                           T.C. Memo. 1999-271



                         UNITED STATES TAX COURT



          JON L. STOLTE AND ESTHER J. STOLTE, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 22988-97.           Filed August 12, 1999.



        Robert C. Zack and Eric T. Weiss, for petitioners.

     Alexandra E. Nicholaides, for respondent.



                           MEMORANDUM OPINION


        LARO, Judge:   Petitioners petitioned the Court on November

26, 1997, to redetermine respondent's determination of

deficiencies in petitioners' Federal income tax for 1987 through

1990.    By notice of deficiency dated September 3, 1997,

respondent determined petitioners had unreported income resulting
                                - 2 -


from payments petitioner Jon L. Stolte1 received under two

disability policies.    The resulting deficiencies in income tax,

additions to tax, and penalties are as follows:

                                Additions to Tax         Penalty
     Year      Deficiency    Sec. 6653(a) Sec. 6661     Sec. 6662

     1987       $12,472          $624      $3,118
     1988        5,371            269       1,343
     1989        6,274                                    $1,255
     1990        6,263                                     1,253

     After concessions by petitioners, the sole issue for

decision is whether certain payments received by petitioner may

be excluded from petitioners' gross income under section 105(c).

We hold they may.

     Unless otherwise stated, section references are to the

applicable versions of the Internal Revenue Code, and Rule

references are to the Tax Court Rules of Practice and Procedure.

                             Background

     Some of the facts are stipulated and are so found.

Petitioners resided in Bloomfield Hills, Michigan, when they

filed their petition.   Petitioner is 64 years old and received

his license as a medical doctor in 1972.   Petitioner practiced

medicine as an employee of his wholly owned corporation, Jon L.

Stolte, M.D.P.C. (P.C.), from 1972 through 1990.      During most of


     1
      All singular references to petitioner are to petitioner Jon
L. Stolte unless otherwise indicated. Petitioner Esther J.
Stolte is a party to this proceeding due to filing a joint
Federal income tax return with petitioner.
                               - 3 -


his career, he specialized in general surgery but also practiced

general medicine.   Petitioner served as deputy medical examiner

for the county from 1972 to 1993, where his duties included

examining deceased bodies and signing death certificates.

      In the early 1970's, the P.C. purchased two disability

policies for petitioner and paid all premiums on behalf of

petitioner.   One policy was issued by the Monarch Life Insurance

Company ("Monarch policy"), which policy provided generally five

different benefit payments based on the type of disability:

      Disability                         Payment

(1)   Blindness, loss of
      2 extremities2                     $60,000

(2)   Loss of sight, speech,
      hearing or 2
      extremities                        $2,500/month for life

(3)   Total disability from transplant   $2,500/month for up
                                         to 6 months




      2
      The Monarch Policy provided that if petitioner had a
sickness or injury that resulted in total and irrevocable loss of
the use of both hands, both feet, or a hand and a foot, through
severance or otherwise, then, in addition to other benefits
payable, petitioner would receive the $60,000 benefit. This
benefit was payable even if petitioner could still engage in his
regular occupation and even if he did not require regular
attendance of a physician.
                               - 4 -


(4)   Total disability                   before age 50;
      from sickness                      $2,500/month for life,
                                         from ages 50-65,minimum
                                         $60,000 or $2,500/month,
                                         whichever is greater

(5)   Total disability                   before age 65,
      from accident                      $2,500/month for life,
                                         after age 65, $60,000

The $2,500 per month figure was fixed as of the time the policy

was issued except that it may be adjusted by a cost-of-living

factor.   Under the Monarch policy, total disability is defined as

a sickness or injury requiring regular attendance of a licensed

physician, and benefits are payable as long as petitioner is

unable to engage in his regular profession as a general surgeon.

The Monarch policy contemplates that petitioner is allowed to

train for or engage in any other occupation or profession.

      The other policy was a group hospital indemnity policy

issued by the Provident Life and Accident Insurance Company

(Provident policy), which policy provided for payments under the

circumstances set forth in the policy which payments varied with

the type of illness or disability.

      In the early 1980's petitioner suffered from extreme

fatigue, recurrent abdominal pain, and flulike symptoms which

were ultimately diagnosed as chronic fatigue syndrome.   In 1986,

petitioner was diagnosed with a cancerous disease of the lymph

glands commonly known as Hodgkin's Disease.   Petitioner began

receiving chemotherapy, which continued for approximately 8
                                - 5 -


months.   During chemotherapy, petitioner underwent two surgeries

for an obstruction of the bowel.   Petitioner's cancer is in

remission, but the chemotherapy immediately caused petitioner to

suffer peripheral nerve damage in his hands, legs, and feet known

as polyneuropathy.   Petitioner experienced and continues to

experience numbness, weakness, and quivering of the muscles in

his hands, legs, and feet.    This condition has led to atrophy of

the muscles and permanent nerve damage.     Petitioner experiences

burning in his hands and feet and is unable to stand for extended

periods or grasp and hold objects.      During 1988, the severity of

this condition caused petitioner to fall and break his hip.

