William D. and Joyce M. Reimels v. Commissioner , 123 T.C. No. 13 ( 2004 )

123 T.C. No. 13UNITED STATES TAX COURT
WILLIAM D. AND JOYCE M. REIMELS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9182-02. Filed August 26, 2004.
While actively serving in the U.S. Armed Forces in the
Vietnam conflict, H was exposed to Agent Orange and
consequently developed lung cancer. During 1999, H received
Social Security disability insurance benefits on account of
his lung cancer.
Held: The Social Security disability insurance benefits
that H received in 1999 are includable in Ps’ gross income
under sec. 86, I.R.C., and are not excludable under sec.
104(a)(4), I.R.C. Haar v. Commissioner, 78 T.C. 864, 866
(1982), affd. 709 F.2d 1206 (8th Cir. 1983), followed.
William D. Reimels and Joyce M. Reimels, pro sese.
Linda P. Azmon, for respondent.
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OPINION
THORNTON, Judge: Respondent determined a $2,376 deficiency
in petitioners’ 1999 Federal income tax. After concessions, the
only issue for decision is whether Social Security disability
insurance benefits that Mr. Reimels received in 1999 are
excludable from petitioners’ income under section 104(a)(4).1
Background
The parties submitted this case fully stipulated pursuant to
Rule 122. We incorporate herein the stipulated facts. When
petitioners filed their petition, they resided in Hicksville,
New York.
From September 25, 1968, to September 1, 1974, Mr. Reimels
served in the U.S. Armed Forces. He was highly decorated for his
combat service in Vietnam. While serving there, he was exposed
to Agent Orange, an instrumentality of war.2
After serving in Vietnam, Mr. Reimels was employed in the
private sector until February 19, 1993, when he was diagnosed
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the taxable year in issue,
and Rule references are to the Tax Court Rules of Practice and
Procedure.
2
Agent Orange is an herbicide and defoliant that was used
widely in the Vietnam conflict. It contains dioxin and has been
shown to possess residual postexposure carcinogenic and
teratogenic properties in humans. PDR Medical Dictionary (2d ed.
2000).
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with lung cancer. This illness resulted from his exposure to
Agent Orange during his Vietnam combat service.
On August 3, 1993, Mr. Reimels applied for disability
insurance benefits with the Social Security Administration,
claiming disability on account of his lung cancer. On
January 13, 1994, the Social Security Administration determined
that Mr. Reimels was entitled to disability insurance benefits.
On November 2, 1993, Mr. Reimels applied for service-
connected disability compensation with the Veterans’
Administration.3 On June 15, 1998, the Veterans’ Administration
awarded Mr. Reimels a “100 percent service connected disability”
on the basis of his exposure to Agent Orange and his diagnosis of
lung cancer.
In 1999, Mr. Reimels received $12,194 in disability
insurance benefits from the Social Security Administration. He
also received service-connected disability compensation from the
Veterans’ Administration, which petitioners allege totaled $2,246
per month.
On their 1999 joint Federal income tax return, petitioners
excluded from their gross income Mr. Reimels’s Social Security
3
In the Department of Veterans Affairs Codification Act,
Pub. L. 102-83, sec. 301, 105 Stat. 378 (1991), Congress
redesignated the Veterans’ Administration the Department of
Veterans Affairs. For convenience, we refer to the Veterans’
Administration, consistent with the language used in sec. 104.
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disability insurance benefits as well as the disability
compensation that he received from the Veterans’ Administration.
By notice of deficiency, respondent determined that Mr.
Reimels’s Social Security disability insurance benefits were
includable in petitioners’ gross income to the extent provided in
section 86.
Discussion
I. Inclusion of Social Security Benefits in Gross Income
Before 1983, Social Security benefits were excluded from the
recipient’s gross income. See, e.g., Rev. Rul. 70-217, 1970-1
C.B. 13. This longstanding practice ended with the enactment of
section 86 as part of the Social Security Amendments of 1983,
Pub. L. 98-21, sec. 121(a), 97 Stat. 80. The legislative history
indicates that Congress made this change to shore up the solvency
of the Social Security trust funds and to treat “more nearly
equally all forms of retirement and other income that are
designed to replace lost wages”. S. Rept. 98-23, at 25 (1983),
1983-2 C.B. 326, 328.
