1 Unless otherwise indicated, subsequent section

references are to the Internal Revenue Code in effect for the

year in issue.

T.C. Summary Opinion 2006-41

UNITED STATES TAX COURT

RUSSELL CLIFFORD MULLEN AND JOAN MARIE MULLEN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4715-04S. Filed March 16, 2006.

Russell Clifford Mullen and Joan Marie Mullen, pro se.

Noelle C. White, for respondent.

POWELL, Special Trial Judge: This case was heard pursuant

to the provisions of section 74631 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.
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2 The Railroad Retirement Board is an independent agency

of the United States charged with the administration of the

Railroad Retirement Act, ch. 868, 48 Stat. 1287 (1934), and the

Railroad Unemployment Insurance Act, ch. 680, 52 Stat. 1094

(1938). 

Respondent determined a $2,498 deficiency in petitioners’

2001 Federal income tax. The issues are (1) whether $14,970.84

in disability annuity payments paid to petitioner Joan Marie

Mullen (petitioner) by the United States Railroad Retirement

Board2 (RRB) is includable in petitioners’ 2001 income and (2)

whether interest payments of $245 received by petitioners are

includable in petitioners’ 2001 income. At the time the petition

was filed petitioners resided in Baltimore, Maryland.

Background

Petitioner was born on November 10, 1941, and worked as a

clerk for CSX, a railroad company, from July 28, 1981, to June 2,

1991. Petitioner was not employed from June 2, 1991, to January

31, 1998. In 1998, before reaching the minimum retirement age,

petitioner applied for and was granted a disability annuity under

the Railroad Retirement Act of 1974, Pub. L. 93-445, 87 Stat.

162, currently codified at 45 U.S.C. sec. 231a(a)(1)(v), by the

RRB. The RRB found that January 31, 1998, was the onset date of

petitioner’s disability, entitling her to disability annuity

payments as of July 1, 1998.

Petitioner received $14,970.84 in annuity payments from the

RRB during the 2001 taxable year. For that year, petitioner
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received a Form RRB-1099-R, Annuities or Pensions by the Railroad

Retirement Board. Listed on the Form RRB-1099-R are the

following amounts:

Employee contributions $11,415.58

Contributory amount paid 14,970.84

Total gross paid 14,970.84

Federal income tax withheld -0-

Petitioners did not include any of the annuity payments as income

on their 2001 Federal income tax return. 

Due to an adjustment made to petitioners’ 1999 Federal

income tax liability petitioners received a refund of $2,722 from

the Internal Revenue Service in 2001 that included an interest

payment to petitioners of $241. Petitioners also received $4 in

interest income from Provident Bank. The Internal Revenue

Service and Provident Bank each reported these respective

payments on a Form 1099-INT, Interest. Petitioners did not

include either interest payment as income on their 2001 Federal

income tax return. 

Upon examination, respondent included the entire disability

annuity payments of $14,970.84 and the $245 of interest in

petitioners’ income for 2001.

Discussion

1. Railroad Retirement Disability Annuity Payments

Petitioners contend that the disability annuity payments are

not includable in gross income because they are attributable to a
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3 Petitioners do not contend that the annuity

distribution is exempt under either sec. 104, compensation for

illness, or sec. 105, amounts received under health plans. We

have examined both sections and do not find that either applies.

4 Petitioner applied to the RRB for a Social Security

equivalent benefit designation for her disability annuity. Her

request was denied because she did not meet the requirement of

having worked 20 out of the 40 quarters preceding the date of the

onset of the disability under the Social Security Act, ch. 531,

49 Stat. 620 (1933), currently codified at 42 U.S.C. sec. 416(i)

(2000). Petitioner left work 7 years before the date of the

onset of the disability of Jan. 31, 1998, therefore, the

disability annuity was not eligible for a Social Security

equivalent benefit designation.

return of employee contributions.3

Benefits received from railroad retirement programs

generally have two components, identified as Tier 1 and Tier 2

benefits. Absent disability, no railroad retirement benefits are

paid until the employee reaches age 62 or is at least 60 years

old and has completed 30 years of service. Railroad Retirement

Act of 1974, Pub. L. 93-445, 87 Stat. 162, currently codified at

45 U.S.C. sec. 231a(a)(1)(v). Tier 1 benefits are essentially

the equivalent of Social Security benefits and are taxed under

the provisions of section 86. Sec. 86(d)(1)(B); see Ernzen v.

