                        T.C. Memo. 1996-534



                      UNITED STATES TAX COURT



                 GEORGE KIOURTSIS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9283-95.                     Filed December 4, 1996.



     Alan E. Rabunski, for petitioner.

     Gary W. Bornholdt and Lewis J. Abrahams, for respondent.



                        MEMORANDUM OPINION


     RAUM, Judge:   The Commissioner determined a $2,651

deficiency in petitioner's 1992 Federal income tax.    The issues

for decision are:   (1) Whether, pursuant to section 104(a)(4),

petitioner may exclude from gross income a $23,094 pension he

received from New York City on account of his disability
                               - 2 -

retirement from its Department of Corrections, (2) whether the

Commissioner is precluded from including the New York City

pension in petitioner's 1992 gross income where the Commissioner

had issued a closing letter accepting as filed petitioner's 1990

return that failed to include in petitioner's gross income the

New York City pension payments received in that year, and (3)

whether petitioner must include $3,181 of benefits received from

the Social Security Administration in gross income.   Unless

otherwise indicated, all section references are to the Internal

Revenue Code in effect for the year in issue.   The facts have

been stipulated.

     Petitioner, George Kiourtsis, resided in Astoria, New York,

when the petition in this case was filed.   He served in the U.S.

Armed Forces from August 30, 1966, to August 29, 1969, including

9 months in the infantry in Vietnam.   While thus serving in the

Armed Forces, petitioner received the National Defense Service

Medal, a Parachute Badge, the Vietnam Service Medal, the Combat

Infantryman's Badge, the Vietnam Campaign Medal, the Purple

Heart, and the Bronze Star Medal.

     In 1969, the Veterans' Administration awarded petitioner "a

10 percent service-connected disability" based on the shortening

of his right leg due to injuries resulting from active service in

the Armed Forces.   The Veterans' Administration subsequently

increased petitioner's service-connected disability compensation

by 10 percent based on an injury to his right ear caused by
                               - 3 -

exposure to explosions while in active service in Vietnam.     The

Veterans' Administration subsequently increased petitioner's

"service-connected disability" by 30 percent because he was

suffering from Post Traumatic Stress Disorder caused by combat-

related injuries incurred as a result of active service in the

Armed Forces.   In February, 1993, the Veterans Administration

increased petitioner's service-connected disability compensation

for Post Traumatic Stress Disorder from 30 to 70 percent, and he

was "granted Individual Unemployability" effective February 1,

1991, meaning that petitioner's disorder was severe enough to

render him incapable of working.

     In 1987, petitioner was working as a captain in the New York

City Department of Corrections and was assigned to Riker's

Island.   On March 6, 1989, he applied for ordinary disability

retirement under the New York City Employees' Retirement System

on the basis that he was suffering from Post Traumatic Stress

Disorder.   On June 8, 1989, he appeared before the Medical Board

of the New York City Employees' Retirement System for an

evaluation of his application for ordinary disability.   The

Medical Board Report included the reports of several physicians

who diagnosed petitioner as suffering from Post Traumatic Stress

Disorder.   On October 20, 1989, the Board of Trustees of the

Employees' Retirement System accepted the recommendations of the

Medical Board and granted petitioner's application for ordinary
                               - 4 -

disability as provided by the New York City Employees' Retirement

System.

     On his 1990 U.S. Individual Income Tax Return, petitioner

did not include in income the $23,032 New York City pension

payments received that year.   The IRS sent petitioner an

Information Request inquiring why his 1990 return did not include

the New York 1990 pension income in the amount of $23,032

reported by the New York City Comptroller.    By letter dated March

30, 1993, petitioner responded to that inquiry, attaching a copy

of his Report of Discharge from the armed services, a copy of the

Veterans Administration's letter granting him Individual

Unemployability, and a letter from the New York City Employees'

Retirement System granting him ordinary disability retirement.

After submitting the foregoing letter, petitioner received a

"closing letter" from respondent dated May 7, 1993, which

accepted petitioner's 1990 return as filed.