Section 86 requires the inclusion in gross income of up to
85 percent of Social Security benefits received, including Social
Security disability insurance benefits.4 See, e.g., Joseph v.
4
Sec. 86(d)(1)(A) defines Social Security benefits to
include any amount received by reason of entitlement to a monthly
benefit under tit. II of the Social Security Act, 42 U.S.C. secs.
(continued...)
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Commissioner, T.C. Memo. 2003-19; Thomas v. Commissioner, T.C.
Memo. 2001-120; Maki v. Commissioner, T.C. Memo. 1996-209.
Absent some exception, then, Mr. Reimels’s Social Security
disability insurance benefits are includable in petitioners’
gross income as provided in section 86 and as respondent
determined in the notice of deficiency. The question is whether
section 104 provides an exception that allows petitioners to
exclude Mr. Reimels’s Social Security disability insurance
benefits from gross income.
II. Exclusion From Gross Income Under Section 104
A. The Parties’ Contentions
Section 104(a) excludes from gross income certain
compensation for injuries or sickness. Petitioners rely upon
section 104(a)(4), which excludes from gross income “amounts
received as a pension, annuity, or similar allowance for personal
injuries or sickness resulting from active service in the Armed
Forces of any country”. Petitioners contend that the
requirements of section 104(a)(4) are met because the Social
Security Administration granted Mr. Reimels’s disability
insurance benefits solely on the basis of his disability, which
resulted from Mr. Reimels’s active service in the U.S. Armed
Forces.
4
(...continued)
401-434 (2000); i.e., amounts received as disability insurance
benefits.
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Respondent does not dispute that Mr. Reimels’s Social
Security disability insurance benefits were “received as a
pension, annuity, or similar allowance” within the meaning of
section 104(a)(4); consequently, for present purposes we assume
that they were.5 Nor does respondent dispute that Mr. Reimels
has suffered personal injuries or sickness resulting from active
service in the U.S. Armed Forces. Instead, relying on Haar v.
Commissioner, 78 T.C. 864, 866 (1982), affd. 709 F.2d 1206 (8th
Cir. 1983), and its progeny, respondent contends that the section
104(a)(4) exclusion is inapplicable because Social Security
disability insurance benefits are not paid for personal injury or
sickness incurred in military service within the meaning of
section 104(a)(4).
We are unaware of any court decision specifically addressing
the applicability of section 104(a)(4) to Social Security
disability insurance benefits. As explained below, the well-
established and consistent pattern of decisions in Haar and its
progeny compels the conclusion that the Social Security
disability insurance payments that Mr. Reimels received in 1999
are not excludable from income under section 104(a)(4).
5
Sec. 86(f) specifies that “any social security benefit
shall be treated as an amount received as a pension or annuity”
for purposes of certain specified Code sections, not including
sec. 104.
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B. Haar v. Commissioner
In Haar v. Commissioner, supra, this Court addressed for the
first time whether payments made by a nonmilitary employer to a
person who retires from service with that employer are excludable
from gross income pursuant to section 104(a)(4). In Haar, the
taxpayer suffered a hearing loss while serving in the U.S. Air
Force. For reasons other than disability, he was discharged from
the U.S. Air Force and began working as a civilian employee of
the General Services Administration (GSA). He later retired from
GSA on account of his hearing disability and began receiving
annuity payments from the Civil Service Retirement and Disability
Fund.6 He sought to exclude these payments from his taxable
income, relying on section 104(a)(4).
In Haar v. Commissioner, supra at 866, we concluded that
“Although the ambiguous wording of section 104(a)(4) provides
some superficial support” for the taxpayer’s position, this
circumstance was “overshadowed” by the nature of the Civil
Service benefits in question. We noted that the Civil Service
Retirement Act, 5 U.S.C. sec. 8331 et seq., is not designed to
compensate for military injuries. Rather, in determining
6
In Haar v. Commissioner, 78 T.C. 864 (1982), affd. 709
F.2d 1206 (8th Cir. 1983), the taxpayer also applied for
disability compensation from the Veterans’ Administration.