Petitioner's condition has deteriorated rapidly since 1986,

leaving him frail and weak.   His condition has been so

debilitating that he no longer lives a normal lifestyle and is

unable to enjoy most activities in which he previously engaged.

Petitioner's condition leaves him too exhausted to be productive

during his days, and he spends most of his time resting.     His

prognosis is poor.

     Since 1986, petitioner has been unable to practice as a

general surgeon due to the polyneuropathy he suffers.     In 1987,

petitioner returned to work as a general practitioner on a very

limited basis, acting as a primary care doctor for a small number

of health maintenance organization patients and spending only a

few hours a week at his office.    Petitioner continued working in
                               - 6 -


this limited capacity throughout the years in issue and did a

small amount of medical consulting work.   Petitioner's

polyneuropathy rendered him unable to drive, and he relied on his

wife for transportation.   With her help, he was able to continue

his work as the deputy medical examiner.   The P.C. reported gross

receipts from 1987 through 1990 ranging from $14,738 to $27,858.

These receipts represented payments from petitioner's various

medical services and largely related to amounts collected for

services rendered prior to 1987.

     Petitioner received benefits under the Provident policy in

1987 and 1988 in the amounts of $12,500 and $2,800, respectively.

These amounts were calculated in accordance with the above table

and were based upon the specific type of injury suffered by

petitioner.3   Petitioner was considered disabled under the

Monarch policy from 1986 forward. He received benefits under the

Monarch policy in 1987, 1988, 1989, and 1990, in the amounts of

$34,320, $31,700, $35,640, and $35,640, respectively.     These

amounts represented the maximum benefit of $2,500 per month.4




     3
      The daily indemnity amount for each day petitioner was
confined in the hospital due to cancer under the Provident policy
is 200 percent of $200 or $400 per day. In 1987, petitioner was
confined in a hospital for 31.25 days and in 1988 was confined
for 7 days.
     4
      The $2,500 figure was adjusted each year for a cost-of-
living factor.
                               - 7 -


     Petitioners did not report any of these disability payments

on their return for 1987, 1988, 1989, or 1990.   Respondent

determined that the payments received by petitioner under the

Monarch policy and the Provident policy were includable in

income.

                            Discussion

     We must decide whether petitioner, who suffers from a

debilitating physical condition, is eligible for the tax benefit

Congress intended to confer upon those whose quality of life has

been significantly lessened by a severe and permanent physical

injury.   Petitioner contends that the disability payments at

issue are excludable from his gross income because: (1) They

constituted payment for the permanent loss or loss of use of a

member or function of the body, in that petitioner has

permanently lost the use of the function of his hands, feet, and

legs; and, (2) the payments were computed with reference to the

nature of the injury without regard to the period petitioner was

absent from work.   Respondent, in contrast, argues the payments

received by petitioner under the Monarch policy do not satisfy

either of the conditions imposed by section 105(c); that the

payments received under the Provident policy do not satisfy the

first condition of section 105(c); and that the payments under
                               - 8 -


both policies must, therefore, be included in petitioner’s gross

income.5   We disagree.

     Section 105(a) provides in general that amounts received by

an employee under accident and health plans funded by the

employer are included in the employee’s gross income. Section

105(c), however, provides an exception to the general rule:

          (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, * * * and

                (2) are computed with reference to the
           nature of the injury without regard to the
           period the employee is absent from work.

     As to the first element of section 105(c), injuries

encompassed by the statute fall into three categories:     (1) The

permanent loss or loss of use of a member of the body; (2) the

permanent loss or loss of use of a function of the body; and (3)

permanent disfigurement.   The third category is inapplicable

because it refers only to external bodily appearance.    Petitioner

must fall under one of the first two categories to prevail.

Petitioner bears the burden of disproving respondent’s



     5
      With respect to the Provident policy the parties stipulate
and respondent concedes that the second element of sec. 105(c)
(relating to whether payments are based on the type of injury and
unrelated to absence from work) is satisfied.
                                - 9 -


determination.   See Rule 142(a); Welch v. Helvering, 290 U.S. 111

(1933).

     Injuries included in the first two categories are described

in section 1.105-3, Income Tax Regs., which provides in pertinent

part:

     For purposes of section 105(c), loss or loss of use of
     a member or function of the body includes the loss or
     loss of use of an appendage of the body, the loss of an
     eye, the loss of substantially all of the vision of an
     eye, and the loss of substantially all of the hearing
     in one or both ears. * * *

     The term "member" was intended to cover loss of extremities

such as arms, legs, or loss of bodily function.   See Hines v.

