                      128 T.C. No. 11



                 UNITED STATES TAX COURT



           ROOSEVELT WALLACE, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 4637-03.               Filed April 16, 2007.



     P participated in a compensated work therapy
program administered by the U.S. Department of Veterans
Affairs (VA) and, on account thereof, received a
distribution of $16,393 from the VA Special Therapeutic
and Rehabilitation Activities Fund. R increased P’s
gross income by that amount on the ground that the
distribution is a payment for services. P claims that
the distribution is a tax-exempt veterans’ benefit
pursuant to I.R.C. sec. 139(a)(3) and 38 U.S.C. sec.
5301 (2000).

     Held:   The distribution is a tax-exempt veterans’
benefit.


Thomas Stylianos, Jr., for petitioner.

Nina P. Ching, for respondent.
                                 - 2 -

                                OPINION

     HALPERN, Judge:     Respondent determined a deficiency of

$2,460 in petitioner’s 2000 Federal income tax.    The sole issue

for decision is whether $16,393 received by petitioner during

2000 in connection with his participation in a work therapy

program administered by the U.S. Department of Veterans Affairs

(VA) is includable in his gross income for 2000.    We hold that it

is not.

     Unless otherwise stated, all section references are to the

Internal Revenue Code in effect for 2000.

                              Background

Introduction

     This case was submitted for decision without trial pursuant

to Rule 122, Tax Court Rules of Practice and Procedure.    Facts

stipulated by the parties are so found.    The stipulation of facts

filed by the parties, with attached exhibits, is included herein

by this reference.

Residence

     At the time the petition was filed, petitioner resided in

Lowell, Massachusetts.

Participation in Compensated Work Therapy

     During 2000, pursuant to a physician’s prescription,

petitioner participated in (and completed) a VA-administered

therapeutic and rehabilitative work program.    As part of his
                                - 3 -

participation in that program, petitioner undertook compensated

work therapy.    As part of that therapy, he was assigned to the

Veterans Construction Team.    As a team member, he worked in the

facilities department of Middlesex Community College, in Lowell,

Massachusetts.    His work included sweeping floors and moving

offices.   During 2000, petitioner received from the VA $16,393

for services he provided as a part of his compensated work

therapy.

The Compensated Work Therapy Program

     The VA administers therapeutic and rehabilitative activities

under its Compensated Work Therapy (CWT) program (sometimes just

the program).    Many aspects of the program are described in a

staff manual, the CWT Veterans Employment Resources Staff Program

Manual (the manual), prepared by staff at Edith Nourse Rogers

Memorial Veterans Medical Center, Bedford, Massachusetts.      The

following description of the program is drawn from the manual.

     The program provides assistance to veterans unable to work

and support themselves.    Many of the veterans in the program have

histories of one or more conditions such as psychiatric illness,

substance abuse, and homelessness.      Under the program, the VA

provides a range of vocational rehabilitation services, with the

degree of structure and level of support provided to the

participating veteran geared to his or her needs.      The goal of

the program is to assist participants in attaining independence
                                - 4 -

and vocational functioning as they return to the work

environment.

     The most structure and support is provided to participants

at lower levels of psychosocial functioning, such as participants

experiencing chronic physical or psychiatric disabilities that

prevent them from sustaining regular employment.   Those

participants are given work within a workshop or other hospital-

based setting and work between 4 and 30 hours a week at simple

tasks.

     Participants capable of working outside of a hospital, in

community settings, such as Federal agencies and private

businesses, but not prepared to take on full-time employment, or

struggling with frequent substance abuse relapses, participate in

a day labor pool, where work appropriate to the participants’

levels of commitment and ability is provided.

     Participants able to commit to continuous full-time

community-based employment, and who demonstrate appropriate work

ethics and behavior, can be assigned to a range of activities,

such as administrative support, data entry, landscaping,

accounting, and construction.   A participant at this level

interested in, or with experience in, the construction trades,

may be assigned to the Veterans Construction Team.   Members of

the Veterans Construction Team are assigned to construction

projects both inside and outside the VA hospital system.
                                - 5 -

     Participants capable of transitioning to competitive

employment are provided individual placement and support services

that are necessary to obtain and keep competitively obtained

employment.

     The manual provides the following summary about what is

therapeutic about compensated work therapy:    “In sum, the social

system that is inherent in the work-setting[] can be a major

restorative feature that fosters the development of the

relationships, work ethics, and skills needed to function

optimally in society.”

