TAX COURT OPINION

Case: Helena Penaflor Walker
Docket Number: 7890-11S
Judge: Marvel
Opinion Type: bench
Filed: 05/22/2012
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 HELENA PENAFLOR WALKER, Petitioner, v. COMMISSIONER OF 1NTERNAL REVENUE, ) ) ) ) ) Docket No. 7890-11S ) Respondent. ) ) ORDE R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings of the above case before Judge L. Paige Marvel at Atlanta, Georgia, on March 29, 2012, containing her oral findings of fact and opinion. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) L. Paige Marvel Judge Dated: Washington, D.C. May 22, 2012 AERVED MAY Ñ2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion By Judge L. Paige Marvel Helena Penaflor Walker v. Commissioner Docket No. 7890-11S March 29, 2012 THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This proceeding for the redetermination of a deficiency is a small tax case conducted pursuant to the provisions of section 7463 of the Internal Revenue Code, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. Pursuant to section 7463 (:b), the decision to be entered is not reviewable by any other court, and this opinion shall .not be treated as precedent for any other case. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, subsequent section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 effect for the relevant period and subsequent gule references are to the Tax Court Rules of Practice and 4 L Procedure. Helena Penaflor Walker appeared pro se. John T. Arthur appeared on behalf of respondent. When she filed her petition, petitioner resided in Maryland. After concessions by petitioner, the only issue for decision is the proper tax treatment of petitioner's 2008 pension income. Facts Some of the facts have been stipulated. The stipulated facts are incorporated herein by this reference. Until she retired on July 1, 2007, petitioner was employed by the State of Maryland. During her long career, petitioner worked as a teacher and as a school administrator. She obtained her undergraduate degree in 1976 from the University of Maryland and a Master's degree from the same university in 1991. Petitioner specialized in working with children with disabilities. During her career as a teacher, she taught children with disabilities, and during her last 15 years or so, petitioner worked as a transition coordinator, helping children with disabilities, ages 14 to 21 years, transition from Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 school to work environments. In March 2006 petitioner injured her right hand while at work. For some period of time, she attempted to self-treat but eventually she sought medical treatment for problems caused by the injury. From approximately June through August 2006, she continued to see a doctor regarding her hand. During the time petitioner was undergoing treatment for her hand, her supervisor changed, and her relationship with the supervisor created a great deal of stress. Ultimately, petitioner was referred to a counselor, who recommended that she see a psychiatrist. Petitioner continued to experience problems that affected her ability to work. In January 2007 petitioner was placed on Special Leaves Pay by the Baltimore City Public School System. On July 1, 2007, petitioner retired. On July 25, 2007, the Medical Board of the State Retirement and Pension System of Maryland (Medical Board) issued a report regarding petitioner's condition and retirement. In the report, the Medical Board recommended that petitioner be approved for an ordinary disability retirement due to a psychiatric condition, concluding the petitioner was permanently Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 disabled and unable to perform her job duties. The Medical Board also recommended that petitioner be denied accidental disability because the facts alleged did not constitute an accident under applicable retirement law. On August 1, 2007, petitioner filed a claim for worker's compensation. By letter dated August 21, 2001, the State Retirement and Pension System of Maryland (MSRPS) advised petitioner that it had accepted the Medical Board's recommendation and approved petitioner's retirement on ordinary disability. However, the MSRPS concluded that the facts alleged did not constitute an accident and that petitioner was not entitled to an accidental disability benefit under section 29-109 of the State Personnel and Pensions title of the Annotated Code of Maryland. The MSRPS presented petitioner with 3 options and she chose the option permitting her to retire on ordinary disability. Following the receipt of the MSRPS letter and her acceptance of the ordinary disability retirement option, petitioner withdrew her worker's compensation claim. Petitioner received $48,280 of pension income from the MSRPS and $13,649 of Social Security benefits during 2008. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 Petitioner, who was married during 2008, filed a late 2008 Federal income tax return, using a filing status of married filing separately. On the return, petitioner d'id not report either her pension income or her Social Security benefits. In a notice of deficiency issued to petitioner on January 14, 2011, respondent determined deficiencies of $787 and $8,771.80 in petitioner's Federal income taxes for 2007 and 2008,.respectively and an addition to tax under section 6651(a) (1) of , for 2008. The 2008 deficiency arises from respöndent s determination that petitioner's pension income and Social Security benefits were taxable. Petitioner timely petitioned this Court. On March 26, 2012, we held a trial during which petitioner testified. Petitioner has paid the deficiency for 2007, and the adjustments givingjrise to the 2007 deficiency are not in dispute. Petitioner has conceded that her Social Security benefits are taxable, and she has conceded her liability for the addition to tax under section 6651(a) (1) for 2008. Consequently, the sole issue remaining for decisión is the taxability of petitioner's 2008 pension income. Discussion Heritage Reporting Corporation (202) 628:4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 Petitioner contends that she properly excluded her pension income