutes in the nature of workmen’s
compensation acts which provide compensation to employees for personal injuries
or sickness incurred in the course of employment. Sec. 1.104-1(b), Income Tax
Regs. The exclusion, however, “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.” Id.
Since the issuance of petitioner’s retirement payments is governed by State
law, to evaluate those benefits we look to the relevant North Carolina statutes.
Cf., e.g., Green v. Commissioner, T.C. Memo. 1994-264, 1994 WL 247039, at *3-
*5 (looking to Connecticut State law to determine whether payments received by a
policeman and fireman are excludable under section 1.104-1(b), Income Tax
Regs.), aff’d, 60 F.3d 142 (2d Cir. 1995).
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[*8] III. North Carolina State Employee Retirement Provisions
A. LGERS
Article 3 of chapter 128 of the General Statutes of North Carolina
establishes and governs LGERS, the retirement system for the State’s counties,
cities, and towns. LGERS is a defined benefit plan funded by employer and
employee contributions. N.C. Gen. Stat. Ann. sec. 128-30 (Westlaw 2012). Under
the plan, an employee with at least five years of service may retire on a disability
retirement allowance upon medical certification of incapacity for the further
performance of his duties. Id. sec. 128-27(c). The five-year service minimum
does not apply to law enforcement officers, firemen, and eligible rescue squad
workers who become “incapacitated for duty as the natural and proximate result of
injuries incurred while in the actual performance” of their duties. Id. Employees
retiring by reason of disability may be required to undergo medical examinations
annually for 5 years after their retirement and once every 3 years thereafter until
they attain the age of 60 years. Id. sec. 128-27(e). A beneficiary’s payments are
reduced if he is determined to be engaged in or be able to engage in a gainful
occupation paying more than a certain amount. Id. sec. 128-27(e)(1). In lieu of
this reduction, the beneficiary irrevocably “may elect to convert his disability
retirement allowance to a service retirement allowance calculated on the basis of
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[*9] his average final compensation and creditable service at the time of disability
retirement and his age at the time of conversion to service retirement.” Id.
An employee retiring for disability after July 1, 1982, “shall receive a
service retirement allowance if he has qualified for an unreduced service
retirement allowance”. Id. sec. 128-27(d4). Otherwise, the allowance equals “a
service retirement allowance calculated on the member’s average final
compensation prior to his disability retirement and the creditable service he would
have had had he continued in service until the earliest date on which he would
have qualified for an unreduced service retirement allowance.” Id. The service
retirement allowance for an employee not a law enforcement officer retiring from
service on or after July 1, 1990, but before July 1, 1992, equals 1.64% of his
average final compensation multiplied by the number of years of creditable
service, provided that the service retirement date occurs (1) on or after his 65th
birthday upon completing 5 years of service, (2) after completing 30 years of
service, or (3) on or after his 60th birthday upon completing 25 years of service.
Id. sec. 128-27(b12)(2). The retirement allowance is reduced if the employee did
not satisfy the minimum service requirements. Id.
A former employee receiving a disability retirement allowance, upon
reaching the earliest date on which he would have qualified for an unreduced
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[*10] service retirement allowance, is no longer subject to further medical
reexaminations or a reduction in benefits by engaging in gainful employment with
an employer not participating in LGERS. N.C. Gen. Stat. Ann. sec. 128-27(e)(6).
Furthermore, the former employee ceases to receive a disability retirement
allowance and instead is “considered a beneficiary in receipt of a service
retirement allowance.” Id. If a beneficiary’s disability retirement allowance was
reduced by reason of medical reexamination or ability to engage in a gainful
occupation before the date on which he would have qualified for an unreduced
retirement allowance, he has only the right to immediately convert to an early or
service retirement allowance as provided in N.C. Gen. Stat. Ann. sec. 128-
27(e)(1). Id.
B. FRSWPF
Unlike LGERS, FRSWPF is governed by article 86 of chapter 58 of the
General Statutes of North Carolina. It was established “to provide pension
allowances and other benefits for eligible firemen and rescue squad workers in the
State who elect to become members of the fund.” N.C. Gen. Stat. sec. 58-86-1
(2015). Firemen who participate in the fund must contribute $10 monthly. Id. sec.
