Court Opinion

ID: 4335064
Source: CourtListenerOpinion
Date Created: 2018-11-14 02:01:01.237968+00
Date Added: 2024-06-11T14:46:57.581720
License: Public Domain

123 T.C. No. 13

                UNITED STATES TAX COURT

    WILLIAM D. AND JOYCE M. REIMELS, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9182-02.                Filed August 26, 2004.

    While actively serving in the U.S. Armed Forces in the
Vietnam conflict, H was exposed to Agent Orange and
consequently developed lung cancer. During 1999, H received
Social Security disability insurance benefits on account of
his lung cancer.

    Held: The Social Security disability insurance benefits
that H received in 1999 are includable in Ps’ gross income
under sec. 86, I.R.C., and are not excludable under sec.
104(a)(4), I.R.C. Haar v. Commissioner, 78 T.C. 864, 866
(1982), affd. 709 F.2d 1206 (8th Cir. 1983), followed.

William D. Reimels and Joyce M. Reimels, pro sese.

Linda P. Azmon, for respondent.
                                - 2 -

                               OPINION

     THORNTON, Judge:    Respondent determined a $2,376 deficiency

in petitioners’ 1999 Federal income tax.   After concessions, the

only issue for decision is whether Social Security disability

insurance benefits that Mr. Reimels received in 1999 are

excludable from petitioners’ income under section 104(a)(4).1

Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.    We incorporate herein the stipulated facts.   When

petitioners filed their petition, they resided in Hicksville,

New York.

     From September 25, 1968, to September 1, 1974, Mr. Reimels

served in the U.S. Armed Forces.   He was highly decorated for his

combat service in Vietnam.    While serving there, he was exposed

to Agent Orange, an instrumentality of war.2

     After serving in Vietnam, Mr. Reimels was employed in the

private sector until February 19, 1993, when he was diagnosed

     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the taxable year in issue,
and Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
       Agent Orange is an herbicide and defoliant that was used
widely in the Vietnam conflict. It contains dioxin and has been
shown to possess residual postexposure carcinogenic and
teratogenic properties in humans. PDR Medical Dictionary (2d ed.
2000).
                                - 3 -

with lung cancer.    This illness resulted from his exposure to

Agent Orange during his Vietnam combat service.

     On August 3, 1993, Mr. Reimels applied for disability

insurance benefits with the Social Security Administration,

claiming disability on account of his lung cancer.    On

January 13, 1994, the Social Security Administration determined

that Mr. Reimels was entitled to disability insurance benefits.

     On November 2, 1993, Mr. Reimels applied for service-

connected disability compensation with the Veterans’

Administration.3    On June 15, 1998, the Veterans’ Administration

awarded Mr. Reimels a “100 percent service connected disability”

on the basis of his exposure to Agent Orange and his diagnosis of

lung cancer.

     In 1999, Mr. Reimels received $12,194 in disability

insurance benefits from the Social Security Administration.    He

also received service-connected disability compensation from the

Veterans’ Administration, which petitioners allege totaled $2,246

per month.

     On their 1999 joint Federal income tax return, petitioners

excluded from their gross income Mr. Reimels’s Social Security

     3
       In the Department of Veterans Affairs Codification Act,
Pub. L. 102-83, sec. 301, 105 Stat. 378 (1991), Congress
redesignated the Veterans’ Administration the Department of
Veterans Affairs. For convenience, we refer to the Veterans’
Administration, consistent with the language used in sec. 104.
                               - 4 -

disability insurance benefits as well as the disability

compensation that he received from the Veterans’ Administration.

      By notice of deficiency, respondent determined that Mr.

Reimels’s Social Security disability insurance benefits were

includable in petitioners’ gross income to the extent provided in

section 86.

                            Discussion

I.   Inclusion of Social Security Benefits in Gross Income

      Before 1983, Social Security benefits were excluded from the

recipient’s gross income.   See, e.g., Rev. Rul. 70-217, 1970-1

C.B. 13.   This longstanding practice ended with the enactment of

section 86 as part of the Social Security Amendments of 1983,

Pub. L. 98-21, sec. 121(a), 97 Stat. 80.   The legislative history

indicates that Congress made this change to shore up the solvency

of the Social Security trust funds and to treat “more nearly

equally all forms of retirement and other income that are

designed to replace lost wages”.   S. Rept. 98-23, at 25 (1983),

1983-2 C.B. 326, 328.

