71 T.C. 991">*992 Respondent determined a deficiency in the amount of 1979 U.S. Tax Ct. LEXIS 159">*161 $ 1,270.60 in petitioners' Federal income tax for 1975. The issues for decision are:

(1) Whether petitioners, who excluded $ 5,200 from their gross income for 1975 as sick pay under section 105(d), ¹ are entitled under section 72(d)(1) also to exclude from their gross income an additional $ 5,679 as a recovery of their contributions to the Civil Service Retirement Fund.

(2) Whether petitioners are entitled to a retirement income credit under section 37 in the amount of $ 228.60 for 1975.

FINDINGS OF FACT

Petitioners William I. Woodford and Madge L. Woodford, husband and wife, were legal residents of Little Rock, Ark., when they filed their petition. They filed a timely joint Federal income tax return for 1975 with the District Director, Internal Revenue Service Center, Austin, Tex. Both petitioners were 65 years of age or over at the end of 1975.

On March 1, 1966, petitioner William1979 U.S. Tax Ct. LEXIS 159">*162 I. Woodford (hereinafter petitioner) retired from the Army of the United States. On December 31, 1973, at the age of 67, he retired from a position in the Internal Revenue Service after approximately 29 years of qualifying employment under the Federal civil service system.

Initially, petitioner's retirement under the civil service system was on a nondisability basis. On November 4, 1974, however, pursuant to petitioner's application, the Bureau of Retirement, Insurance, and Occupational Health (the bureau) of the United States Civil Service Commission reclassified petitioner's retirement status to "disability" retirement. The letter from the bureau notifying petitioner of this reclassification reads in pertinent part as follows:

71 T.C. 991">*993 This is in reference to your application for retirement under the disability provisions of the Civil ServiceRetirement law.

Our Medical Division has approved your application on the basis that you were totally disabled for useful and efficient service in the position you last occupied. Therefore, a change in the type of your award to "disability" has been approved.

This action does not change the amount of your monthly annuity.

Your "normal 1979 U.S. Tax Ct. LEXIS 159">*163 retirement date" for tax purposes is 2/7/76.

Thereafter, in 1974 and 1975, petitioner received disability retirement benefits pursuant to the provisions of 5 U.S.C. secs. 8337 and 8339. During 1975, petitioner received 12 monthly payments totaling $ 10,879.

On February 7, 1976, petitioner became 70 years of age.

At the time of his retirement in 1973, petitioner had contributed $ 12,284 into the Civil Service Annuity Fund (the fund). For purposes of this case, the parties have stipulated that petitioner had unrecovered contributions to the fund in the amount of $ 8,643 at the beginning of 1975.

In addition to the disability retirement payments, petitioner in 1975 received Army retirement payments totaling $ 5,898.48. Also, petitioners received in that year taxable dividends and interest income of $ 677.86 and $ 1,841.83, respectively.

Petitioner had received earned income in excess of $ 600 in each year for more than 10 years prior to 1975, and he did not receive payments of either Social Security or railroad retirement benefits during 1975.

Of the $ 10,879 disability retirement payments which petitioner received in 1975, petitioners, under1979 U.S. Tax Ct. LEXIS 159">*164 section 105(d), excluded from their gross income for that year the sum of $ 5,200 as sick pay. In addition, petitioners, under section 72(d)(1) excluded the sum of $ 5,679 as a recovery of petitioner's contributions to the Civil Service Retirement Fund. Petitioners also claimed a retirement income credit in the amount of $ 228.60.

In the notice of deficiency, respondent determined that petitioners had gross income in the amount of the $ 5,679 excluded under section 72(d)(1) and that petitioners did not qualify for a retirement income credit.

OPINION

In 1975 petitioner received disability retirement benefits under 71 T.C. 991">*994 the Civil Service Retirement System totaling $ 10,879. At that time, he had not yet reached the mandatory or normal retirement age of 70 years. Both parties agree that petitioner was entitled to exclude from his gross income $ 5,200 of the benefit payments as a sick pay exclusion under section 105(d). ² The issue is whether petitioner is entitled also in the same year under section 72(d)(1) to exclude $ 5,679, the remainder of his disability retirement payments, as a recovery of contributions to the Civil Service Retirement Fund. We1979 U.S. Tax Ct. LEXIS 159">*165 hold he is not.

