The opinion
T.C. Summary Opinion 2001-31
UNITED STATES TAX COURT
WILLIAM REYNOLD LUHR, Petitioner
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7541-99S. Filed March 15, 2001.
William Reynold Luhr, pro se.
Anne S. Daugharty, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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Respondent determined a deficiency in petitioner’s 1996
Federal income tax in the amount of $1,883.1 The issues for
decision are: (1) Whether pension payments from Boilermaker-
Blacksmith National Pension Trust (pension trust) are includable
in gross income under section 105, and (2) whether Social
Security benefits are includable in gross income under section
86.
Some of the facts were stipulated and are so found. The
stipulation of facts and the attached exhibits are incorporated
herein. Petitioner resided in Olympia, Washington, at the time
the petition was filed. During the year in issue, petitioner was
married and filed a joint Federal income tax return.
Petitioner worked as a field boilermaker for 22 years and
was a member of the Boilermakers Local 563 (union) before he was
diagnosed with ankylosing spondylitis in 1986. As a member of
the union, petitioner paid dues and participated in the pension
trust, an employer-paid plan for disability and retirement
pensions. Due to his illness, petitioner was no longer able to
work after 1986. Petitioner became eligible to receive Social
Security disability benefits in 1987 and received total benefits
of $11,034 in 1996. No portion of these benefits was disclosed
or reported in gross income by petitioner on his 1996 return. In
1988, petitioner was also approved to receive a “disability
1
The notice of deficiency was addressed to “William R &
Patricia M Luhr”. Patricia Luhr did not sign the petition or any
other documents relating to this case and is not a party in this
matter.
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pension” from the pension trust. In 1996, petitioner received
$6,995 from the pension trust, which was also not disclosed or
reported in gross income on his return. Petitioner was born on
April 1, 1934, and was 62 years old during the year in issue.
In the notice of deficiency, respondent determined that
petitioner failed to report $5,517 of taxable Social Security
benefits, and $6,995 of taxable pension and annuity income.
Pension Trust Income
Section 61(a) provides that, except as otherwise provided by
law, gross income includes all income from whatever source
derived. Gross income does not include amounts received through
accident or health insurance for personal injuries or sickness,
other than amounts received by an employee to the extent such
amounts are: (1) Attributable to contributions by the employer
which were not includable in the gross income of the employee; or
(2) paid by the employer. See sec. 104(a)(3). The latter
amounts are includable in the gross income of the employee
pursuant to section 105(a).
In Trappey v. Commissioner, 34 T.C. 407, 408 (1960), we held
that disability income received through accident or health
insurance for personal injuries or sickness is within the meaning
of section 104(a)(3). Hence, the provisions in sections 104 and
105 dealing with amounts received through health insurance are
used to resolve whether petitioner’s disability benefits are
includable in gross income.
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Petitioner concedes that the disability payments are
attributable to insurance premiums which were paid by employers
who contracted for his services through the union and which were
not included in his gross income. However, petitioner contends
that the 1996 payments from the pension trust were disability
payments pursuant to section 105(c), and, therefore, excludable
from gross income.
Section 105(c) provides as follows:
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 * * *, 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 petitioner must satisfy both paragraphs (1) and (2)
of section 105(c). Section 105(c)(2) itself has two parts 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 absent from work. With respect to the first part of
section 105(c)(2), the Court of Appeals for the Fourth Circuit
stated in Rosen v. United States, 829 F.2d 506, 509 (4th Cir.
1987):
A review of the cases indicates that for payments
to be excludible from income under section 105(c), the
instrument or agreement under which the amounts are
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paid must itself provide specificity as to the
permanent loss or injury suffered and the corresponding
amount of payments to be provided. * * * exclusion is
permitted only under plans which vary benefits to
reflect the particular loss of bodily function. * * *
Accord Beisler v. Commissioner, 814 F.2d 1304, 1307 (9th Cir.
1987), affg. T.C. Memo. 1985-25; Hines v. Commissioner, 72 T.C.
715, 720 (1979). Petitioner relies on a letter from the pension
trust manager stating that petitioner’s receipt of the monthly
pension is solely based on the amount of petitioner’s Social
Security disability benefits. The letter also informs petitioner
that upon attaining age 65, “this Disability Pension was
converted to an Age Pension.” It is well settled that we “are
fully justified in examining such contracts or relationships to
determine whether they are truthfully described by the labels
which the parties have attached to them.” Graybar Elec. Co. v.
Commissioner, 29 T.C. 818 (1958), affd. per curiam 267 F.2d 403
(2d Cir. 1959). The labeling of the pension trust as
“disability” without evidence confirming that the requirements of
section 105(c) have been met is not binding on us. At trial,
petitioner did not produce the written pension trust agreement
and has been unable to establish that the pension trust payments
he received from the union comport with the requirements of
section 105(c). Indeed, petitioner concedes that the union
computed his pension trust benefits based on the number of hours
performed and years of credited service rather than with regard
to any injury as required by section 105(c)(2).