58-86-35.
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[*11] An FRSWPF participant must have served 20 years as an eligible fireman or
rescue squad worker and attained the age of 55 years to be entitled to a monthly
pension from the fund. Id. sec. 58-86-55(a). Participants who became totally and
permanently disabled as a result of discharging their official duties are entitled to
the monthly benefit when they reach the age of 55 years. Id. sec. 58-86-55(c).
Participants who became disabled other than in the line of duty, who leave their
position because of the disability, and who have contributed to the pension fund
for at least 10 years, may continue to contribute until they have made 20 years’
worth of contributions and thereupon become eligible for benefits once they reach
the age of 55 years. Id. sec. 58-86-55(d). In all cases, the monthly benefit is $170.
Id. sec. 58-86-55.
IV. Includibility of LGERS Retirement Payments in Petitioner’s Gross Income
A. Petitioner’s Arguments
To support his cause petitioner argues that the payments were neither a
“retirement pension” nor an “annuity” as referenced in section 1.104-1(b), Income
Tax Regs. (“[S]ection 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[.]”). Petitioner points out that N.C. Gen. Stat. Ann. sec. 128-21(3), (15)
defines both “annuity” and “pension” as “payments for life”. Petitioner likens his
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[*12] situation to that of the taxpayer in Picard v. Commissioner, 165 F.3d 744
(9th Cir. 1999), rev’g T.C. Memo. 1997-320, where the Court of Appeals for the
Ninth Circuit held in the taxpayer’s favor on the excludability of disability
retirement income. Petitioner argues that, as was the case with the taxpayer in
Picard, if he were determined to be fit for work, his disability retirement payments
would cease. Because he was subject to medical reexaminations and his disability
retirement allowance could be reduced if he were determined to be able to earn
over a certain amount, see N.C. Gen. Stat. Ann. sec. 128-27(e)(1), petitioner
maintains that his payments were not for life and so were not “a retirement pension
or annuity” for purposes of section 1.104-1(b), Income Tax Regs.
Moreover, petitioner submits that while North Carolina law allows
disability beneficiaries to “convert” a disability retirement allowance to a reduced
service retirement allowance if they are determined to be engaged in or able to
engage in a gainful occupation paying more than a certain amount, N.C. Gen. Stat.
Ann. sec. 128-27(e)(1), the rule in subdivision (e)(6) of that section, which treats
disability retirement beneficiaries as service retirement beneficiaries when they
reach the earliest date on which they would have qualified for an unreduced
service retirement allowance, uses a different word: “considered”. Petitioner
understands this to mean that beneficiaries are not transferred from one retirement
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[*13] system to another. Petitioner reads into this Court’s precedent, see, e.g.,
Tateosian v. Commissioner, T.C. Memo. 2008-101; Mabry v. Commissioner, T.C.
Memo. 1985-328; Wiedmaier v. Commissioner, T.C. Memo. 1984-540, aff’d, 774
F.2d 109 (6th Cir. 1985), a requirement that there be a clear, unambiguous formal
transfer of a taxpayer from one system to another.
B. Respondent’s Position
Respondent admits that petitioner was not eligible for an unreduced service
retirement allowance under LGERS as of the date of his retirement, because he
was only 46 years old with 24 years and 8 months of creditable service. However,
respondent argues, since petitioner’s disability retirement allowance was
calculated with reference to his age and length of service, it is includible in his
gross income. See sec. 104(a)(1); sec. 1.104-1(b), Income Tax Regs.
Respondent further asserts that, regardless of the initial classification of
petitioner’s retirement income, petitioner is no longer receiving a disability
retirement allowance. Under N.C. Gen. Stat. Ann. sec. 128-27(e)(6), respondent
points out, once a beneficiary in receipt of a disability retirement allowance
becomes eligible for an unreduced service retirement allowance, he is deemed to
be in receipt of the latter. This occurred, respondent claims, when petitioner
turned 60 years old in 2004, 8 years before the taxable year in issue. Respondent
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[*14] looks for further support to several cases in this Court, Tateosian v.
