110 T.C. No. 9

UNITED STATES TAX COURT

RALPH P. WATERMAN, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9201-95. Filed February 9, 1998. 

 P accepted an offer for an early separation which

had been made to him by the U.S. Navy pursuant to a

downsizing program. At the time of acceptance, P was

in a combat zone and had served over 14 years, the vast

majority of which were not in a combat zone. P would

not have been entitled to a pension until he had served

20 years. The amount of P's severance payment was

calculated on the basis of his length of service. Sec.

112, I.R.C., provides that compensation received for

active service in a combat zone is excludable from

gross income. The regulations under sec. 112 emphasize

that the right to the income must accrue during service

in a combat zone, but the payment may be received after

the combat service. R determined that none of the

payment received by P was excludable under sec. 112. 

On brief, R conceded that an apportioned amount of the

severance payment attributable to the time in a combat

zone over total time served would be excludable. P

argues that the entire severance payment is excludable

because his right to the payment arose at the time of
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1Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year under

consideration, and all Rule references are to this Court's Rules

of Practice and Procedure.

his acceptance of the offer for an early separation,

and he accepted that offer while in a combat zone. 

Held: P's severance payment is not excludable from

gross income under sec. 112.

Cynthia L. Mire, for petitioner.

William Henck, for respondent.

OPINION

GERBER, Judge: Respondent, by means of a statutory notice

of deficiency, determined an income tax deficiency of $10,038 and

sections 6651(a)(1)1 and 6654(a) additions to tax in the amounts

of $2,495 and $435, respectively, for petitioner's 1992 taxable

year. Respondent has conceded that petitioner is not liable for

the additions to tax. The remaining issue for our consideration

is whether the special separation payment to which petitioner

became entitled while serving in a combat zone is excludable from

petitioner's gross income under section 112.

Background

This case was submitted fully stipulated pursuant to Rule

122. Petitioner, Ralph F. Waterman, served in the U.S. Navy for

14 years and 3 months as an enlisted person. Petitioner was

stationed aboard the U.S.S. America in the Persian Gulf, a
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designated combat zone, from January 1 through May 4, 1992. On

April 20, 1992, petitioner accepted an early separation offer

from the Navy as part of its downsizing program. Petitioner

agreed to leave the Navy. By accepting the separation offer and

payment, petitioner was not entitled to any future benefits,

including a pension, which would have first become available

after 20 years of service. The amount of the lump-sum special

separation payment was, in part, measured by petitioner's 14

years and 3 months of active military service. Petitioner left

the ship pursuant to this agreement and also left the Persian

Gulf region on May 4, 1992. Petitioner received an honorable

discharge from the Navy on May 18, 1992, in Norfolk, Virginia. 

The Navy withheld $9,159 from petitioner's $44,946 separation

payment. In substantial part, the withholding was for Federal

income tax.

Upon acceptance of the Navy's offer for early separation,

petitioner was advised by the Navy that payments received

pursuant to his early separation would be excludable from gross

income if accepted while serving in a designated combat zone. In

accord with that advice, petitioner requested and the Navy issued

an $8,951 check to petitioner representing the previously

withheld Federal tax portion of the original $9,159 withholding.

Respondent determined that the $44,946 separation payment

constituted taxable income and was not excludable under section
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2 In the notice of deficiency, respondent determined that no

part of the separation payment should be excluded under sec. 112. 

On brief, respondent conceded that the portion of the payment

apportioned by reference to the portion of time served in a

combat zone should be excluded from income. Our interpretation

of sec. 112 would not permit any portion to be excluded. Because

of respondent's concession, however, petitioner is entitled to

exclude the $2,382 of the $44,946 severance payment. 

112. On brief, respondent conceded that $2,382, the portion of

the separation payment that was measured by time served in a

combat zone, is excludable under section 112.

Discussion

We consider here a matter of first impression involving

whether an early separation payment, the right to which arose and

became fixed while a member of the military was serving in a

combat zone, is excludable from gross income under section 112. 

