T.C. Memo. 2011-7 

UNITED STATES TAX COURT

ROGER W. AND SHARON L. ZARDO, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23647-08. Filed January 10, 2011.

Roger W. and Sharon L. Zardo, pro se.

Chong Hong, for respondent.

MEMORANDUM OPINION

MORRISON, Judge: The Commissioner of Internal Revenue

issued a notice of deficiency for the tax year 2006 to Roger W.

and Sharon L. Zardo. We refer to the Commissioner here as the

IRS. In the notice, the IRS determined an income-tax deficiency

of $5,862, a late-filing penalty of $71 under section
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6651(a)(1),1 and an accuracy-related penalty of $1,172 under

section 6662(a). The IRS has conceded that the Zardos are not

liable for the late-filing penalty and the accuracy-related

penalty. The primary issue remaining for decision is whether

$26,365 of disability retirement benefits from an employer

pension plan is included in income. We hold that it is. The

other issues are computational and will be resolved under Rule

155. These issues are: (1) how much of the $23,742 of Social

Security disability benefits is included in income, and (2) to

what extent the Zardos are entitled to a $2,152 medical-expense

deduction. 

Background

We adopt the stipulation of facts and its attached exhibits. 

The Zardos filed their 2006 income-tax return on May 3, 2007. 

They resided in California when they filed their petition. 

Roger W. Zardo (Zardo) worked as a meat cutter for Nob Hill

Foods, a grocery store, from July 28, 1984 until June 3, 2003. 

Nob Hill Foods contributed to the United Food and Commercial

Workers Northern California Employers Joint Pension Plan (the

UFCW Pension Plan). The UFCW Pension Plan was the result of

collective bargaining agreements between participating employers

1All section references are to the Internal Revenue Code as

in effect for the year at issue. All references to regulations

are to those in effect for the year at issue. All Rule

references are to the Tax Court Rules of Practice and Procedure. 
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and participating UFCW local unions. Under the UFCW Pension

Plan, Zardo was potentially eligible for a variety of benefits,

including disability retirement benefits. Zardo could receive

disability retirement benefits if: (1) he was eligible for

Social Security disability benefits, (2) he was under age 60, (3)

the disability began after he had worked a certain amount of

time,2 and (4) he was still employed at the end of the plan year

before the disability began. The amount of disability retirement

benefits was based solely on the number of years Zardo had worked

(and for which plan contributions were made) and the benefit

factor associated with each year. Zardo’s employer made all plan

contributions on his behalf, and the employer’s contributions

were not included in Zardo’s gross income. 

During the course of his employment, Zardo incurred injuries

that impaired the functioning of his back, right knee, and right

shoulder. Although he received treatment for these injuries, he

could no longer work after June 3, 2003. Starting December 1,

2003, Zardo received a monthly disability retirement benefit of

$2,197.09 from the UFCW Pension Plan. During 2006, Zardo

2To be eligible for disability retirement benefits,

employees had to accumulate at least 10 years of vesting credit

or 8,000 hours of service over a 10-year period in which they

worked at least 150 hours each year. Employees received 1 year

of vesting credit if they worked at least 750 hours in a year. 

They received partial vesting credit if they worked at least 150

hours in a year. Partial vesting credit was determined by

dividing an employee’s hours of service by 2,000.
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received a total of $26,365.08 in benefits from the UFCW Pension

Plan, as reflected in his Form 1099-R, Distributions From

Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,

Insurance Contracts, etc. 

In addition to the disability pension benefits, Zardo

received workers’ compensation payments and Social Security

disability insurance benefits. Zardo received $41,529.97 in

workers’ compensation for temporary disability for the periods

April 6 to 15, 2001, and June 4, 2003 to September 20, 2004. 

Zardo was also awarded $58,136.25 in workers’ compensation for

permanent disability under a stipulation filed with the State of

California Workers’ Compensation Appeals Board on December 19,

2006. Zardo was granted Social Security disability insurance

benefits under a July 12, 2005 notice of decision issued by the

Social Security Administration. The notice of decision

determined that Zardo had residual functional capacity for a full

range of light work as of April 29, 2005, but that he was unable

to resume his past work and had not “acquired work skills

transferable to work within his remaining functional capacity”. 

