                       T.C. Memo. 1996-445



                     UNITED STATES TAX COURT



         RONALD A. AND KELLIE J. WEIGELT, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14989-95.               Filed September 30, 1996.



     Ronald A. and Kellie J. Weigelt, pro se.

     Julie L. Payne, for respondent.



                       MEMORANDUM OPINION

     DAWSON, Judge: This case was assigned to Special Trial Judge

Carleton D. Powell pursuant to section 7443A(b)(4) and Rules 180,
                               - 2 -

181, and 183.1   The Court agrees with and adopts the opinion of

the Special Trial Judge which is set forth below.



                 OPINION OF THE SPECIAL TRIAL JUDGE

     POWELL, Special Trial Judge:   By notice of deficiency dated

May 25, 1995, respondent determined a deficiency in petitioners'

Federal income tax for the taxable year 1992 in the amount of

$1,348.   At the time the petition was filed, petitioners resided

in Federal Way, Washington.

     The issues are (1) whether petitioners are entitled to a

deduction for contributions made to Individual Retirement

Accounts (IRA's), and (2) whether petitioners are entitled to an

overpayment of income taxes paid on separation benefits received

from the U.S. Army (Army).

     Petitioners timely filed a petition with this Court

disputing the disallowance of the IRA deduction and claiming an

overpayment in the amount of $17,103.   The alleged overpayment

results from the inclusion of $70,070.60 in income that

petitioners contend is exempt from taxation under section

104(a)(4).

     The facts concerning the $70,070.60 have their genesis in

the disintegration of the Soviet Union and the winding down of

     1
         Unless otherwise indicated, 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
Procedure.
                               - 3 -

the Cold War.   In 1980, Ronald A. Weigelt (petitioner) joined the

Army and, after completing Officer's Candidate School, was

commissioned an officer in the U.S. Army Reserves.    Petitioner

had planned to make the Army a career.   In 1990, the Army began a

reduction in force because of the changes in the international

situation.   On September 30, 1992, petitioner was honorably

discharged from the Army and received a special separation

benefit (SSB payment) in the amount of $70,070.60.

     Prior to his discharge, petitioner applied to the Department

of Veterans Affairs (DVA) for a disability pension.    On January

11, 1994, the DVA notified petitioner by letter that he was

entitled to monthly disability compensation benefits commencing

November 1, 1992, December 1, 1992, and January 1, 1993, in the

respective amounts of $83, $85, and $87.   The letter, however,

also informed him that

     You have received a Special Separation Benefit (SSB)
     payment of $70,070.60 from the Army. We must withhold
     benefit payments until we recover that full amount. We
     will then automatically begin monthly payments.

     On their 1992 joint Federal income tax return, petitioners

reported the $70,070.60 SSB payment.   Petitioners also claimed a

$4,000 deduction for two $2,000 IRA contributions.    Upon

examination, respondent determined that petitioners had

unreported income from wages and interest in the respective

amounts of $153 and $83, and that the deduction claimed for the

IRA contributions was not allowable.   While the 1992 return was
                                - 4 -

being examined, petitioners filed an amended 1992 return omitting

the SSB payment from income.    The amended return was treated as a

claim for refund and was denied by respondent.    Petitioners do

not dispute the adjustments to the wage and interest income.

They do, however, contest the disallowance of the IRA

contributions deduction and contend that the SSB payment is

nontaxable, and, accordingly, they are entitled to an

overpayment.    The parties agree that, if the SSB payment is

nontaxable, petitioners' adjusted gross income is $46,277.2

     The issues raised both depend on the taxability of the SSB

payment.    With regard to the IRA issue, under section 219(a) an

individual is allowed a deduction for qualified retirement

contributions.    Section 219(g)(1), however, limits the deduction

where an individual or the individual's spouse is an "active

participant" for any part of the taxable year of certain pension

plans.    An active participant includes a participant in "a plan

established for its employees by the United States".    Sec.

219(g)(5)(A)(iii).    Petitioner was an "active participant" during

1992.    In the case of married individuals filing a joint return,

the deduction when one individual is an "active participant" is

reduced using a ratio determined by dividing the amount of the

taxpayers' adjusted gross income in excess of $40,000 by $10,000.


     2
         Adjusted gross income as reported ($112,111) plus
adjustments to income ($236) plus disallowed IRA contributions
deduction ($4,000) minus the SSB payment ($70,070).
                                 - 5 -

Sec. 219(g)(2) and (3).   This results in the total disallowance

of the IRA deduction for filers of joint returns where the total

adjusted gross income exceeds $50,000.        Felber v. Commissioner,

T.C. Memo. 1992-418, affd. without published opinion 998 F.2d

1018 (8th Cir. 1993).   If the $70,070.60 SSB payment is

includable in petitioners' gross income, no deduction would be

allowed for the IRA contributions.       Accordingly, we now turn to

that issue.

     The SSB payment was made under 10 U.S.C. sec. 1174(c) and

(d) (1994).   Under these provisions, a Reserve Officer who has

completed more than 5 years of active service and is

involuntarily discharged is entitled to a lump-sum separation

payment equal to the product of the total years of active service

times the monthly basic pay at the time of the discharge

multiplied by 12.

     Section 61(a) provides that gross income means "all income

from whatever source derived".    Unless Congress specifically

exempts certain income from inclusion, the broad language of

section 61(a) requires its inclusion.        Commissioner v. Glenshaw

Glass Co., 348 U.S. 426, 430 (1955).       The broad reach of section

61(a), therefore, would include the SSB payment in gross income.