      Section 86 requires the inclusion in gross income of up to

85 percent of Social Security benefits received, including Social

Security disability insurance benefits.4   See, e.g., Joseph v.

      4
       Sec. 86(d)(1)(A) defines Social Security benefits to
include any amount received by reason of entitlement to a monthly
benefit under tit. II of the Social Security Act, 42 U.S.C. secs.

                                                    (continued...)
                                - 5 -

Commissioner, T.C. Memo. 2003-19; Thomas v. Commissioner, T.C.

Memo. 2001-120; Maki v. Commissioner, T.C. Memo. 1996-209.

Absent some exception, then, Mr. Reimels’s Social Security

disability insurance benefits are includable in petitioners’

gross income as provided in section 86 and as respondent

determined in the notice of deficiency.    The question is whether

section 104 provides an exception that allows petitioners to

exclude Mr. Reimels’s Social Security disability insurance

benefits from gross income.

II.   Exclusion From Gross Income Under Section 104

      A.   The Parties’ Contentions

      Section 104(a) excludes from gross income certain

compensation for injuries or sickness.    Petitioners rely upon

section 104(a)(4), which excludes from gross income “amounts

received as a pension, annuity, or similar allowance for personal

injuries or sickness resulting from active service in the Armed

Forces of any country”.    Petitioners contend that the

requirements of section 104(a)(4) are met because the Social

Security Administration granted Mr. Reimels’s disability

insurance benefits solely on the basis of his disability, which

resulted from Mr. Reimels’s active service in the U.S. Armed

Forces.

      4
      (...continued)
401-434 (2000); i.e., amounts received as disability insurance
benefits.
                                 - 6 -

     Respondent does not dispute that Mr. Reimels’s Social

Security disability insurance benefits were “received as a

pension, annuity, or similar allowance” within the meaning of

section 104(a)(4); consequently, for present purposes we assume

that they were.5   Nor does respondent dispute that Mr. Reimels

has suffered personal injuries or sickness resulting from active

service in the U.S. Armed Forces.    Instead, relying on Haar v.

Commissioner, 78 T.C. 864, 866 (1982), affd. 709 F.2d 1206 (8th

Cir. 1983), and its progeny, respondent contends that the section

104(a)(4) exclusion is inapplicable because Social Security

disability insurance benefits are not paid for personal injury or

sickness incurred in military service within the meaning of

section 104(a)(4).

     We are unaware of any court decision specifically addressing

the applicability of section 104(a)(4) to Social Security

disability insurance benefits.    As explained below, the well-

established and consistent pattern of decisions in Haar and its

progeny compels the conclusion that the Social Security

disability insurance payments that Mr. Reimels received in 1999

are not excludable from income under section 104(a)(4).

     5
       Sec. 86(f) specifies that “any social security benefit
shall be treated as an amount received as a pension or annuity”
for purposes of certain specified Code sections, not including
sec. 104.
                                  - 7 -

     B.    Haar v. Commissioner

     In Haar v. Commissioner, supra, this Court addressed for the

first time whether payments made by a nonmilitary employer to a

person who retires from service with that employer are excludable

from gross income pursuant to section 104(a)(4).     In Haar, the

taxpayer suffered a hearing loss while serving in the U.S. Air

Force.    For reasons other than disability, he was discharged from

the U.S. Air Force and began working as a civilian employee of

the General Services Administration (GSA).    He later retired from

GSA on account of his hearing disability and began receiving

annuity payments from the Civil Service Retirement and Disability

Fund.6    He sought to exclude these payments from his taxable

income, relying on section 104(a)(4).

     In Haar v. Commissioner, supra at 866, we concluded that

“Although the ambiguous wording of section 104(a)(4) provides

some superficial support” for the taxpayer’s position, this

circumstance was “overshadowed” by the nature of the Civil

Service benefits in question.     We noted that the Civil Service

Retirement Act, 5 U.S.C. sec. 8331 et seq., is not designed to

compensate for military injuries.     Rather, in determining

     6
       In Haar v. Commissioner, 78 T.C. 864 (1982), affd. 709
F.2d 1206 (8th Cir. 1983), the taxpayer also applied for
disability compensation from the Veterans’ Administration.
Although the Veterans’ Administration determined that the
taxpayer had defective hearing that was service connected, it
concluded that the taxpayer’s injury was not disabling to a
compensable degree.
                               - 8 -

eligibility for Civil Service disability benefits, the nature or

cause of the disability is irrelevant; the only consideration is

the employee’s ability to perform his or her job.   We concluded:

          Because disability payments under the Civil
     Service Retirement Act are not paid for personal
     injuries or sickness incurred in military service, we
     conclude that section 104(a)(4) did not entitle
     petitioner to exclude the disability payments he
     received in the years in issue. [Id. at 867.]

