Conroy v. Commissioner , 41 T.C. 685 ( 1964 )

William E. Conroy, et al., ^{Conroy v. Commissioner}

Docket Nos. 583-62, 705-62, 973-62, 1443-62, 1444-62, 1692-63, 3368-63

United States Tax Court

41 T.C. 685; 1964 U.S. Tax Ct. LEXIS 146;

February 26, 1964, Filed

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Decisions will be entered for the respondent.

Petitioners, former members of a city police department, were retired on account of physical disability prior to the taxable years and received payments, continuing through the taxable years, from a special fund administered by the department made up of fines imposed on policemen, rewards, contributions by the member employees, and appropriations by the city, from which fund payments were made without any allocation as to source to members who had retired voluntarily after reaching the age of 60 and after 30 years of service, to members involuntarily retired at age 70, to members retired on account of injuries received in the line of duty, and to members retired on account of physical disability. The proportion of the sources of the fund is not shown. During the taxable years the petitioners would have been retired voluntarily had they remained in the employ of the department since all had reached the age of 60 and would have had 30 years' service. Held, that, even assuming arguendo that payments to petitioners during taxable years were received under health or accident insurance, such payments were not excludable from gross income under section 105(d), I.R.C. 1954, but were includable in gross income under section 105(a), I.R.C. 1954.

W. Carroll Parks, for the petitioners.

George K. Dunham, for the respondent.

Kern, Judge.

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KERN

Respondent determined deficiencies in petitioners' income taxes as follows:

Docket No.	Year	Amount
583-62	1960	$ 705.87
705-62	1958	681.18
705-62	1959	587.13
705-62	1960	536.85
973-62	1960	669.91
1443-62	1960	$ 591.31
1444-62	1959	350.30
1692-63	1961	841.30
3368-63	1961	636.08

These deficiencies result from respondent's determinations that certain payments made to the male petitioners, who were retired policemen, by the Baltimore City Police Department after they had been retired on account of physical disability, were includable in petitioners' gross incomes.

The cases were consolidated for trial, briefing, and opinion.

FINDINGS OF FACT

The parties have filed herein a stipulation of facts. We find the facts to be as stipulated and incorporate herein by this reference the stipulation and the exhibits attached thereto.

Petitioners reside in Baltimore, Md., and their returns for the years here in question were filed with the district director of internal revenue at Baltimore, Md.

The male petitioners are former employees of the Baltimore City Police Department (hereinafter referred to as the Department), who had been retired from the Department prior to the taxable years on account of physical disability. Since the only items of income here involved are the payments received by them after their retirement and the female petitioners are parties to certain of the proceedings only because they signed joint returns for certain years, the male petitioners will be hereinafter referred to as "petitioners."

During their employment by the Department petitioners were members of a so-called special fund set up by the Charter and Public Laws of Baltimore City, and during that time contributed 2 percent of their salaries, which were paid to them out of the general city funds, to the special fund. This fund paid benefits at the times of petitioners' retirements to those policemen who voluntarily retired, as they had the right to do, at age 60 after 30 years of service, to those who retired, as they were compelled to do, at age 70, to those who retired on account of being incapacitated by injuries received in the line of duty, and to those who were retired (as petitioners were) on account of being physically incapable of performing police duties. The benefits received by retired members were calculated on the current salaries of the grades at which they retired, and not on the salaries paid at the times of their retirements. During the taxable years those members who retired voluntarily after 30 years of service received for life 50 percent of the current salary of active duty personnel in the same rank or grade as that in which they retired. Those who retired on account of physical incapacity received for life 55 percent of such salary if they had 20 to 25 years of service, 60 percent if they had 25 to 30 years of service, and 65 percent if they had over 30 years of service. The moneys of the special fund from which petitioners were paid the amounts here in controversy were derived from fines imposed on policemen, from rewards paid to the Police Department, from the contributions (to the extent of 2 percent of their salaries) of all members appointed prior to 1947, and from appropriations made to the fund by the city in amounts necessary to make up the deficit between the moneys available in the fund and the pensions and retirement benefits required to be paid by the fund. The amount of such deficit and the necessary appropriation by the city in 1963 was over $ 3,500,000.

