                  T.C. Summary Opinion 2005-132



                     UNITED STATES TAX COURT



          JOHN M. AND NANCY L. JEROSE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13606-03S.             Filed September 6, 2005.


     John M. and Nancy L. Jerose, pro sese.

     Steven M. Webster, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue.
                               - 2 -

     Respondent determined a deficiency in petitioners’ Federal

income tax of $1,425 for the taxable year 2000.

     The issue for decision is whether disability benefits

received by petitioner, Nancy L. Jerose, in 2000 from the Fortis

Benefits Insurance Co. are excludable from petitioners’ gross

income pursuant to section 105(c).     For reasons set forth herein,

we hold they are not.

                             Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    Petitioners resided in

Horse Shoe, North Carolina, on the date the petition was filed in

this case.

     During the period from 1991 through September 2000, Nancy L.

Jerose (petitioner) was employed as a certified nursing assistant

by Henderson County Hospital Corp. doing business as Margaret R.

Parsee Memorial Hospital (Memorial Hospital).    Memorial Hospital

contracted through the Fortis Benefits Insurance Co. (Fortis Co.)

for a group long-term disability insurance program (the Fortis

policy) for the benefit of its employees.    The Fortis policy

states, in pertinent part:

     Schedule Amount

     Core Plan:   The Schedule Amount is 60 percent of
                  monthly pay subject to a Maximum Schedule
                  Amount of $6,000 per month.
                           - 3 -

Alternate Plan:    The Schedule Amount is 60 percent
                   of monthly pay subject to a Maximum
                   Schedule of $6,000 per month.

Insurance Provided

If you [a covered person] become disabled while insured
under the long term disability insurance, we will pay
benefits if you satisfy the qualifying period. We will
continue to pay benefits during your disability, but not
beyond the Maximum Benefit Period. Any benefits are subject
to the provisions of the policy.

Maximum Benefit Period

We will not pay benefits under the Core Plan beyond the
maximums stated below, based on your age on the day the
period of disability started.

AGE                   MAXIMUM BENEFIT PERIOD
Before 65             36 months of disability, following   the
                      end of the qualifying period
65 but before 68      24 months of disability, following   the
                      end of the qualifying period
68 but before 70      18 months of disability, following   the
                      end of the qualifying period
70 but before 72      15 months of disability, following   the
                      end of the qualifying period
72 or more            12 months of disability, following   the
                      end of the qualifying period

We will not pay benefits under the Alternate Plan beyond the
maximums stated below, based on your age on the day the
period of disability started.

AGE                   MAXIMUM BENEFIT PERIOD
Before 65             the day before Social Security Normal
                      Retirement Date or 36 months of
                      disability, following the end of the
                      qualifying period, whichever is longer
65 but before 68      24 months of disability, following the
                      end of the qualifying period
68 but before 70      18 months of disability, following the
                      end of the qualifying period
70 but before 72      15 months of disability, following the
                      end of the qualifying period
72 or more            12 months of disability, following the
                      end of the qualifying period
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Amount of Benefit

The amount of benefit we will pay is the Schedule Amount
minus the Offset Amount. However, if the Schedule Amount
plus the amount of benefits and payments from Other Sources
is more than 70% of your monthly pay, your benefit will be
further reduced by the excess.

Schedule Amount

The Schedule Amount, shown in the Schedule, is based on the
Rate of Benefit and Maximum Schedule Amount determined in
accordance with a plan, approved by us, which precludes
individual selection.

Offset Amount

If you are eligible for any of the following benefits or
payments, the total of all monthly benefits plus the pro-
rated amount of any lump sum payments will be subtracted
from the Schedule Amount

     -    group disability benefits from any other plan;
     -    disability benefits from the United States Social
          Security Act, including dependent benefits,
          payable because of your injury, sickness, or
          pregnancy;
     -    disability benefits from a government plan, except
          Social Security;
     -    any benefits (except medical or death benefits) or
          any amount received in a compromise settlement of
          your rights, under:
     -    any Worker’s Compensation Act (or a similar
          law); or
     -    the Maritime Doctrine of Maintenance, Wages, or
          Cure;
     -    retirement benefits, disability benefits, or
          similar benefits (not including benefits based on
          your contributions) from a retirement plan
          sponsored by your participating employer, or
     -    retirement benefits from a government plan.