under section 104 (a) (2). As we understand petitioner's argument, however, her argument is not limited to section 104 (a) (2). Petitioner appears to be contending that the payments are either excludable under section 104 (a) (1) as payments in the nature of worker's compensation or under section 104 (a) (2) as damages for the hand injury she sustained at work in March 2006. In fairness and in recognition that petitioner is self-represented and is not a lawyer, we shall address both parts of her argument. While we do not doubt that petitioner injured her hand in 2006, we must reject petitioner's arguments under section 104. We explain as follows. _Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that they are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 61 includes in gross income "all income from whatever source derived" unless excluded by a specific provision of the Code. This section is construed broadly, whereas exclusions from gross income are construed narrowly. See sec. 61(a); Commissioner v. Schleier, 515 U.S. 323, 327-328 Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 9 (1995). Section 104 (a) (1) provides that gross income does not include amounts received under workers' compensation acts as compensation for personal injuries or sickness. The regulations promulgated under section 104(a) (1) expand the reach of that section to encompass "a statute in the nature of a workmen's compensation act which provides compensation to employees for personal injuries or sickness incurred in the course of employment." Sec. 1.104-1(b), Income Tax Regs. A statute is in the nature of a workers' compensation act if it allows disability payments solely for service-related personal injury.or sickness. See Haar v. Commissioner, 78 T.C. 864, 868 (1982), aff'd, 709 F.2d 1206 (8th Cir. 1983). Section 104 (a) (1) does not exclude from gross income an amount received as a retirement pension "to the extent that it is determined by reference to the employee's age or length of service, or the employee's prior contributions, even though the employee's retirement is occasioned by an occupational injury or sickness." Sec. 1.104-1(b), Income Tax Regs. The MSRPS concluded that petitioner was not entitled to an accidental disability benefit; however, Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 petitioner did receive ordinary disability benefits. Ordinary disability benefits are granted only if the employee has at least five years of eligibility service and the Medical Board certifies that employee is mentally or physically incapacitated from continuing to perform her duties, the incapacity is permanent, and the employee should be retired. Md. Code Ann., State Pers. & Pens. sec. 29-105(a) (1994). Consequently, ordinary disability benefits are determined by reference to the employee's length of service. Because Maryland law requires an employee to have at least five years of eligibility service before ordinary disability benefits may be granted, the ordinary disability statutory provision is not in the nature of a workmen's compensation act. The ordinary disability statutory provision does not allow payments solely for service-related personal injuries. Petitioner has failed to cite to any other statute under which she receives her pension. Accordingly, we conclude that petitioner is not entitled to exclude her pension income from gross income under section 104 (a) (1). Section 104(a) (2) excludes from gross income "the amount of any damages (other than punitive damages) received (whether by Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11 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 agreement entered into in lieu of such prosecution." Sec. 1.104-1(c), Income Tax Regs. To be eligible for the section 104 (a) (2) exclusion, a taxpayer must demonstrate that (1) the underlying cause of action giving rise to the recovery is based in tort or tort-type rights and (2) the damages were received on account of personal physical injuries or physical sickness. Commissioner v. Schleier, 515 U.S. at 336-337; Prasil v. Commissioner, T.C. Memo. 2003-100. In the context of section 104 (a) (2), the terms "physical injury" and "physical sickness" do not include emotional distress, except to the extent of damages not in excess of the amount paid for medical care described in section 213(d) (1) (A) and (B) attributable to emotional distress. See sec. 104 (a). Petitioner did not pursue a claim on the basis of her hand injury. She did not receive any Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 damages or a worker's compensation award on account of 12 her hand injury. Although the MSRPS awarded petitioner ordinary disability benefits, petitioner did not receive these benefits through a settlement agreement entered into in lieu of prosecution of a legal action. The MSRPS awarded petitioner ordinary disability benefits on the basis of petitioner's mental health issues. In its decision letter, the MSRPS specifically disclaimed any award for the physical injury to petitioner's hand. The MSRPS decision did not allocate any portion of the pension income to any personal physical injury or physical sickness involving petitioner. Although petitioner contends that her emotional distress was attributable to her physical injury, neither the Medical Board nor the MSRPS reached such a conclusion in awarding petitioner ordinary disability benefits. Furthermore, petitioner first experienced her emotional distress after her supervisor changed and she began to experience greater stress at work. Consequently, we cannot conclude that petitioner's emotional distress was attributable to her hand injury. Accordingly, we conclude that no portion of petitioner's pension income is compensation for a personal physical injury or physical sickness Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 13 and that petitioner is not entitled to exclude the payment f rom gross income under section 104 (a) (2) . Decision will be }entered for respondent . THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE . (Whereupon, at 12:37 p.m., the bench opinion in the above-entitled matter was.concluded.) // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888