No apportionment is or was made with regard to either the contribution of the city or the contributions of the employees as to the four categories of benefits paid by the special fund.

There were approximately 650 members of the special fund in 1963. In the same year the maximum pay of a police sergeant was $ 6,468 a year.

No police officers appointed to the Department after 1947 were members of the special fund. Such police officers are now members of an employees' retirement system.

Petitioner, William E. Conroy, was retired from the Department in 1956 at the age of 60 with 27 years in service. In 1960, the taxable year involved, he was 64 years old and if he had remained in the Department he would have had 31 years in service. On his Federal income tax return for the year 1960 he reported $ 3,360 received from the Department. This sum was deducted from the total wages shown on the return with a notation: "Pensioned due to physical disability Excludable Sick Pay Act 1954, Sec. 1058." The respondent disallowed the exclusion claimed and included the amount received in Conroy's taxable income.

Petitioner, Charles J. Tauter, was retired from the Department in 1948 at the age of 49 with 24 years in service. In 1959, the first of the taxable years involving Tauter, he was 60 years of age and if he had remained with the Department would have had 35 years of service. In the year 1960, the second taxable year involving Tauter in this proceeding, he was 61 years of age and had he remained with the Department he would have had 36 years in service. In the year 1961, the final year involving Tauter in this proceeding, he was 62 years old and if he had remained with the Department he would have had 37 years in service. For the years 1959, 1960, and 1961 Tauter received the amounts of $ 2,750.04, $ 2,750.04, and $ 2,887.56, respectively, from the Department, which amounts were not included in the income shown on his returns for the respective years. For the years 1959, 1960, and 1961 the respondent in his statutory notices included the amounts received from the Department as taxable income. The deficiency as determined by the respondent for the year 1959 makes allowance for the unrecovered contributions of Tauter to the special fund.

Petitioner, Jay C. Dobbs, was retired from the Department in 1951 at the age of 56 after 24 years and 10 months of service. In 1958, the first of the taxable years here involved, he was 63 years of age and if he had remained with the Department he would have had 31 years in service. In the taxable year 1959 he was 64 years of age and if he had remained with the Department he would have had 32 years of time in service. In the taxable year 1960 he was 65 years of age and had he remained with the Department he would have had 33 years in service. In his returns for each of the years 1958, 1959, and 1960 he included the sum of $ 2,750.04, received from the Department as wages, and on each of his returns he deducted that amount from the total wages shown as sick pay. The respondent disallowed the claimed sick pay exclusion for each year and included in each year the amount paid by the Department as taxable income.

Petitioner, James W. Jenkins, was retired from the Department in 1958 at the age of 59 after 32 years of service. In 1960, the first taxable year involved in this proceeding, he was 61 years of age and if he had remained with the Department would have had 34 years of service in the Department. In 1961, the second taxable year involved herein, he was 62 years old and had he remained with the Department would have had 35 years in service. On his return for 1960 Jenkins included wages of $ 3,639.96, which he received from the Department and then deducted that amount as excludable sick pay. During the year 1961 he received $ 3,834.96 from the Department which was not included by him on his return for 1961. The respondent disallowed the claimed sick pay exclusion for the amounts received from the Department in 1960, and included such amounts in Jenkins' income for each year. The deficiency for the year 1960, as determined by the respondent, makes allowance for the unrecovered contributions by Jenkins to the special fund.

All of the petitioners were retired after a physical examination by Department physicians, as provided in section 591 of the Charter and Public Laws of Baltimore City, who certified that each was physically incapable of performing police duties. The Department physicians found that the physical disabilities of each of the petitioners did not result from any injury sustained in the line of police duty.

The following is a summary of the retirements from the Baltimore Police Department for the years 1956 to 1960, inclusive:

	Reason
Year	Physically	Injuries	Voluntary	Compulsory	Total
	incapable	sustained
	of performing	in line of
	police	duty
	duty
1956	67	21	13	1	102
1957	33	15	6	4	58
1958	27	11	7	2	47
1959	22	20	8	1	51
1960	16	7	2		25

The average age and average years in service at the time of retirement for all categories of retirees from the Department for the years 1956 through 1960 may be summarized as follows:

	Average	Average
Year	age	years in
		service
1956	56	26
1957	56	25
1958	56	25
1959	54	25
1960	56	25

The average age and average years in service at time of retirement for all categories of retirees with the exception of those retired for injuries sustained in the line of duty may be summarized as follows:

	Average	Average
Year	age	years in
		service
1956	57	27
1957	59	28
1958	58	28
1959	57	27
1960	57	26

The amounts paid into the special fund by the petitioners were recovered through benefits paid out of the special fund within 3 years from the commencement of the payment of the benefits to the petitioners.

