Wallace v. Comm'r of Internal Revenue

• Citation: 128 T.C. 132,128 T.C. No. 11
• Decision Date: 16 April 2007
• Docket Number: No. 4637–03.,4637–03.
• Parties: Roosevelt WALLACE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

128 T.C. 132

128 T.C. No. 11

Roosevelt WALLACE, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 4637–03.

United States Tax Court.

April 16, 2007.

P participated in a compensated work therapy program administered by the U.S. Department of Veterans Affairs (VA) and, on account thereof, received a distribution of $16,393 from the VA Special Therapeutic and Rehabilitation Activities Fund. R increased P's gross income by that amount on the ground that the distribution is a payment for services. P claims that the distribution is a tax-exempt veterans' benefit pursuant to I.R.C. sec. 139(a)(3) and 38 U.S.C. sec. 5301 (2000).

Held: The distribution is a tax-exempt veterans' benefit.

Thomas Stylianos, Jr., for petitioner.

Nina P. Ching, for respondent.

OPINION

HALPERN, Judge.

Respondent determined a deficiency of $2,460 in petitioner's 2000 Federal income tax. The sole issue for decision is whether $16,393 received by petitioner during 2000 in connection with his participation in a work therapy program administered by the U.S. Department of Veterans Affairs (VA) is includable in his gross income for 2000. We hold that it is not.

Unless otherwise stated, all section references are to the Internal Revenue Code in effect for 2000.

Background

Introduction

This case was submitted for decision without trial pursuant to Rule 122, Tax Court Rules of Practice and Procedure. Facts stipulated by the parties are so found. The stipulation of facts filed by the parties, with attached exhibits, is included herein by this reference.

Residence

At the time the petition was filed, petitioner resided in Lowell, Massachusetts.

Participation in Compensated Work Therapy

During 2000, pursuant to a physician's prescription, petitioner participated in (and completed) a VA-administered therapeutic and rehabilitative work program. As part of his participation in that program, petitioner undertook compensated work therapy. As part of that therapy, he was assigned to the Veterans Construction Team. As a team member, he worked in the facilities department of Middlesex Community College, in Lowell, Massachusetts. His work included sweeping floors and moving offices. During 2000, petitioner received from the VA $16,393 for services he provided as a part of his compensated work therapy.

The Compensated Work Therapy Program

The VA administers therapeutic and rehabilitative activities under its Compensated Work Therapy (CWT) program (sometimes just the program). Many aspects of the program are described in a staff manual, the CWT Veterans Employment Resources Staff Program Manual (the manual), prepared by staff at Edith Nourse Rogers Memorial Veterans Medical Center, Bedford, Massachusetts. The following description of the program is drawn from the manual.

The program provides assistance to veterans unable to work and support themselves. Many of the veterans in the program have histories of one or more conditions such as psychiatric illness, substance abuse, and homelessness. Under the program, the VA provides a range of vocational rehabilitation services, with the degree of structure and level of support provided to the participating veteran geared to his or her needs. The goal of the program is to assist participants in attaining independence and vocational functioning as they return to the work environment.

The most structure and support is provided to participants at lower levels of psychosocial functioning, such as participants experiencing chronic physical or psychiatric disabilities that prevent them from sustaining regular employment. Those participants are given work within a workshop or other hospital-based setting and work between 4 and 30 hours a week at simple tasks.

Participants capable of working outside of a hospital, in community settings, such as Federal agencies and private businesses, but not prepared to take on full-time employment, or struggling with frequent substance abuse relapses, participate in a day labor pool, where work appropriate to the participants' levels of commitment and ability is provided.

Participants able to commit to continuous full-time community-based employment, and who demonstrate appropriate work ethics and behavior, can be assigned to a range of activities, such as administrative support, data entry, landscaping, accounting, and construction. A participant at this level interested in, or with experience in, the construction trades, may be assigned to the Veterans Construction Team. Members of the Veterans Construction Team are assigned to construction projects both inside and outside the VA hospital system.

Participants capable of transitioning to competitive employment are provided individual placement and support services that are necessary to obtain and keep competitively obtained employment.

The manual provides the following summary about what is therapeutic about compensated work therapy: “In sum, the social system that is inherent in the work-setting[ ] can be a major restorative feature that fosters the development of the relationships, work ethics, and skills needed to function optimally in society.”

