                  T.C. Summary Opinion 2011-55



                      UNITED STATES TAX COURT



          DUANE A. AND RACHEL A. BAKKEN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13834-09S.             Filed April 19, 2011.



     Thomas C. Morrison, for petitioners.

     Christopher C. Fawcett, for respondent.



     GERBER, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1   Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year under
consideration.
                                - 2 -

case.    Respondent determined a $5,834 income tax deficiency and a

$1,167 section 6662(a) accuracy-related penalty for petitioners’

2006 taxable year.    The issue remaining2 for our consideration is

whether the distributions received during 2006 by Duane A. Bakken

(petitioner) were excludable from gross income under section 104.

                             Background

     Petitioners resided in Montana at the time their petition

was filed.    Petitioner was born in 1937 and began employment as a

police officer for the city of Austin, Minnesota, on May 1, 1962.

On February 26, 1982, because of an injury he sustained in the

line of duty, petitioner became permanently disabled and unable

to perform his duties as a police officer.    Petitioner’s injuries

occurred while he was en route to investigate a criminal act in

progress.    Petitioner was a member of the Austin Policemen’s

Benefit Association (APBA), and on June 17, 1983, the APBA

approved his application for a disability pension.    At the time

of his disability and when his pension was approved, petitioner

had completed 18 years, 6 months, and 11 days of service as a




     2
      At trial respondent conceded that petitioners are not
liable for a sec. 6662(a) accuracy-related penalty for their 2006
tax year.
                                - 3 -

police officer and was not qualified to retire.3   Under the APBA

plan disability benefits were calculated at a rate of 50 percent

of the base pay of an active first class patrolman who had

reached 50 years of age with 20 or more years of service.    Under

the APBA plan active police officers were entitled to retire when

they had a combination of at least 20 years “of service as a

patrolman” and “after he has arrived at the age of fifty years or

more”.    Under the APBA plan disabled police officers received the

same pay as a police officer who had qualified to retire, even if

the disabled officer did not have sufficient years of service to

retire.

     For taxable years after petitioner reached age 50 (1987),

APBA began issuing Forms 1099-R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., reflecting that his distributions were taxable.

Effective January 1, 1994, Minnesota State statutes facilitated

the switch of the administration of the APBA to the Minnesota

Public Employees Retirement Association (MPERA).   For the 2006

tax year MPERA issued petitioner a Form 1099-R reflecting that

his distributions totaling $41,652.72 were taxable.



     3
      On the basis of the date that petitioner began his service,
he would have had over 21 years of service at the time his
pension was approved. The difference is attributable to time
lost when he was unable to work because of other serious injuries
incurred in the line of duty.
                               - 4 -

     At the time that MPERA took over the administration of the

APBA plan, petitioner remained under the terms of the APBA plan.

After MPERA took over the administration of the plan, they

offered both disability beneficiaries and retirees the

opportunity to elect a cost of living allowance (COLA) instead of

the existing plan’s increases based upon active police officers’

raises.   Petitioner elected the COLA increases.   Petitioner

otherwise remained under the terms of the APBA plan after his

election.   Accordingly, from December 1, 1993, petitioner’s

benefits were based on 50 percent of the current pay of an active

first class patrolman under the ABPA plan as of December 1, 1993,

plus any COLA that accrued after that date.

     Following his 50th birthday, when APBA began withholding

from his benefits, petitioner contacted APBA to inquire why they

had unilaterally decided to change his benefits status from

disability to retirement even though he had not qualified for

retirement under the APBA plan.   Petitioner’s gross benefits did

not change when APBA began treating his disability benefits as

retirement benefits.   If petitioner’s benefits were from

retirement, however, they would be subject to Federal income tax.

Accordingly, petitioner expressed his disagreement with this

change in treatment, as he continued to be disabled and was

unable to work.   Petitioner explained to the APBA that it was his

disability that prevented him from completing sufficient service
                                - 5 -

as a patrolman to qualify for retirement from the police

department under the APBA plan.   APBA, however, continued to

treat petitioner’s benefits as being for retirement and reported

to MPERA (when they began administering the APBA plan) that

petitioner’s benefits were attributable to retirement.

     Initially, when he began receiving Forms 1099-R, petitioner

reported his benefits as taxable for Federal income tax purposes.

Sometime after 2001, however, petitioner learned from another

disabled Austin police officer that their disability benefits

should not have been classified as retirement benefits and that

the amounts received were not subject to Federal income tax.

Petitioner hired a tax professional, who filed refund claims for

all open years, including 1999 through 2001, and he received

refunds (without litigation or controversy) of the Federal income

tax paid for those years.   Also, from that time forward,

including 2006, on the advice of his tax professional/return

preparer, petitioner did not report, as taxable, the benefits

received.

