                  T.C. Summary Opinion 2001-102



                     UNITED STATES TAX COURT



       JAMES K. AND PATRICIA J. GOODCHILD, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1254-00S.                      Filed July 5, 2001.


     Bruce N. Crawford, for petitioners.

     Melissa J. Hedtke, for respondent.



     PAJAK, 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, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
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       Respondent determined a deficiency of $2,666 in petitioners’

1997 Federal income tax.    Due to the manner in which petitioners

presented their case, the sole issue we must decide is whether

petitioners are entitled to exclude disability benefits from

income under section 105(c).

       This case was submitted fully stipulated pursuant to Rule

122.    The limited facts stipulated are so found.   Petitioners

resided in Maple Grove, Minnesota, at the time their petition was

filed.

       It was determined that petitioner James K. Goodchild

(petitioner) had Crohn’s disease, arthritis in both knees, and

job-related stress.    Respondent conceded that petitioner’s

medical condition prevented him from continuing as a senior

broadcast technician at the University of Minnesota.     Petitioner

began receiving a disability benefit from the Minnesota State

Retirement System in April 1997.

       During 1997, petitioners received $12,873 from the Minnesota

State Retirement System.    The Minnesota State Retirement System

provided petitioners with a Form 1099-R, Distributions From

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

Insurance Contracts, etc., for that amount.    During 1997,

petitioners received $6,030 from the Social Security

Administration.    The Social Security Administration provided

petitioners with a Form 1099-SSA for that amount.
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     Respondent determined that petitioners did not report

pension income in the amount of $12,873.   Respondent also

determined that petitioners did not report as income taxable

benefits of $5,126 from the $6,030 paid to petitioners by the

Social Security Administration.   Petitioners take the position

that the Social Security benefits are subsumed in the section

105(c) exclusion issue.

     Both parties argued the case based on the applicability of

section 105(c).   Petitioners argue that they are entitled to an

exclusion of the disability payments under section 105(c).

Respondent’s position is that section 105(c) does not apply under

the facts in this case for a number of reasons.

     Initially, we find it unnecessary to decide whether the

Minnesota State Retirement System qualifies as a health or

accident plan because petitioners cannot satisfy one of the

requirements under section 105(c).

     Pursuant to section 105(a), payments received by an employee

under an employer-provided accident or health insurance plan for

personal injuries or sickness are generally includable in the

employee’s income.   However, section 105(c) grants an exception

under which such payments may be excluded from an employee’s

gross income if the requirements of section 105(c) are met.

     Section 105(c) provides that:

         SEC. 105(c). Payments Unrelated to Absence From Work.–-
     Gross income does not include amounts referred to in
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     subsection (a) to the extent such amounts–

             (1) constitutes payment for the permanent loss or
          loss of use of a member or function of the body, or the
          permanent disfigurement, of the taxpayer, his spouse,
          or a dependent (as defined in section 152), and

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

Thus, a necessary predicate for exclusion under section 105(c) is

that the amounts are computed “without regard to the period the

employee is absent from work.”    Armstrong v. Commissioner, T.C.

Memo. 1993-579.

     The Minnesota State Retirement System provides that

disability payments are to be made to employees found to be

“totally and permanently disabled”.      Minn. Stat. sec. 352.113

subdiv. 1, sec. 352.01 subdiv. 22 (2001).      The statute defines

total and permanent disability as the employee’s “inability to

engage in any substantial gainful activity by reason of any

medically determinable physical * * * impairment that has existed

or is expected to continue for a period of at least one year.”

Minn. Stat. sec. 352.01 subdiv. 17 (2001).      The statute goes on

to provide that if “the employee is no longer permanently and

totally disabled, or is engaged in or can engage in a gainful

occupation, payments of the disability benefit by the fund must

be discontinued.”   Minn. Stat. sec. 352.113 subdiv. 6 (2001).

     Thus, the disability payments under the Minnesota State

Retirement System cover only the period of time during which an
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employee has to be absent from work.    Such payments are promptly

discontinued if and when an employee becomes able to work again.

The disability payments from the Minnesota State Retirement

System are computed with regard to the period the employee was

absent from work.    The critical requirement for exclusion under

section 105(c) that the payments must be “computed * * * without

regard to the period the employee is absent from work” is not

satisfied.   Armstrong v. Commissioner, supra.

     Section 105(c) does not apply in this case.     The payments

from the Minnesota State Retirement System are taxable under

section 61(a)(11).   The payments from the Social Security

Administration are taxable under section 86.     We sustain

respondent’s determination.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                          Decision will be entered

                                     for respondent.
