                          T.C. Memo. 1997-230



                        UNITED STATES TAX COURT



   THOMAS J. RABIDEAU AND SANDRA M. RABIDEAU, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 19249-95.                Filed May 15, 1997.



        Thomas J. and Sandra M. Rabideau, pro sese.

        George W. Bezold, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


        ARMEN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1




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

     Respondent determined a deficiency in petitioners' Federal

income tax for the taxable year 1992, as well as an accuracy-

related penalty for negligence under section 6662(a), in the

amounts of $6,176 and $1,235, respectively.

     Respondent subsequently conceded that petitioners are not

liable for the accuracy-related penalty.    Accordingly, the sole

issue for decision is whether petitioners may exclude from gross

income the disability benefits that petitioner Thomas J. Rabideau

received from his former employer.2

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and they are so

found.   Petitioners resided in Pardeeville, Wisconsin, at the

time that their petition was filed with the Court.

     Petitioner Thomas J. Rabideau (petitioner) was employed by

Metropolitan Life Insurance Co. (Met Life) from no later than

1981 through 1989.

     During 1989, Met Life maintained a "flexible benefits plan",

or "cafeteria plan", that allowed eligible employees to select

between different types of benefits and cash.   Specifically, the

flexible benefits plan offered medical, dental, long-term

disability, and life insurance benefits to eligible employees of

Met Life.


     2
      An adjustment to petitioners' earned income credit is a
mechanical matter, the resolution of which depends on our
disposition of the issue for decision.
                                  -3-

     Met Life maintains a "Met Life Options Decision Book" (the

Met Life manual) that explains an employee's options under the

flexible benefits plan.   The Met Life manual provides in

pertinent part as follows:

     The Company currently spends money to pay for your
     benefits. * * * The contribution you receive will pay
     for most of the cost of coverage for you and for your
     dependents. The cost you pay, if any, will depend on
     the options you select under the Met Life Options
     program.

                      *   *   *     *   *   *   *

     If you select lower levels of coverage * * * the cost
     may be less than the Company's contribution for you.
     Then you will receive extra dollars in your pay
     throughout the year. Of course, you will have to pay
     taxes on these extra dollars.

     If you select higher levels of coverage * * * the cost
     may be more than the Company's contribution for you.
     Then you will pay the difference. But you pay this
     remaining cost with before-tax dollars, so you reduce
     your taxes.

     The amount of the "Company's contribution" (the Met Life

contribution) is not a static figure, but is based instead on the

number of dependents for whom an employee selects medical and

dental coverage.3   Thus, the Met Life contribution is greater for

employees who select medical and dental coverage for themselves

and their dependents than it is for employees who select such

coverage for themselves but not their dependents.   Similarly, the



     3
       The Met Life contribution also includes an amount for life
insurance and long-term disability benefits, which amount is
independent of the number of an employee's dependents.
                                -4-

Met Life contribution is greater for employees who select medical

and dental coverage for themselves but not their dependents than

it is for employees who do not select any medical and dental

coverage.   Specifically, employees who select medical and dental

coverage for themselves and two or more dependents receive a Met

Life contribution in the amount of $4,811, whereas employees who

select medical and dental coverage for themselves but not their

dependents receive a Met Life contribution in the amount of

$1,990.   Employees electing not to receive any medical or dental

benefits receive a Met Life contribution in the amount of $881.

     The cost of employee benefits is determined by the type and

level of coverage selected and, in the case of medical and dental

benefits, also by the number of covered dependents.    For

employees selecting lower levels of coverage (e.g., less life

insurance or higher deductibles), the cost is less than for

similarly situated employees selecting higher levels of coverage

(e.g., more life insurance or lower deductibles).

     Although employees are not required to select either medical

or dental coverage, employees are required to select long-term

disability coverage and life insurance coverage.    However,

employees may choose among several options for each type of

required coverage.   In the case of long-term disability, the

options involve coverage based on different replacement-of-salary

percentages, which range from 50 percent of salary to 60 percent
                                 -5-

of salary.4   In the case of life insurance, the options involve

coverage based on different multiples of salary, which range from

1 times salary to 4 times salary.

     According to the Met Life manual, if the cost of the

selected benefits is less than the Met Life contribution, then

the excess of the Met Life contribution over the cost of the

selected benefits is distributed to the employee as cash in his

or her wages.    On the other hand, if the cost of the selected

benefits is greater than the Met Life contribution, then the

excess of the cost of the selected benefits over the amount of

the Met Life contribution is deducted from the employee's wages

on a pre-tax basis.