    In the 20-plus years since this Court decided Haar, we have

consistently followed it in numerous cases addressing whether

benefit payments under Civil Service and public employee

disability plans were eligible for exclusion under section

104(a)(4).   See, e.g., Jeanmarie v. Commissioner, T.C. Memo.

2003-337 (holding that Civil Service Retirement System disability

benefits were not excludable); Kiourtsis v. Commissioner, T.C.

Memo. 1996-534 (holding that disability retirement income

received from New York City Employees’ Retirement System was not

excludable); French v. Commissioner, T.C. Memo. 1991-417 (holding

that Civil Service annuity payments from U.S. Postal Service were

not excludable); Grady v. Commissioner, T.C. Memo. 1989-55

(holding that disability pension received from Civil Service

Retirement and Disability Fund was not excludable); Tolotti v.

Commissioner, T.C. Memo. 1987-13 (holding that Civil Service

disability retirement payments from U.S. Office of Personnel

Management were not excludable); Lonestar v. Commissioner, T.C.
                               - 9 -

Memo. 1984-80 (holding that civilian service disability pay

received from Department of the Navy was not excludable).

     C.   Applicability of Section 104(a)(4) Exclusion to Social
          Security Disability Insurance Benefits

     Like the Civil Service and public employee disability

benefits considered in Haar v. Commissioner, supra, and its

progeny, Social Security disability insurance benefits do not

take into consideration the nature or cause of the disability.

Social Security disability insurance benefits are provided in

title II of the Social Security Act (SSA), 42 U.S.C. secs. 401-

434 (2000).   Title II provides disability insurance benefits to

every individual who is insured for disability insurance

benefits, has not attained retirement age, has filed an

application for disability insurance benefits, and is under a

disability.   42 U.S.C. sec. 423(a)(1); see Cleveland v. Policy

Mgmt. Sys. Corp., 526 U.S. 795, 801 (1999).7   For purposes of

determining eligibility for disability insurance benefits, the

Social Security Act gives no consideration to whether the

disability arose from service in the Armed Forces or was

     7
       Social Security disability insurance is contributory and
is designed to prevent public dependency by protecting workers
and their families against common economic hazards. Mathews v.
de Castro, 429 U.S. 181, 185-186 (1976). Its primary objective
is to provide workers and their families with basic protection
against hardships created by loss of earnings due to illness or
old age; the disability insurance provisions are not general
public assistance laws and are not need based. Id.; see also
Sciarotta v. Bowen, 735 F. Supp. 148, 151 (D.N.J. 1989).
                              - 10 -

attributable to combat-related injuries.   See 42 U.S.C. sec.

423(d)(1).8   Insured status for purposes of Social Security

disability insurance benefits is determined on the basis of the

individual’s prior work record and not on the cause of his

disability.   See, e.g., 42 U.S.C. sec. 423(c); 20 C.F.R. secs.

404.101-404.146 (2003).   Moreover, the amount of Social Security

disability payments is computed under a formula that does not

consider the nature or extent of the injury.9   Consequently,

under the reasoning of Haar v. Commissioner, 78 T.C. 864 (1982),

     8
        Eligibility for Social Security disability insurance
benefits is conditioned on the existence of a “disability”, which
is defined as an “inability to engage in any substantial gainful
activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous
period of not less than 12 months”. 42 U.S.C. sec. 423(d)(1).
For this purpose, the beneficiary’s impairment must be:

     of such severity that he is not only unable to do his
     previous work but cannot, considering his age,
     education, and work experience, engage in any other
     kind of substantial gainful work which exists in the
     national economy, regardless of whether such work
     exists in the immediate area in which he lives, or
     whether a specific job vacancy exists for him, or
     whether he would be hired if he applied for work.
     [42 U.S.C. sec. 423(d)(2)(A).]