Commissioner, T.C. Memo. 2008-101, Mabry v. Commissioner, T.C. Memo.
1985-328, and Wiedmaier v. Commissioner, T.C. Memo. 1984-540, in which
disability payments initially were excludable but later became includible in gross
income when the taxpayer would have qualified for a service retirement pension
had he continued to work. As in those cases, respondent maintains, petitioner’s
retirement payments are includible in his gross income as nondisability pension
income.
Respondent also distinguishes Picard, in which the Court of Appeals for the
Ninth Circuit determined that the taxpayer’s retirement payments were not taxable
because they were determined by his date of hire and not by reference to his length
of service. Respondent argues that Picard differs from this case in two respects:
first, petitioner’s disability benefit and service retirement allowance both are
computed with regard to his age and length of service and not his employment
anniversary, see N.C. Gen. Stat. Ann. sec. 128-21(8) (defining “Creditable
service” as “the total of ‘prior service’ plus ‘membership service’ plus service,
both noncontributory and purchased, for which credit is allowable as provided in
G.S. 128-26”); and second, petitioner’s disability retirement allowance converted
to a service retirement allowance when he turned 60 years of age in 2004.
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[*15] C. Classification of Petitioner’s LGERS Retirement Income
While section 104(a)(1) excludes from gross income amounts received
under workmen’s compensation acts, section 1.104-1(b), Income Tax Regs.,
specifies that the exclusion “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”. Petitioner ports the definitions of
“annuity” and “pension” from the General Statutes of North Carolina to interpret
the phrase “retirement pension or annuity” in the regulation. However, the proper
place to seek the definition of words as used in the Code and its appurtenant
regulations is in the Federal tax law, not State statutes. Cf. CRI-Leslie, LLC v.
Commissioner, 147 T.C. ___, ___ (slip op. at 15) (Sept. 7, 2016) (looking to the
Code for the definition of a term used therein). Regulations are interpreted in the
same manner as statutes, Guardian Indus. Corp. v. Commissioner, 143 T.C. 1, 12
(2014), which in turn are interpreted according to their plain meaning, looking “to
the particular statutory language at issue, as well as the language and design of the
statute as a whole”, K Mart Corp. v. Cartier, 486 U.S. 281, 291 (1988).
Section 1.104-1, Income Tax Regs., does not define “pension”. However,
within the Code’s structure, subchapter D of chapter 1 of subtitle A, encompassing
sections 401 through 436, governs pension plans. Section 401(a) establishes what
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[*16] constitutes a “qualified” pension plan, while section 1.401-1(b)(1)(i),
Income Tax Regs., elaborates on the definition of “pension plan”:
A pension plan within the meaning of section 401(a) is a plan
established and maintained by an employer primarily to provide
systematically for the payment of definitely determinable benefits to his
employees over a period of years, usually for life, after retirement.
Retirement benefits generally are measured by, and based on, such factors
as years of service and compensation received by the employees. The
determination of the amount of retirement benefits and the contributions to
provide such benefits are not dependent upon profits. * * * A pension plan
may provide for the payment of a pension due to disability and may also
provide for the payment of incidental death benefits through insurance or
otherwise. * * *
There is nothing to support petitioner’s assertion that a pension need be for life.
Nor is there corroboration for his suggestion that a pension cannot be conditional
upon certain factors, such as continued medical verification of disability.
Similarly, for annuities this hoary definition from this Court’s earliest days still
applies in the present: “The term annuity has been variously defined, but the
definitions, although differing in form, are substantially alike in meaning. In
general terms, it is a yearly payment of a certain sum of money granted to another
in fee for life or for years”. Estate of Jackson v. Commissioner, 3 B.T.A. 832, 834
(1926) (quoting 2 Ruling Case Law 2 (emphasis omitted)). As with pensions,
there is nothing to establish that annuities must be for life and cannot be
terminable.