Although the Veterans’ Administration determined that the
taxpayer had defective hearing that was service connected, it
concluded that the taxpayer’s injury was not disabling to a
compensable degree.
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eligibility for Civil Service disability benefits, the nature or
cause of the disability is irrelevant; the only consideration is
the employee’s ability to perform his or her job. We concluded:
Because disability payments under the Civil
Service Retirement Act are not paid for personal
injuries or sickness incurred in military service, we
conclude that section 104(a)(4) did not entitle
petitioner to exclude the disability payments he
received in the years in issue. [Id. at 867.]
In the 20-plus years since this Court decided Haar, we have
consistently followed it in numerous cases addressing whether
benefit payments under Civil Service and public employee
disability plans were eligible for exclusion under section
104(a)(4). See, e.g., Jeanmarie v. Commissioner, T.C. Memo.
2003-337 (holding that Civil Service Retirement System disability
benefits were not excludable); Kiourtsis v. Commissioner, T.C.
Memo. 1996-534 (holding that disability retirement income
received from New York City Employees’ Retirement System was not
excludable); French v. Commissioner, T.C. Memo. 1991-417 (holding
that Civil Service annuity payments from U.S. Postal Service were
not excludable); Grady v. Commissioner, T.C. Memo. 1989-55(holding that disability pension received from Civil Service
Retirement and Disability Fund was not excludable); Tolotti v.
Commissioner, T.C. Memo. 1987-13 (holding that Civil Service
disability retirement payments from U.S. Office of Personnel
Management were not excludable); Lonestar v. Commissioner, T.C.
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Memo. 1984-80 (holding that civilian service disability pay
received from Department of the Navy was not excludable).
C. Applicability of Section 104(a)(4) Exclusion to Social
Security Disability Insurance Benefits
Like the Civil Service and public employee disability
benefits considered in Haar v. Commissioner, supra, and its
progeny, Social Security disability insurance benefits do not
take into consideration the nature or cause of the disability.
Social Security disability insurance benefits are provided in
title II of the Social Security Act (SSA), 42 U.S.C. secs. 401-
434 (2000). Title II provides disability insurance benefits to
every individual who is insured for disability insurance
benefits, has not attained retirement age, has filed an
application for disability insurance benefits, and is under a
disability. 42 U.S.C. sec. 423(a)(1); see Cleveland v. Policy
Mgmt. Sys. Corp., 526 U.S. 795, 801 (1999).7 For purposes of
determining eligibility for disability insurance benefits, the
Social Security Act gives no consideration to whether the
disability arose from service in the Armed Forces or was
7
Social Security disability insurance is contributory and
is designed to prevent public dependency by protecting workers
and their families against common economic hazards. Mathews v.
de Castro, 429 U.S. 181, 185-186 (1976). Its primary objective
is to provide workers and their families with basic protection
against hardships created by loss of earnings due to illness or
old age; the disability insurance provisions are not general
public assistance laws and are not need based. Id.; see also
Sciarotta v. Bowen, 735 F. Supp. 148, 151 (D.N.J. 1989).
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attributable to combat-related injuries. See 42 U.S.C. sec.
423(d)(1).8 Insured status for purposes of Social Security
disability insurance benefits is determined on the basis of the
individual’s prior work record and not on the cause of his
disability. See, e.g., 42 U.S.C. sec. 423(c); 20 C.F.R. secs.
404.101-404.146 (2003). Moreover, the amount of Social Security
disability payments is computed under a formula that does not
consider the nature or extent of the injury.9 Consequently,
under the reasoning of Haar v. Commissioner, 78 T.C. 864 (1982),
8
Eligibility for Social Security disability insurance
benefits is conditioned on the existence of a “disability”, which
is defined as an “inability to engage in any substantial gainful
activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous
period of not less than 12 months”. 42 U.S.C. sec. 423(d)(1).
For this purpose, the beneficiary’s impairment must be:
of such severity that he is not only unable to do his
previous work but cannot, considering his age,
education, and work experience, engage in any other
kind of substantial gainful work which exists in the
national economy, regardless of whether such work
exists in the immediate area in which he lives, or
whether a specific job vacancy exists for him, or
whether he would be hired if he applied for work.
[42 U.S.C. sec. 423(d)(2)(A).]