Respondent contends that the portion of the separation payment

apportioned as to time served while petitioner was not in a

combat zone represents compensation that is not excludable under

section 112. Conversely, petitioner contends that the entire

separation payment is excludable from gross income under section

112 as compensation for an act performed and/or a right to

compensation that became fixed while he was in a combat zone. We

hold that no portion of the separation payment would be

excludable from gross income under section 112.2 

Section 112 was enacted to provide a tax benefit to members

of the armed services whose lives were placed at risk because of
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their service to their country. Section 112, in pertinent part,

provides that "Gross income does not include compensation

received for active service * * * for any month during any part

of which such member * * * served in a combat zone". Section 112

and the underlying regulations do not specifically address the

question of whether severance pay is excludable. 

In construing a statute, we generally give effect to the

plain and ordinary meaning of its language. United States v.

Locke, 471 U.S. 84, 93, 95-96 (1985); United States v. American

Trucking Associations, 310 U.S. 534, 543 (1940). Words with a

fixed legal or judicially settled meaning, on the other hand,

generally must be presumed to have been used in that sense unless

such an interpretation would lead to absurd results. See United

States v. Merriam, 263 U.S. 179, 187 (1923); Lenz v.

Commissioner, 101 T.C. 260, 265 (1993). Our principal objective

in interpreting any statute is to determine Congress' intent in

using the statutory language being construed. United States v.

American Trucking Associations, supra at 542. When a statute is

ambiguous, we may look to its legislative history and the

purposes for its enactment. United States v. Ron Pair Enters.,

489 U.S. 235, 241 (1989). With respect to section 112, however,

there is a paucity of legislative history or discussion

concerning the legislative intent. See Bruinooge v. United

States, 213 Ct. Cl. 26, 550 F.2d 624, 627 (1977). 
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3On Aug. 19, 1993, these regulations were retroactively

amended under authority of sec. 7805 to be effective Jan. 16,

1991. T.D. 8489, 1993-2 C.B. 65.

Use of the word "for" in the section 112(a)(1) language

"compensation received for active service * * * in a combat zone"

requires that the compensation be earned for a person's service

in a combat zone. This statutory language is not ambiguous

concerning the subject of when and how the compensation must be

earned. 

As to when the payment is received, the underlying

regulation contains the following pertinent language:

The time and place of payment are irrelevant in

considering whether compensation is excludable under

section 112; rather, the time and place of the

entitlement to compensation determine whether the

compensation is excludable under section 112. * * * For

this purpose, entitlement to compensation fully accrues

upon the completion of all actions required of the

member to receive the compensation. * * * [Sec.

1.112-1(b)(4), Income Tax Regs.3]

The above-quoted language also addresses the question of when the

compensation is earned. The regulation does not, however,

address how the compensation is to be earned in order to be

excludable under section 112; i.e., for military service

performed in a combat zone or any type of service or act that is

performed or may occur in a combat zone. 

Congress provided a specific exception from the type of

compensation that may be excludable under section 112; to wit,

pensions and retirement pay. Sec. 112(c)(4). Respondent does
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4 We note that neither party has challenged the validity of

the regulations under consideration. 

not argue that the severance payment is a pension or a form of

retirement pay. Therefore, the question we consider is whether

the severance payment is "compensation received for active

service * * * in a combat zone".

By means of regulations, compensation excludable from gross

income under section 112 has not been limited to active duty pay

while in a combat zone. In particular, section 1.112-1(b)(5),

Example (5), Income Tax Regs., provides:

In July, while serving in a combat zone, an enlisted

member voluntarily reenlisted. After July, the member

neither served in a combat zone nor was hospitalized

for wounds incurred in the combat zone. In February of

the following year, the member received a bonus as a

result of the July reenlistment. The reenlistment

bonus can be excluded from income as combat zone

compensation although received outside of the combat

zone, * * * [because] the member completed the

necessary action for entitlement to the reenlistment

bonus in a month during which the member served in the

combat zone.

