                         T.C. Memo. 1996-463



                       UNITED STATES TAX COURT



            KIRK A. AND IDA R. CRANDALL, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 8220-94.             Filed October 15, 1996.



       Kirk A. and Ida R. Crandall, pro sese.

       Yolanda R. Garcia and Franklin R. Hise, for respondent.



                         MEMORANDUM OPINION


       WOLFE, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.    All section references are to the Internal Revenue Code in

effect for the taxable year in issue, unless otherwise indicated.
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All Rule references are to the Tax Court Rules of Practice and

Procedure.

     Respondent determined a deficiency in petitioners' 1991

Federal income tax in the amount of $999.   The sole issue for

decision is whether payments received by petitioner Kirk A.

Crandall in 1991 from the Kodak Welfare Benefit Plan Trust are

includable as gross income on petitioners' 1991 Federal income

tax return.

     Some of the facts have been stipulated and are so found.

The stipulated facts and attached exhibits are incorporated by

this reference.   Petitioners resided in Datil, New Mexico, when

their petition was filed.

     On September 1, 1985, petitioner Kirk A. Crandall (Mr.

Crandall) began employment with the Eastman Kodak Company (Kodak)

as a service representative.   Approximately 13 months later Mr.

Crandall became disabled.   The last date on which he worked at

Kodak was October 17, 1986.    In March 1987, Mr. Crandall filed an

application for benefits under the Kodak Long Term Disability

(LTD) Plan (sometimes hereinafter referred to as "the Plan").

His coverage under the Plan became effective March 31, 1987.     A

subsequent, lump sum settlement of a disputed worker's

compensation claim filed by Mr. Crandall did not adversely affect

his eligibility for benefits under the Plan.

     During 1991, Mr. Crandall received payments from the Kodak

Welfare Benefit Trust in the amount of $5,491.52.   Petitioners
                               - 3 -

did not include that amount in income on their joint 1991 Federal

income tax return.   Mr. Crandall's 1991 Form W-2, Wage and Tax

Statement, issued by the Kodak Welfare Benefit Trust, reported

the amount of $5,491.52 in separate boxes, alternatively entitled

"Wages, tips, other compensation" and "Disability Benefits (Sick

Pay) Included in Wages", and also in the box for "Total Benefits

Paid".   Nothing was withheld or excluded from Mr. Crandall's 1991

benefits.   On their 1991 return, Mr. Crandall reported as his

occupation "Disabled", and petitioner Ida Crandall reported as

her occupation "Teacher".

     Petitioners contend that the payments they received in 1991

from the Kodak Welfare Benefit Trust are excludable from gross

income because the total amount received was not attributable to

employer contributions that were not includable in petitioners'

gross income.

     Respondent determined that the payments Mr. Crandall

received must be included in petitioners' 1991 gross income

because the Kodak Long Term Disability Plan was funded solely by

employer contributions.   Respondent's determinations as to

petitioners' tax liability are presumed correct, and petitioners

have the burden of proving otherwise.   Rule 142(a).

     Section 105 provides that, in general, amounts received by

an employee, through an accident or health plan for employees,

for personal injuries or sickness must be included in gross

income to the extent such amounts (1) are attributable to
                               - 4 -

contributions by the employer that were not includable in the

gross income of the employee, or (2) are paid by the employer.

Sec. 105(a), (e).

     Documents stipulated by the parties in this case establish

that the payments received by Mr. Crandall from the Kodak Welfare

Benefit Trust were made under the Kodak Long Term Disability

(LTD) Plan, and that Kodak funded the Kodak Welfare Benefit Trust

without any contributions from employees.

     The parties stipulated into the record a copy of select

portions of an undated employee handbook (hereinafter "the

employee handbook"), in addition to a copy of applicable portions

of an undated booklet issued by Kodak that explained the Kodak

LTD Plan (sometimes hereinafter referred to as "Kodak's Long Term

Disability booklet" or "the booklet").     The copied material had

been provided to respondent in 1995 by Nick Laino, a manager in

the Disability Management Services unit of the Metropolitan Life

Insurance Company (MetLife).   At the time, MetLife was

responsible for reviewing claims under the Plan and assisting

Kodak in general planning.