In the case of the petitioners William E. Conroy and Jay C. Dobbs, all the amounts contributed to the special fund were recovered prior to the taxable years involved in these proceedings.

In the case of petitioner Charles J. Tauter the sum of $ 998.50, contributions to the special fund, was not recovered as of the beginning of the taxable year 1959.

In the case of James W. Jenkins the sum of $ 359.51, contributions to the special fund, was not recovered as of the beginning of the taxable year 1960.

There was no provision under the applicable local law for the payment of workmen's compensation to Baltimore City policemen during any of the years involved in these proceedings.

OPINION

It is respondent's position that the amounts received by petitioners from the special fund are amounts received by them as annuities. As such they would be includable in petitioners' gross incomes under section 72 of the Internal Revenue Code of 1954, ^{*159 the pertinent parts of which are set out in the margin. Respondent alternatively argues that if the amounts received by petitioners may be characterized as amounts received through accident or health insurance they are attributable to contributions by the employer which were not includable in the gross incomes of the employees, or are paid by the employer and, as such, they are includable in petitioners' gross incomes pursuant to sections 104 and 105 of the Internal Revenue Code of 1954, *160 Petitioners contend that the amounts received by them from the special fund, which have been described in our Findings of Fact, are excludable from gross income as "amounts received" through "accident or health insurance for personal injuries," pursuant to the provisions of sections 104 and 105 of the Internal Revenue Code of 1954. Petitioners specifically referred to section 105(e). They cite as authorities Haynes v. United States, 353 U.S. 81">353 U.S. 81; J. Wesley Sibole, 28 T.C. 40">28 T.C. 40; and William L. Winter, 36 T.C. 14">36 T.C. 14, affd. 303 F.2d 150">303 F. 2d 150.}

Of these cases only the Winter case considered the provisions of the Internal Revenue Code of 1954, which in important respects differ from those of the 1939 Code which were considered in the Haynes and Sibole cases. ^{Adam S. H. Trappey, 34 T.C. 407">34 T.C. 407, amounts received through accident or health insurance are not excludable from gross income under the 1954 Code to the extent that they are attributable to contributions by the employer which were not includable in the gross income of the employee or which are paid by the employer. This general rule is stated in section 104(a)(3) and section 105(a); the exceptions are stated in subsections (b), (c), and (d) of section 105.}

In the instant cases no attempt was made, as was made in the Trappey case, to show the extent to which the amounts received by petitioners were attributable to contributions by the employer and the extent to which they were attributable to contributions by the employees. Petitioners have failed to prove that the amounts received by them were attributable to contributions by employees. Indeed, there is no showing that the amounts received by petitioners were not paid by the employer. Straight retirement pensions were paid from the special fund as well as amounts claimed by petitioners to be accident or health benefits, and there is no proof that any provision of the plan under which the special fund operated or any law or ordinance which created it prescribed that "the accident or health benefits are provided in whole or in part by employee contributions and the portion of employee contributions to be used for such purpose." Accordingly, section 1.72-15(c)(2), Income Tax Regs., the pertinent portion of which is set out in the margin, *164 is applicable and "it will be presumed that none of the employee contributions is used to provide such benefits." This presumption is supported by the meager facts in the record having to do with the sources of the moneys paid out by the special fund which indicate that as a practical matter only a negligible or de minimis proportion of the amounts received by petitioners could have been attributable to employee contributions. These moneys were derived from fines, rewards, employees' contributions, and from appropriations to the fund made by the city (petitioners' employer). In 1963 there were approximately 650 members entitled to benefits from the fund, who contributed to the fund 2 percent of their salaries. In that year the annual salary of a police sergeant was $ 6,468. In that year the city appropriated approximately $ 3,500,000 to the fund in order that it might make the payments of benefits required.