9
The monthly Social Security disability insurance benefit
is equal to the “primary insurance amount”. 42 U.S.C. sec.
423(a)(2); 20 C.F.R. secs. 404.201(a), 404.317 (2003). The
primary insurance amount is computed primarily under one of two
major methods, the average-indexed-monthly-earnings method or the
average-monthly-wages method, both of which are based on the
beneficiary’s earnings record. See 20 C.F.R. secs. 404.204,
404.210-404.212, 404.220-404.222 (2003).
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and its progeny, Mr. Reimels’s Social Security disability
insurance benefits were not paid for personal injuries or
sickness resulting from military service within the meaning of
section 104(a)(4). Accordingly, these Social Security disability
insurance benefits, which are expressly includable in income to
the extent provided under section 86, are not eligible for
exclusion under section 104(a)(4).
D. Petitioners’ Argument To Distinguish Haar v.
Commissioner
Petitioners argue that Haar is distinguishable in that the
taxpayer in Haar had been denied disability compensation from the
Veterans’ Administration, whereas the Veterans’ Administration
awarded Mr. Reimels a 100-percent service-connected disability.
This Court has previously concluded, however, that Haar cannot be
fairly distinguished on such grounds. As we stated in Kiourtsis
v. Commissioner, supra:
Contrary to petitioner’s assertions, the key to
the holding of Haar and its progeny is not whether the
taxpayer received disability compensation from the
Veterans Administration or whether there was a specific
finding that the disability was service-related. Haar
looked to the retirement plan under the Civil Service
Retirement Act, and determined that it was “not
designed to provide compensation for military
injuries.” * * *
Similarly, as just discussed, disability insurance benefits
under the Social Security Act are not designed to provide
compensation for military injuries.
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E. Petitioners’ Argument To Overturn Haar
Petitioners suggest that Haar was wrongly decided and that
we should no longer follow it. Petitioners contend that section
104(a)(4) contains no express requirement that a disability
pension be received under a statute designed to compensate for
military injuries. They contend that under the literal language
of section 104(a)(4) it is sufficient that Mr. Reimels received
his Social Security disability insurance benefits on account of a
disability resulting from combat-related injuries.
In support of their contentions, petitioners rely upon
Freeman v. United States, 265 F.2d 66 (9th Cir. 1959), and Prince
v. United States, 127 Ct. Cl. 612, 119 F. Supp. 421 (1954).
Petitioners’ reliance on these cases is misplaced. Freeman and
Prince involved military compensation statutes that were
designed, at least in part, to compensate for injuries incurred
during, or as an incident of, active military service. In each
case, the court linked the taxpayer’s injuries to that portion of
the retirement statute that awarded benefits for service-
connected disabilities.
The instant case, like Haar and its progeny, and unlike
Freeman and Prince, does not involve benefits received under
military compensation statutes. Relevant legislative history
supports the view that only pensions, annuities, or similar
allowances that are received under what are essentially military
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disability compensation statutes qualify for exclusion under
section 104(a)(4).10 Specifically, in 1976, responding to
perceived abuses of the section 104(a)(4) exclusion, Congress
acted to severely restrict its availability. As stated in the
legislative history to the 1976 amendments of section 104:
Military personnel can exclude from income pensions for
personal injuries or sickness paid by the Department of
Defense (as well as all Veterans Administration
disability compensation).
* * * * * * *
The House bill * * * eliminates the exclusion for
non-combat related disability pensions for those who
joined the armed forces after September 24, 1975, but
continues the exemption for V.A. disability
compensation or an equivalent amount paid by the
Department of Defense. * * * [S. Conf. Rept. 94-1236,
at 432 (1976), 1976-3 C.B. (Vol. 3) 807, 836; emphasis
added.]
As a general principle, provisions granting special tax
exemptions are to be strictly and narrowly construed. See
Commissioner v. Schleier, 515 U.S. 323, 328 (1995); Helvering v.
