Campbell v. Comm'r
| Decision Date | 22 December 2014 |
| Docket Number | T.C. Summary Opinion 2014-109,Docket No. 29222-13S. |
| Parties | KEVIN M. CAMPBELL AND PAMELA J. CAMPBELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Carol Ann Szczepanik, for petitioners.
Nancy P. Klingshirn, for respondent.
GUY, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable byany other court, and this opinion shall not be treated as precedent for any other case.
Respondent determined a deficiency of $2,800 in petitioners' Federal income tax for 2011. Petitioners, husband and wife, filed a timely petition for redetermination with the Court pursuant to section 6213(a). At the time the petition was filed, petitioners resided in Ohio.
The sole issue remaining for decision is whether petitioners may exclude from gross income retirement pay of $9,210 that Mr. Campbell received from the U.S. Coast Guard (Coast Guard) during 2011.2 To the extent not discussed herein, other issues are computational and flow from our decision in this case.
Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference.
Mr. Campbell enlisted in the Coast Guard on July 12, 1987. His military service was cut short in 1990, however, when he was diagnosed with insulin-dependent diabetes mellitus. The Coast Guard concluded that Mr. Campbell's illness rendered him unfit for duty.
At all times relevant to this case, chapter 61 of title 10 of the United States Code established the standards and processes by which the armed forces (including the Coast Guard)3 determine whether a service member may be retired or separated from service because of a medical disability. Generally speaking, a service member found unfit for duty because of a permanent and stable physical disability is eligible to receive retirement pay if the member has at least 20 years of service or his disability is rated at least 30% under the Department of Veterans Affairs standard schedule of rating disabilities (VASRD). See 10 U.S.C. sec. 1201 (2012).4 A service member otherwise entitled to retire permanently under the provisions of 10 U.S.C. sec. 1201, but whose disability is not determined to bepermanent and stable, is eligible to be placed in temporary disability retirement status. See 10 U.S.C. sec. 1202 (2012). A service member in temporary disability retirement status must submit to periodic physical examinations, and a determination whether a particular disability is permanent and stable must be made within five years. See 10 U.S.C. sec. 1210(a) and (b) (2012).
After his diagnosis the Coast Guard evaluated Mr. Campbell and, effective August 5, 1990, placed him in temporary disability retirement status. At the time the Coast Guard assigned Mr. Campbell a VASRD rating of 40%.
By letter dated September 20, 1990, the Coast Guard informed Mr. Campbell that he was entitled to monthly retirement pay equal to the product of his base pay multiplied by his disability rating. See 10 U.S.C. sec. 1401 (2012). The letter further stated that the Coast Guard would withhold Federal income tax from his monthly retirement payments. Mr. Campbell subsequently began to receive monthly retirement pay of $403 (offset by $50 allotted to survivor benefits and $20 for Federal income tax withholding).
From early 1992 through 1995 Mr. Campbell attempted to convince the Coast Guard that his retirement pay was exempt from Federal income tax. During this period he submitted numerous Forms W-4, Employee's Withholding Allowance Certificate, stating that he was exempt from income tax withholding. By letter dated June 18, 1994, Mr. Campbell provided the Coast Guard with a copy of a publication titled "PHYSICAL DISABILITY EVALUATION SYSTEM" which was provided to him by Coast Guard legal counsel at the time of his retirement. The publication stated that Coast Guard disability retirement pay is not taxable. The record does not include any response from the Coast Guard to Mr. Campbell's entreaties, and the Coast Guard continued to withhold Federal income tax from his monthly retirement payments.
By letter dated April 6, 1995, the Coast Guard notified Mr. Campbell that his diabetes qualified as a permanent physical disability, he was unfit for duty, and he would be permanently retired from the Coast Guard effective May 4, 1995. At that time the Coast Guard assigned Mr. Campbell a VASRD rating of 60%, and he retired under the provisions of 10 U.S.C. sec. 1201. His retirement pay was computed by multiplying his base pay by 60% (his disability rating). The CoastGuard again informed Mr. Campbell that his retirement pay was taxable and that it would withhold Federal income tax from his monthly payments.
Mr. Campbell testified that at the time he was permanently retired from the Coast Guard, he contacted the Department of Veterans Affairs (VA), submitted to a physical examination, and received a VA disability rating. He could not recall the percentage of his VA disability rating but remembered that it was less than the disability rating that he received from the Coast Guard. Mr. Campbell was unable to produce any documents from the VA related to his physical examination or disability rating.
Shortly after he was placed in temporary disability retirement status by the Coast Guard, Mr. Campbell was hired by the Cuyahoga County Sheriff's Office as a deputy sheriff. He continued to be employed by the sheriff's office at the time of trial and testified that he was able to perform his duties without any special accommodations.
Over the years, the Coast Guard routinely issued to Mr. Campbell Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reporting that he had received taxable retirement pay. It was Mr. Campbell's practice to provide the Forms 1099-R to his accountant, Ralph DeLuca, who prepared and filed petitioners' tax returns. Mr. DeLuca testified at trial that he routinely reviewed the Forms 1099-R, concluded that the retirement payments were not includable in income, and excluded the payments from petitioners' gross income.
Every few years, the IRS issued to Mr. Campbell a Notice CP-2000 proposing to increase his taxable income by the amount of his Coast Guard retirement pay. Mr. Campbell forwarded the notices to Mr. DeLuca, who would promptly contact the IRS and assert that the retirement pay was exempt from Federal income tax. After this exchange, Mr. Campbell normally received a "No Change" letter from the IRS accepting his tax return as filed.
The record includes a "No Change" letter that the IRS issued to Mr. Campbell for the taxable year 1991. Although the letter invited Mr. Campbell tosubmit an official request for a letter ruling regarding the status of his retirement pay, he failed to do so.
In 2011 Mr. Campbell received Coast Guard retirement pay of $9,210. Petitioners timely filed a joint Federal income tax return for 2011 reporting the retirement pay on line 16a of their return as pension and annuity income, but they excluded that amount from the taxable amount of pension and annuity income reported on line 16b. As previously discussed, respondent issued a notice of deficiency to petitioners determining that Mr. Campbell's retirement pay is required to be included in their gross income.
The Commissioner's determinations in a notice of deficiency are generally presumed correct, and the taxpayer normally bears the burden of proving those determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).5
Section 61(a) provides that gross income means "all income from whatever source derived". Pensions and retirement allowances constitute gross incomeunless excluded by law. Sec. 61(a)(11); sec. 1.61-11(a), Income Tax Regs. Military retirement pay is pension income within the meaning of section 61(a)(11). Wheeler v. Commissioner, 127 T.C. 200, 205 n.11 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008).
It is well established that statutory exclusions from income are narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995). Taxpayers seeking an exclusion from income must demonstrate that they are eligible for the exclusion and "bring themselves within the clear scope of the exclusion." Dobra v. Commissioner, 111 T.C. 339, 349 n.16 (1998).
Section 104(a)(4) provides the general rule that 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 are not included in gross income. Section 104(b)(1) and (2), however, limits the exclusion prescribed in subsection (a)(4), as relevant here, to an individual who "on application therefor * * * would be entitled to receive disability compensation from the Veterans Administration."6 Section 104(b)(4) further provides that if an individual isdescribed in subsection (b)(2), the amount excludable from gross income under subsection (a)(4) for any period "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."7
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