In 2006, Zardo received Social Security disability insurance

benefits totaling $23,742, as shown on his Form SSA-1099, Social

Security Benefit Statement. 

The Zardos’ 2006 income-tax return excluded from gross

income all $26,365 of the UFCW Pension Plan disability retirement
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benefits and $13,447 of the Social Security disability benefits. 

A statement attached to the tax return cited section 104(a)(2) as

the authority for excluding the UFCW Pension Plan disability

retirement benefits. The Zardos also claimed a medical-expense

deduction of $2,152. The IRS adjusted the Zardos’ gross income

to include all $26,365 of the UFCW Pension Plan disability

retirement benefits and $9,886 in Social Security disability

benefits that were not included on the return. The IRS

disallowed the entire medical-expense deduction. The adjustments

concerning the Social Security disability benefits and the

medical-expense deduction were purely computational and were

based on the increase in adjusted gross income after including

the UFCW Pension Plan disability retirement benefits. 

Discussion

The Zardos bear the burden of proving the IRS’s

determination of deficiencies incorrect. See Rule 142(a)(1);

Welch v. Helvering, 290 U.S. 111, 115 (1933). Because the IRS

disallowed their exclusion of the UFCW Pension Plan disability

retirement benefits, the Zardos bear the burden of proving they

are entitled to the claimed exclusion.3 We consider whether the

3Under some circumstances, sec. 7491(a) shifts the burden of

proof to the IRS. The Zardos have neither argued, nor adduced

evidence, that the conditions of sec. 7491(a) have been met. 

Thus, the burden of proof has not shifted to the IRS on any

issue. Even if the burden of proof had shifted, we do not

believe it would change the outcome of the case.
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Zardos can exclude the UFCW Pension Plan disability retirement

benefits under section 104(a)(1), section 104(a)(2), or section

105(c). 

1. The Benefits Are Not Excludable Under Section 104(a)(1). 

Section 104(a)(1) provides that gross income does not

include “amounts received under workmen’s compensation acts as

compensation for personal injuries or sickness”. The section

104(a)(1) exclusion does not apply to benefits paid pursuant to a

private contractual relationship. Wallace v. United States, 139

F.3d 1165 (7th Cir. 1998). Zardo’s UFCW Pension Plan disability

retirement benefits are not excludable under section 104(a)(1). 

Zardo received his benefits under a private collective bargaining

agreement, not a statute. We therefore reject the Zardos’

argument that these benefits are essentially equivalent to

workers’ compensation. 

2. The Benefits Are Not Excludable Under Section 104(a)(2). 

Section 104(a)(2) excludes from gross income “the amount of

any damages (other than punitive damages) received (whether by

suit or agreement and whether as lump sums or as periodic

payments) on account of personal physical injuries or physical

sickness”. The term “damages received (whether by suit or

agreement)” means an amount received (other than workmen’s

compensation) through “prosecution of a legal suit or action

based upon tort or tort type rights, or through a settlement
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agreement entered into in lieu of such prosecution.” Sec. 1.104-

1(c), Income Tax Regs. 

Zardo’s UFCW Pension Plan disability retirement benefits are

not excludable under section 104(a)(2). Zardo did not receive

these payments through a legal suit or a settlement based on a

tortlike claim. Zardo never sued or threatened to sue Nob Hill

Foods or the UFCW Pension Plan regarding his work-related

injuries. Instead Zardo received his disability retirement

payments as a benefit of his previous employment with Nob Hill

Foods. Without more information, we cannot conclude that Zardo’s

disability benefits were paid in lieu of a tort-based legal suit. 

See Cash v. Commissioner, T.C. Memo. 1994-166 (holding the Court

could not automatically conclude that payments under an employer

disability policy were made in lieu of a tort suit just because

the taxpayer suffered a work-related injury). We thus reject the

Zardos’ assertion that section 104(a)(2) permits them to exclude

the UFCW Pension Plan disability retirement benefits from gross

income.

3. The Benefits Are Not Excludable Under Section 105(c). 

Under section 105(a), amounts received by an employee

through accident or health insurance for personal injuries or

sickness are included in gross income to the extent such amounts

are (1) attributable to contributions by the employer which were

not includable in the employee’s gross income, or (2) paid by the
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employer. Amounts received under an accident or health plan4 for

employees are considered “amounts received through accident or

health insurance” for the purposes of section 105. Sec. 105(e). 