Northwest Steel Rolling Mills, Inc., 311 U.S. 46, 49 (1940). We
believe this general principle has particular cogency in the
instant case: as previously discussed, in 1983 Congress reversed
10
One example of a disability compensation statute that is
designed, at least in part, to compensate individuals for
military injuries, is 10 U.S.C. sec. 1201 (2000). Under this
provision, military disability retirement pay is available for,
among other things, a disability that is the proximate result of
performing active duty, a disability that was incurred in the
line of duty in time of war or national emergency, or a
disability that was incurred in the line of duty after Sept. 14,
1978.
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prior tax-free treatment of Social Security benefits by mandating
that all Social Security benefits, including disability insurance
benefits, be at least partially includable in gross income. In
making this change, Congress gave no indication that it intended
to allow an exception under section 104 or otherwise. Indeed, to
allow an exception under section 104 for Social Security
disability insurance benefits would appear incongruous with the
stated purpose of section 86 to treat “more nearly equally all
forms of retirement and other income that are designed to replace
lost wages”. S. Rept. 98-23, supra at 25-26, 1983-2 C.B. at 328.
This Court decided Haar v. Commissioner, 78 T.C. 864 (1982),
over 20 years ago. On numerous occasions since, Congress has
amended section 104 in various respects.11 At no time has
Congress sought to overturn Haar or to clarify the scope of the
section 104(a)(4) exclusion in light of Haar. “[P]rolonged
11
See Victims of Terrorism Tax Relief Act of 2001, Pub. L.
107-134, sec. 113(a), 115 Stat. 2435 (2002) (amending sec.
104(a)(5) as relates to terrorist attacks); Taxpayer Relief Act
of 1997, Pub. L. 105-34, sec. 1529, 111 Stat. 1075 (creating
personal injury presumption for heart disease and hypertension of
former police officers and firefighters for purposes of sec.
104(a)(1)) (amended by Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. 105-206, sec. 6015(c)(1), 112 Stat.
821); Small Business Job Protection Act of 1996, Pub. L. 104-188,
sec. 1605(a), 110 Stat. 1838 (restricting sec. 104(a)(2) to
personal physical injuries and sickness); Omnibus Budget
Reconciliation Act of 1989, Pub. L. 101-239, sec. 7641(a), 103
Stat. 2379 (making sec. 104(a)(2) inapplicable with respect to
punitive damages in connection with a case not involving physical
injury or physical sickness); Act of Jan. 14, 1983, Pub. L. 97-
473, sec. 101(a), 96 Stat. 2605 (amending sec. 104(a)(2) with
respect to amounts received by suit or agreement).
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congressional silence in response to a settled interpretation of
a federal statute provides powerful support for maintaining the
status quo. In statutory matters, judicial restraint strongly
counsels waiting for Congress to take the initiative in modifying
rules on which judges and litigants have relied.” Hibbs v. Winn,
542 U.S. ___, ___, 124 S. Ct. 2276, 2296 (2004) (Stevens, J.,
concurring); see Commissioner v. Noel’s Estate, 380 U.S. 678,
680-681 (1965).
This Court’s decision in Haar is consistent with the
Commissioner’s longstanding administrative position in Rev. Rul.
77-318, 1977-2 C.B. 45, that section 104(a)(4) does not apply to
a pension, annuity, or similar allowance received on account of
active service in a government organization other than the U.S.
Armed Forces.12 This Court’s decision in Haar was affirmed by
the Court of Appeals for the Eighth Circuit; no court has
expressly rejected it. As previously discussed, this Court has
consistently followed Haar and has applied its reasoning in many
cases. The principle of stare decisis strongly counsels against
our now undertaking to reexamine the well-settled pattern of
decision that has evolved in this Court and at least one Court of
Appeals, consistent with longstanding administrative guidance.
12
Rev. Rul. 77-318, 1977-2 C.B. 45, holds that an
individual may not exclude from gross income Civil Service
payments received for a disability retirement occasioned by
injuries sustained during active military service.
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Acknowledging that petitioners’ position is not without force or
appeal, we feel compelled to conclude that any impetus for change
should come from the legislature, rather than this Court.
For these reasons, and adhering to this Court’s reasoning in
Haar and its progeny, we conclude that because Mr. Reimels’s
Social Security disability insurance benefits were not paid as
compensation for military injuries or sickness, they are not
excludable under section 104(a)(4).
