DocketNumber: No. 9988-03
Citation Numbers: 89 T.C.M. 662, 2005 Tax Ct. Memo LEXIS 5, 2005 T.C. Memo. 5
Judges: \"Wherry, Robert A.\"
Filed Date: 1/13/2005
Status: Non-Precedential
Modified Date: 11/20/2020
Judgment entered for respondent.
*5 Ps excluded a portion of H's disability benefits from gross income for the 1999 and 2000 taxable years. R determined that Ps were required to include in gross income an additional portion of H's benefits.
Held: Ps are not entitled under
Held, further, R is not precluded from making adjustments to Ps' gross income by reason of R's decision not to adjust prior years' income.
MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: Respondent determined deficiencies in petitioners' Federal income taxes for their 1999 and 2000 taxable years in the amounts of $ 3,347 and $ 4,570, respectively. The issues for decision are:
(1) Whether, pursuant to
(2) if not, whether respondent is nonetheless barred from making adjustments to petitioners' gross income with respect to Mr. Wright's STRS payments for the taxable years 1999 and 2000 since respondent had previously declined to make similar adjustments in prior tax years.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference. At the time the petition was filed, petitioners resided in Granville, Ohio.
Mr. Wright was born on September 22, 1930. Mr. Wright worked for the Ohio Public School System for 21 years, the*7 first 10 years as a high school teacher and the remaining 11 years as a high school principal. During his tenure, Mr. Wright was a member of STRS. In February 1977, Mr. Wright suffered a mental and emotional breakdown which left him permanently disabled with respect to his teaching profession. Mr. Wright was granted disability retirement in August of 1977 from the Ohio Public School System and his job as the principal of Granville High School in Granville, Ohio.
From 1977 to 1983, Mr. Wright reported disability retirement benefits received from STRS primarily as ordinary income in accordance with the Forms 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRA's, Insurance Contracts, Etc. In 1983, after talking to friends and family members and after his own investigation of Internal Revenue Service (IRS) publications, Mr. Wright decided to treat his benefits as 60 percent includable in gross income and 40 percent excludable from gross income based on his alleged 8-percent contribution rate and an alleged 12-percent contribution rate by his employer. 2 This exclusion rate, thus determined, was much greater than the exclusion rate determined by STRS. *8
In 1999, Mr. Wright received $ 33,123.90 in distributions from STRS. A Form 1099-R issued to Mr. Wright for 1999 indicated a taxable distribution in the amount of $ 32,128.50 and employee contributions or insurance premiums in the amount of $ 995.40. In 2000, Mr. Wright received $ 45,506.66 in distributions from STRS. The Form 1099-R issued to Mr. Wright for 2000 indicated a taxable distribution in the amount of $ 44,511.26 and employee contributions or insurance premiums in the amount of $ 995.40. The $ 995.40 amounts listed on the Forms*9 1099-R represent a tax-free recovery of previously taxed employee contributions to the plan. STRS used the exclusionary ratios under
Petitioners timely filed a joint Form 1040, U.S. Individual Income Tax Return, for each of the years 1999 and 2000. On these returns, they reported as taxable $ 19,278 and $ 26,707 of the distributions received by Mr. Wright from STRS in 1999 and 2000, respectively. On April 1, 2003, respondent issued to petitioners the notice of deficiency underlying the instant proceeding, determining that petitioners were required to include in income STRS distribution amounts in excess of those reported by petitioners. The statutory notice indicated that only $ 995.40 was nontaxable for each of the years in issue.
Prior to issuing the notice of deficiency for 1999 and 2000, respondent had contacted petitioners on four occasions questioning whether petitioners were properly excluding the correct portion of Mr. Wright's disability retirement payments from their gross income for the taxable years 1989, 1994, 1997, and 1998. In each*10 of those instances, respondent chose not to adjust petitioners' taxable income.
In order to be eligible for disability retirement under STRS, a member must be: (1) Under the age of 60 and no longer teaching; (2) have 5 or more years of Ohio service credit; (3) be disabled, physically or mentally, for teaching service; (4) if mentally and physically able to do so, file an application with STRS within 2 years from the date contributing service is terminated, unless the disability is manifested in some degree (as evidenced by medical records) before the contributing service is terminated; and (5) may not be receiving service retirement benefits. The evidence indicates that Mr. Wright satisfied these eligibility requirements. He applied for disability retirement benefits from STRS in February 1977, and his application was approved that same year.