     On November 10, 1988, petitioner completed an enrollment

form for participation in Met Life's flexible benefits plan for

1989.    On that form, petitioner selected the following "before-

tax" benefits:    (1) Medical benefits for himself and his

dependents; (2) dental benefits for himself and his dependents;

(3) long-term disability benefits at 60 percent of salary; and

(4) life insurance benefits at 4 times salary.    The cost for each

of these benefits was $4,448, $495, $502, and $288, respectively,

for a total cost of $5,733.    The applicable Met Life contribution

applied against the total cost was $4,811.    The difference


     4
       The amount of disability benefits is also related to the
number of years of service that an employee accrues prior to the
date of his or her disability.
                                 -6-

between the total cost of coverage selected by petitioner and the

amount of the Met Life contribution, i.e., $5,733 less $4,811 or

$922, was deducted from petitioner's wages on a pre-tax basis.

     In August 1989, petitioner was injured and filed a claim for

disability benefits.    For 1992, the taxable year in issue,

petitioner received disability benefits from Met Life in the

amount of $35,520.60.    The amount of such benefits was based on

the applicable percentage of petitioner's salary and his years of

service prior to the date of his disability.

     Met Life issued petitioner a Form W-2 (Wage and Tax

Statement) for 1992.    On such form, Met Life characterized the

disability benefits that were paid to petitioner as compensation.

     On their 1992 Federal income tax return, petitioners did not

report as income the disability benefits that petitioner received

from Met Life.   In the notice of deficiency, respondent

determined that such benefits constituted taxable income.

Respondent also determined that petitioners were liable for an

accuracy-related penalty for negligence under section 6662(a).5

                               OPINION

     As a general rule, section 104(a)(3) excludes from an

employee's gross income amounts received through accident or

health insurance for personal injuries or sickness.   However, the

section provides an exception for amounts received by an employee

     5
      As previously stated, respondent subsequently conceded the
accuracy-related penalty.
                                -7-

to the extent such amounts are either paid by the employer or are

attributable to employer contributions that were not includable

in the employee's gross income.6

     Section 105(a) coordinates with section 104.   As a general

rule, section 105(a) provides that 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 either paid by the employer or are

attributable to contributions by the employer that were not

included in the employee's gross income.

     Section 105(c) sets forth an exception to the general rule

of subsection (a).   Thus, section 105(c) provides in relevant

part as follows:

          (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 use of a member or function of the body * * *,
          and

               (2) are computed with reference to the nature
          of the injury without regard to the period the
          employee is absent from work.




     6
      See Trappey v. Commissioner, 34 T.C. 407 (1960)
(disability income is received through accident or health
insurance for personal injuries or sickness within the meaning of
sec. 104(a)(3)); see also sec. 105(e)(1) (for purposes of secs.
104 and 105, amounts received under an accident or health plan
for employees are treated as amounts received through accident or
health insurance).
                                -8-

     Finally, section 106 works in conjunction with section

104(a)(3) and section 105(a).   Section 106 excludes from an

employee's gross income the cost of employer-provided coverage

under an accident or health plan.     Thus, if employer

contributions are not included in the employee's gross income

under section 106, the benefits attributable to such

contributions are governed by the inclusionary rule of section

105(a), rather than by the exclusionary rule of section

104(a)(3).

     Petitioners contend that the disability payments received by

petitioner are attributable to contributions made by petitioner

and, thus, are excluded from petitioners' gross income under

section 104(a)(3).   Specifically, petitioners argue that the

money used to pay the premiums for petitioner's long-term

disability policy would have been received by petitioner in his

weekly paycheck if he had selected cash in lieu of benefits.

From this, petitioners conclude that petitioner's disability

benefits are attributable to contributions made by petitioner,

rather than by Met Life.   Alternatively, petitioners argue that

petitioner's disability payments are excludable from gross income

under section 105(c).

     Respondent contends that petitioners must include

petitioner's disability benefits in gross income under section

105(a) because such benefits are attributable to contributions
                                 -9-

made by Met Life that were not includable in petitioners' gross

income.

     We begin by addressing petitioners' primary contention that

the contributions for petitioner's disability benefits were paid

with funds that petitioner could have received if he had elected

to receive cash in lieu of benefits.

      Petitioners' contention is not supported by the record.

Here we recall that Met Life employees were required to select

long-term disability coverage (as well as life insurance

coverage).   Petitioner did not have the option, therefore, of

forgoing long-term disability coverage and receiving instead cash

in an amount equivalent to the cost of such coverage.   In other

words, petitioner could not have increased his take home pay by

forgoing long-term disability coverage (or by forgoing life

insurance coverage).

