Filed: Apr. 02, 2012
Latest Update: Nov. 14, 2018
Summary: JAY SEWARDS AND FRANCES SEWARDS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 24080–08. Filed April 2, 2012. P–H received disability retirement payments relating to injuries suffered in the course of his employment. The pay- ment amount was determined, in part, by reference to P–H’s length of service. Ps did not report any portion of the pay- ments as taxable. Held: Pursuant to I.R.C. sec. 104(a)(1), the portion of P–H’s disability retirement payments determined by refe
Summary: JAY SEWARDS AND FRANCES SEWARDS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 24080–08. Filed April 2, 2012. P–H received disability retirement payments relating to injuries suffered in the course of his employment. The pay- ment amount was determined, in part, by reference to P–H’s length of service. Ps did not report any portion of the pay- ments as taxable. Held: Pursuant to I.R.C. sec. 104(a)(1), the portion of P–H’s disability retirement payments determined by refer..
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JAY SEWARDS AND FRANCES SEWARDS, PETITIONERS
v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket No. 24080–08. Filed April 2, 2012.
P–H received disability retirement payments relating to
injuries suffered in the course of his employment. The pay-
ment amount was determined, in part, by reference to P–H’s
length of service. Ps did not report any portion of the pay-
ments as taxable. Held: Pursuant to I.R.C. sec. 104(a)(1), the
portion of P–H’s disability retirement payments determined
by reference to his length of service is not excludable from
income. See sec. 1.104–1(b), Income Tax Regs. Held, further,
Ps are not liable for an accuracy-related penalty.
Marshall West Taylor, for petitioners.
Scott B. Burkholder, for respondent.
OPINION
FOLEY, Judge: The issues for decision, relating to peti-
tioners’ 2006 joint Federal income tax return, are whether
petitioners may exclude certain retirement payments from
income and whether petitioners are liable for a section
6662(a) 1 accuracy-related penalty. The parties submitted this
case fully stipulated pursuant to Rule 122.
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect
for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Proce-
320
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(320) SEWARDS v. COMMISSIONER 321
Background
On November 29, 2000, after many years of employment
with the Los Angeles County Sheriff’s Department (Sheriff’s
Department), and because of service-connected injuries, Jay
Sewards was placed on involuntary medical disability leave.
While on disability leave, he was provided a continuation of
his $14,093 per month salary (final compensation) for one
year. Because he suffered his service-connected injury after
more than 34 years of employment with the Sheriff’s Depart-
ment, Mr. Sewards was eligible for two types of retirement
plans: a service retirement based on his length of service
(service retirement) and a service-connected disability retire-
ment based on his service-connected injuries (SCD retire-
ment).
On an election form dated July 30, 2001, Mr. Sewards
requested, and the Los Angeles County Employees Retire-
ment Association (LACERA) 2 granted, a service retirement to
take effect upon the expiration of his disability leave on
October 31, 2001. 3 Service retirement was authorized for
individuals who: had completed 20 years of service regardless
of age; had attained the applicable compulsory age of retire-
ment; 4 or had attained the age of 50, completed 10 years of
service, and had no break from service which exceeded 12
months. California County Employees Retirement Law of
1937 (CERL) sec. 31663.26. 5 The amount of Mr. Sewards’
service retirement payment was determined, by reference to
his length of service, 6 to be $12,861 per month. 7
On May 28, 2002, Mr. Sewards applied for and was
granted SCD retirement retroactive to the date upon which
his service retirement took effect. Thus, his SCD retirement
replaced his service retirement. Individuals were eligible for
dure.
2 LACERA was the legally constituted agency for management of retirement assets and pay-
ments to Los Angeles County employees.
3 His service retirement was originally approved to take effect on October 9, 2001, but upon
Mr. Sewards’ request, his service retirement became effective immediately upon the expiration
of his disability leave.
4 The compulsory retirement age varied depending on the individual’s job title. See Cal. Govt.
Code secs. 31662.4–31663 (West 2008).
5 CERL is codified in Cal. Govt. Code secs. 31450–31898 and adopted into L.A. County Code
secs. 5.20.010–5.20.080.
6 Mr. Sewards acquired service credit for each payroll period of county employment during
which a retirement contribution was made.
7 In subsequent years, this amount was increased to take into account cost of living adjust-
ments.
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322 138 UNITED STATES TAX COURT REPORTS (320)
SCD retirement if they were permanently incapacitated
because of an injury or disease arising from their county
employment. Id. secs. 31720, 31727.4. The SCD retirement
plan would provide him with one-half of his final compensa-
tion (i.e., $7,046) or his full service retirement allowance (i.e.,
$12,861), whichever was higher. Id. sec. 31727.4. Thus, Mr.
Sewards received his full service retirement allowance of
$12,861 per month.
LACERA sent Mr. Sewards 2001 and 2002 Forms 1099–R,
Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc., indi-
cating that his service retirement payments were taxable.