     The Commissioner's determination of deficiency for 1992 was

based upon two adjustments:

     a.   The inclusion in gross income of the $23,094 pension

          received in 1992 by petitioner from New York City.

     b.   The inclusion in gross income of a portion ($3,181) of

          the $14,073 in benefits he received from the Social

          Security Administration in 1992.
                                       - 5 -

       Petitioner relies upon the exclusion provisions of section

104(a)(4) as applied to the New York City pension received by

him.       He also argues that the Commissioner should be equitably

estopped from including the pension in his 1992 gross income

because of the "closing letter" in respect of petitioner's 1990

return.       Since the amount of Social Security benefits to be

included in gross income depends entirely upon a computation to

be made based upon the taxpayer's adjusted gross income1

petitioner makes no separate argument regarding this adjustment.

1.     Exclusion under section 104(a)(4)

       To the extent relevant in this case, section 104(a)(4)

provides that "gross income does not include * * * amounts

received as a pension, annuity, or similar allowance for personal

injuries or sickness resulting from active service in the Armed

Forces of any country".         Pertinent portions of section 104(a)(4)

and related portions of section 104(b) are set forth in the

margin.2


       1
           See sec. 86.
       2
           Sec. 104.   Compensation for injuries or sickness.

               (a)   In General.

                     * * * gross income does not include--

                       *    *      *    *      *   *   *

                     (4) amounts received as a pension, annuity,
                     or similar allowance for personal injuries or
                                                         (continued...)
                                   - 6 -

     The principal case interpreting the application of section

104(a)(4) is Haar v. Commissioner, 78 T.C. 864 (1982), affd. 709

F.2d 1206, 1207 (8th Cir. 1983) "on the basis of * * * [this

Court's] opinion."      In that case, the taxpayer had served in the

U.S. Air Force and had sustained a hearing disability caused by a

war injury.     After discharge from the Air Force he worked a

number of years as a civilian auditor for the General Services



     2
      (...continued)
               sickness resulting from active service in the
               armed forces
               * * *

                    *     *    *    *      *   *   *

          (b)     Termination of Application of Subsection
                  (a)(4) in Certain Cases.

                  (1) In general. Subsection (a)(4) shall not
                  apply in the case of any individual who is
                  not described in paragraph (2).

                  (2) Individuals to whom subsection (a)(4)
                  continues to apply. An individual is
                  described in this paragraph if--

                        (A) on or before September 24, 1975, he
                        was entitled to receive any amount
                        described in subsection (a)(4),

                    *     *    *    *      *   *   *

                        (C) he receives an amount described in
                        subsection (a)(4) by reason of a combat-
                        related injury, or

                        (D) on application therefor, he would
                        be entitled to receive disability
                        compensation from the Veterans'
                        Administration.
                              - 7 -

Administration (GSA), and was finally retired from GSA on

disability because of his hearing disability.   He sought to

exclude from gross income annuity payments thereafter received

from the Civil Service Retirement and Disability Fund.   He

contended that the Civil Service disability amount should be

excluded from gross income, regardless of whether the retirement

plan was a military one, so long as the disability pension was

paid for an injury incurred during active service.   Id. at 866.

This Court held otherwise, focusing instead on the provisions of

the retirement plan:

     No case has previously considered whether section
     104(a)(4) can be applied to exclude from income
     payments made to persons who retire from nonmilitary
     employment. Although the ambiguous wording of section
     104(a)(4) provides some superficial support for
     petitioner's position, this is overshadowed by the fact
     that the Civil Service Retirement Act * * * is not
     designed to provide compensation for military injuries.
     5 U.S.C. sec. 8331(6) defines "disability" to mean the
     total disability for useful and efficient service in
     the grade or class of position last occupied by the
     employee, because of disease or injury. Under this
     provision, the nature or cause of the disability is
     irrelevant; all that is taken into consideration is the
     employee's ability to perform his or her job. Thus, in
     determining eligibility for disability retirement and
     the amount of disability annuity payments, no
     consideration is given to whether the disease or injury
     arose from military service.