     9
       The monthly Social Security disability insurance benefit
is equal to the “primary insurance amount”. 42 U.S.C. sec.
423(a)(2); 20 C.F.R. secs. 404.201(a), 404.317 (2003). The
primary insurance amount is computed primarily under one of two
major methods, the average-indexed-monthly-earnings method or the
average-monthly-wages method, both of which are based on the
beneficiary’s earnings record. See 20 C.F.R. secs. 404.204,
404.210-404.212, 404.220-404.222 (2003).
                              - 11 -

and its progeny, Mr. Reimels’s Social Security disability

insurance benefits were not paid for personal injuries or

sickness resulting from military service within the meaning of

section 104(a)(4).   Accordingly, these Social Security disability

insurance benefits, which are expressly includable in income to

the extent provided under section 86, are not eligible for

exclusion under section 104(a)(4).

     D.   Petitioners’ Argument To Distinguish Haar v.
          Commissioner

     Petitioners argue that Haar is distinguishable in that the

taxpayer in Haar had been denied disability compensation from the

Veterans’ Administration, whereas the Veterans’ Administration

awarded Mr. Reimels a 100-percent service-connected disability.

This Court has previously concluded, however, that Haar cannot be

fairly distinguished on such grounds.   As we stated in Kiourtsis

v. Commissioner, supra:

          Contrary to petitioner’s assertions, the key to
     the holding of Haar and its progeny is not whether the
     taxpayer received disability compensation from the
     Veterans Administration or whether there was a specific
     finding that the disability was service-related. Haar
     looked to the retirement plan under the Civil Service
     Retirement Act, and determined that it was “not
     designed to provide compensation for military
     injuries.” * * *

Similarly, as just discussed, disability insurance benefits

under the Social Security Act are not designed to provide

compensation for military injuries.
                              - 12 -

     E.   Petitioners’ Argument To Overturn Haar

     Petitioners suggest that Haar was wrongly decided and that

we should no longer follow it.    Petitioners contend that section

104(a)(4) contains no express requirement that a disability

pension be received under a statute designed to compensate for

military injuries.   They contend that under the literal language

of section 104(a)(4) it is sufficient that Mr. Reimels received

his Social Security disability insurance benefits on account of a

disability resulting from combat-related injuries.

     In support of their contentions, petitioners rely upon

Freeman v. United States, 265 F.2d 66 (9th Cir. 1959), and Prince

v. United States, 127 Ct. Cl. 612, 119 F. Supp. 421 (1954).

Petitioners’ reliance on these cases is misplaced.    Freeman and

Prince involved military compensation statutes that were

designed, at least in part, to compensate for injuries incurred

during, or as an incident of, active military service.   In each

case, the court linked the taxpayer’s injuries to that portion of

the retirement statute that awarded benefits for service-

connected disabilities.

     The instant case, like Haar and its progeny, and unlike

Freeman and Prince, does not involve benefits received under

military compensation statutes.   Relevant legislative history

supports the view that only pensions, annuities, or similar

allowances that are received under what are essentially military
                                   - 13 -

disability compensation statutes qualify for exclusion under

section 104(a)(4).10       Specifically, in 1976, responding to

perceived abuses of the section 104(a)(4) exclusion, Congress

acted to severely restrict its availability.       As stated in the

legislative history to the 1976 amendments of section 104:

     Military personnel can exclude from income pensions for
     personal injuries or sickness paid by the Department of
     Defense (as well as all Veterans Administration
     disability compensation).

                *      *      *    *    *    *    *

          The House bill * * * eliminates the exclusion for
     non-combat related disability pensions for those who
     joined the armed forces after September 24, 1975, but
     continues the exemption for V.A. disability
     compensation or an equivalent amount paid by the
     Department of Defense. * * * [S. Conf. Rept. 94-1236,
     at 432 (1976), 1976-3 C.B. (Vol. 3) 807, 836; emphasis
     added.]

     As a general principle, provisions granting special tax

exemptions are to be strictly and narrowly construed.       See

Commissioner v. Schleier, 515 U.S. 323, 328 (1995); Helvering v.