     We further recall that the cost of the coverage for long-

term disability and life insurance, which coverage petitioner was

required to select, was less than the Met Life contribution of

$881 that was allocable to petitioner if he did not select any

medical and dental coverage.   In other words, the cost of the

required coverage, given the options as selected by petitioner,

was $790 (i.e., $502 for long-term disability and $288 for life

insurance), and this amount was $91 less than the aforementioned

Met Life contribution of $881.   Thus, Met Life effectively paid
                               - 10 -

in full the cost of petitioner's long-term disability coverage.

Pursuant to section 105(a), the long-term disability benefits

received by petitioner pursuant to such coverage would therefore

be includable in petitioners' gross income.

     Petitioners seek to avoid the foregoing conclusion by

focusing on the fact that petitioner selected benefits for which

the total cost ($5,733) exceeded the Met Life contribution

($4,811).   Because such excess (i.e., $922) was deducted from

petitioner's wages, and because such excess exceeded the cost of

petitioner's long-term disability coverage, petitioners argue

that petitioner's long-term disability benefits should be

excluded from gross income.

     Petitioners' argument overlooks the fact that the cost of

petitioner's benefits exceeded the Met Life contribution only

because petitioner selected medical and dental coverage for

himself and his dependents.   In other words, the excess of the

total cost of benefits over the Met Life contribution is

allocable to the cost of medical and dental coverage and not to

the cost of long-term disability coverage.    Indeed, as previously

stated, the combined cost of long-term disability coverage and

insurance coverage was $91 less than the Met Life contribution if

petitioner had forgone medical and dental coverage.

     In summary, after careful consideration, we conclude that

the cost of petitioner's long-term disability coverage was
                               - 11 -

attributable to petitioner's employer, Met Life, and that, as a

consequence, section 104(a)(3) does not serve to exclude

petitioner's long-term disability benefits from petitioners'

gross income.

     Having so concluded, we turn to petitioners' contention

regarding the exclusion of petitioner's disability benefits under

section 105(c).

     For disability benefits to qualify for exclusion under

section 105(c), the payments must be computed with reference to

the nature of the injury.   This requirement is met only if the

plan varies the benefits according to the type and severity of

the taxpayer's injury.   Rosen v. United States, 829 F.2d 506, 510

(4th Cir. 1987); Beisler v. Commissioner, 814 F.2d 1304, 1307-

1308 (9th Cir. 1987), affg. en banc T.C. Memo. 1985-25; Hines v.

Commissioner, 72 T.C. 715, 720 (1979).

     In the instant case, the disability benefits received by

petitioner were not based on the type and severity of the injury

suffered.   Rather, the amount of the benefits that petitioner

received was determined by the amount of his salary and his years

of service prior to his disability.     Thus, because petitioner's

disability coverage did not compute the amount of the benefits

with reference to the nature of the injury as required by section

105(c)(2), petitioner's disability benefits are not excludable

from gross income under such section.
                               - 12 -

     We have carefully considered petitioners' remaining

arguments and find them unavailing.7

     In conclusion, because the entire cost of petitioner's

disability benefits was attributable to petitioner's employer,

Met Life, and because such benefits were not computed with

reference to the nature of petitioner's disability, such benefits

must be included in petitioners' gross income pursuant to section

105(a).

     To reflect our disposition of the disputed issue, as well as

respondent's concession,



                                             Decision will be entered

                                        for respondent as to the

                                        deficiency in income tax and

                                        for petitioners as to the

                                        accuracy-related penalty.



     7
        Petitioners rely, in part, on the following statement in
IRS Publication 525 at 9 (Taxable and Nontaxable Income): "If you
pay the entire cost of a health or accident insurance plan, do
not include any amounts you receive for your disability as income
on your tax return." In view of our holding that Met Life paid,
or is deemed to have paid, the cost of petitioner's long-term
disability coverage, the foregoing statement is inapposite. Even
if this were not the case, we note that informal IRS publications
are not authoritative sources of Federal tax law; rather,
applicable statutes, regulations, and judicial decisions
constitute the authoritative sources of law that inform our
decisions. E.g., Zimmerman v. Commissioner, 71 T.C. 367, 371
(1978), affd. without published opinion 614 F.2d 1294 (2d. Cir.
1979); Green v. Commissioner, 59 T.C. 456, 458 (1972).