It follows, therefore, that the amounts received by petitioners from the special fund are not excludable from gross income under either section 104 or section 105 unless they are covered by subsection 105(b), subsection 105(c), or subsection 105(d). Only the last subsection (105(d)), to which petitioners make no reference in their argument, can have any possible application to the facts of the instant cases, and it was on this subsection that we relied in deciding in favor of the taxpayers in the Winter case. In that case we found that "during 1959 [the taxable year there involved] only 10.2 percent of the eligible employees exercised their privilege of retiring at 60 and that over the 10-year period ending in 1959 that figure ranged from 6.6 percent to 'something over 13 percent'" and concluded that it was the normal practice of the employees in that case to retire at 65 rather than at 60 and, therefore, under section 1.105-4(a)(3)(i), Income Tax Regs., the amounts received by a 60-year-old employee under a pension and retirement plan because of illness were excludable from gross income pursuant to the provisions of subsection 105(d) of the 1954 Code. On the record before us in the instant cases we cannot make similar findings and therefore cannot reach the same result. See Corkum v. United States, 204 F. Supp. 471">204 F. Supp. 471. In this case it has been stipulated and we have found as a fact that the average ages and years in service of those members of the special fund who retired were less than the ages of petitioners during the taxable years and less than their years of service if they had remained in the Department. There is nothing in the record which would indicate that the average age and average years of service at which members of the special fund retired voluntarily were more than 60 and 30, respectively. Petitioners were not "absent from work" during the taxable years since they were not expected to work because they had reached retirement age. See sec. 1.105-4(a)(3)(i), Income Tax Regs. Accordingly, we conclude that subsection 105(d) of the 1954 Code is not applicable to the facts of the instant cases and that the payments received by petitioners are not excludable from their gross incomes under section 104(a)(3) or section 105(a).

Petitioners strongly deny that the amounts they received constituted annuities taxable under section 72 of the Internal Revenue Code of 1954. In their pleadings they have raised no alternative issue and have made no argument at the trial or on brief that section 1.72-15(f), Example (1), Income Tax Regs., is in any way applicable, nor have they introduced in evidence any facts which would warrant us in making allowances under that section of the regulations on account of their contributions to the fund in amounts greater than those made by respondent in his determinations of deficiencies, even if we decided that the amounts received by petitioners were taxable under section 72 of the 1954 Code. Therefore, since the amounts of the receipts of petitioners here involved and as determined by respondent would be includable in petitioners' gross incomes, on the record before us, under either section 72 or section 105(a), it is not necessary for us to decide which of the two sections is applicable, and we limit our decision to a conclusion that, assuming arguendo that the amounts received by petitioners were, as petitioners contend, received through health or accident insurance, they are nevertheless includable in gross income under section 105(a) of the Internal Revenue Code of 1954. Accordingly,

Decisions will be entered for the respondent.

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Footnotes

• 1. Proceedings of the following petitioners are consolidated herewith: Jay C. Dobbs and Edith Dobbs, docket No. 705-62; James W. Jenkins and Marie C. Jenkins, docket No. 973-62; Charles J. Tauter, docket No. 1443-62; Charles J. Tauter and Marion M. Tauter, docket No. 1444-62; James W. Jenkins, docket No. 1692-63; and Charles J. Tauter, docket No. 3368-63.↩

• 2. SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE CONTRACTS.

  (a) General Rule for Annuities. -- Except as otherwise provided in this chapter, gross income includes any amount received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract.

  * * * *

  (d) Employees' Annuities. --

  (1) Employee's contributions recoverable in 3 years. -- Where --

  (A) part of the consideration for an annuity, endowment, or life insurance contract is contributed by the employer, and

  (B) during the 3-year period beginning on the date (whether or not before January 1, 1954) on which an amount is first received under the contract as an annuity, the aggregate amount receivable by the employee under the terms of the contract is equal to or greater than the consideration for the contract contributed by the employee,

  then all amounts received as an annuity under the contract shall be excluded from gross income until there has been so excluded (under this paragraph and prior income tax laws) an amount equal to the consideration for the contract contributed by the employee. Thereafter all amounts so received under the contract shall be included in gross income.

