1 All section references are to the Internal Revenue Code

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

Tax Court Rules of Practice and Procedure.

T.C. Memo. 1998-1

UNITED STATES TAX COURT

JOSE HERNANDEZ, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6618-96. Filed January 5, 1998.

Jose Hernandez, pro se.

Willis B. Douglas, for respondent.

MEMORANDUM OPINION

NAMEROFF, Special Trial Judge: This case was heard pursuant

to the provisions of section 7443A(b)(3)1 and Rules 180, 181, and

182. Respondent determined a deficiency in petitioner’s 1993

Federal income tax in the amount of $4,738. 
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2 Section 1 of Standard’s group policy states:

The amount of Monthly Income shall be 50% of

the first $5,000 of the Member’s basic

monthly earnings, reduced by any Deductible

Benefits. 

After a concession by petitioner, the sole issue for

decision is whether petitioner is entitled to exclude from gross

income amounts received as disability payments during 1993.

Background

Some of the facts have been stipulated, and they are so

found. The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time he filed his

petition, petitioner resided in Costa Mesa, California.

Petitioner worked for the City of Santa Ana, California (the

City), as a grounds maintenance worker, earning approximately

$2,250 per month. The City provided petitioner with long-term

disability insurance through Standard Insurance Co. of Portland,

Oregon (Standard).

Standard offers two disability insurance options to the

City’s employees. Under plan A, a disabled employee is eligible

to receive one-half of his base monthly salary until his

disability ends or until he reaches age 65.2 The City pays the

entire premium for this coverage, but an employee is not eligible

for the benefits until he is unable to work for 130 days because

of the disability. Under plan B, a disabled employee receives
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the same benefits as above, with the exception that the waiting

period is reduced from 130 days to 60 days. Enrollment in plan B

requires the submission of a medical history statement and is

subject to Standard’s approval. The employee cost of plan B is

approximately $5 per month; the City pays the rest. During all

relevant times, petitioner was enrolled in plan A.

On October 15, 1985, while working for the City, petitioner

tripped on an unrepaired crack in the sidewalk and struck his

head on the pavement, sustaining permanent injuries to his head,

back, and right eye. Nevertheless, petitioner returned to work

with the City. In November 1988, as a result of these injuries,

petitioner applied for disability benefits under plan A. 

Standard, however, rejected his claim.

In December 1988, petitioner applied to change his long-term

disability insurance coverage from plan A to plan B. As

requested by Standard, petitioner submitted a medical history

statement. Standard denied petitioner’s request, and petitioner

remained covered under plan A.

On April 26, 1989, petitioner suffered another work-related

accident. This time, petitioner, while trimming high tree

branches, fell and suffered head, back, and neck injuries. As a

result of the accident, he was unable to perform his regular

duties for the City. After the accident, petitioner’s work

schedule was as follows: (1) From April 27 to May 2, 1989,
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petitioner performed light-duty work; (2) from May 3, 1989, to

January 15, 1990, petitioner did not perform any work for the

City, as none was available that he could perform; (3) from

January 16 to June 19, 1990, petitioner performed nonmaintenance

“night-man” work; (4) on June 19, 1990, petitioner was instructed

not to report to work, pending the investigation of an

altercation, occurring on June 2, 1990, between him and several

City security guards; and (5) on August 29, 1990, the City

terminated petitioner’s employment.

On November 17, 1990, petitioner filed a long-term

disability claim with Standard, asserting that he had become

totally and permanently disabled because of the two accidents

described above. Soon after, Standard denied his claim. 

Petitioner pursued the issue during the 2 subsequent years but

was unable to secure payment. It was not until petitioner

elicited the assistance of the California State Insurance

Commissioner’s Office, in February 1993, that Standard agreed to

honor petitioner’s claim retroactively to September 9, 1989. 

Through a series of 12 checks, Standard paid petitioner the sum

of $22,820.23 during 1993.

On the basis of information supplied to him by the City and

Standard, petitioner believed that the benefits he had received

were nontaxable. In accordance with this belief, petitioner did
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3 Petitioner prepares his tax returns on the cash method of

accounting.

not report the $22,820.23 on his 1993 Federal income tax return.3

In the notice of deficiency, respondent determined that

petitioner should have reported the above amount. 

Petitioner’s Year-to-Date Earning Reports for 1989 and 1990

(i.e., the City’s employment records) show that no funds were

withheld from petitioner’s wages to pay for the long-term

disability plan. Francisco Gutierrez, the City’s administrative

service manager in charge of payroll functions, testified that

Standard’s insurance premiums, to the extent paid by employees,

are typically paid through withholding and would be reflected on

those earning reports.

Discussion

Respondent asserts that the distributions should be included

in petitioner’s 1993 gross income because the City, not

petitioner, exclusively funded the long-term disability plan

under which petitioner benefited. Petitioner, on the other hand,

argues that the payments should be excluded from gross income

because he funded the disability plan through employee

withholdings and because he was advised that the payments were

not taxable.
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Respondent’s determination is presumed correct, and

petitioner bears the burden of proving otherwise. Rule 142(a);

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

Section 105(a) provides that amounts received by an employee

under accident or health plans funded by the employer are

included in the employee’s gross income. Section 105(c),

however, provides this exception to the general rule:

SEC. 105(c). Payments Unrelated to Absence From

Work.--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.

We hold that the distribution amounts are not excludable

under section 105 from petitioner’s 1993 gross income. 

Petitioner received the disability payments under a long-term

disability plan (i.e., plan A) that was fully funded by the City. 

The record clearly demonstrates that no funds were withheld from

petitioner’s wages and that petitioner did not pay for the plan

from other sources. Moreover, the section 105(c) exception does

not apply. Petitioner did not establish that the payments were

computed with reference to the nature of his injuries without

regard to the period he was absent from work. Beisler v.

Commissioner, 814 F.2d 1304, 1307-1308 (9th Cir. 1987), affg. en
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banc T.C. Memo. 1985-25; Hines v. Commissioner, 72 T.C. 715, 720

(1979). Accordingly, respondent’s determination shall be

sustained. 

Petitioner argues that his 1993 Form W-2 indicates that the

entire distribution is nontaxable sick pay. We disagree. 

Petitioner misunderstands the Form W-2, particularly box 13,

which contains the terms “J 0.00”. Code J is explained as sick

pay, and 0.00 indicates that no amount is to be applied for that

category. Thus, in our estimation, the Form W-2 indicates the

opposite, that none of the distributions were for nontaxable sick

pay and that the distributions are, in fact, taxable.

Petitioner also asserts that, assuming we find that the

distributions are taxable, they should not be includable in his

1993 gross income because many payments pertain to years prior to

1993 during which petitioner was unable to work. We disagree. 

Petitioner, as a cash basis taxpayer, must include income during

the taxable year it was actually or constructively received. 

Sec. 451(a). Since petitioner received $22,820.23 during 1993,

that amount is income for that year.

To reflect the foregoing,

Decision will be entered

for respondent.