38 U.S.C. Section 1718 (2000)

The parties agree that, during 2000, the CWT program was operated pursuant to 38 U.S.C. section 1718 (2000) (when discussed, rather than cited, “section 1718”, with all references to the year 2000). Title 38 of the United States Code (title 38) is concerned with veterans' benefits. Section 1718 is entitled “Therapeutic and rehabilitative activities”. Among other things, section 1718 authorizes the Secretary to enter into contracts with third parties to provide therapeutic work for patients in VA health care facilities. 38 U.S.C. sec. 1718(b)(1) and (2). Section 1718(c)(1) establishes a fund, the “Department of Veterans Affairs Special Therapeutic and Rehabilitation Activities Fund” (VA Special Therapeutic and Rehabilitation Activities Fund), from which distributions are to be made to patients for therapeutic work, “at rates not less than the wage rates specified in the Fair Labor Standards Act (29 U.S.C. 201 et seq.) and the regulations prescribed thereunder for work of similar character.” 38 U.S.C. sec. 1718 (c)(2).

Section 1718(f)(3) provides that, for purposes of 38 U.S.C. chapter 15, a distribution to a patient from the VA Special Therapeutic and Rehabilitation Activities Fund is to be considered a donation from a public or private relief or welfare organization.¹

The complete text of section 1718 is set forth in an appendix to this report.

The Notice of Deficiency

The principal adjustment giving rise to the deficiency determined by respondent is his addition of $16,393 to the amount of gross income reported by petitioner for 2000. That adjustment is explained as reflecting information reported by the VA to the Internal Revenue Service (IRS) on an IRS Form 1099–MISC.

Discussion

I. Introduction

The starting point in determining a taxpayer's Federal income tax liability for any taxable year is the computation of gross income. The term “gross income” is defined in section 61. Compensation for services is includable in gross income unless excluded by law. See sec. 61(a)(1); sec. 1.61–2(a)(1), Income Tax Regs. The parties have stipulated (and we have found accordingly) that, during 2000, petitioner received $16,393 for his services provided under a VA CWT program. Petitioner argues that the receipt is excluded by law from his gross income because it constitutes payment of a tax-exempt veterans' benefit. Respondent disagrees, arguing that it constitutes compensation for petitioner's services.

II. Bases of Parties' ArgumentsA. Petitioner's Argument

Petitioner relies on 38 U.S.C. section 5301(a) (2000). As stated, title 38 is concerned with veterans' benefits. Section 5301 thereof is entitled “Nonassignability and exempt status of benefits”. In pertinent part, 38 U.S.C. section 5301(a) (2000) provides: “Payments of benefits due or to become due under any law administered by the Secretary [of Veterans Affairs] * * * made to, or on account of, a beneficiary shall be exempt from taxation”. That exemption is cross-referenced in the Internal Revenue Code, section 139(a)(3), as an exemption from income with respect to veterans' benefits.

Petitioner also relies on Rev. Rul. 72–605, 1972–2 C.B. 35, wherein the Commissioner ruled with respect to the almost identical language in a predecessor version of 38 U.S.C. section 5301 (2000): “[P]ayments of benefits under any law administered by the Veterans' Administration are excludable from the gross income of a recipient under section 61 of the Code.”

B. Respondent's Argument

Respondent does not dispute that petitioner participated in the CWT program for therapeutic reasons, or that, because he participated in the program, he received a distribution of $16,393 from of the VA Special Therapeutic and Rehabilitation Fund. Respondent argues that petitioner overstates his case when he argues that money is a benefit and, by that fact alone, is exempt from taxation to petitioner under the general exemption for veterans' benefits found in section 5301 of title 38. Respondent adds: “The monies paid to the petitioner for his participation in the program are unlike those payments made to taxpayers under legislatively-provided-social-welfare-benefit programs, which are excludable from gross income.”

In support of that argument, respondent refers us to a set of his revenue rulings exemplifying payments excludable from gross income not pursuant to the provision of any statute but pursuant to the Commissioner's policy to exclude from income most Government benefits and other welfare payments. That set of revenue rulings comprises Rev. Rul. 63–136, 1963–2 C.B. 19 (benefit payments made to individuals undergoing employment training or retraining under certain Federal acts dealing with unemployment and underemployment), Rev. Rul. 57–102, 1957–1 C.B. 26 (payments to the blind), Rev. Rul. 74–74, 1974–1 C.B. 18 (awards to crime...