Northwest Steel Rolling Mills, Inc., 311 U.S. 46, 49 (1940).          We

believe this general principle has particular cogency in the

instant case:   as previously discussed, in 1983 Congress reversed

     10
       One example of a disability compensation statute that is
designed, at least in part, to compensate individuals for
military injuries, is 10 U.S.C. sec. 1201 (2000). Under this
provision, military disability retirement pay is available for,
among other things, a disability that is the proximate result of
performing active duty, a disability that was incurred in the
line of duty in time of war or national emergency, or a
disability that was incurred in the line of duty after Sept. 14,
1978.
                              - 14 -

prior tax-free treatment of Social Security benefits by mandating

that all Social Security benefits, including disability insurance

benefits, be at least partially includable in gross income.    In

making this change, Congress gave no indication that it intended

to allow an exception under section 104 or otherwise.   Indeed, to

allow an exception under section 104 for Social Security

disability insurance benefits would appear incongruous with the

stated purpose of section 86 to treat “more nearly equally all

forms of retirement and other income that are designed to replace

lost wages”.   S. Rept. 98-23, supra at 25-26, 1983-2 C.B. at 328.

     This Court decided Haar v. Commissioner, 78 T.C. 864 (1982),

over 20 years ago.   On numerous occasions since, Congress has

amended section 104 in various respects.11   At no time has

Congress sought to overturn Haar or to clarify the scope of the

section 104(a)(4) exclusion in light of Haar.   “[P]rolonged

     11
       See Victims of Terrorism Tax Relief Act of 2001, Pub. L.
107-134, sec. 113(a), 115 Stat. 2435 (2002) (amending sec.
104(a)(5) as relates to terrorist attacks); Taxpayer Relief Act
of 1997, Pub. L. 105-34, sec. 1529, 111 Stat. 1075 (creating
personal injury presumption for heart disease and hypertension of
former police officers and firefighters for purposes of sec.
104(a)(1)) (amended by Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. 105-206, sec. 6015(c)(1), 112 Stat.
821); Small Business Job Protection Act of 1996, Pub. L. 104-188,
sec. 1605(a), 110 Stat. 1838 (restricting sec. 104(a)(2) to
personal physical injuries and sickness); Omnibus Budget
Reconciliation Act of 1989, Pub. L. 101-239, sec. 7641(a), 103
Stat. 2379 (making sec. 104(a)(2) inapplicable with respect to
punitive damages in connection with a case not involving physical
injury or physical sickness); Act of Jan. 14, 1983, Pub. L. 97-
473, sec. 101(a), 96 Stat. 2605 (amending sec. 104(a)(2) with
respect to amounts received by suit or agreement).
                               - 15 -

congressional silence in response to a settled interpretation of

a federal statute provides powerful support for maintaining the

status quo.   In statutory matters, judicial restraint strongly

counsels waiting for Congress to take the initiative in modifying

rules on which judges and litigants have relied.”    Hibbs v. Winn,

542 U.S. ___, ___, 124 S. Ct. 2276, 2296 (2004) (Stevens, J.,

concurring); see Commissioner v. Noel’s Estate, 380 U.S. 678,

680-681 (1965).

     This Court’s decision in Haar is consistent with the

Commissioner’s longstanding administrative position in Rev. Rul.

77-318, 1977-2 C.B. 45, that section 104(a)(4) does not apply to

a pension, annuity, or similar allowance received on account of

active service in a government organization other than the U.S.

Armed Forces.12   This Court’s decision in Haar was affirmed by

the Court of Appeals for the Eighth Circuit; no court has

expressly rejected it.   As previously discussed, this Court has

consistently followed Haar and has applied its reasoning in many

cases.    The principle of stare decisis strongly counsels against

our now undertaking to reexamine the well-settled pattern of

decision that has evolved in this Court and at least one Court of

Appeals, consistent with longstanding administrative guidance.

     12
       Rev. Rul. 77-318, 1977-2 C.B. 45, holds that an
individual may not exclude from gross income Civil Service
payments received for a disability retirement occasioned by
injuries sustained during active military service.
                                - 16 -

Acknowledging that petitioners’ position is not without force or

appeal, we feel compelled to conclude that any impetus for change

should come from the legislature, rather than this Court.

     For these reasons, and adhering to this Court’s reasoning in

Haar and its progeny, we conclude that because Mr. Reimels’s

Social Security disability insurance benefits were not paid as

compensation for military injuries or sickness, they are not

excludable under section 104(a)(4).

     F.   Petitioners’ Alternate Contentions

          1.    Section 104(b)(2)

     Petitioners make what appear to be alternate contentions on

the basis of the section 104(b)(2) limitations to section

104(a)(4).     Essentially, petitioners contend that because Mr.