After his SCD retirement became effective, LACERA sent him
amended 2001 and 2002 Forms 1099–R which indicated that
the taxable amount was not determined. LACERA later sent
him 2003, 2004, and 2005 Forms 1099–R which also
indicated that the taxable amount was not determined. In a
letter dated December 20, 2006, LACERA notified Mr. Sewards
that beginning in 2006 it would report as taxable 50% of his
final compensation. Consistent with the letter, LACERA sent
him a 2006 Form 1099–R indicating a portion of his SCD
retirement payments was taxable.
On their joint 2006 Federal income tax return, petitioners
did not report any portion of Mr. Sewards’ SCD retirement
payments as taxable. Respondent subsequently issued a
statutory notice of deficiency determining that a portion of
his SCD retirement payments was taxable and that peti-
tioners were liable for a section 6662(a) accuracy-related pen-
alty. On October 1, 2008, petitioners, while residing in Port
Ludlow, Washington, filed their petition with the Court.
Discussion
Section 104(a)(1) and the regulations thereunder provide
that retirement payments are excludable from gross income
if they are received pursuant to a workmen’s compensation
act or a statute in the nature of a workmen’s compen-
sation act. Sec. 1.104–1(b), Income Tax Regs. Section
104(a)(1) does not apply, however, to the extent the pay-
ments are determined by reference to the employee’s age or
length of service or the employee’s prior contributions, even
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(320) SEWARDS v. COMMISSIONER 323
if the employee’s retirement is occasioned by occupational
injury. Sec. 1.104–1(b), Income Tax Regs.
The statute authorizing payments to Mr. Sewards is in the
nature of a workmen’s compensation act 8 and Mr. Sewards
suffered an injury which arose in the course of his employ-
ment. See Givens v. Commissioner, 90 T.C. 1145 (1998); sec.
1.104–1(b), Income Tax Regs. Thus, in order to determine
whether his SCD retirement payments are excludable, we
must examine whether the amounts received were deter-
mined by reference to his age, length of service, or prior con-
tributions.
Petitioners contend that the entire retirement benefit is
excludable. 9 We disagree. SCD retirees were guaranteed an
annual retirement allowance payable in monthly install-
ments equal to 50% of their final compensation (guaranteed
amount). 10 CERL sec. 31727.4. If an individual qualified for
a service retirement benefit that exceeded the guaranteed
amount, however, that person was eligible to receive the
higher amount. Id. sec. 31727.4. Accordingly, because Mr.
Sewards’ service retirement benefit (i.e., $12,861) was higher
than the guaranteed amount (i.e., $7,046), his SCD retirement
benefit amount was increased to his service retirement ben-
efit amount, which was determined by reference to his length
of service. See sec. 1.104–1(b), Income Tax Regs.; cf. Picard
v. Commissioner, 165 F.3d 744 (9th Cir. 1999) (holding that
reduction of taxpayer’s disability retirement benefits was
determined by reference to his date of hire rather than by his
age or length of service), rev’g T.C. Memo. 1997–320. Thus,
the portion exceeding the guaranteed amount is not exclud-
able from income.
Respondent further determined that petitioners are liable
for a section 6662(a) accuracy-related penalty relating to
2006. Section 6662(a) and (b)(2) imposes a 20% penalty on
the amount of any underpayment of tax attributable to a
substantial understatement of income tax. An understate-
8 Respondent does not challenge that the statute was in the nature of a workmen’s compensa-
tion act.
9 Pursuant to sec. 7491(a), petitioners have the burden of proof unless they introduce credible
evidence relating to the issue that would shift the burden to respondent. See Rule 142(a). Our
conclusions, however, are based on a preponderance of the evidence, and thus the allocation of
the burden of proof is immaterial. See Martin Ice Cream Co. v. Commissioner, 110 T.C. 189,
210 n.16 (1998).
10 At the time of Mr. Sewards’ retirement, the guaranteed amount was $7,046. In subsequent
years, this amount was increased to account for cost of living adjustments.
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324 138 UNITED STATES TAX COURT REPORTS (320)
ment is substantial if it exceeds the greater of $5,000 or 10%
of the tax required to be shown on the return. Sec.
6662(d)(1)(A). Although petitioners substantially understated
their income tax, section 6664(c)(1) provides that no penalty
shall be imposed if there was reasonable cause for the under-
payment and the taxpayer acted in good faith.
LACERA sent Mr. Sewards 2001, 2002, 2003, 2004, and
2005 Forms 1099–R which did not indicate a taxable amount.
LACERA, in late 2006, sent a letter to him indicating it would
begin reporting as taxable a portion of his SCD retirement
benefits and, in 2007, sent him a Form 1099–R reflecting the
taxable portion. Over the course of several years, the guid-
ance provided by LACERA varied. Petitioners, in good faith,
took reasonable efforts to assess their proper tax liability.
Thus, petitioners had reasonable cause for the underpayment
and are not liable for a section 6662(a) accuracy-related pen-
alty.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Decision will be entered under Rule 155.
f
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