Craft v. US

• Decision Date: 20 March 1995
• Docket Number: No. IP 93-776-C.,IP 93-776-C.
• Parties: Dale CRAFT, Rudolph Hamblin, and Richard Block, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of Indiana

879 F. Supp. 925

Dale CRAFT, Rudolph Hamblin, and Richard Block, Plaintiffs, v. UNITED STATES of America, Defendant.

No. IP 93-776-C.

United States District Court, S.D. Indiana, Indianapolis Division.

March 20, 1995.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Patrick J. Bennett, Bennett & Sheff, Lance Wittry, Indianapolis, IN, for plaintiffs.

Samuel D. Brooks, Trial Atty., Tax Div. U.S. Dept. of Justice, Washington, DC, Jeffrey L. Hunter, Asst. U.S. Atty., Office of the U.S. Atty., Indianapolis, IN, for defendant.

ORDER ON SUMMARY JUDGMENT

McKINNEY, District Judge.

This cause comes before the Court on cross-motions for summary judgment filed by the plaintiffs, Dale Craft, Rudolph Hamblin and William Block, and by the United States. For the reasons provided below, the Plaintiffs' motion for summary judgment is DENIED, and the motion for summary judgment filed by the United States is GRANTED.

I. FACTUAL & PROCEDURAL BACKGROUND

The facts of this case are mostly undisputed. Plaintiffs, Dale Craft ("Craft"), Rudolph Hamblin ("Hamblin"), and William Block ("Block") (collectively the "Officers"), are former officers of the Indiana State Police Department ("ISPD"). Compl. ¶¶ 18, 5, 30; Ans. ¶¶ 18, 5, 30. Craft became employed with ISPD in 1955. He was injured on January 27, 1963, in an automobile accident that occurred while he was performing his police duties; he continued to work until he was placed on full "line of duty" disability as a result of his injuries on October 5, 1971. Compl. ¶¶ 5, 6, 8; Ans. ¶¶ 5, 6, 8.

Hamblin began working for the ISPD in 1966, but was placed on full line of duty disability on August 21, 1984, after he was determined to be without the necessary physical and mental health to perform his assigned duties. Compl. 30, 31; Ans. 30, 31. Block began working for the ISPD in 1956. During the performance of his police duties on December 13, 1966, he became injured while assisting persons at the scene of an automobile accident. Compl. ¶¶ 18, 19; Ans. ¶¶ 18, 19. He continued working until May 5, 1977, when he was placed on full line of duty disability. Compl. ¶ 20; Ans. ¶ 20.

The Officers each filed a Federal Income Tax Form 1040 for the three years preceding their requests to the Internal Revenue Service ("IRS") for tax refunds.¹ The Officers claim, and the United States does not dispute, that they paid income tax on the full amount of the line of duty disability benefits they received for each of the years in question. Craft and Hamblin requested a refund of those taxes in 1990, and Block requested a refund in 1991.² Compl. ¶¶ 16, 21, 23, 3, 9, 10, 28, 29, 32, 33; Ans. 16, 21, 23, 3, 9, 10, 28, 29, 32, 33; Def's Ex. A and Ex. B. Each Officer subsequently had his request for a refund denied by the IRS. Pls' Ex. H, Ex. I, Ex. J; Compl. ¶¶ 9, 21, 33; Ans. ¶¶ 9, 21, 33. In addition, the Officers claim to have made contributions to the Employee Insurance Fund (a fund established exclusively by employee contributions), the name of which has been changed to the Employee Death and Disability Fund as reflected in the 1991 revised Pension Trust Agreement and Supplemental Agreement. See Def's Ex. D; Pls' Ex. G and K. Those contributions, however, have not been clearly identified as contributions to that exclusively employee-generated plan. William C. Krueger, who signed a letter on ISPD letterhead above the title, "Acting Commander, Pension Benefits Section," merely stated that the Officers made contributions as of certain dates, and specified the amounts of those contributions.³See Pls' Ex. G (Letter dated March 3, 1992 from Krueger).

On June 17, 1993, the Officers filed their complaint in this Court, seeking a refund of the taxes they paid on the alternative grounds that the disability benefits at issue are in the nature of worker's compensation, or they are health or accident insurance benefits from a fund to which each officer had made prior contributions. Compl. ¶¶ 12, 25. In their prayer for relief each officer demands judgment in the amount of the alleged tax overpayment, interest as allowed by law, and attorneys' fees and costs.

The United States moved this Court for summary judgment on September 12, 1994, after which the Officers likewise moved for summary judgment in their favor on October 11, 1994. The issues have been fully briefed and are now ready for resolution.