Reimels meets one or several of the requirements in section

104(b)(2), petitioners are entitled to exclude Mr. Reimels’s

Social Security disability insurance benefits.

     Congress enacted section 104(b) to curb perceived abuses.13

     13
       The relevant legislative history explains the reasons for
the 1976 amendments as follows:

     In many cases, armed forces personnel have been
     classified as disabled for military service shortly
     before they would have become eligible for retirement
     principally to obtain the benefits of the special tax
     exclusion on the disability portion of their retirement
     pay. In most of these cases the individuals, having
     retired from the military, earn income from other
                                                   (continued...)
                             - 17 -

Section 104(b)(1) provides that the exclusion under section

104(a)(4) is restricted to the classes of individuals described

in section 104(b)(2), as follows:

          (2) Individuals to whom subsection (a)(4)
     continues to apply.--An individual is described in this
     paragraph if--

               (A) on or before September 24, 1975, he was
          entitled to receive any amount described in
          subsection (a)(4),

               (B) on September 24, 1975, he was a member of
          any organization (or reserve component thereof)
          referred to in subsection (a)(4) or under a
          binding written commitment to become such a
          member,

               (C) he receives an amount described in
          subsection (a)(4) by reason of a combat-related
          injury, or

               (D) on application therefor, he would be
          entitled to receive disability compensation from
          the Veterans’ Administration.

For purposes of section 104(b)(2)(C), the term “combat-related

injury” means personal injury or sickness which is:   (1) Incurred

as a direct result of armed conflict, engagement in extra

hazardous service, or under conditions simulating war; or (2)

caused by an instrumentality of war.   Sec. 104(b)(3).14

     13
      (...continued)
     employment while receiving tax-free “disability”
     payments from the military. * * * [H. Rept. 94-658, at
     152 (1975), 1976-3 C.B. (Vol. 2) 695, 844.]
     14
       Sec. 104(b)(3) also provides that “In the case of an
individual who is not described in subparagraph (A) or (B) of
paragraph (2), except as provided in paragraph (4), the only
                                                   (continued...)
                              - 18 -

     Petitioners argue that the Social Security disability

insurance benefits Mr. Reimels received in 1999 are excludable

under section 104(b)(2)(C) because they are part of a disability

pension for his combat-related injury resulting from his exposure

to Agent Orange.   Petitioners also argue that the Social Security

disability insurance benefits are excludable under section

104(b)(2)(D) because Mr. Reimels is entitled to receive

disability compensation from the Veterans’ Administration.   We

disagree.

     Section 104(b)(2) provides no independent basis for

exclusion.   Instead, consistent with express legislative intent,

it limits the classes of persons who otherwise might be eligible

for the section 104(a)(4) exclusion.   Thus, regardless of whether

Mr. Reimels’s disability arose from combat-related injuries while

he was serving in the U.S. Armed Forces, the payments in question

must meet the requirements for exclusion under section 104(a)(4).

For the reasons discussed above, Mr. Reimels’s Social Security

disability insurance benefits do not meet those requirements.15

     14
      (...continued)
amounts taken into account under subsection (a)(4) shall be the
amounts which he receives by reason of a combat-related injury.”
     15
       Moreover, as previously discussed, the fact that Mr.
Reimels received disability compensation from the Veterans’
Administration does not distinguish Haar v. Commissioner, 78 T.C.
864 (1982), and does not entitle Mr. Reimels to an exclusion
under sec. 104(a)(4). See Kiourtsis v. Commissioner, T.C. Memo.
1996-534.
                              - 19 -

          2.   Section 104(b)(4)

     Finally, petitioners rely on section 104(b)(4), which

provides that in the case of an individual described in section

104(b)(2) (i.e., an individual who is in one of the classes of

persons who remain eligible for the section 104(a)(4) exclusion)