F. Petitioners’ Alternate Contentions
1. Section 104(b)(2)
Petitioners make what appear to be alternate contentions on
the basis of the section 104(b)(2) limitations to section
104(a)(4). Essentially, petitioners contend that because Mr.
Reimels meets one or several of the requirements in section
104(b)(2), petitioners are entitled to exclude Mr. Reimels’s
Social Security disability insurance benefits.
Congress enacted section 104(b) to curb perceived abuses.13
13
The relevant legislative history explains the reasons for
the 1976 amendments as follows:
In many cases, armed forces personnel have been
classified as disabled for military service shortly
before they would have become eligible for retirement
principally to obtain the benefits of the special tax
exclusion on the disability portion of their retirement
pay. In most of these cases the individuals, having
retired from the military, earn income from other
(continued...)
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Section 104(b)(1) provides that the exclusion under section
104(a)(4) is restricted to the classes of individuals described
in section 104(b)(2), as follows:
(2) Individuals to whom subsection (a)(4)
continues to apply.--An individual is described in this
paragraph if--
(A) on or before September 24, 1975, he was
entitled to receive any amount described in
subsection (a)(4),
(B) on September 24, 1975, he was a member of
any organization (or reserve component thereof)
referred to in subsection (a)(4) or under a
binding written commitment to become such a
member,
(C) he receives an amount described in
subsection (a)(4) by reason of a combat-related
injury, or
(D) on application therefor, he would be
entitled to receive disability compensation from
the Veterans’ Administration.
For purposes of section 104(b)(2)(C), the term “combat-related
injury” means personal injury or sickness which is: (1) Incurred
as a direct result of armed conflict, engagement in extra
hazardous service, or under conditions simulating war; or (2)
caused by an instrumentality of war. Sec. 104(b)(3).14
13
(...continued)
employment while receiving tax-free “disability”
payments from the military. * * * [H. Rept. 94-658, at
152 (1975), 1976-3 C.B. (Vol. 2) 695, 844.]
14
Sec. 104(b)(3) also provides that “In the case of an
individual who is not described in subparagraph (A) or (B) of
paragraph (2), except as provided in paragraph (4), the only
(continued...)
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Petitioners argue that the Social Security disability
insurance benefits Mr. Reimels received in 1999 are excludable
under section 104(b)(2)(C) because they are part of a disability
pension for his combat-related injury resulting from his exposure
to Agent Orange. Petitioners also argue that the Social Security
disability insurance benefits are excludable under section
104(b)(2)(D) because Mr. Reimels is entitled to receive
disability compensation from the Veterans’ Administration. We
disagree.
Section 104(b)(2) provides no independent basis for
exclusion. Instead, consistent with express legislative intent,
it limits the classes of persons who otherwise might be eligible
for the section 104(a)(4) exclusion. Thus, regardless of whether
Mr. Reimels’s disability arose from combat-related injuries while
he was serving in the U.S. Armed Forces, the payments in question
must meet the requirements for exclusion under section 104(a)(4).
For the reasons discussed above, Mr. Reimels’s Social Security
disability insurance benefits do not meet those requirements.15
14
(...continued)
amounts taken into account under subsection (a)(4) shall be the
amounts which he receives by reason of a combat-related injury.”
15
Moreover, as previously discussed, the fact that Mr.
Reimels received disability compensation from the Veterans’
Administration does not distinguish Haar v. Commissioner, 78 T.C.
864 (1982), and does not entitle Mr. Reimels to an exclusion
under sec. 104(a)(4). See Kiourtsis v. Commissioner, T.C. Memo.
1996-534.
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2. Section 104(b)(4)
Finally, petitioners rely on section 104(b)(4), which
provides that in the case of an individual described in section
104(b)(2) (i.e., an individual who is in one of the classes of
persons who remain eligible for the section 104(a)(4) exclusion)
the amounts excludable under section 104(a)(4) “shall not be less
than the maximum amount which such individual, on application
therefor, would be entitled to receive as disability compensation
from the Veterans’ Administration.”16 On the basis of this
16
The Veterans’ Administration provides compensation for
service-connected disability. See 38 U.S.C. sec. 1110 (2000)
(providing compensation for disability resulting from personal
injury suffered or disease contracted in line of duty, or for
aggravation of a preexisting injury suffered or disease
contracted in line of duty, in the active military, naval, or air
service, during a period of war); id. sec. 1131 (providing
compensation for disability resulting from personal injury
suffered or disease contracted in line of duty, or for
aggravation of a preexisting injury suffered or disease
contracted in line of duty, in the active military, naval, or air
service, during other than a period of war); see also Sidoran v.