  * * * *

  (f) Special Rules for Computing Employees' Contributions. -- In computing, for purposes of subsection (c)(1)(A), the aggregate amount of premiums or other consideration paid for the contract, for purposes of subsection (d)(1), the consideration for the contract contributed by the employee, and for purposes of subsection (e)(1)(B), the aggregate premiums or other consideration paid, amounts contributed by the employer shall be included, but only to the extent that --

  (1) such amounts were includible in the gross income of the employee under this subtitle or prior income tax laws; or

  (2) if such amounts had been paid directly to the employee at the time they were contributed, they would not have been includible in the gross income of the employee under the law applicable at the time of such contribution.↩

• 3. SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.

  (a) In General. -- Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include --

  (1) amounts received under workmen's compensation acts as compensation for personal injuries or sickness;

  (2) the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness;

  (3) amounts received through accident or health insurance for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer); and

  (4) 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 or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity payable under the provisions of section 831 of the Foreign Service Act of 1946, as amended (22 U.S.C. 1081; 60 Stat. 1021).

  SEC. 105. AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH PLANS.

  (a) Amounts Attributable to Employer Contributions. -- Except as otherwise provided in this section, amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer.

  (b) Amounts Expended for Medical Care. -- Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in section 213(e)) of the taxpayer, his spouse, and his dependents (as defined in section 152).

  (c) Payments Unrelated to Absence From Work. -- Gross income does not include amounts referred to in subsection (a) to the extent such amounts --

  (1) constitute payment for the permanent loss or loss of use of a member or function of the body, or the permanent disfigurement, of the taxpayer, his spouse, or a dependent (as defined in section 152), and

  (2) are computed with reference to the nature of the injury without regard to the period the employee is absent from work.

  (d) Wage Continuation Plans. -- Gross income does not include amounts referred to in subsection (a) if such amounts constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of personal injuries or sickness; but this subsection shall not apply to the extent that such amounts exceed a weekly rate of $ 100. In the case of a period during which the employee is absent from work on account of sickness, the preceding sentence shall not apply to amounts attributable to the first 7 calendar days in such period unless the employee is hospitalized on account of sickness for at least one day during such period. If such amounts are not paid on the basis of a weekly pay period, the Secretary or his delegate shall by regulations prescribe the method of determining the weekly rate at which such amounts are paid.

  (e) Accident and Health Plans. -- For purposes of this section and section 104 --

  (1) amounts received under an accident or health plan for employees, and

  (2) amounts received from a sickness and disability fund for employees maintained under the law of a State, a Territory, or the District of Columbia,

  shall be treated as amounts received through accident or health insurance.

  (f) Rules for Application of Section 213. -- For purposes of section 213(a) (relating to medical, dental, etc., expenses) amounts excluded from gross income under subsection (c) or (d) shall not be considered as compensation (by insurance or otherwise) for expenses paid for medical care.↩

• 4. The cases of William L. Neill, 17 T.C. 1015">17 T.C. 1015, and Charles F. Brown, 25 T.C. 220">25 T.C. 220↩, are to some extent factually similar to the instant cases in that they considered tax problems of retired members of the Baltimore Police Department. However, they also considered different questions arising under different statutes.

• 5. Sec. 1.72-15 Applicability of section 72 to accident or health plans.

  (c) Accident or health benefits attributable to employee contributions.

  (2) In determining the taxation of any amounts received as accident or health benefits from a plan to which this section applies, the first step is to determine the portion, if any, of the contributions of the employee which is used to provide the accident or health benefits and the portion of the accident or health benefits attributable to such portion of the employee's contributions. If such a plan expressly provides that the accident or health benefits are provided in whole or in part by employee contributions and the portion of employee contributions to be used for such purpose, the contributions so used will be treated as used to provide accident or health benefits. However, if the plan does not expressly provide that the accident or health benefits are to be provided with employee contributions and the portion of employee contributions to be used for such purpose, it will be presumed that none of the employee contributions is used to provide such benefits. Thus, in the case of a contributory pension plan, it will be presumed that the disability pension is provided by employer contributions, unless the plan expressly provides otherwise, * * *↩

• 6. There is no evidence with regard to similar figures for the taxable years or, indeed, for any years other than 1963.↩