Commissioner, 72 T.C. 715 (1979).   Regarding loss of bodily

"function", we look to whether petitioner's condition has left

him effectively without the use of his hands, legs, and feet, as

opposed to whether his use is partially impaired.   See Hines v.

Commissioner, supra.    In Hines v. Commissioner, supra, we

considered the application of section 105(c) to a pilot who

suffered a heart attack and lost the use of a portion of his

heart.    The taxpayer was barred by FAA regulations from returning

to his employment.   We considered the function of the heart as a

circulatory organ and concluded "petitioner's heart is now

functioning normally in that respect" and that "petitioner is now

leading a normal life and he may well live out a normal life span

in spite of increased risk."    Hines v. Commissioner, supra at
                                  - 10 -


719.       We held the injury to the taxpayer’s heart was not the loss

of a body function and was not of the type envisaged by section

105(c)(1).

       The facts of this case are materially distinguishable from

those in Hines, and we hold the impairment petitioner suffers in

his hands, legs, and feet due to polyneuropathy is tantamount to

the loss of a member or a body function within the meaning of

section 105(c).       Unlike the taxpayer's heart in Hines,

petitioner's arms, legs, and feet have not functioned normally

since he began chemotherapy.      Petitioner's hands and legs fail

him frequently and unexpectedly, and he can barely hold objects

or stand for any significant period of time.      We find the

negative impact on petitioner's quality of life to be of such a

degree as rises to the level of severity contemplated by Congress

in section 105(c).6

       Respondent argues petitioner has merely lost his ability to

function as a general surgeon and that loss of earning capacity

is not equivalent to loss of a body function.      See Hines v.

Commissioner, supra; West v. Commissioner, T.C. Memo. 1992-617.

While we agree with this legal proposition, we disagree with


       6
      In Hines v. Commissioner, 72 T.C. 715, 718-719 (1979), we
recognized the Congressional intent of sec. 105(c) "was to
provide a tax benefit to one who receives a severe physical
injury which permanently and significantly lessens the quality of
life which he had enjoyed prior to the injury."
                                - 11 -


respondent's analysis of the facts.      We listened to petitioner's

credible testimony about his condition from 1986 forward and

reviewed documentary evidence of petitioner's condition, which

evidence included several letters from physicians who examined

petitioner at relevant times.7    We are convinced that

petitioner's condition is severe and permanent and has left him

without functional use of his hands, legs and feet.       Petitioner's

polyneuropathy robbed him not only of his ability to function as

a general surgeon but also of his ability to lead the life he

enjoyed before his condition.    See, e.g., Maller v. Commissioner,

T.C. Memo. 1984-614 (wherein the parties stipulated loss of sight

was loss of a body function); Berner v. United States, 81-2 USTC

par. 9733 (W.D. Pa. 1981) (wherein taxpayer's loss of virtually

all respiratory function was loss of a body function).

Petitioner has satisfied the first element of section 105(c).

     The parties stipulated the second element of section 105(c)

for the Provident policy.   Regarding the Monarch policy,

the payments must be computed with regard to the nature of the

injury and must not be computed with regard to the period the

employee is absent from work.    See sec. 105(c)(2); Hines v.


     7
      We also observed petitioner at trial and noted his weak
condition and difficulty moving around. While the trial was
several years after the years in issue, we conclude based upon
this record that petitioner's condition was substantially similar
during the years in issue.
                                - 12 -


Commissioner, supra; Berman v. Commissioner, T.C. Memo. 1989-654,

affd. 925 F.2d 936 (6th Cir. 1991).      The Monarch policy provides

at least five different payment categories based upon the type of

injury suffered.   It is not related to the period of time

petitioner is absent from work as the policy contemplates that

petitioner may engage in any employment or occupation while

disabled as a general surgeon.    The facts of this case are

distinguishable from those cited by respondent.     See, e.g., West

v. Commissioner, supra (benefits determined by years of "benefit

credit"); Berman v. Commissioner, supra (benefits determined by

salary and years of service);     Beisler v. Commissioner, T.C.

Memo. 1985-25, affd. 814 F.2d 1304 (9th Cir. 1987) (benefits

determined solely by reference to years in the NFL).     We hold

petitioner has satisfied the second element of section 105(c) for

the Monarch policy.

     In reaching our holdings herein, we have considered each

argument made by the parties, and, to the extent not discussed

above, find those arguments to be irrelevant or without merit.

Due to concessions of the parties,



                                      Decision will be entered

                                 under Rule 155.
