                        T.C. Memo. 1999-41



                      UNITED STATES TAX COURT



          WILLIAM T. AND KATHRYN A. KEES, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8467-95.              Filed February 8, 1999.



     William T. Kees, pro se.

     William Henck, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   Respondent determined a deficiency in the

amount of $39,612 in petitioners’ 1992 Federal income tax, and an

accuracy-related penalty under section 6662(a)1 in the amount of

$7,922.   This case was submitted to the Court fully stipulated

     1
       Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the year in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

pursuant to Rule 122.    We must decide the following issues:    (1)

Whether petitioners are entitled to exclude disability payments

from income under section 105(c) or some other provision.      We

hold they are not.    (2) Whether petitioners are liable for the

accuracy-related penalty as determined by respondent.     We hold

they are not.

     At the time of filing the petition, petitioners resided in

Oak Hill, West Virginia.

     In his opening brief, William T. Kees (petitioner) offered

both a substantive argument with respect to the deficiency and a

request for the “exclusion” of petitioner Kathryn A. Kees (Mrs.

Kees) from the instant case.    Petitioner’s request for the

exclusion of Mrs. Kees is based on the assertion that, in

finalizing their divorce, she and petitioner had agreed that he

would be responsible for any tax liabilities arising from the

instant case.    We shall treat petitioner’s request for the

exclusion of Mrs. Kees as petitioners’ motion to dismiss with

respect to Mrs. Kees, and we shall treat the remainder of the

document as petitioners’ opening brief.

     The notice of deficiency was issued jointly to petitioners,

as they had filed a joint return for the year in issue.

Petitioners jointly filed a petition and an amended petition in

this Court, and Mrs. Kees has signed jointly with petitioner

several subsequent filings, although not the opening brief.2


     2
         Along with petitioner, Mrs. Kees signed a joint
                                                     (continued...)
                               - 3 -

Having invoked the jurisdiction of the Tax Court with respect to

Mrs. Kees, petitioners may not unilaterally oust the Court from

jurisdiction.   Dorl v. Commissioner, 57 T.C. 720 (1972).    Under

section 7459(d), once a taxpayer has filed a petition in the Tax

Court, dismissal for any reason other than lack of jurisdiction

requires the Court to enter an order finding the deficiency to be

the amount determined by the Commissioner in the notice of

deficiency, unless the Commissioner reduces the amount of his

claim.   Estate of Ming v. Commissioner, 62 T.C. 519, 522 (1974);

see also Rule 123(d).   This is a result obviously not sought by

petitioner; consequently, petitioners’ motion to dismiss with

respect to Mrs. Kees will be denied.3

                         FINDINGS OF FACT

     During the year in issue, petitioners were married and filed

a joint tax return.   Petitioner was employed as a human resources

manager for Arch Mineral Corp. (Arch Mineral).   Arch Mineral

funded a long-term disability plan (the disability plan) for its

employees through UNUM Insurance Co. (UNUM).   Arch Mineral paid

all the premiums for the disability plan, and petitioners did not

include in income the value of those premiums.


     2
      (...continued)
stipulation of facts, a joint motion to submit the case under
Rule 122, and a letter to respondent requesting that she be
dismissed from the instant case.
     3
       We note, however, that petitioner Kathryn Kees is still
free to seek relief under the new “innocent spouse” provision,
sec. 6015, added to the Code by the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub L. 105-206, sec.
3201(a), 112 Stat. 734.
                               - 4 -

     In January 1987, petitioner suffered a concussion when he

slipped on ice in the driveway of his residence and hit his head.

Petitioner missed 2 months of work after the injury.   After he

returned to work, he began to suffer seizures and progressively

worse headaches.   Approximately 18 months later, on November 1,

1988, petitioner went on long-term disability.    Pursuant to the

standard procedure of Arch Mineral, he was terminated from

employment on November 1, 1989, after 1 year on long-term

disability.

     Under the disability plan an insured is totally disabled if,

because of sickness or injury, he cannot perform all of the

duties of his regular job, and, after benefits have been paid for

24 months, he cannot perform the duties of any job he is suited

for by training, education or experience.   Payments under the

disability plan do not begin until the insured has been totally

disabled for 26 weeks.   Benefits are paid monthly, in an amount

equal to 60 percent of monthly salary just before total

disability begins.   If the insured was injured before reaching

age 60, benefits are paid up until age 65, as long as the insured

remains totally disabled and requires a doctor’s attendance.

     Beginning May 1, 1989, petitioner received long-term

disability payments from UNUM pursuant to the provisions of the

disability plan.   In accordance with the terms of the disability

plan, petitioner received monthly disability payments equal to 60

percent of his monthly salary, or approximately $3,200.
                                - 5 -

Petitioner was 45 years old when he began to receive payments

from UNUM.

