                  T.C. Memo. 1996-405



                UNITED STATES TAX COURT



  LAWRENCE L. AND KATHLEEN J. KELTER, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 6209-95.                 Filed September 3, 1996.



     P sustained work-related injuries to his hands.
For that reason, the pension plan of which P was a
member distributed to P 100 percent of his accrued plan
benefit. R determined a deficiency in income tax based
on Ps' failure to include that distribution in gross
income. Ps argue that the distributions are excludable
from gross income under sec. 105(c), I.R.C.
     Held: The distributions are not excludable from
gross income under sec. 105(c), I.R.C., because the
amount of the distribution was not computed with
reference to the nature of the injuries sustained by P.




John F. Daniels III, for petitioners.

Katherine Holmes Ankeny, for respondent.
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                MEMORANDUM FINDINGS OF FACT AND OPINION

     HALPERN, Judge:     By notice of deficiency dated January 27,

1995, respondent determined deficiencies of $190,189 and $45,127

in petitioners’ Federal income tax liabilities for 1989 and 1990,

respectively.    The only question for decision is whether certain

pension plan distributions that petitioner Lawrence L. Kelter

received in 1989 and 1990 are includable in gross income.      Unless

otherwise noted, all section references are to the Internal

Revenue Code in effect for the years in issue, and all Rule

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

                           FINDINGS OF FACT

     Some facts have been stipulated and are so found.      The

stipulation of facts filed by the parties and accompanying

exhibits are incorporated herein by this reference.       Petitioners

resided in Scottsdale, Arizona, at the time the petition in this

case was filed.

Dr. Kelter

     Petitioner Lawrence L. Kelter (hereafter, petitioner) is a

dentist.   In 1987, petitioner began suffering from bilateral

carpel tunnel syndrome.    Thereafter, in 1987, 1988, and 1989,

petitioner underwent several surgeries in order to alleviate his

pain and suffering therefrom.    The surgeries were unsuccessful in

relieving petitioner’s pain.    In 1987, petitioner ceased the

practice of dentistry.
                                 - 3 -


The Pension Plan

     Petitioner had carried on his dental practice as an employee

of Kelter Professional Corp. (the corporation).    Petitioner was

the sole officer, director, and shareholder of the corporation.

On December 31, 1984, the corporation adopted the “Kelter

Professional Corporation Restated Pension Plan No. Two” (the

Plan), a defined benefit plan.    Section 9.3 of the Plan is

entitled “Disability”, and provides:

     A participant who becomes totally and permanently
     disabled prior to his Normal Retirement Date shall be
     vested one hundred percent (100%) in his Accrued
     Benefit. The determination of the Committee based upon
     competent medical advice which shall include the
     opinion of a licensed physician shall be final as to
     whether any Participant is totally and permanently
     disabled within the meaning of this paragraph. * * *
     Benefits payable under this Section 9.3 shall be deemed
     made from a disability plan maintained by the Employer
     pursuant to Sections 105(c) and 105(e) of the Code.

     The “Committee” specified in section 9.3 of the Plan (the

Committee) consisted only of petitioner and his wife.    As defined

by the Committee, the term “totally and permanently disabled”

meant that the participant would be unable to do any job.      The

term “Accrued Benefit” is defined in the Plan to mean, “at any

time the monthly retirement benefit to which a Participant is

entitled * * * [subject to certain limitations] commencing at his

Normal Retirement Date based upon his number of Years of

Participation to the date of determination.”
                               - 4 -


      In 1989 and 1990, petitioner received distributions pursuant

to the Plan of $654,964 and $136,749, respectively (collectively,

the plan distributions).   The plan distributions equaled

100 percent of petitioner’s accrued benefits under the Plan.

Petitioner did not report the plan distributions as items of

gross income on petitioners’ joint 1989 and 1990 Federal income

tax returns.

      There were no writings concerning any determination by the

Committee that petitioner was totally and permanently disabled.

The Committee determined that petitioner was totally and

permanently disabled on or about November 7, 1989.

      On February 20, 1986, the corporation had filed with the

Internal Revenue Service a Form 5300, Application for

Determination for Defined Benefit Plan For Pension Plans Other

Than Money Purchase Plans.   On June 2, 1987, the Internal Revenue

Service issued a favorable determination letter (the

determination letter).

                              OPINION

I.   Introduction

      The only question we must decide is whether the plan

distributions constitute items of gross income to petitioner.