Early retirement benefits from a retirement plan sponsored
by your participating employer or from a government plan
will be included only if:
     -    you choose to receive them; or
                                 - 5 -

          -    you have not chosen to receive them but they would
               not reduce the normal retirement benefit under the
               retirement plan sponsored by your participating
               employer.

     Other Sources

     If you are eligible to receive any salary, wages,
     partnership or proprietorship draw, commissions, or similar
     pay from any work you do, we will not consider such income
     for the 12 consecutive months starting on the day you become
     entitled to it, as long as the sum of:
     -    the income described above,
     -    the Schedule Amount, and
     -    benefits from any source described in Other Sources,
          is not more than 100% of your monthly pay. If the sum
          is more than 100% of your monthly pay, we will subtract
          the amount over 100% from the Schedule Amount when
          determining your benefit under the policy.

     After 12 months, we will consider 70% of the amount
     determined after reducing any salary, wages, partnership or
     proprietorship draw, commissions or similar pay you earn
     from any work you do, by any family care expense, or

     Any group disability insurance contract, except one
     sponsored by the participating employer, or an affiliated
     employer.

     As a result of degenerative disk disease of the spine and

permanent nerve damage, petitioner ceased working at Memorial

Hospital in September of 1999.    Due to her illness, petitioner

was prevented from engaging in any gainful employment after 1999.

During taxable year 2000, petitioner received disability benefits

under the Fortis policy in the amount of $9,481.

     The Fortis Co. sent to petitioner and respondent a Form W-2,

Wage and Tax Statement, for taxable year 2000 reflecting wages,

tips, and other compensation paid to petitioner in the amount of

$9,481.
                                 - 6 -

     Petitioners timely filed their joint Federal income tax

return for taxable year 2000, on April 14, 2001.    On their Form

1040, U.S. Individual Income Tax Return, petitioners did not

report the amount of $9,481 received from the Fortis Co. in their

gross income.   Petitioners attached a Form 8275, Disclosure

Statement, to their Form 1040.    On the Form 8275, the

petitioners’ tax return preparer wrote:

     W-2 issued by Fortis Insurance Co. indicates taxable income
     of $9,481 the taxpayer presents that the income is comprised
     of disability payments not subject to tax and that the W-2
     was issued with the income coded incorrectly. The taxpayer
     is attempting to resolve the issue with Fortis Insurance Co.
     at the time.

     Respondent issued petitioners a notice of deficiency for

taxable year 2000, in which respondent determined that

petitioners had unreported income of $9,481 and that they were

liable for a tax deficiency in the amount of $1,425.

                            Discussion1

     Section 61(a) defines gross income as “all income from

whatever source derived,” unless otherwise provided.      McClanahan

v. United States, 292 F.2d 630, 631-632 (5th Cir. 1961).     The

Supreme Court has consistently given this definition of gross

income a liberal construction “in recognition of the intention of

Congress to tax all gains except those specifically exempted.”


     1
      We decide the issue in this case without regard to the
burden of proof. Accordingly, we need not decide whether the
general rule of sec. 7491(a)(1) is applicable in this case. See
Higbee v. Commissioner, 116 T.C. 438 (2001).
                               - 7 -

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955).

     Generally, gross income does not include amounts received

through accident or health insurance for personal injuries or

sickness, other than amounts received by an employee to the

extent such amounts are:   (1) Attributable to contributions by

the employer which were not includable in the gross income of the

employee; or (2) paid by the employer.   See sec. 104(a)(3).     If

amounts received by an employee through accident or health

insurance for personal injuries or sickness are:    either (1)

Attributable to contributions by the employer that were not

includable in the gross income of the employee; or (2) paid by

the employer, then the amounts are specifically included in the

employee’s gross income under section 105(a).

     Four conditions must be met for section 105(a) to apply.