Section 1.72-15(b), Income Tax Regs., prescribes a general rule that section 72, dealing with annuities, does not apply to any amount received as an accident or health benefit, within the meaning of section 105(a), and that the tax treatment of any such amount shall be determined under sections 104 and 105. Section 105(a) prescribes the general rule that amounts received by an employee through health or accident insurance for personal injuries or sickness shall be included in gross income to the extent such amounts are paid by the employer. Under section 105(d) in the form1979 U.S. Tax Ct. LEXIS 159">*166 in which it was applicable in 1975, the year in controversy, disability retirement payments received by a Federal employee retired prior to his normal retirement age were treated as "wages or payments in lieu of wages" for a period during which the employee was absent from work on account of personal injuries or sickness. Such payments to the extent of $ 100 per week were excluded from the employee's gross income. See DePaolis v. Commissioner, 69 T.C. 283">69 T.C. 283, 69 T.C. 283">286-287 (1977); sec. 1.105-4(a), Income Tax Regs. Disability retirement payments in excess of $ 100 per week, unless excluded under some other provision, are thus includable in gross income under the general rule prescribed by section 105(a).

To exclude the payments totaling $ 5,679 in excess of $ 100 per week, petitioner relies upon section 72(d)(1). ³ That section permits 71 T.C. 991">*995 an employee receiving an annuity paid for in part by his employer to exclude from his gross income the annuity payments he receives until the amounts so excluded are equal to the consideration contributed by the employee for the contract. One condition imposed by the section is that the receipts in the first 3 years1979 U.S. Tax Ct. LEXIS 159">*167 of the annuity must equal or exceed the contributions made by the employee.

We agree with respondent that petitioners are not entitled1979 U.S. Tax Ct. LEXIS 159">*168 to split the payments they received and in the same year treat part of their civil service retirement annuity under section 105(d) as sick pay and to treat the remainder under section 72(d)(1) as a recovery of contributions to the Civil Service Retirement Fund. 69 T.C. 283">DePaolis v. Commissioner, supra at 287. This conclusion is dictated by section 1.72-15(d), Income Tax Regs., as follows:

(d) Accident or health benefits attributable to employer contributions. Any amounts received as accident or health benefits and not attributable to contributions of the employee are includible in gross income except to the extent that such amounts are excludable from gross income under section 105(b), (c), or (d) and the regulations thereunder. Thus, such amounts may be excludable under section 105(d) as payments under a wage continuation plan. However, if such payments, when added to other such payments attributable to employer contributions, exceed the limitations of section 105(d), then the excess is includible in gross income under section 105(a). Such excess is not excludable under section 72. See, however, paragraph (i) of this section, for special rules 1979 U.S. Tax Ct. LEXIS 159">*169 for taxable years ending before January 27, 1975, relating to certain accident or health benefits which were treated as distributions to which section 72 applied. ⁴ [Emphasis added.]

1979 U.S. Tax Ct. LEXIS 159">*170 71 T.C. 991">*996 In a case involving 1973, a year ended before January 27, 1975, to which the special rules referred to in the last sentence of the foregoing regulation ⁵ were applicable ( Brownholtz v. Commissioner, 71 T.C. 332">71 T.C. 332 (1978)), this Court reached the same result and explained the relationship of section 105(a) to section 72 as follows ( 71 T.C. 332">Brownholtz v. Commissioner, supra at 337):

Section 105(a) is intended to tax an employee on wage continuation benefits provided by untaxed employer contributions when received during a period of absence from work due to sickness, subject to the limited sick pay exclusion exception. See Conf. Rept. 2543, 83d Cong., 2d Sess. 24-25 (1954); S. Rept. 1622, 83d Cong., 2d Sess. 183-184 (1954). If section 72 were to apply in a case such as this, the very amounts that section 105(a) seeks to tax could be treated as recovery of cost, and thus escape taxation. To resolve this conflict between sections 72 and 105, it seems reasonable to construe section 105, specifically directed to the taxation of sick pay, as superseding the general provisions of section 72, which do not expressly address that1979 U.S. Tax Ct. LEXIS 159">*171 problem. [Fn. ref. omitted.]

Although petitioners are not entitled in 1975 to the cost recovery exclusion provided by section 72(d), they will be entitled to such exclusion in due time. On February 7, 1976, petitioner reached the then-mandatory or normal retirement age of 70 years, and thereafter his right to exclude his1979 U.S. Tax Ct. LEXIS 159">*172 contributions to the Civil Service Retirement Fund will no longer be limited by section 105(a) and (d). 69 T.C. 283">DePaolis v. Commissioner, supra at 287. In years subsequent to his attaining the age of 70, he will be able to recover tax free the remaining amount he contributed to the fund.

For years beginning after December 31, 1964, section 37, subject to certain limitations, allows an individual who had earned income in excess of $ 600 in any 10 prior calendar years a credit against his tax liability equal to 15 percent of his retirement income. One limitation is prescribed by section 37(d)(2)(B) as follows:

71 T.C. 991">*997 SEC. 37. RETIREMENT INCOME.

(d) Limitation on Retirement Income. -- For purposes of subsection (a), the amount of retirement income shall not exceed $ 1,524 less --

* * * *

(2) in the case of any individual who has not attained age 72 before the close of the taxable year --