Petitioners claim that the Plan was a dual purpose plan providing

both retirement and disability benefits and that the plan

distributions were disability payments excludable from gross
                               - 5 -


income pursuant to section 105(c) and (e).   Alternatively,

petitioners claim that, because of the determination letter,

respondent is precluded from challenging the qualification of the

Plan under section 105.   Respondent challenges the qualification

of the Plan as an accident and health plan for employees under

section 105(e), claims that the plan distributions were not

computed with reference to the nature of the injury under section

105(c)(2), claims that the Plan distributions did not constitute

payments for the permanent loss or loss of use of a member or

function of the body under section 105(c)(1), and claims that

petitioners are not entitled to rely on the determination letter.

      Because we agree with respondent that the plan distributions

were not computed with reference to the nature of the injury

under section 105(c)(2), we need not consider whether the Plan

qualifies as an accident and health plan for employees under

section 105(e) or whether Plan distributions constituted payments

for the permanent loss or loss of use of a member or function of

the body under section 105(c)(1).   We also agree with respondent

that petitioners are unable to rely on the determination letter.

II.   Applicable Law

      A.   The Statute

      Section 105(a) provides the general rule that amounts

received by an employee through accident or health insurance for

personal injuries or sickness shall be included in gross income
                               - 6 -


to the extent such amounts are attributable to employer

contributions that were not includable in the employee's gross

income.   Section 105(e) provides that amounts received by an

employee from employer accident or health plans shall, for

purposes of sections 104 and 105, be treated as amounts received

from accident or health insurance.

     Section 105(c) provides an exception to the general rule

contained in section 105(a):

          (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.

     Thus, among other requirements, in order for the plan

distributions to be excluded from gross income, the payments must

have been computed with reference to the nature of petitioner's

injuries without regard to the period petitioner was absent from

work.

     B.   Case Law

     In Hines v. Commissioner, 72 T.C. 715 (1979), we were

concerned with an airline pilot who had suffered a heart attack

that, under both the rules of his employer and regulations
                                 - 7 -


promulgated by the Federal Aviation Administration, rendered him

ineligible for employment as an airline pilot.   Under a loss of

license plan maintained by the pilot’s employer, because of his

medical incapacity, he became entitled to certain payments.

Under that plan, all medically incapacitated pilots received the

same yearly benefit.   We determined that the payments received by

the pilot failed to satisfy the requirement of section 105(c)(2)

that payments be computed with reference to the nature of the

injury:

     The benefits, however, do not vary according to the
     type of injury received and a pilot who has a heart
     attack is entitled to the same benefits as one who
     suffers a mental breakdown or loses a limb. Thus, the
     payments are not computed with reference to the nature
     of the injury. [Id. at 720.]

     We refused to accept the taxpayer’s argument that payment

for any injury that permanently robs an individual of his

principal means of livelihood should qualify for the section

105(c) exclusion.   We stated:

     We think that the overall scheme of section 105(c) is
     aimed at providing tax relief to persons who suffer
     serious, permanent physical injury and receive
     compensation because of it. The fact that a person may
     have also lost wages or suffered a diminution of
     earning capacity because of the injury is irrelevant.
     * * * [Id.; emphasis added.]

     In Beisler v. Commissioner, 814 F.2d 1304 (9th Cir. 1987),

affg. T.C. Memo. 1985-25, the Court of Appeals for the Ninth

Circuit affirmed a decision of ours based on our finding that

line-of-duty disability payments received on account of a career-
                                - 8 -


ending injury sustained by a professional football player were

not computed with reference to the nature of the football injury

he sustained.    The player earned a specified benefit credit for

each season he played, which was not dependent on the nature of

the injuries sustained.    If appealed, our decision in this case

is likely to go to the Court of Appeals for the Ninth Circuit.

In affirming our decision in the Beisler case, the Court of

Appeals for the Ninth Circuit said:     “We conclude that benefit

payments, to be excludable from gross income under section

105(c), must be made under a plan that varies benefits according

to the type and severity of the injury incurred.”     Id. at 1307.

Turning to the facts of the case before it, the Court of Appeals

for the Ninth Circuit said:

       Mr. Beisler's benefit payments necessarily fail to
       qualify for exclusion under section 105(c)(2). Rather
       than computing benefit amounts with reference to the
       type and severity of the injury, the NFL Plan, upon a
       showing of substantial disablement, determines them
       solely on the basis of the number of seasons played.
       The fact that the NFL Plan compensates only the most
       severe permanent injuries (those subsumed under the
       term "substantial disablement") does not cure this
       section 105(c)(2) defect. * * * The plan makes no
       attempt to distinguish among the various "substantial
       disablements," even though the types and severity of
       these injuries can vary greatly. The NFL Plan thus
       does not compute the amount of its disability payments
       with reference to the nature of the injury. [Id. at
       1309; emphasis added.]