United States, 875 F.2d 228, 229 (9th Cir. 1989). Petitioner’s

disability annuity payments are not essentially the equivalent of

a Social Security benefit and thus are not Tier 1 benefits taxed

under section 86.4

Tier 2 benefits consist of all benefits under the Railroad

Retirement Act of 1974 other than Tier 1 benefits and are taxed
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as private pensions. Section 72(r)(1) provides that for income

tax purposes, Tier 2 railroad retirement benefits are treated “as

a benefit provided under an employer plan which meets the

requirements of section 401(a).” Section 401(a) pensions are

treated as annuities and are taxable under section 72. Sec.

402(a). 

Section 72(a) generally requires that any amount received as

an annuity be included in gross income. Under section 72(b)

“Gross income does not include that part of any amount received

as an annuity * * * which bears the same ratio to such amount as

the investment in the [annuity] contract * * * bears to the

expected return”. See also sec. 72(d). Petitioner contends that

the amount she received in 2001 as a disability annuity was a

return of her investment in the railroad retirement program and

therefore not includable in income.

Section 72 generally “does not apply to any amount received

as an accident or health benefit”. Sec. 1.72-15(b), Income Tax

Regs. Amounts received as a result of a disability are accident

or health benefits within the meaning of section 1.72-15, Income

Tax Regs. If an employer plan to which section 72 applies

specifically provides for accident or health benefits that are

attributable to employee contributions, then such portion of that

benefit is excludable from gross income under section 104(a)(3). 

Sec. 1.72-15(c)(1), Income Tax Regs. On the other hand, if a
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5 Sec. 7491(a) does not shift the burden of proof to

respondent because petitioner has provided no credible evidence

regarding the terms of her retirement plan. Sec. 7491(a)(1).

plan does not expressly provide for accident or health benefits

attributable to employee contributions and what portion of the

employee contributions is to be used for such purpose, then it

will be presumed that no employee contributions are used to

provide such benefits. Sec. 1.72-15(c)(2), Income Tax Regs. Any

amounts received as accident or health benefits and not

attributable to contributions of the employee are includable in

gross income except to the extent excludable under section 105(b)

or (c). Sec. 1.72-15(d), Income Tax Regs. As previously noted,

we have concluded that section 105 does not apply in this case.

 Although section 72 applies to Tier 2 railroad retirement

benefits, there is no indication that petitioner contributed to a

plan that expressly provided for accident or health benefits

attributable to employee contributions. She did not provide any

evidence or documentation of the existence, terms, or

participation in such a plan.5 Nor is there any indication in

the Railroad Retirement Act of 1974 that a portion of the

employees’ contributions was attributable to an accident or

health plan. Without evidence that the plan’s terms expressly

provide for accident and health benefits attributable to employee 
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contributions, we must presume that no employee contributions

were used to provide petitioner’s disability annuity payments. 

Sec. 1.72-15(c)(2), Income Tax Regs.

Furthermore, we conclude that with 10 years of service,

petitioner was not eligible for retirement until she turned 62 on

November 10, 2003, and that the railroad retirement benefits she

received in 2001 were on account of a disability and are

includable in gross income.

In sum, petitioner’s disability annuity payments are not

subject to the return of capital provisions of section 72(b) (or

section 72(d)) and are fully taxable. See secs. 61(a)(9), (11), 

72(a). Respondent’s determination on this issue is sustained. 

2. Interest Payments

Section 61(a)(4) provides that interest payments are to be

included in gross income. Petitioners stipulated that they

received $241 in interest from the Internal Revenue Service and

$4 in interest from Provident Bank. Petitioners failed to

address in their petition the reason they did not include either

interest payment in their 2001 income. We find, therefore, that 
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6 We note at the conclusion of the trial on Feb. 14,

2005, petitioners were directed to file a memorandum in response

to respondent’s pretrial memorandum by Mar. 21, 2005. No such

memorandum by petitioners was filed, and the record was ordered

closed on Mar. 31, 2005. 

petitioners have conceded the issue of inclusion into income of

both interest payments.6 Respondent’s determination on this

issue is sustained.

Reviewed and adopted as the report of the Small Tax Case

Division. 

Decision will be entered

for respondent.