This regulation, to a limited extent, may expand upon the

statutory language "compensation received for active service"

because reenlistment bonuses could be to secure future service

which is not served in a combat zone.4 

Example (5) indicates that the time and place of payment are

irrelevant when considering whether compensation is excludable

under section 112. More importantly, the example contains a

variation from the section 112 language to the extent that there
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is acknowledgment that a portion of the reenlistment bonus in

that example will not be earned for service in a combat zone. 

Sec. 1.112-1(b)(4), Income Tax Regs. Instead, it is sufficient

that the offer and acceptance of the reenlistment occur while the

member is serving in the combat zone. We note, however, that as

a matter of policy, the potential for continued service in a

combat zone exists where a person reenlists. 

Petitioner wishes us to go a step further than Example (5)

and hold that the language of section 112, as interpreted in

section 1.112-1(b)(4), Income Tax Regs., would extend to a

severance payment, even though that payment is being made to

ensure that there would be no further service, in a combat zone

or otherwise. We do not find petitioner's argument to be

persuasive. Petitioner's proposed approach does not comport with

the statutory language and does not carry out the intent of the

statute. 

Respondent makes no effort to distinguish Example (5), but

instead argues that Example (2) of the regulation is more

analogous. Section 1.112-1(b)(5), Example (2), Income Tax Regs.,

provides:

From March through December, an enlisted member became

entitled to 25 days of annual leave while serving in a

combat zone. The member used all 25 days of leave in

the following year. The member may exclude from income

the compensation received for those 25 days, even if

the member performs no service in the combat zone in

the year the compensation is received.
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Respondent finds support in this example because the excludable

amount is limited to an amount attributable solely to leave

accrued while the member was in a combat zone. We find Example

(2) analogous to the extent that the excludable portion accrued

while the member was in a combat zone, but it is excluded from

income even though utilized and received while the member was not

in a combat zone. We do not find that Example (2) controls our

factual situation. 

Respondent's argument focuses on the fact that the amount of

the severance payment here was measured, in part, by time served

outside a combat zone. On the basis of that observation,

respondent argues that the payment was earned, in corresponding

part, outside a combat zone. Respondent also concludes that

petitioner is entitled to exclude the portion of the severance

payment that is allocable to his past service in a combat zone. 

Although we agree that petitioner is not entitled to exclude the

severance payment, we disagree with respondent's reasoning. 

Petitioner's severance payment is in exchange for his

agreement to leave the military. Although measured by length of

service, the severance payment is not for prior service, either

in a combat zone or otherwise. In the same manner as the

reenlistment example, when petitioner accepted the Navy's early

separation offer, he did not then become entitled to any

additional compensation for the services previously performed. 
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Accordingly, the severance payment cannot be considered 

compensation for earlier services. Rather, it must be considered 

compensation for petitioner's agreeing to early separation from

the Navy. Ultimately, the statute requires that the member's

service be performed in a combat zone. 

Respondent argues that the severance payment was received in

exchange for the pension petitioner would have received if he had

completed 20 years of service. The parties in this case

stipulated that petitioner accepted the separation offer as part

of the Navy's downsizing program, and, as a result, he would not

be eligible for a pension after 20 years of service. 

Accordingly, respondent's argument that the severance payment was

received in exchange for pension benefits is a matter of

conjecture. On the basis of the parties' stipulation, petitioner

was not entitled to a pension at the time he accepted the early

separation. Petitioner had served just over 14 years and was

almost 6 years short of having "vested" pension benefits. It is

true that as a result of petitioner's agreeing to sever his

relationship with the military, he would not be able to serve

long enough to be entitled to a pension. That is a far cry from

exchanging his pension for a severance payment. The only

similarity between a pension (which by statute is not exempt

under section 112) and a severance payment is that both are

calculated by means of length of service. There is no evidence
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here that there was any other correlation or connection between a

severance payment and a Government military pension. 

We accordingly hold that the severance payment here is not

excludable from petitioner's gross income under section 112.

To reflect the foregoing and because of concessions by the

parties,

Decision will be entered

under Rule 155.