III.    Discussion

       The payments in question here (the plan distributions)

equaled 100 percent of petitioner’s accrued benefits under the
                                 - 9 -


Plan.   Petitioners claim that the plan distributions were made

under section 9.3 of the Plan on account of petitioner becoming

totally and permanently disabled.    The Plan contains no

definition of the term “totally and permanently disabled”,

although the Committee, which consisted of petitioner and his

wife, determined that the term meant that a Plan participant

would be unable to do any job.

     The cases cited previously, Beisler v. Commissioner, supra

and Hines v. Commissioner, supra, suggest that, to satisfy the

computed-with-reference-to-the-nature-of-the-injury requirement

of section 105(c)(2), an employee health or accident plan must

provide at least two levels of benefits, with the difference in

entitlement at each level keyed to the nature (severity) of the

injury compensated at that level.    Whether a plan that has only

one level of benefit, keyed to truly the severest of injuries

(e.g., loss of all limbs or irreversible coma), would qualify is

unclear.   See Beisler v. Commissioner, supra at 1308 n.3.   We

need not deal with that theoretical possibility, however,

because, although here there was only one level of benefit

specified in the Plan (for total and permanent disability), we

are unconvinced that the term “total and permanent disability”,

as used in section 9.3 of the Plan, encompassed injuries of only

the truly severest kind.
                               - 10 -


     The Committee determined that petitioner was totally and

permanently disabled in November 1989.    Petitioners propose that

we find that such determination by the Committee was based on

competent medical advice, “which included [the advice] of

Dr. Sterusky, Dr. Moote, Dr. Butzine and Dr. Cofield.”    In

support of that proposed finding, however, petitioners have

failed to cite us to specific testimony or documents in the

record that would constitute such medical advice.

     A letter from Dr. Sterusky, dated May 25, 1988, states that

petitioner “is permanently and totally disabled to practice

dentistry”.    (Emphasis added.)   Dr. Sterusky’s office notes from

October 12, 1989, express the conclusion that petitioner’s

medical condition is stationary and that he has a 10 percent

permanent impairment of both the right and left upper

extremities.    Dr. Sterusky’s office notes from May 15, 1990,

state his belief that petitioner could drive, could work as a

dental equipment salesman or dental technologist instructor, or

could do dental bill auditing.

     A letter from Dr. Moote dated June 14, 1988, states that

petitioner will never be able to practice dentistry on account of

his problems with his upper extremities.    Petitioners have

submitted Dr. Moote’s expert witness report dated January 19,

1996.   Although Dr. Moote’s expert testimony is that petitioner’s

injuries preclude him from employment other than dentistry, that
                               - 11 -


testimony is contradicted by statements that Dr. Moote made

earlier, on eight occasions from 1990 through 1992 in documents

entitled “Attending Physician’s Statements”.   In those

statements, Dr. Moote gives the prognosis that petitioner is not

totally disabled from performing work other than dentistry.       He

states that petitioner is incapable of performing those duties of

his job (dentistry) that required using his hands to grip or

required bending his wrists.   Dr. Moote has failed to convince us

that petitioner is disabled beyond being disabled for the

practice of dentistry or occupations requiring similar motor

skills.   Moreover, petitioners have failed to convince us that,

in November 1989, the Committee was in receipt of advice from

Dr. Moote that petitioner’s injuries precluded him from all

employment.

     Dr. Cofield is the consulting psychologist who evaluated

petitioner on January 11, 1988.   He found very significant

elevations on clinical scales measuring, among other things,

hypochondria, hysteria, and depression.   His evaluation states

that, if petitioner’s condition were not checked, it could “lead

to chronic unemployment and many unproductive years.”     Among

other things, Dr. Cofield suggested personal and vocational

counseling to assist petitioner in setting future goals and

making reasonable plans.   In his evaluation, Dr. Cofield did not
                                - 12 -


state that petitioner’s psychological condition made him

presently unemployable.