     In a letter dated January 8, 1990, UNUM informed petitioner

that his disability payments would end May 1, 1991, because in

UNUM’s view, petitioner’s disability was due to mental illness,

and the disability plan covered mental illness for only 24

months.   In a letter dated June 30, 1991, UNUM informed

petitioner that its investigation of his medical condition was

ongoing, and that UNUM had decided to extend payments through

July 1, 1991.   For the period between May 1991 and May 1992, UNUM

stopped making monthly payments on several occasions and resumed

those payments only after petitioner threatened legal action.    In

May 1992, after protracted oral negotiations, UNUM paid

petitioner a lump-sum settlement of $135,000 with respect to his

disability claim.   UNUM issued a Form W-2, Wage and Tax

Statement, to petitioner for the taxable year 1992 in the amount

of $150,646, which included the lump-sum amount and other

payments made by UNUM in that year.     Petitioners did not include

any of the Form W-2 amount in income in 1992 and did not attach

the Form W-2 to their return.

     On July 17, 1992, petitioner filed a request for hearing

with the Social Security Administration for disability insurance

benefits, and his claim was upheld in a decision by the presiding

administrative law judge on March 24, 1993.    The administrative

law judge found that petitioner was under a “disability” within

the meaning of sections 216(i) and 223 of the Social Security
                               - 6 -

Act, 42 U.S.C. secs. 416(i), 423 (1994), as a result of chronic

headaches, labile hypertension, major depressive disorder,

seizure disorder, and sleep apnea.

                              OPINION

     Respondent argues that the entire amount petitioners

received from UNUM in 1992, $150,646, is included in gross income

under section 105(a).   Petitioners argue that the lump-sum

payment of $135,000 was not paid under the disability plan and

that as a result the amounts received from UNUM are not taxable

income to them.   We agree with respondent.

     Section 105(a) provides as follows:

     Except as otherwise provided in this section, amounts
     received by an employee through accident or health
     insurance for personal injuries or sickness shall be
     included in gross income to the extent such amounts
     * * * are attributable to contributions by the employer
     which were not includible in the gross income of the
     employee * * *.


Section 105(a), therefore, has several conditions for its

application.   First, it applies to “amounts received * * *

through accident or health insurance”.    Second, the amounts must

be “for personal injuries or sickness”.    Third, the amounts must

be “attributable to contributions by the employer”.    Fourth, it

must be the case that the contributions “were not includible in

the gross income of the employee”.     In the instant case, there is

no question that the second, third, and fourth conditions have

been met.   The concussion petitioner suffered is a personal

injury.   Petitioner’s employer, Arch Mineral, funded the
                               - 7 -

disability plan and paid all the premiums.   Petitioners did not

include the premiums in income.   Thus, the application of section

105(a) turns on whether the first condition is met; i.e., whether

the lump-sum payment constitutes “amounts received * * * through

accident or health insurance”.4

     Petitioners argue that the $135,000 lump sum petitioner

received from UNUM was not paid under the disability plan.

Petitioners base their argument on the assertion that there is no

provision in the disability plan authorizing UNUM to offer a

lump-sum payment to an employee in lieu of future payments under

the plan.   When an amount is paid in settlement, we look to the

specific claims for which the settlement was paid.   See Allen v.

Commissioner, T.C. Memo. 1998-406 (citing Bagley v. Commissioner,

105 T.C. 396, 406 (1995), affd. 121 F.3d 393 (8th Cir. 1997)).

If the language of the settlement agreement is not clear, we look

to the intent of the payor, considering all the facts and

circumstances.   See Allen v. Commissioner, supra (citing Knuckles

v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), affg. T.C.

Memo. 1964-33, and Robinson v. Commissioner, 102 T.C. 116, 127

(1994), affd. in part and revd. and remanded in part 70 F.3d 34

(5th Cir. 1995)).   The record does not contain any documents

relating to the settlement or any information about the terms of


     4
       The $150,646 that petitioner received during the year in
issue comprises the lump-sum settlement of $135,000 and $15,646
in monthly benefits. Petitioners make no argument concerning the
$15,646 in monthly benefits, and there is no question that these
amounts constitute “amounts received * * * through accident or
health insurance”.
                                - 8 -

the settlement.    Further, the record contains no direct evidence

about UNUM’s intent in making the lump-sum payment to petitioner.

The record does contain the stipulation that “after protracted

oral negotiations, UNUM paid petitioner a lump-sum settlement of

$135,000 with respect to his disability claim.”    Under all the

facts and circumstances, we find that the nature of the claim

underlying the lump-sum payment was UNUM’s liability under the

disability plan.    Settlement does not transform the nature of the

payments into something other than “amounts received * * *

through accident or health insurance” within the meaning of

section 105(a).    Thus, section 105(a) applies to the lump-sum

payment of $135,000 as well as to the monthly payments totaling

$15,646.

