TAX COURT OPINION

Case: Roger W. & Sharon L. Zardo
Docket Number: 23647-08
Judge: Morrison
Opinion Type: memo
Filed: 01/10/2011
Pages: 11

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 , SERVED JAN 1 0 2011 - 2 - 6651(a) (1) ,' and an accuracy related penalty of $1,172 under il sectioji 6662 (a) . The IRS has conceded that the Zardos are not liable for the late-filing genalty 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 Securi y disability benefits is included in income, and (2) to what e tent the Zardos are entitled to a $2, 152 medical'expense deduction. Background W adopt the stipulation of facts and its attached exhibits. The Za dos filed their 2006 income-tax return on May 3, 2007. They r sided in California hen they filed their petition. R ger W. Zardo (Zardo) worked as a meat cutter for Nob Hill Foods, a grocery store, froni July 28, 1984 until June 3, 2003. Nob Hi -i .1 N'oods contributed tio the United Food and Commercial Workers Northern California Employers Joint Pension Plan (the UFCW P nsion Plan). The UFCW Pension Plan was the sresult of collective bargaining agreements betiween participating empioÿers 11 section references are to the Internal Revenue Code as issue. All references to regulations in effÊct for the year at are tol those in effect for the year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. - 3 - 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,a(2) he was under age 60, (3) the disability began after he had worked a certain amount of time,2 a'nd (4) he was still employed at the end of the plan year before the disanility began. The amount of disability retirement benefits was based solely on the number of years Zardo had worked (and for which plan contributionsawere 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 Plano: During 2006, Zardo 2To be eligible for disability rètirement bänefits, 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. of vesting credit if they worked at They received partial vesting credit if they worked at hours in a year. Partial vesting credit was determined by dividing an employee's hours of service by 2,000. least 750 hours in a year. Employees received 1 year least 150 | - 4 - received a total of $26,365.08 in benefits from the UFCW Pension Plan, as reflected in his F rm .1099-R, Distributions From Pensions, Annuities,, Retirement or Profit-Sharing Plans, >IRAs, Insurance .Contracts, etc.e In addition,to the disabiliity pension,benefits, Zardo received workers ' compensat on epayment s, and Soc ial _ Security disabi ity .insurance bene f its . Zardo received ,$41, 529 . 97 in worker ' compensation for temporary disability for the periods April sto 15, 2001, and June 4, 2003 to September 20, 20:04.. y Zardo Nas also awarded $58,136.25 in workers' compensation for, perman nt 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 determli.ned that Zardo had residual functional capacity for a full range of light work as of April 29,, 2005, but that he was unable to res me his, past work and had nots "acquired work skills transf rable to work-within his remaining functional capacity". In 200 , Zardo received Social Security disability insurance benefiès totaling $23,742, as shown on his Form SSA-1099, Social Secufity Bene f it Statement . Thë Zardos' 2006 incom -tax return excluded from gross income all $26, 365 of the U CW Pension Plan disability r tirement - 5- - benefits and $13,447 of the Socialy 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 enti-re medical-expense deduction. The adjustments concerning thé Social Security disability benefits and the medical-expense deduction were purely computational and were based on' the 'increase in adjustëd 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 SUnder some circumstances, sec. 7491(a) shifts the burden of The Zardos have neither argued, nor adduced the case. I to the IRS. proof evidence, Thus, issue. believe it would change the outcome of that the conditions of sec. 7491(a) have been det. the burden of proof has not shifted to the IRS on any Even if the burden of proof had shifted, we do not - 6 - Zardos can exclude the. UFCW Pension' Plan disability retirement benef i s under section 104 (a) (1) , section 104 (a) (2) , or section 105 (c) 1. , The Benefits Are Not Excludable Under Section 104 (a) (1) . S ction 104 (a) (1) provides that gross income does not includ "amounts received under sworkmen' 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 privat contractual relationship. Wallace v. United States, 139 F.3d 1165 (7th Cir. -1998) . Zardo's"UFCW Pension Plan disability reti e ent benefits are not excludable under section 104 (a) (1) . Zardo eceived his benefits under a private collective bargaining agreem nt, not a statute. We therefore reject the Zardos' argume t that these benefits are essentially equivalent to worker ' compensation. 