the amounts excludable under section 104(a)(4) “shall not be less

than the maximum amount which such individual, on application

therefor, would be entitled to receive as disability compensation

from the Veterans’ Administration.”16   On the basis of this

     16
       The Veterans’ Administration provides compensation for
service-connected disability. See 38 U.S.C. sec. 1110 (2000)
(providing compensation for disability resulting from personal
injury suffered or disease contracted in line of duty, or for
aggravation of a preexisting injury suffered or disease
contracted in line of duty, in the active military, naval, or air
service, during a period of war); id. sec. 1131 (providing
compensation for disability resulting from personal injury
suffered or disease contracted in line of duty, or for
aggravation of a preexisting injury suffered or disease
contracted in line of duty, in the active military, naval, or air
service, during other than a period of war); see also Sidoran v.
Commissioner, 640 F.2d 231, 233 (9th Cir. 1981) (“The Veterans
Administration’s disability benefits program is intended to
compensate a veteran for impairment resulting from service-
connected injuries.”), affg. T.C. Memo. 1979-56. In general,
monthly compensation for service-connected disability is paid on
the basis of a rating of the claimant’s disability, which is in
turn based on a schedule of ratings of reductions in earning
capacity from specific injuries or combination of injuries. See,
e.g., 38 U.S.C. secs. 1114, 1134, 1155 (2000); 38 C.F.R. secs.
4.1-4.150 (2003).

     Payments of Veterans’ Administration benefits are tax
exempt. 38 U.S.C. sec. 5301 (2000); Porter v. Aetna Cas. & Sur.
Co., 370 U.S. 159, 160 (1962) (“Since 1873, it has been the
policy of the Congress to exempt veterans’ benefits from creditor
actions as well as from taxation.”).
                               - 20 -

provision, petitioners argue that the amount of Social Security

disability insurance benefits to be excluded shall not be less

than the disability compensation that Mr. Reimels received in

1999 from the Veterans’ Administration.    Petitioners contend that

because the Social Security disability insurance benefits

Mr. Reimels received in 1999 were less than his Veterans’

Administration disability compensation, they are entitled to

exclude the entire amount of Social Security disability insurance

benefits received.    We disagree for the following reasons.

     First, subsection (b)(4) of section 104, like just-discussed

subsection (b)(2), provides no independent basis for exclusion:

for petitioners to be eligible for the claimed exclusion, they

must meet the requirements of section 104(a)(4).    See Grady v.

Commissioner, T.C. Memo. 1989-55.    We have held that the Social

Security disability insurance benefits in question do not meet

those requirements.

     Second, although section 104(b)(4) is not a model of

clarity, its legislative history suggests that it was intended to

apply with respect to retired military personnel who do not

receive the Veterans’ Administration benefits to which they are

otherwise entitled.    In certain circumstances, section 104(b)(4)

provides such persons with a tax benefit at least as great as the
                                - 21 -

tax exemption that would have been available for the forgone

Veterans’ Administration benefits.17

     Mr. Reimels received his entitlement to full disability

benefits from the Veterans’ Administration.    The parties agree

that these benefits are exempt from taxation.    There is no

indication that Congress intended section 104(b)(4) effectively

to provide a second, duplicate tax exclusion with respect to

amounts of excludable Veterans’ Administration benefits that the

taxpayer has actually received.    See Kiourtsis v. Commissioner,

T.C. Memo. 1996-534.

     17
          The legislative history to sec. 104(b)(4) states:

          At all times, Veterans’ Administration disability
     payments will continue to be excluded from gross
     income. In addition, even if a future serviceman who
     retires does not receive his disability benefits from
     the Veterans’ Administration, he will still be allowed
     to exclude from his gross income an amount equal to the
     benefits he could receive from the Veterans’
     Administration. Otherwise, future members of the armed
     forces will be allowed to exclude military disability
     retirement payments from their gross income only if the
     payments are directly related to “combat injuries.”
     * * * [S. Rept. 94-938, at 139 (1976), 1976-3 C.B.
     (Vol. 3) 49, 177.]

     In other words, a retired serviceman ordinarily would be
unable to exclude benefit payments received for a non-combat-
related injury. See sec. 104(b)(2)(C) and (3). If such benefit
payments otherwise meet the requirements of sec. 104(a)(4),
however, sec. 104(b)(4) would allow the serviceman to exclude at
least as much of the payments as equals any Veterans’
Administration benefits which the serviceman would have been
entitled to, but did not, receive.
                             - 22 -

III. Conclusion

     We hold that the Social Security disability insurance

benefits Mr. Reimels received in 1999 are not excludable from

gross income under section 104(a)(4).   Accordingly, these

benefits are includable in gross income to the extent provided in

section 86.

                                              Decision will be

                                         entered under Rule 155.