     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:

     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 this exception, the payments to

petitioner must satisfy both conditions.   We find that the

payments fail to satisfy 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:   The payments to the taxpayer must be computed with

reference to the nature of the injury, and they must be computed

without regard to the period the taxpayer is absent from work.

With respect to the first part, the Court of Appeals for the

Fourth Circuit, to which an appeal in this case would lie, has

stated as follows:

          A review of the cases indicates that for payments to be
     excludable 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. * * *


Rosen v. United States, 829 F.2d 506, 509 (4th Cir. 1987).5

There is nothing in the disability plan 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 disability plan gets a monthly payment equal to 60

percent of monthly earnings.   Thus, payments under the disability

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



     5
       It may be noted that our own precedent accords with Rosen
v. United States, 829 F.2d 506 (4th Cir. 1987). Hines v.
Commissioner, 72 T.C. 715, 720 (1979).
                               - 10 -

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,6 and the

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

     Finally, we note that even if petitioners were correct that

the lump-sum amount was not paid under the disability plan, they

would still be required to include it in income.    At most,

petitioners’ argument that the lump-sum payment was not made

under the disability plan amounts to arguing that section 105(a)

does not apply.   But if section 105(a) does not apply, then the

exclusion under section 105(c) does not apply, and the payments

are included in income under section 61, unless specifically

excluded by another section.   There are no specific exclusions

available to petitioner.   For example, respondent notes, and we

agree, that section 104(a)(2) does not apply.   Section 104(a)(2)

excludes from income “the amount of any damages received (whether

by suit or agreement and whether as lump sums or as periodic

payments) on account of personal injuries or sickness”.    Section

104(a)(2) applies if the underlying cause of action is based upon

tort or tort type rights and the damages were received on account

of personal injuries or sickness.   Commissioner v. Schleier, 515

U.S. 323, 337 (1995).   In the instant case, there is no evidence

that petitioner had any tort or tort type claim against UNUM.



     6
       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.
                                - 11 -

Indeed, as we have indicated, the evidence shows that the lump-

sum amount was not damages for a tort claim but settlement of a

contract dispute as to how much was owed petitioner under the

disability plan.    Thus, section 104(a)(2) does not apply.

Accuracy-Related Penalty

     Respondent determined an accuracy-related penalty under

section 6662 in the amount of $7,922, based on the determination

that petitioners’ underpayment was attributable to a “substantial

understatement of income tax” within the meaning of section

6662(d).   However, the accuracy-related penalty will not be

imposed with respect to any portion of an underpayment if it is

shown that there was reasonable cause and that the taxpayer acted

in good faith.     Sec. 6664(c)(1).   The determination of whether

there was reasonable cause and good faith "is made on a case-by-

case basis, taking into account all pertinent facts and

circumstances."     Sec. 1.6664-4(b)(1), Income Tax Regs.

“Generally, the most important factor is the extent of the

taxpayer’s efforts to assess the taxpayer’s proper tax

liability.”   Id.    Reasonable cause includes "an honest

misunderstanding of fact or law that is reasonable in light of

the experience, knowledge and education of the taxpayer."      Id.

     The taxpayer's mental and physical condition, as well as

sophistication with respect to the tax laws, at the time the

return was filed are relevant in deciding whether the taxpayer

acted with reasonable cause.     Ruckman v. Commissioner, T.C. Memo.

1998-83; see also Carnahan v. Commissioner, T.C. Memo. 1994-163,
                             - 12 -

affd. without published opinion 70 F.3d 637 (D.C. Cir. 1995);

Gray v. Commissioner, T.C. Memo. 1982-392.    The decision of the

administrative law judge in the record herein demonstrates

petitioner’s medical infirmities, which existed when petitioners

filed their return for the year in issue.    Petitioner’s medical

history as documented in his disability hearing shows that he was

subject to grand mal seizures, a major depressive disorder,

debilitating headaches, and other chronic pain.   Further,

petitioners’ opening brief and other submitted documents suggest

that he does not have a sophisticated knowledge of the tax laws.

In these circumstances, we believe that petitioners’ failure to

include the disability payments in income was due to reasonable

cause under section 6664(c)(1).   Thus, the underpayment arising

from the omitted income is not subject to accuracy-related

penalties under section 6662(b)(2).

     To reflect the foregoing,


                                       An appropriate order will

                                  be issued, and decision will be

                                  entered for respondent with

                                  respect to the deficiency and

                                  for petitioners with respect to

                                  the accuracy-related penalty.