     Dr. Butzine did not testify, nor is any copy of any report

by him in the record.    However, attached to Dr. Moote’s expert

testimony is a letter from Dr. Butzine to Aetna Commercial

claims, dated March 9, 1988, acknowledging Aetna’s request for

the results of a psychiatric evaluation done on petitioner

“regarding the issue of disability.”      In that letter, Dr. Butzine

refuses to provide any information on the grounds that he

believed that his interview with petitioner was not to be used

for purposes of determining disability, and petitioner had made

him promise that he would not reveal that information to anyone

else.     He states that the information he has “might well directly

relate to the issue of disability”.      Petitioners did not show

that Dr. Butzine was unavailable to testify.      We shall assume

that Dr. Butzine’s testimony would have been adverse to

petitioner.     Wichita Terminal Elevator Co. v. Commissioner, 6

T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

        We are convinced that, in November 1989, when the Committee

determined that petitioner was totally and permanently disabled

within the meaning of section 9.3 of the Plan, petitioner was

disabled from the practice of dentistry.      We are unconvinced,

however, that he was disabled from any employment, or that the

Plan required such total disability from any employment before
                                - 13 -


benefits could be paid pursuant to section 9.3.    The term “total

and permanent disability” is undefined in the Plan, and, contrary

to petitioner’s testimony as to what the Committee thought that

term meant, we believe that the Committee implemented the Plan by

allowing petitioner disability benefits on a showing that he was

disabled from the practice of dentistry without a showing that he

was disabled from any employment.    We find that the Plan did not

vary the amount of benefit according to the type and severity of

the injury suffered by the employee, and that the Plan’s

requirement of total and permanent disability was satisfied on a

showing of disability to practice dentistry.    Based on those

findings, the Plan failed to meet the requirements of section

105(c) that payments be computed with reference to the nature of

the injury.   This case is similar to both Beisler v.

Commissioner, 814 F.2d 1304 (9th Cir. 1987), and Hines v.

Commissioner, 72 T.C. 715 (1979), and we are governed by the

results therein.

     Petitioners argue that both this Court, in the Hines case,

and the Court of Appeals for the Ninth Circuit, in the Beisler

case, misconstrued section 105(c) in imposing a requirement that

benefits vary in accordance with the nature of the injury.    In

petitioners’ view, it suffices that benefits are paid on account

of injury or sickness and without regard to the period the

employee is absent from work.    Petitioners claim:   “There is no
                               - 14 -


basis to impose any requirement that a plan must vary payments in

accordance with the type of injury.”    That is the same argument

that was made to the Court of Appeals for the Ninth Circuit in

the Beisler case.    It was rejected by the Court of Appeals there,

814 F.2d. at 1308, and we reject it here.    Like the Court of

Appeals, we have examined the legislative history of section

105(c).   We believe that it is insufficient to satisfy the

section 105(c) requirements for exclusion that payments are made

without regard to absence from work and on account of injury or

sickness.   We agree with the Court of Appeals, 814 F.2d at 1308,

that petitioners’ interpretation would make the nature-of-the-

injury language superfluous.    Under petitioners’ interpretation,

section 105(c) would be satisfied if the Plan had been designed

to pay petitioner 100 percent of his Accrued Benefit (his

retirement benefit) if he had gone deaf in one ear.    See section

1.105-3, Income Tax Regs. (loss of substantially all of the

hearing in one ear is considered loss of use of a function of the

body).    We do not believe that result comports with Congress’

purpose in enacting the section 105(c) exclusion rule.

     Finally, petitioners claim that, because of the

determination letter, respondent is precluded from challenging

the qualification of the plan under section 105.    We disagree.

First, we are unconvinced that the corporation asked for a

determination with respect to section 105 or pointed out to the
                              - 15 -


Internal Revenue Service that the Plan, clearly labeled a pension

plan, contained a section dealing with disability.    Second, the

determination letter does not purport to deal with the taxability

to plan participants of distributions made under the plan.

Third, petitioners have failed to show any reliance on the

determination letter, that any such reliance would have been

reasonable, or that they were damaged on account of such

purported reliance.   “Although the doctrines of estoppel and

quasi-estoppel are applicable against the Commissioner, it is

well established that these doctrines should be applied against

him with utmost caution and restraint.”    Estate of Emerson v.

Commissioner, 67 T.C. 612, 617 (1977) (citations omitted).      This

is not an occasion for such application.    Furthermore, respondent

has done nothing to revoke her determination letter, and, even if

she had, petitioners have failed to show reliance or other

grounds to challenge such revocation.

IV.   Conclusion

      The plan distributions constitute gross income to

petitioner.   Respondent’s determinations of deficiencies are

sustained.


                                           Decision will be entered

                                    for respondent.