Id. at 866-867 (emphasis added); accord French v. Commissioner,

T.C. Memo. 1991-417; cf. Lonestar v. Commissioner, T.C. Memo.

1984-80.
                                - 8 -

       Petitioner contends that the result in his case should be

different because, unlike the taxpayer in Haar, he actually

received disability compensation from the Veterans

Administration.    He attempts to distinguish his case from Haar

and others following it on the ground that in those cases there

was no specific finding that the injuries for which the taxpayer

received disability retirement were caused by active service in

the Armed Forces.    See French v. Commissioner, T.C. Memo. 1991-

196; Grady v. Commissioner, T.C. Memo. 1989-55; Tolotti v.

Commissioner, T.C. Memo. 1987-13.    Since petitioner's disability

pension from the New York City Employees' Retirement System was

based on the Medical Board Report, which included reports of

physicians diagnosing petitioner as suffering from Post Traumatic

Stress Disorder, petitioner contends that his pension was

received "because of a disability incurred while serving in the

military."    Haar v. Commissioner, 78 T.C. at 866.

       Contrary to petitioner's assertions, the key to the holding

of Haar and its progeny is not whether the taxpayer received

disability compensation from the Veterans Administration or

whether there was a specific finding that the disability was

service-related.    Haar looked to the retirement plan under the

Civil Service Retirement Act, and determined that it was "not

designed to provide compensation for military injuries."     Id. at

866.    In this case, the New York City Employees' Retirement
                               - 9 -

System is governed by the New York City Administrative Code.    The

applicable section provides as follows:

     b. If such medical examination shows that any such
     member referred to in subdivision a of this section is
     physically or mentally incapacitated for the
     performance of duty and ought to be retired, the
     medical board shall so report and the board shall
     retire such member for ordinary disability * * * .

New York City Admin. Code, sec. 13-167 (1988) (emphasis added).

The New York City Administrative Code awards disability

retirement because of inability to perform duties, regardless of

the cause.   Although petitioner could not perform his duties

because he was suffering from Post Traumatic Stress Disorder, he

was awarded disability retirement because he could not perform

the duties of a captain in the New York City Department of

Corrections; the specific finding of Post Traumatic Stress

Disorder was incidental to the finding that he was disabled.

Under Haar, petitioner is not entitled to exclude his pension

payments from gross income.

     Petitioner further contends, on the basis of a Senate

Finance Committee report, that the legislative history of section

104(a) supports his interpretation of the statute.   That report

states in pertinent part:

          At all times, Veterans' Administration disability
     payments will continue to be excluded from gross
     income. In addition, even if a future serviceman who
     retires does not receive his disability benefits from
     the Veterans' Administration, he will still be allowed
     to exclude from his gross income an amount equal to the
     benefits he could receive from the Veterans'
                               - 10 -

     Administration. Otherwise, future members of the armed
     forces will be allowed to exclude military disability
     retirement payments from their gross income only if the
     payments are directly related to "combat injuries."

Tax Reform Act of 1976, S. Rept. 94-938, at 139, 1976-3 C.B.

(Vol. 3) 49, 177.