To be sure, Congress may exempt types of income from taxation.

However, "exemption from taxation must be clearly made out" and

not rest on "doubt or ambiguity".        Bank of Commerce v. Tennessee,

161 U.S. 134, 146 (1896), on rehearing 163 U.S. 416, 423 (1896).
                               - 6 -

An exemption "cannot rest upon mere implications."   United States

v. Stewart, 311 U.S. 60, 71 (1940); see also United States v.

Wells Fargo Bank, 485 U.S. 351, 355-356 (1988).

     Section 104(a)(4) excludes from income "amounts received as

a pension * * * for personal injuries or sickness resulting from

active service in the armed forces".   The parties agree that with

respect to the disability compensation received from the DVA,

those payments would be exempt under section 104(a)(4).   The SSB

payment, however, was not made for personal injury or sickness.

The payment was made under 10 U.S.C. sec. 1174(c) because of

petitioner's separation from active service prior to normal

retirement, and was based, in part, on his years of active

service.   There are two distinct potential sources for the

payment--the SSB payment and the DVA disability compensation.

     10 U.S.C. sec. 1174(h)(2) provides, however, that

     A member [of the armed forces] who has received
     separation pay under this section * * * based on
     service in the armed forces shall not be deprived, by
     reason of his receipt of such separation pay * * * of
     any disability compensation to which he is entitled
     under the laws administered by the Department of
     Veterans Affairs, but there shall be deducted from that
     disability compensation an amount equal to the total
     amount of separation pay * * * received. [10 U.S.C.
     sec. 1174(h)(2).]

     Petitioner does not dispute that normally the SSB payment

would be includable in gross income.   See Felman v. Commissioner,

49 T.C. 599 (1968); Woolard v. Commissioner, 47 T.C. 274 (1966).

On the other hand, petitioner argues that since he in effect is
                                 - 7 -

required to repay that amount from the nontaxable DVA disability

compensation, the SSB payment should also be treated as

nontaxable.

     This same issue was before the Court in Berger v.

Commissioner, 76 T.C. 687 (1981).        Berger involved 10 U.S.C. sec.

687, Pub. L. 89-718, sec. 6, 80 Stat. 1115, 1116 (1966) (repealed

by Pub. L. 96-513, sec. 109(a), 94 Stat. 2870 (1980)).       That

section provided that a member of the reserves who was

involuntarily released from active duty was entitled to

readjustment pay based on his years of service.       If, however, the

member was entitled under repealed 10 U.S.C. sec. 687(b)(6) to

disability compensation from the DVA (then known as the Veteran's

Administration), an "amount equal to 75 percent of the

readjustment payment is deducted from the disability

compensation."   In Berger, as here, the taxpayer argued that the

readjustment pay he received should be reclassified as disability

compensation excludable from income under section 104(a)(4).

Berger v. Commissioner, supra at 689.       In rejecting that

argument, the Court noted that

          The legislative history reveals the congressional
     awareness of the plight of servicemen who have been
     involuntarily released from active duty, and, who
     * * * are immediately entitled to both a lump-sum
     readjustment payment and disability compensation.
     * * * Congress provided that these veterans would
     receive readjustment pay and that upon subsequent
     confirmation of entitlement to disability compensation,
     the readjustment pay in essence would be repaid to the
     Government by a deduction from the disability
     compensation * * *
                               - 8 -

          *        *      *        *      *       *      *

          Congress could have enacted a law which would have
     allowed the immediate exclusion of readjustment
     payments from taxation * * *. However, Congress did
     not choose to have the lump-sum readjustment payments
     treated in this manner. Congress deliberately
     determined that a veteran covered by 10 U.S.C. sec.
     687(b)(6) would be permitted to receive Veterans'
     Administration disability compensation upon restoring
     to the Government that 75-percent portion of the
     readjustment payment * * *. [Id. at 693-694.]

     The repealed section 687 of title 10 would appear to be the

lineal ancestor of 10 U.S.C. sec. 1174.   While 10 U.S.C. sec.

1174(h)(2) mandates a 100-percent recovery of the SSB payment

before petitioner would receive the DVA disability compensation,

in substance the two provisions are the same.    Congress could

have provided that the SSB payment received under 10 U.S.C. sec.

1174(c) was nontaxable to the extent it was subject to recoupment

under 10 U.S.C. sec. 1174(h)(2).   We have searched the statutory

language and the legislative history of 10 U.S.C. sec. 1174 and

find no indication that Congress intended that an SSB payment

would be tax exempt under these circumstances.    See H. Rept. 96-

1462 (1980).   In sum, Congress did not provide for such an

exemption, and we cannot infer one.    See Palm v. United States,

904 F. Supp. 1312 (M.D. Ala. 1995).3




     3
         Contrary to petitioners' argument, Strickland v.
Commissioner, 540 F.2d 1196 (4th Cir. 1976), is inapposite.    That
case concerned the tax treatment of retirement pay and the
retroactive granting of increased disability compensation.
                                 - 9 -

     Because the $70,070.60 SSB payment was properly included in

petitioners' 1992 income, petitioners' adjusted gross income

exceeds $50,000.   Accordingly, the $4,000 deduction for the IRA

contributions is not allowable under section 219(g).

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