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[*17] LGERS is a pension plan: It was established by the State of North Carolina
to provide definitely determinable, periodic retirement payments to former
employees. Section 128-22 of the General Statutes of North Carolina designates
LGERS as a governmental plan within the meaning of section 414(d) and requires
that the plan operate consistently with section 401(a)(1). Accordingly, payments
from LGERS are payments from a “retirement pension or annuity” as those words
are used in section 1.104-1(b), Income Tax Regs. The parties have stipulated that
petitioner’s disability retirement allowance was computed with reference to
petitioner’s age, length of service, and average final compensation before his
disability retirement. Thus the amounts he received are from “a retirement pension
* * * determined by reference to the employee’s age or length of service, or the
employee’s prior contributions” and the exclusion for workmen’s compensation
under section 104(a)(1) does not apply. See sec. 1.104-1(b), Income Tax Regs.
Because we have found that petitioner’s disability retirement allowance
under LGERS was a retirement pension determined by reference to his age and
length of service, we need not address the extent to which petitioner in 2004 upon
his 60th birthday was transferred from a disability retirement allowance to a
service retirement allowance. We have established that petitioner’s disability
retirement allowance was not received under a workmen’s compensation act or a
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[*18] statute in the nature of such, see sec. 1.104-1(b), Income Tax Regs., and so
was not excludable from gross income under section 104. If petitioner remained
on a disability retirement allowance after 2004, then the treatment of his
payments--includible as they were in gross income--was unchanged. If petitioner
in 2004 ceased to receive a disability retirement allowance and was considered
thereafter “a beneficiary in receipt of a service retirement allowance”, see N.C.
Gen. Stat. Ann. sec. 128-27(e)(6), then consistently with N.C. Gen. Stat. Ann. sec.
128-27(b12) he would receive a pension calculated by reference to his age and
length of service. Such a pension too would not fall within the section 104(a)(1)
exclusion from gross income. See sec. 1.104-1(b), Income Tax Regs.
V. Classification of Petitioner’s FRSWPF Retirement Income
Respondent suggests that petitioner’s income from FRSWPF appears to
have been reported on petitioner’s original Federal income tax return. We note
that respondent’s statement is at odds with the notice of deficiency, in which he
allocated the $2,324 of taxable retirement income shown on petitioner’s return to
LGERS, not FRSWPF.
However, we agree with respondent that petitioner has not asserted a
dispute regarding the FRSWPF payment’s taxability and so has conceded it. See,
e.g., Thiessen v. Commissioner, 146 T.C. 100, 106 (2016) (“[I]ssues and
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[*19] arguments not advanced on brief are considered to be abandoned.”); see also
Rule 34(b)(4) (providing that issues not raised in a petition are deemed to be
conceded). Even were the FRSWPF income contested, it is not in the nature of
workmen’s compensation. A fireman becomes eligible for the FRSWPF fixed
monthly pension once he reaches the age of 55 years and either (1) contributes to
the fund for 20 years or (2) contributes for a lesser period of time but becomes
totally and permanently disabled in the course of his official duties. Because
eligibility for the FRSWPF pension is determined by reference to the employee’s
age and prior contributions, it is not excludable from gross income under section
104(a)(1). See sec. 1.104-1(b), Income Tax Regs. Petitioner also has not raised,
nor are there sufficient facts in the record enabling us to evaluate, the extent to
which FRSWPF payments may be excludable from gross income as amounts
received through accident or health insurance. See secs. 104(a)(3), 105.
VI. Conclusion
The fireman’s vocation is not an easy one. Petitioner fought fires for over
24 years and retired disabled. But Lady Justice is blind, and the tax law takes its
toll without regard for sentiment. It is true that “nobody owes any public duty to
pay more than the law demands”. Commissioner v. Newman, 159 F.2d 848, 851
(2d Cir. 1947) (Hand, J., dissenting), rev’g 5 T.C. 603 (1945). But where the law
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[*20] demands a result, the courts are bound to enforce it. Petitioner’s income
from LGERS and FRSWPF is in both instances a retirement pension determined
by reference to his age or length of service, or his prior contributions, and under
the Code cannot be excluded from his gross income for the 2012 tax year.
We have considered all of the parties’ arguments, and to the extent not
discussed above, conclude that those arguments are irrelevant, moot, or without
merit.
To reflect the foregoing,
Decision will be entered for
respondent.