     Contrary to petitioner's argument, that report supports the

interpretation of the statute applied in Haar--that disability

payments may be excluded if the pension plan, whether civilian or

military, compensates for military injuries.   The payments at

issue here, as in Haar, are based upon a civilian pension

received by the employee for his inability to do the required

work, regardless of whether such inability, as pointed out in

Haar v. Commissioner, 78 T.C. at 867, "arose from military

service."   Moreover, the report makes clear that Congress was

attempting to prevent abuse of the exclusion by military retirees

who qualified for disability just before retirement and then

engaged in full-time civil employment while receiving an

excludable "disability" paycheck.   S. Rept. 94-938, supra at 138,

1976-3 C.B. (Vol. 3) at 176.   To allow petitioner to exclude from

income disability payments received from a civilian source, thus

in effect setting the stage for being compensated twice for the

same injury, would run counter to the Congressional purpose

explicitly stated in the committee report upon which petitioner

relies.
                                - 11 -

2.   Equitable Estoppel

     Petitioner contends further that equitable estoppel prevents

the Commissioner from requiring petitioner to include the New

York City 1992 pension payments in his 1992 gross income because

he had received a "closing letter" from the IRS accepting as

filed his 1990 return which had excluded such 1990 payments from

gross income.   The traditional elements of equitable estoppel

have been stated to be:   "(1) conduct constituting a

representation of a material fact; (2) actual or imputed

knowledge of such fact by the representor; (3) ignorance of the

fact by the representee; (4) actual or imputed expectation by the

representor that the representee will act in reliance upon the

representation; (5) actual reliance thereon; and (6) detriment on

the part of the representee."    Graff v. Commissioner, 74 T.C.

743, 761 (1980), affd. 673 F.2d 784 (5th Cir. 1982).    And the

Court in Graff pointed out that "Although the doctrine of

equitable estoppel is not inapplicable to the Federal Government,

it has been applied to such Government with caution and only

where justice and fair play require it.    Federal Crop Ins. Corp.

v. Merrill, 332 U.S. 380 (1947); Goldstein v. United States, 227

F.2d 1, 4 (8th Cir. 1955)."

     The doctrine of equitable estoppel does not bar the

Commissioner from correcting a mistake of law, Automobile Club v.

Commissioner, 353 U.S. 180, 183 (1957), absent unfair conduct on
                              - 12 -

the part of the Commissioner, Edens v. Commissioner, T.C. Memo.

1974-309, affd. 549 F.2d 798 (4th Cir. 1976).    The Government has

the power to correct mistakes of law because "'Whoever deals with

the government does so with notice that no agent can, by neglect

or acquiescence, commit it to an erroneous interpretation of the

law.'"   Graff v. Commissioner, 74 T.C. at 762 (quoting Schafer v.

Helvering, 83 F.2d 317, 320 (D.C. Cir. 1936)).   Interpreting

section 104(a)(4) so as to exclude petitioner's pension payments

from income was a mistake of law.

     Petitioner contends that the Commissioner should be bound by

the 1990 closing letter.   However, a "closing letter" is to be

sharply distinguished from a "closing agreement" under section

7121, entered into by both the taxpayer and the Commissioner

which is binding in accordance with its terms.   The "closing

letter" is nothing more than the Commissioner's acceptance of a

return as filed.   And the prior practice of the IRS or the

Commissioner's acceptance of a prior year's return does not bar

the Commissioner as to later years.    Caldwell v. Commissioner,

202 F.2d 112, 115 (2d Cir. 1953), affg. in part a Memorandum

Opinion of this Court; Rose v. Commissioner, 55 T.C. 28, 31-32

(1970); Tollefsen v. Commissioner, 52 T.C. 671, 681 (1969), affd.

431 F.2d 511 (2d Cir. 1970); Meneguzzo v. Commissioner, 43 T.C.

824, 836 (1965); cf. Dixon v. United States, 381 U.S. 68, 72-75

(1965); Niles Bement Pond Co. v. United States, 281 U.S. 357,
                                - 13 -

361-62 (1930).   Moreover, even if it were otherwise relevant

here, petitioner has presented no evidence of unfair conduct by

the IRS, apart from his bald assertion that he relied to his

detriment on the closing letter.    And there is no showing here

that the Commissioner has even sought to reopen petitioner's 1990

liability for tax.   We hold that even though the IRS made a

mistake of law in respect of petitioner's 1990 return, the

Commissioner certainly had the power to correct that mistake as

it affected petitioner's 1992 return.

3.   Social Security payments

     The Commissioner's inclusion of petitioner's New York City

pension in his gross income increased his adjusted gross income.

Such increase resulted, without dispute, in an increase in the

amount of taxable Social Security benefits petitioner received.

As indicated earlier herein, petitioner does not contest this

adjustment if, as we have held, his New York City pension is

includable in his gross income.

                                          Decision will be entered

                                     for respondent.
