                          T.C. Memo. 2002-236



                      UNITED STATES TAX COURT



          ROBERT B. AND DAISY A. MILEY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 683-00.                 Filed September 19, 2002.



     Robert B. and Daisy A. Miley, pro se.

     C. Teddy Li, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a deficiency of $3,261

in petitioners’ 1997 Federal income tax.     After concessions, the

sole issue for decision is whether petitioners may exclude from

income disability payments that petitioner Robert B. Miley

(petitioner) received under a disability policy in 1997.    We hold

that they may not.
                                - 2 -

     Section references are to the Internal Revenue Code in

effect for 1997.    Rule references are to the Tax Court Rules of

Practice and Procedure.

                          FINDINGS OF FACT

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

A.   Petitioners

     Petitioners are married and resided in Glen Burnie,

Maryland, when they filed their petition.

     Petitioner worked for Hearth Home Doors, LLC (Hearth Home)

in January 1997.    He earned about $450 a week at that time.   On

his 16th day of work in 1997, petitioner was injured in an

automobile accident.    His injuries caused him to miss several

months of work.    He never returned to work for Hearth Home.

B.   Petitioner’s Disability Payments

     Hearth Home was the plan holder for a disability insurance

policy issued by Guardian Life Insurance Co. of America

(Guardian) that covered petitioner.     Guardian paid disability

payments to petitioner totaling $7,618 from January 17 to July

17, 1997, less amounts Guardian withheld for Social Security and

Medicare taxes.

C.   Petitioners’ 1997 Return

     In February 1998, Hearth Home issued to petitioner a Form W-

2, Wage and Tax Statement, which stated that he received $9,149

in wages in 1997.    Petitioners did not report any income from
                                - 3 -

Hearth Home or Guardian on their 1997 tax return or attach the

Form W-2 from Hearth Home to their 1997 return.

                               OPINION

     Petitioners contend that Guardian’s payments to petitioner

of $7,618 were nontaxable disability benefits.1

     Gross income includes all income from whatever source

derived.   Sec. 61(a).   Exclusions from income are a matter of

legislative grace and are construed narrowly.      Commissioner v.

Schleier, 515 U.S. 323, 328 (1995).      Taxpayers bear the burden of

proving that they are entitled to exclude the amounts claimed.2

Rule 142(a)(1).




     1
        Respondent determined that petitioner received unreported
income of $9,149, the amount that Hearth Home reported on the
Form W-2 that it issued to petitioner for 1997. Of that amount,
$7,618 was disability income and $1,531 was compensation that
petitioner received from Hearth Home for the 15 days he worked in
January 1997. Petitioners do not contend that the compensation
for the 15 days is excludable from income.
     2
        Petitioners do not contend that the burden of proof is on
respondent under sec. 7491, nor have petitioners established that
they complied with the requirements of sec. 7491(a)(2)(A) and (B)
to substantiate items, maintain required records, and fully
cooperate with respondent's reasonable requests.
                                   - 4 -

       Disability benefits are excludable from gross income under

section 104(a)(3)3 or section 105(c)4 if certain requirements are

met.       However, as discussed next, we conclude that those

requirements are not met.




       3
            SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.

            (a) In General.–- * * * gross income does not
       include--

                   *     *     *     *      *    *     *

                    (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);
       4
            Sec. 105(c) provides in part:

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

            (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.
                                - 5 -

A.   Whether Petitioner’s Disability Payments Are Excludable as
     Amounts Received Through Accident or Health Insurance

     Gross income does not include amounts received through

accident or health insurance for personal injuries or sickness to

the extent those amounts are:   (1) Attributable to contributions

by the employer which were includable in the gross income of the

employee, or (2) paid by the employee.     Sec. 104(a)(3).

Petitioner’s disability payments were received through accident

or health insurance for personal injuries or sickness for

purposes of sections 104(a)(3) and 105(c).      See Trappey v.

Commissioner, 34 T.C. 407, 408 (1960); Andrews v. Commissioner,

T.C. Memo. 1992-668.   Thus, petitioner may exclude the disability

payments under section 104(a)(3) if the payments were

attributable to premiums paid by his employer that were included

in petitioner’s gross income.   Sec. 104(a)(3).     Similarly,

petitioner may exclude disability payments if he paid the

premiums for the disability policy.      Id.   If he did not pay the

premiums and his employer’s contributions were not included in

his income, the disability payments are includable in income

under section 105(a)5 unless an exception applies.


     5
         Sec. 105(a) provides in part:

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

          (a) Amounts Attributable to Employer
     Contributions.--Except as otherwise provided in this
                                                   (continued...)
                              - 6 -

     Petitioner testified that he paid premiums of $3 per pay

period for his disability policy.   His testimony does not

establish that the disability payments he received in 1997 were

attributable solely to contributions he made to the disability

policy or that the disability payments were not attributable in

whole or part to contributions by Hearth Home for the policy.6

There is no evidence that the Hearth Home contributions were

included in petitioner’s income.

B.   Whether Petitioner’s Disability Payments Are Excludable as
     Payments for Permanent Loss or Disfigurement

     Gross income does not include disability benefits to the

extent that they 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, sec. 105(c)(1), and are computed

with reference to the nature of the injury without regard to the

period the taxpayer is absent from work, sec. 105(c)(2).

Petitioners do not contend that the disability payments are




     5
      (...continued)
     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.
     6
        There is no evidence of what portion of the premiums
petitioner’s $3 contribution per pay period represents.
                              - 7 -

excludable under section 105(c)(1).    We conclude that the

disability payments petitioner received in 1997 are not

excludable from petitioners’ income under section 105(c).

C.   Conclusion

     Petitioner’s disability payments are includable in income

under section 105(a) and are not excludable from income under

section 104(a)(3) or section 105(c).   Thus, petitioners

underreported their 1997 income by $9,149.

                                              Decision will be

                                         entered for respondent.