The STRS Employer's Manual sets forth the required contribution rates for STRS members and their employers. These contribution rates show the percentage of each member's compensation contributed to STRS by the member and by the employer. STRS also published a brochure entitled "Disability*11 Retirement" describing the program, including sections on eligibility requirements and taxes. Notably, the STRS publications do not indicate any specific portion of an employee's contribution which funds the disability benefit.
Neither the extent nor severity of the disability affects the computation of the amount of disability benefits.
*12 OPINION
Both parties agree that at least a portion of Mr. Wright's disability retirement payments is includable in his gross income and that a portion of the payments may be excludable for the 1999 and 2000 taxable years. 4 The parties disagree as to the exclusion ratio for the payments.
Petitioners principally contend that the disability retirement payments are subject to the rules set forth under
Respondent's primary position is that petitioners must include in gross income the amount of disability payments designated as taxable by STRS because they failed to prove a greater exclusion ratio or amount excludable from gross income. 5 In addition, respondent argues that respondent should not be estopped from asserting deficiencies in petitioners' 1999 and 2000 taxable years merely because respondent declined to make adjustments in prior years. In support of this claim, respondent points out that petitioners do not satisfy the requirements of laches, equitable estoppel, or collateral estoppel.
As a general rule, the Commissioner's determination of a taxpayer's liability*14 is presumed correct, and the taxpayer bears the burden of proving that the determination is improper.
A. Gross Income
Annuities and pensions are enumerated*15 among the forms of income within the purview of
*16
B.
Petitioners seek to obtain a greater exclusion through the application of
The general*18 rule of
*19 However,
Petitioners acknowledged at trial that the benefits were not designed to reimburse Mr. Wright for any medical expenses. In addition, petitioners did not provide any evidence that the benefit payments received were payments for a permanent loss of use of a member or function of Mr. Wright's body. Further, the record indicates that the STRS benefits received by petitioners were not based on*20 or paid with reference to the severity of Mr. Wright's injury. Accordingly, Mr. Wright's benefits are not excludable under these two exceptions.
Mr. Wright testified that he excluded 40 percent of his benefits from gross income based on his alleged 8-percent of compensation contribution and his employer's alleged 12-percent of compensation contribution to the plan. Mr. Wright relied on the idea that, of the total amount contributed, his portion constituted 40 percent and his employer's portion was 60 percent. However, these assertions fall short of demonstrating that 40 percent of the benefits received by Mr. Wright may be excluded from gross income for several reasons. First, petitioners' brief indicates that their 40-percent exclusion rate, and thus the underlying 8-and 12-percent contribution split upon which it was based, was only an approximation derived from various STRS rate contribution schedules that changed over the period of Mr. Wright's employment. Hence, Mr. Wright's testimony failed to substantiate that 40 percent of his benefits were solely the result of his contributions to the plan and that not more than 60 percent of his benefits were attributable to employer contributions. *21 See
Second, petitioners have not shown that any amounts contributed by STRS were included in petitioners' gross income. Consequently, petitioners have not established that they are entitled to exclude portions of the benefits under
*22 Third, petitioners' contention is contrary to the applicable regulations discussed below. The regulations under
*23 In a contributory plan, where accident, health, and retirement benefits are all included, the accident and health benefits attributable to employee contributions are tax free.
*24 While petitioners tried to show, rationally, through their alleged 8-percent contribution that they were entitled to their chosen exclusion percentage, their rationale does not address the requirements of the controlling regulation. The record does not indicate that the STRS plan provided that accident or health benefits were provided in whole or in part by Mr. Wright's contributions, nor did the plan specify any portion of Mr. Wright's contributions to be used for accident or health benefits. Thus, pursuant to
Petitioners did not specifically articulate the theory on which they rely to bar respondent from pursuing the deficiencies. Thus, the Court shall consider laches, equitable estoppel, and collateral estoppel in light of petitioners' argument.
A. Doctrine of Laches
Laches is an equitable doctrine which "prohibits a party from asserting a claim following an unreasonable delay by such party when there has been a change in circumstances during such delay which*25 would result in severe prejudice against an opposing party should the claim be permitted."
B. Doctrine of Equitable Estoppel
Equitable estoppel is a judicial doctrine that precludes a party from denying his or her own acts or representations which induced another to act to his or her detriment.
In order to invoke the doctrine of equitable estoppel against the United States, petitioners must satisfy all the traditional elements: (1) A false representation or wrongful, misleading silence by the party against whom estoppel is to be invoked; (2) an error in a statement of fact and not an opinion or statement of law; (3) ignorance of the true facts by the taxpayer; (4) reasonable reliance on the act or statement*27 by the taxpayer; and (5) detriment suffered by the taxpayer because of the false representation or wrongful, misleading silence.