Commissioner, 640 F.2d 231, 233 (9th Cir. 1981) (“The Veterans
Administration’s disability benefits program is intended to
compensate a veteran for impairment resulting from service-
connected injuries.”), affg. T.C. Memo. 1979-56. In general,
monthly compensation for service-connected disability is paid on
the basis of a rating of the claimant’s disability, which is in
turn based on a schedule of ratings of reductions in earning
capacity from specific injuries or combination of injuries. See,
e.g., 38 U.S.C. secs. 1114, 1134, 1155 (2000); 38 C.F.R. secs.
4.1-4.150 (2003).
Payments of Veterans’ Administration benefits are tax
exempt. 38 U.S.C. sec. 5301 (2000); Porter v. Aetna Cas. & Sur.
Co., 370 U.S. 159, 160 (1962) (“Since 1873, it has been the
policy of the Congress to exempt veterans’ benefits from creditor
actions as well as from taxation.”).
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provision, petitioners argue that the amount of Social Security
disability insurance benefits to be excluded shall not be less
than the disability compensation that Mr. Reimels received in
1999 from the Veterans’ Administration. Petitioners contend that
because the Social Security disability insurance benefits
Mr. Reimels received in 1999 were less than his Veterans’
Administration disability compensation, they are entitled to
exclude the entire amount of Social Security disability insurance
benefits received. We disagree for the following reasons.
First, subsection (b)(4) of section 104, like just-discussed
subsection (b)(2), provides no independent basis for exclusion:
for petitioners to be eligible for the claimed exclusion, they
must meet the requirements of section 104(a)(4). See Grady v.
Commissioner, T.C. Memo. 1989-55. We have held that the Social
Security disability insurance benefits in question do not meet
those requirements.
Second, although section 104(b)(4) is not a model of
clarity, its legislative history suggests that it was intended to
apply with respect to retired military personnel who do not
receive the Veterans’ Administration benefits to which they are
otherwise entitled. In certain circumstances, section 104(b)(4)
provides such persons with a tax benefit at least as great as the
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tax exemption that would have been available for the forgone
Veterans’ Administration benefits.17
Mr. Reimels received his entitlement to full disability
benefits from the Veterans’ Administration. The parties agree
that these benefits are exempt from taxation. There is no
indication that Congress intended section 104(b)(4) effectively
to provide a second, duplicate tax exclusion with respect to
amounts of excludable Veterans’ Administration benefits that the
taxpayer has actually received. See Kiourtsis v. Commissioner,
T.C. Memo. 1996-534.
17
The legislative history to sec. 104(b)(4) states:
At all times, Veterans’ Administration disability
payments will continue to be excluded from gross
income. In addition, even if a future serviceman who
retires does not receive his disability benefits from
the Veterans’ Administration, he will still be allowed
to exclude from his gross income an amount equal to the
benefits he could receive from the Veterans’
Administration. Otherwise, future members of the armed
forces will be allowed to exclude military disability
retirement payments from their gross income only if the
payments are directly related to “combat injuries.”
* * * [S. Rept. 94-938, at 139 (1976), 1976-3 C.B.
(Vol. 3) 49, 177.]
In other words, a retired serviceman ordinarily would be
unable to exclude benefit payments received for a non-combat-
related injury. See sec. 104(b)(2)(C) and (3). If such benefit
payments otherwise meet the requirements of sec. 104(a)(4),
however, sec. 104(b)(4) would allow the serviceman to exclude at
least as much of the payments as equals any Veterans’
Administration benefits which the serviceman would have been
entitled to, but did not, receive.
- 22 -
III. Conclusion
We hold that the Social Security disability insurance
benefits Mr. Reimels received in 1999 are not excludable from
gross income under section 104(a)(4). Accordingly, these
benefits are includable in gross income to the extent provided in
section 86.
Decision will be
entered under Rule 155.