See Kees v. Commissioner, T.C. Memo. 1999-41.     First, the amounts

must be received through accident or health insurance; second,

the amounts must be for personal injuries or sickness; third, the

amounts must be attributable to contributions made by the

employer; and fourth, the employer’s contributions must not have

been includable in the employee’s gross income.

     In the instant case, petitioner received $9,481 from the

Fortis Co. under the Fortis policy, a group long-term disability

insurance program.   Petitioner received the benefits for a

disability caused by degenerative disk disease of the spine and
                               - 8 -

permanent nerve damage, a personal injury or illness that she

suffered beginning in September 1999.   Petitioner testified that

she paid $3.50 biweekly toward the Fortis policy premiums.

However, petitioner did not offer any documentary evidence to

substantiate such a claim.   Based on the common practices of

employer-funded insurance policies, such as the Fortis policy at

issue in the present case, and on the record in this case, we

find that the contributions for the Fortis policy were paid by

Memorial Hospital, petitioner’s employer, and that the

contributions from Memorial Hospital were not included in

petitioner’s gross income.   Thus, in the present case, all four

conditions of section 105(a) have been met.

     The fact that section 105(a) applies does not necessarily

mean that the amounts are included in income.   As section 105(a)

itself indicates, there are exceptions.   The relevant exception

for the instant case appears in section 105(c), which provides as

follows:

     SEC. 105(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.
                                - 9 -

     In order to qualify for the section 105(c) exception, the

payments to petitioner must satisfy both paragraphs (1) and (2)

of section 105(c).    We find that the payments fail section

105(c)(2); therefore, we need not, and do not, decide whether

they satisfy section 105(c)(1).

     Section 105(c)(2) itself has two parts that must be

satisfied:   (1) The payments to the taxpayer must be computed

with reference to the nature of the injury, and (2) the payments

must be computed without regard to the period the taxpayer is

absent from work.    With respect to the first part of section

105(c)(2), the Court of Appeals for the Fourth Circuit stated in

Rosen v. United States, 829 F.2d 506, 509 (4th Cir. 1987):

          A review of the cases indicates that for payments to be
     excludible from income under section 105(c), the instrument
     or agreement under which the amounts are paid must itself
     provide specificity as to the permanent loss or injury
     suffered and the corresponding amount of payments to be
     provided. * * * Exclusion is permitted only under plans
     which vary benefits to reflect the particular loss of bodily
     function. * * *

Accord Beisler v. Commissioner, 814 F.2d 1304, 1307 (9th Cir.

1987), affg. T.C. Memo. 1985-25; Hines v. Commissioner, 72 T.C.

715, 720 (1979).

     Further, the legislative history of section 105(c)(2)

illustrates the distinct character of both the nature-of-the-

injury and the absence-from-work requirements of the statute.    S.

Rept. 1622, 83d Cong., 2d Sess. 183-184 (1954), provides the
                               - 10 -

following example to illustrate the kind of payments excludable

from gross income under section 105(c):

     Assume that under the plan of an employer payments equal to
     25 percent of annual compensation are made to employees for
     loss of a leg. The $10,000 employee would therefore receive
     a payment of $2,500 and the $4,000 employee would receive a
     payment of $1,000. These amounts would be excludible from
     gross income if, under the plan, they are payable regardless
     of the period that the employee is absent from work.

     There is nothing in the Fortis policy that computes payments

with reference to the nature of the injury.   Indeed, regardless

of the injury, a person receiving benefits for total disability

under the Fortis policy gets a monthly payment equal to 60

percent of monthly earnings.   Thus, payments under the Fortis

policy are not “computed with reference to the nature of the

injury”, as required by section 105(c)(2), but instead are

computed with reference to the recipient’s earnings.

Accordingly, the exception does not apply to petitioner,2 and the

payments are taxable to her under section 105(a).

     Reviewed and adopted as the report of the Small Tax Case

Division.


                                    Decision will be entered

                               for respondent.




     2
      Because the payments are computed with reference to
earnings, we need not consider whether they are computed without
regard to the period of absence from work.