Petitioners do not meet the requirements to invoke the doctrine of equitable estoppel against respondent. At trial, Mr. Wright testified that he received letters indicating that respondent was closing audit inquiries on a "no change" basis regarding the 1989, 1994, 1997, and 1998 taxable years. However, Mr. Wright did not introduce any of these letters at trial. Thus, the record is bereft of evidence that respondent made misrepresentations*28 or misleading statements that would have engendered any detrimental reliance on the part of petitioners. Furthermore, petitioners' reliance on the alleged letters would be unjustified. Mr. Wright candidly testified that an IRS Appeals officer told him that "closed does not mean closed" but that it could mean "abandoned for the time being". This conversation should have been an indication to petitioners that their disability payment exclusions were at least questionable.
Mr. Wright's actions demonstrate no ignorance of the facts. On the contrary, Mr. Wright testified that he decided to exclude portions of his disability retirement payments after talking with family and friends and after his own investigation of IRS publications. Petitioners' actions were initiated before any examinations. Petitioners' exclusion of 40 percent of Mr. Wright's disability payments was based not on respondent's decision to forgo adjustment of petitioners' returns; rather, it was the result of petitioners' own notions of exclusions to gross income. Therefore, equitable estoppel does not apply.
C. Doctrine of Collateral Estoppel
Collateral estoppel is used for the "dual purpose of protecting*29 litigants from the burden of relitigating an identical issue and of promoting judicial economy by preventing unnecessary or redundant litigation."
From a legal standpoint, income taxes are levied on an
annual basis, such that each year represents a new liability and
a separate cause of action.
*30 collateral estoppel would not operate to establish entitlement
to deductions in one year based merely on an allowance of
similar deductions in a different year or years. See
apply collateral estoppel to depreciation deductions based on a
prior litigated tax year), affd.
In a factual context, for collateral estoppel to apply, the following requirements are necessary: 1. The issue in the second suit must be identical in all respects with the one decided in the first suit. 2. There must be a final judgment rendered by a court of *31 competent jurisdiction. 3. Collateral estoppel may be invoked against parties and their privies to the prior judgment. 4. The parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision. 5. The controlling facts and applicable legal rules must remain unchanged from those in the prior litigation.
omitted), affd.
Petitioners fail to meet the prerequisites to invoke collateral estoppel. Although the issue, the controlling facts, and the parties are identical for each of the 1989, 1994, 1997, 1998 taxable years and for the years 1999 and 2000 in issue, respondent's decision not to make adjustments to previous years' tax returns was not the subject of any litigation. Thus, there was no final judgment rendered by any court, much less a court of competent jurisdiction. Accordingly, collateral estoppel does not apply in this case.
Petitioners are not entitled to exclude disability benefits payments from their gross*32 income in excess of the amount determined by STRS and respondent. Petitioners did not establish that the additional benefits they sought to exclude were attributable to Mr. Wright's after-tax contributions or that respondent was prohibited from making the adjustments to income at issue in this case.
To reflect the foregoing,
Decision will be entered for respondent.
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Mr. Wright's testimony on this point is contradictory. He initially indicated that he contributed 12 percent and that the six various school boards for which he worked contributed 8 percent in the latter years of his employment. But later in his testimony, he indicated that he contributed 8 percent and the school boards contributed 12 percent. It appears that the latter testimony is his position based on Mr. Wright's reaffirmation of these percentage allocations during trial.↩
3. The total disability retirement benefit cannot be less than 30 percent nor more than 75 percent of the member's final average salary.
4. At trial, respondent initially stated that petitioners were not allowed to exclude any disability payments received in 1999 or 2000 from gross income. However, the notice of deficiency allowed an amount excludable from gross income as determined by STRS, and respondent has not sought an increase in the amount of deficiency.↩
5. See supra note 4.↩
6. SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE CONTRACTS.
b) Exclusion Ratio. -- (1) In general. -- Gross income does not include that part of any amount received as an annuity under an annuity,endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date).↩
7. 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 attributableto 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.* * * 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 * * * of the taxpayer * * *↩
8. As stated in
9. In their petition, petitioners also cited
10.
This section provides the rules for determining the taxation of
amounts received from an employer-established plan which
provides for distributions that are taxable under
for distributions that are taxable under
and which also provides for distributions that may be excludable
from gross income under
benefits. * * *↩
11.
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 * * * [Emphasis added.]↩
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