2. The Benefits Are Not E cludable Under Section 104 (a) (2) . S ction 104 (a) (2) excl des -from gross income "the amount of any damages (other than punitive damages) received (whether by suit 09 agreement and whether as lump sums or as periodic paymen s) on account of peráonal physical injuries or physical sickne s". The term "damages received (whet'her by suit or agreem nt) " means an amount received (other than workmen' compedsation) 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. Zardo's UFCW Pension Plan disability retirement benefits are not excludable under section 104(a) (2). Zardo did not greceive these payments through a legal suit or ansettlement 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 employmentswith.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 sautomatically conclude that payments under an employer disability policy were made in lieu of a tort suit just because the taxpayer suffered as work-related injury) . Werthusyrejectathe Zardös' 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 Se_c__tio_n_10_5_Lc_L. Under section 105(a), amounts received by an employee through accident or health insurance for personal injufies or sickness are incluaed 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 - 8- - employer. Amounts received nder an accident or-health plan4efor employees are considered "amounts received through accident or health insurance" for the purposes of section 105. Sec. 105(e). Section 1.105-1(b) 4, Income Tax Regs., expressly includes within the +sc pe of section 105 (a) accident or health plans financed solely by the employer. S ction 105 (c) prov'ides -that gross income .does not include amour t s ref erred to in section 105 (a) to, the extent they: (1) constitute pay ent for the permanent loss or ldss of use of a member or function of p rmanent disfigurementhof the taxpayer, the body, or the * * *.and . (2) are computed w th reference to the nature of t e injury without rega d to the period the employee is a sent - f rom work . For pa ents to be etreated as "computed with reference to the nature of theainjužy"; the payments that the plan.is .obliged to niake must vary according-to the type and severity-of othefinjury. Béisler v. Commissioner, 814 F.2d 1304, 1308 (9th Cir 1987) (en banc), affg. T.C. Memo. 198 -25; Rosen v. United States, 829 F.2d 506, 509 (4th Cir . 1987) ; Hines v. Commissioner, 72 T.C. 715, 720 *Sec. 1.105-5(a), Incone Tax Regs., defines "an accident or healtl plan" as "an arrange hent for the payment of amognts to emplo ees in the event of p rsonal can cover one or more employees and involve dif ferent plans for diffe$ent employees or clas ses of employees. not need,to be .in writing,. And the employee's rights under the plan c o not need to be enfoi-ceable. It is als&ïmmaterial who pays the plan benefits. & Payments can be made by the , emplo er, a separate fund, an association of employërs or emplo ees, or an insurance company. injuries or sickness."; A plan 'The plan does Id'. 'Id. Id. - 9 - (1979). This nature-of-thedinjury 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 disabi-lity 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 sWe 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 bodily member or function under sec. 105(c) (1), or whether Zardo's payments were computed without regard to his absence from wobk under sec. 105(c) (2). other requirements for the sec. 105(c) exclusion, still fail to satisfy the sec. 105(c) (2) nature-of-the-injury requirement. Even if Zardo's benefits met all they would loss of a - 10 - benefiÈs. 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 he UFCW Pension Plan disability retirement benefits are exclúdable 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 ase is appealable to the Ninth Circuit unless the parties stipul te otherwise . -See s c . 7482 (b) . Theref ore , the Beisler majority opinion is binding precedent.' See Campbell v. Commissioner, 134 T.C. 20, 2 n.6 (2010) ("The Tax Court.follows the law of the circuit in wl ich an appeal would lie if that law is on point . " r ( citing Golser v . Commiss ioner , 54 T . C. -742, 757 (1970 ) af f d . - 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. h conclusion, Zardo' s UFCW Pension Plan disability retir ment benefits are, not excludable under section 104 (a) (1) , secti n 104 (a) (2) , or section 105 (c) . We hold that the entire $26,3 5 of benefits received under the UFCW Pension Plan in 200 should be included in the -Z rdos' gross income. n Beisler v. Commiss oner, 814 F.2d 1304, 1308 (9th Cir. (en banc) , affg. T.C. Memo. 1985-25, thes court interpreted to require the payments to vary, according to the 1987) sec. type nd severity of ]05 (c) (2) the injury. To reflect the foregoing, - 11 - Decision will be entered under Rule 155.