Section 1.105-1(b), Income Tax Regs., expressly includes within

the scope of section 105(a) accident or health plans financed

solely by the employer. 

Section 105(c) provides that gross income does not include

amounts referred to in section 105(a) to the extent they: 

(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.

For payments to be treated as “computed with reference to the

nature of the injury”, the payments that the plan is obliged to

make must vary according to the type and severity of the injury. 

Beisler v. Commissioner, 814 F.2d 1304, 1308 (9th Cir. 1987) (en

banc), affg. T.C. Memo. 1985-25; Rosen v. United States, 829 F.2d

506, 509 (4th Cir. 1987); Hines v. Commissioner, 72 T.C. 715, 720

4Sec. 1.105-5(a), Income Tax Regs., defines “an accident or

health plan” as “an arrangement for the payment of amounts to

employees in the event of personal injuries or sickness.” A plan

can cover one or more employees and involve different plans for

different employees or classes of employees. Id. The plan does

not need to be in writing, and the employee’s rights under the

plan do not need to be enforceable. Id. It is also immaterial

who pays the plan benefits. Id. Payments can be made by the

employer, a separate fund, an association of employers or

employees, or an insurance company. Id. 
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(1979). This nature-of-the-injury requirement is not satisfied

if the plan simply requires a threshold determination of

disability before benefits can be paid. See Beisler v.

Commissioner, supra at 1309; Rosen v. United States, supra at

510; Hines v. Commissioner, supra at 720. Congress intended

section 105(c) to carve out an exception for payments not

resembling income. See Beisler v. Commissioner, supra at 1308. 

If payments do not vary according to the nature of the injury, or

if they vary according to absence from work, then they constitute

compensation for lost wages and should be taxed. Id. 

Zardo’s UFCW Pension Plan disability retirement benefits are

not excludable under section 105(c) because they fail to satisfy

the section 105(c)(2) nature-of-the-injury requirement.5 The

UFCW Pension Plan calculated benefits solely according to the

number of years Zardo worked and the benefit factor associated

with each year. The amount of benefits did not vary according to

the type or severity of the injury. The plan merely required a

threshold determination of disability for benefits to be paid;

the employee had to qualify for Social Security disability

5We express no opinion on whether the UFCW Pension Plan

qualifies as an accident or health plan under sec. 105(e),

whether Zardo received payments for the permanent loss of a

bodily member or function under sec. 105(c)(1), or whether

Zardo’s payments were computed without regard to his absence from

work under sec. 105(c)(2). Even if Zardo’s benefits met all

other requirements for the sec. 105(c) exclusion, they would

still fail to satisfy the sec. 105(c)(2) nature-of-the-injury

requirement.
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benefits. The Zardos cite the dissenting opinion in the Court of

Appeals for the Ninth Circuit case of Beisler v. Commissioner,

supra, as authority for why the UFCW Pension Plan disability

retirement benefits are excludable under section 105(c), but it

is the majority opinion which constitutes precedent. Because the

Zardos resided in California when they filed their petition,

their case is appealable to the Ninth Circuit unless the parties

stipulate otherwise. See sec. 7482(b). Therefore the Beisler

majority opinion is binding precedent.6 See Campbell v.

Commissioner, 134 T.C. 20, 27 n.6 (2010) (“The Tax Court follows

the law of the circuit in which an appeal would lie if that law

is on point.” (citing Golsen v. Commissioner, 54 T.C. 742, 757

(1970), affd. 445 F.2d 985 (10th Cir. 1971))). Even if Beisler

had not been decided, we are bound by Hines v. Commissioner,

supra at 720, in which this Court came to the same conclusion as

the Beisler majority. 

In conclusion, Zardo’s UFCW Pension Plan disability

retirement benefits are not excludable under section 104(a)(1),

section 104(a)(2), or section 105(c). We hold that the entire

$26,365 of benefits received under the UFCW Pension Plan in 2006

should be included in the Zardos’ gross income. 

6In Beisler v. Commissioner, 814 F.2d 1304, 1308 (9th Cir.

1987) (en banc), affg. T.C. Memo. 1985-25, the court interpreted

sec. 105(c)(2) to require the payments to vary according to the

type and severity of the injury. 
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To reflect the foregoing,

Decision will be entered

under Rule 155.