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Petitioner believes that the pension trust payments may be
excludable from gross income because of information he received
in a letter from the pension trust stating:
since you are receiving these benefits due to a
disability and are under the retirement age of sixty-
five, these benefits may be excludable from gross
income to the extent that such amounts are allowed by
the Internal Revenue Service. At age sixty-five, the
benefits will be taxable as ordinary income.
However, the language in the letter correlates to section
105(d).2 During the years section 105(d) was in effect, payments
made under wage continuation plans could be excluded from gross
income under certain conditions. Section 105(d), however, was
repealed, effective for taxable years after 1983, by the Social
Security Act Amendments of 1983, Pub. L. 98-21, sec. 122(b), 97
Stat. 85.
Finally, petitioner cites two cases, Winter v. Commissioner,
303 F.2d 150 (3d Cir. 1962), affg. 36 T.C. 14 (1961), and Jackson
v. Commissioner, 28 T.C. 36 (1957), in support of his argument
that the pension trust amounts are excludable from gross income.
After reviewing the cases, we conclude that each is clearly
distinguishable. Winter v. Commissioner, supra, interprets
2
SEC. 105(d) Certain Disability Payments.–
(1) In General.--In the case of a taxpayer who–
(A) has not attained age 65 before the close of
the taxable year, and
(B) retired on disability and, when he retired,
was permanently and totally disabled, gross income does not
include amounts referred to in subsection (a) if such
amounts constitute wages or payments in lieu of wages for a
period during which the employee is absent from work on
account of permanent and total disability.
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section 105(d) which is no longer in effect, as noted above, and,
therefore, is irrelevant to our analysis. In Jackson v.
Commissioner, supra, the Court examined a written retirement and
death benefit plan and held, based upon the Supreme Court
decision in Haynes v. Commissioner, 353 U.S. 81 (1957), that the
plan qualified as “health insurance” pursuant to section 22(b)(5)
of the Internal Revenue Code of 1939 (section 22(b)(5)).3 We
note that section 22(b)(5) is the precursor to section 104.
Similarly to section 22(b)(5), section 104(a)(3) excludes from
gross income “amounts received through accident or health
insurance * * * for personal injuries or sickness”. A notable
difference between the two sections, however, is that section
104(a)(3) qualifies the exclusion by the following limitation:
(other than amounts received by an employee,
to the extent such amounts (A) are
attributable to contributions by the employer
which were not includible in the gross income
of the employee, or (B) are paid by the
employer);
The opinion in Jackson v. Commissioner, supra, does not apply the
current statute and, therefore, is distinguishable from the
present case.
On the basis of the record, we find that the disability plan
payments petitioner received from the union are not excludable
3
Section 22(b)(5) of the Internal Revenue Code of 1939,
states that gross income shall not include “amounts received
through accident or health insurance or under workmen’s
compensation acts, as compensation for personal injuries or
sickness...”.
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from gross income pursuant to section 105(c)(2). Accordingly, we
need not decide whether they satisfy section 105(c)(1).
Respondent is sustained on this issue.
Social Security Disability Benefits
Section 86(a) provides that if the sum of the modified
adjusted gross income of a taxpayer plus one-half of the Social
Security benefits received exceeds the base amount, then the
taxpayer’s gross income includes Social Security benefits in the
amount equal to the lesser of: (1) One-half of the Social
Security benefits received during the year; or (2) one-half of
the excess of the sum of (a) modified adjusted gross income, plus
(b) one-half of the Social Security benefits received over the
base amount. The base amount for taxpayers filing a joint return
in 1996 is $32,000. See sec. 86(c)(1)(B). Petitioner reported
the following income on his 1996 joint Federal income tax return:
Wages $27,657
Taxable interest 1,139
Rental real estate, etc. 2,600
Total $31,396
For 1996, petitioner’s modified adjusted gross income equals his
adjusted gross income of $31,396 plus the unreported pension
benefits of $6,995. See sec. 86(b)(2). Because petitioner’s
modified adjusted gross income plus one-half of the Social
Security benefits received for the year is more than the base
amount of section 86(c)(1)(B), petitioner’s gross income includes
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an amount of the Social Security benefits received, as provided
by section 86(a).4
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.
4
One-half of the Social Security benefits received ($11,034)
is $5,517. The excess of the sum of the modified adjusted gross
income ($38,391), plus one-half of the Social Security benefits
received ($5,517) over the base amount is $11,908 ($38,391 +
5,517 - 32,000), one-half of which is $5,954. Accordingly,
petitioner must include the lesser of the two amounts, or $5,517.