                             Discussion

     The parties agree that petitioner’s benefits were not

taxable before his 50th birthday.   Respondent, however, contends

that following petitioner’s 50th birthday, his benefits became

taxable.    Conversely, petitioner contends that from the first day
                                - 6 -

of his disability, his benefits were excludable under section 104

because of his disability.

     Section 104(a)(1) permits the exclusion from gross income of

amounts received under worker’s compensation acts as compensation

for personal injuries.    In particular, section 1.104-1(b), Income

Tax Regs., limits the section 104(a)(1) exclusion to certain

benefits.   That regulation specifies that the section 104(a)(1)

exclusion does not apply to benefits “to the extent that [they

are] determined by reference to the employee’s age or length of

service”.   The parties also agree that petitioner’s benefits

would not be taxable if they are found to be for disability

rather than retirement.

     Respondent relies on Minnesota law, Minn. Stat. Ann. sec.

423A.11 (West 2008), and has argued that petitioner’s benefits

are required to be treated as received for retirement; i.e.,

based on his age and length of service.   In Tateosian v.

Commissioner, T.C. Memo. 2008-101, we held that “Because Minn.

Stat. Ann. sec. 423A.11 ‘terminated’ * * * [the taxpayer’s]

disability benefits and deemed him a service pensioner, his

payments could no longer be characterized as compensation for

personal injuries under a statute in the nature of a worker’s

compensation act.”   (Emphasis added.)   Unlike Tateosian, however,

petitioner’s case would have been appealable to the Court of
                              - 7 -

Appeals for the Ninth Circuit.4   In Picard v. Commissioner, 165

F.3d 744 (9th Cir. 1999), revg. T.C. Memo. 1997-320, the Court of

Appeals reversed our decision and held that the taxpayer had

received disability retirement (as opposed to service retirement)

benefits because his benefits could not be determined by

reference to his age or length of service.   The Court of Appeals

explained:

          Picard’s benefits * * * could not be determined by
     reference to his age or length of service. The Tax
     Court attempted to reconcile this apparent distinction
     by determining that, in Picard’s case, as in Mabry [v.
     Commissioner, T.C. Memo. 1985-328], the Plan “deem[s]
     time spent on disability as equivalent to time spent
     actively working, and counting both in setting the date
     when a disabled employee was treated as if he had taken
     service retirement, with a corresponding adjustment to
     his retirement payments.” Picard, T.C. Memo. 1997-320
     (emphasis in original).

          This attempted distinction misapplies the facts of
     this case. As Mabry notes, the fundamental question in
     determining whether benefits are excludable under
     § 104(a)(1) is “upon what basis were the retirement payments
     in question paid?” Mabry, T.C. Memo 1985-328. The
     taxpayers in Mabry and Wiedmaier [v. Commissioner, T.C.
     Memo. 1984-540, affd. 774 F.2d 109 (6th Cir. 1985)], at the
     time their benefits were reduced, qualified for regular
     service retirement, regardless of their continued
     disability. Picard, on the other hand, qualified only for
     disability-retirement benefits. Had Picard become “able”
     just one day before his benefit reduction, he would have
     qualified for neither service nor disability retirement
     benefits. To hold in favor of the Commissioner in this
     case, we would have to do something that neither Mabry nor
     Wiedmaier do--namely, hold that benefits are determined by


     4
      Although under sec. 7463(b) this case is not appealable, we
afford petitioners the same result that they would have obtained
in their particular appellate circuit, which in this case is the
Court of Appeals for the Ninth Circuit.
                                - 8 -

     reference to length of service even though a beneficiary
     would not qualify for a nondisability-based retirement. The
     facts of this case do not permit such a holding.

          [Id. at 746.]

     Petitioner’s benefits also cannot be determined by reference

to his age or length of service.    When he reached age 50,

petitioner had completed less than 20 years of service.    APBA,

pursuant to Minn. Stat. Ann. sec. 423A.11, deemed him a service

retiree only after taking into consideration the number of years

he had received disability benefits.    As in Picard v.

Commissioner, supra, this did not transform petitioner’s benefits

into service retirement benefits, as Minn. Stat. Ann. sec.

423A.11 merely recomputed the amount of disability benefits to

which he was entitled.    See Minn. Stat. Ann. sec. 423A.11,

subdiv. 2 (titled “Amount of disability benefit recomputed as a

service pension” (emphasis added)); Act of March 23, 1982, ch.

610, 1982 Minn. Laws 1458, 1458 (“providing for the recomputation

of a disability benefit as a service pension upon the attainment

of a certain age” (emphasis added)).

     Under Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445

F.2d 985 (10th Cir. 1971), we follow the Court of Appeals’

decision in Picard v. Commissioner, supra, and hold that

petitioner’s benefits continue to be attributable to his

disability and that he is entitled, under section 104, to exclude

his pension distributions from income for 2006.
                              - 9 -

      To reflect the foregoing and considering respondent’s

concession,


                                           Decision will be entered

                                      for petitioners.