     The employee handbook states:     "The plan is known as the

Kodak Long Term Disability (LTD) Plan and is sponsored and

maintained on an uninsured basis by Eastman Kodak Company".     It

states further:

     The Kodak Welfare Benefit Plan Trust with Citibank,
     N.A., as trustee, has been established to accumulate
     assets of the plan and to provide funds for benefit
                               - 5 -

     payments. The assets of the fund held by the trustee
     may not be used for any purpose other than for the
     exclusive benefit of persons entitled to benefits under
     the plan * * *.

The booklet states that the Kodak "LTD Plan is paid for entirely

by the company.   There is no cost to employees."   From the record

in this case, we conclude that the payments received by Mr.

Crandall during 1991 from the Kodak Welfare Benefit Trust were

benefits under the Kodak LTD Plan, and that such payments were

attributable exclusively to contributions by Kodak.

     In support of their contention that the payments at issue

were not attributable to employer contributions, petitioners

submitted into the record a copy of a Summary Annual Report

issued by Kodak for 1991.   With respect to the Kodak LTD Plan,

the Summary Annual Report states that "During the plan year, the

plan had total income of $13,853,115 including employer

contributions of $927,838 and realized net investment gains of

$12,925,277."   Petitioners conclude from this statement that

93.31 percent of the Plan income was from employee contributions

or assets.   We disagree with petitioners' interpretation.   The

quoted statement does not classify the $12,925,277 as employee

contributions or assets, but defines that amount as "realized net

investment gains".   Moreover, petitioners' interpretation is

inconsistent with the statement in Kodak's Long Term Disability

booklet stating that the "Plan is paid for entirely by the

company.   There is no cost to employees."
                               - 6 -

     Petitioners also maintain that Mr. Crandall's payroll stubs

from Kodak evidence employee contributions to the Plan.    Copies

of a sampling of Mr. Crandall's payroll stubs issued by Kodak

during his period of active employment show that 60 cents was

deducted from his weekly earnings for "Disability."    However, the

employee handbook indicates that the weekly deductions of 60

cents from Mr. Crandall's earnings were for Kodak's short-term

Sickness Allowance Plan, not the Kodak LTD Plan.    According to

the employee handbook, the Kodak Sickness Allowance Plan (KSAP)

is a short-term benefits plan covering all employees.    For

employees with less than 15 years of service, such as Mr.

Crandall, the KSAP provides continuation of an employee's full

base pay for a period of 26 weeks while the employee is unable to

work because of sickness, injury, or disability.1   The employee

handbook states that "Kodak pays for the cost of the plan [KSAP],

however, during [an employee's] first three years of coverage,

[the employee] contribute[s] 60 cents per week through payroll

deduction."   The corporate documents available to us demonstrate

that the 60-cent payroll deductions that Mr. Crandall incurred,

until he became disabled in October 1986, were for the short term

coverage.   Stipulated correspondence demonstrates that such was

the administrative construction of the plan.


1
     Mr. Crandall's long term disability benefits began
approximately 23 weeks after the last date he worked at Kodak.
(Oct. 17, 1986 to Mar. 31, 1987 = 165 days or 23.57 weeks).
                                - 7 -

     We hold the following circumstances dispositive.      During

1991, Mr. Crandall received payments from the Kodak Welfare

Benefit Trust totaling $5,491.52.    Payments from the Kodak

Welfare Benefit Trust are made exclusively to satisfy obligations

under the Kodak LTD Plan.    Kodak's Long Term Disability booklet

states that the Plan is paid for entirely by Kodak and that there

is no cost to employees.    The deductions of 60 cents from Mr.

Crandall's weekly earnings were for Kodak's Sickness Allowance

Plan, not the Kodak LTD Plan.    Petitioners did not argue, nor

does the record show, that Kodak's contributions to the Plan were

included in Mr. Crandall's gross income, or that the payments he

received qualify under the exception provided for under section

105(c).2

     Under the circumstances of this case, sections 61 and 105

clearly require petitioners to include in income for Federal

income tax purposes the disability payments that Mr. Crandall

received during 1991.


                                             Decision will be entered

                                        for respondent.




2
     Both the employee handbook and the booklet state that
payments under the Plan are calculated as a percentage of the
employee's base wage or annual salary rate, less certain other
benefits.