II. STANDARDS

Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Although a party bringing a motion for summary judgment must demonstrate that there is no genuine issue of fact for trial, if that burden is met, the party opposing the motion must come forward with evidence of a genuine factual dispute. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). Mere conclusory assertions, whether made in pleadings or affidavits, are not sufficient to defeat a proper motion for summary judgment. First Commodity Traders, Inc. v. Heinold Commodities, Inc., 766 F.2d 1007, 1011 (7th Cir.1985).

From the Supreme Court's 1986 trilogy of decisions on summary judgment, see Celotex Corp., 477 U.S. 317, 106 S.Ct. 2548; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986); and Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986), it is clear that entry of summary judgment is mandatory when the requirements of Rule 56 are met. See Herman v. City of Chicago, 870 F.2d 400, 404 (7th Cir.1989); Spellman v. Commissioner, 845 F.2d 148, 152 (7th Cir. 1988). When, as here, the parties both claim the absence of genuine issues of material fact, and both sides agree to essentially the same facts, the court is obliged to apply the facts to the law and determine which party is entitled to judgment as a matter of law.

III. DISCUSSION

The United States raises three main issues in their motion for summary judgment. The first issue, whether the tax refund claims for the years of 1986 for Craft, and 1987 for Block and Hamblin are barred by the limitations period for bringing such claims pursuant to the Internal Revenue Code ("IRC"), has been mooted by the Officers' response to the Defendant's motion.⁴ Because the Officers have conceded that their claims for those years are barred, the Court will not address this statute of limitations defense.

Second, the United States argues that the Officers' disability benefit payments are not excludable from gross income pursuant to IRC § 104(a)(1), because said payments were not made pursuant to a workers compensation act or a statute in the nature of a workers compensation act.⁵ This exclusion in the IRC has been strictly construed, to comport with the general rule that all income is taxable unless it is specifically excluded. See Kane v. United States, 43 F.3d 1446, 1449, 1451 (Fed.Cir.1994); Nielsen v. United States, 820 F.Supp. 484 (N.D.Cal.1993), vac'd on other grounds, 17 F.3d 395 (9th Cir.1994); Smelley v. United States, 806 F.Supp. 932, 935 (N.D.Ala.1992) aff'd per curiam, 3 F.3d 389 (11th Cir.1993); Givens v. Commissioner of Internal Revenue, 90 T.C. 1145, 1151, 1988 WL 59902 (Tax Ct.1988). According to the United States, the Indiana statute pursuant to which the Officers were paid is not in the nature of a worker's compensation act because it does not require a causal nexus between the disability and an officer's work activities.

Finally, the United States argues that exclusion pursuant to § 105 of the IRC does not apply to the disability payments in question, because the amount of each officer's payment was not computed with reference to the nature of the injury.⁶ Accident or health insurance payments may be excluded from gross income when they are made pursuant to a plan containing "clear indicia" of its intent to provide accident or health benefits, and the taxpayer proves that the payment was for the permanent loss or loss of use of a member or function of his body, and the payment amounts vary according to the type and severity of the injury. 26 U.S.C. § 105(a), (c); See Berman v. Commissioner of Internal Revenue, 925 F.2d 936, 939 (6th Cir.1991); Dorrah v. Commissioner, 68 Tax Ct.Mem.Dec. (CCH) 337, 341, 1994 WL 411544 (T.C. Aug. 17, 1994); Armstrong v. Commissioner, 66 Tax Ct.Mem.Dec. (CCH) 1502, 1505, 1993 WL 501921 (T.C. Dec. 1993); Christensen v. United States, 57 A.F.T.R.2d (P-H) (D.Minn. Mar. 26, 1986).

The Officers claim, however, that the undisputed facts entitle them to judgment as a matter of law on the issue of whether the disability payments were made pursuant to a statute in the nature of a worker's compensation act. Alternatively, they claim to be entitled to judgment as a matter of law under the theory that the disability payments they received came from a fund established exclusively by contributions of the ISPD employees. Under this theory, the payments should not be taxed because they already were taxed as gross income when the employees received them, causing them, by definition, to be excluded from § 105(a).

A. Section 104(a)(1) Issue

The statute pursuant to which the Officers were awarded disability payments provides in pertinent part:

(b) Authority is hereby granted to the department to establish, operate, and make necessary contributions to a disability reserve account for the payment of disability expense reimbursement and pension to disabled employee beneficiaries. No monthly disability pension shall exceed the maximum basic pension amount. However, in the case of disability incurred in line of duty, such employee beneficiary may receive not more than forty dollars ($40) per month for each dependent ... in

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