38 U.S.C. Section 1718 (2000)

     The parties agree that, during 2000, the CWT program was

operated pursuant to 38 U.S.C. section 1718 (2000) (when

discussed, rather than cited, “section 1718”, with all references

to the year 2000).   Title 38 of the United States Code (title 38)

is concerned with veterans’ benefits.   Section 1718 is entitled

“Therapeutic and rehabilitative activities”.    Among other things,

section 1718 authorizes the Secretary to enter into contracts

with third parties to provide therapeutic work for patients in VA

health care facilities.   38 U.S.C. sec. 1718(b)(1) and (2).

Section 1718(c)(1) establishes a fund, the “Department of

Veterans Affairs Special Therapeutic and Rehabilitation

Activities Fund” (VA Special Therapeutic and Rehabilitation

Activities Fund), from which distributions are to be made to
                               - 6 -

patients for therapeutic work, “at rates not less than the wage

rates specified in the Fair Labor Standards Act (29 U.S.C. 201 et

seq.) and the regulations prescribed thereunder for work of

similar character.”   38 U.S.C. sec. 1718(c)(2).

     Section 1718(f)(3) provides that, for purposes of 38 U.S.C.

chapter 15, a distribution to a patient from the VA Special

Therapeutic and Rehabilitation Activities Fund is to be

considered a donation from a public or private relief or welfare

organization.1

     The complete text of section 1718 is set forth in an

appendix to this report.

The Notice of Deficiency

     The principal adjustment giving rise to the deficiency

determined by respondent is his addition of $16,393 to the amount

of gross income reported by petitioner for 2000.   That adjustment

is explained as reflecting information reported by the VA to the

Internal Revenue Service (IRS) on an IRS Form 1099-MISC.




     1
        Tit. 38 U.S.C. ch. 15 (2000) is concerned with certain
pension benefits of veterans and their survivors. Some of those
pension benefits are reduced by the recipient’s annual income.
See, e.g., 38 U.S.C. secs. 1521(b) (veteran’s annual income),
1541(b) (surviving spouse’s annual income). Tit. 38 U.S.C. sec.
1503(a) describes how “annual income” is determined for purposes
of those limitations. Paragraph (1) thereof provides that
“donations from public or private relief or welfare
organizations” are excluded in determining annual income.
                                    - 7 -

                              Discussion

I.    Introduction

       The starting point in determining a taxpayer’s Federal

income tax liability for any taxable year is the computation of

gross income.     The term “gross income” is defined in section 61.

Compensation for services is includable in gross income unless

excluded by law.     See sec. 61(a)(1); sec. 1.61-2(a)(1), Income

Tax Regs.     The parties have stipulated (and we have found

accordingly) that, during 2000, petitioner received $16,393 for

his services provided under a VA CWT program.     Petitioner argues

that the receipt is excluded by law from his gross income because

it constitutes payment of a tax-exempt veterans’ benefit.

Respondent disagrees, arguing that it constitutes compensation

for petitioner’s services.

II.    Bases of Parties’ Arguments

       A.   Petitioner’s Argument

       Petitioner relies on 38 U.S.C. section 5301(a) (2000).   As

stated, title 38 is concerned with veterans’ benefits.     Section

5301 thereof is entitled “Nonassignability and exempt status of

benefits”.     In pertinent part, 38 U.S.C. section 5301(a) (2000)

provides:     “Payments of benefits due or to become due under any

law administered by the Secretary [of Veterans Affairs] * * *

made to, or on account of, a beneficiary shall be exempt from

taxation”.     That exemption is cross-referenced in the Internal
                                    - 8 -

Revenue Code, section 139(a)(3), as an exemption from income with

respect to veterans’ benefits.

     Petitioner also relies on Rev. Rul. 72-605, 1972-2 C.B. 35,

wherein the Commissioner ruled with respect to the almost

identical language in a predecessor version of 38 U.S.C. section

5301 (2000):     “[P]ayments of benefits under any law administered

by the Veterans’ Administration are excludable from the gross

income of a recipient under section 61 of the Code.”

     B.     Respondent’s Argument

     Respondent does not dispute that petitioner participated in

the CWT program for therapeutic reasons, or that, because he

participated in the program, he received a distribution of

$16,393 from of the VA Special Therapeutic and Rehabilitation

Fund.     Respondent argues that petitioner overstates his case when

he argues that money is a benefit and, by that fact alone, is

exempt from taxation to petitioner under the general exemption

for veterans’ benefits found in section 5301 of title 38.

Respondent adds:     “The monies paid to the petitioner for his

participation in the program are unlike those payments made to

taxpayers under legislatively-provided-social-welfare-benefit

programs, which are excludable from gross income.”

     In support of that argument, respondent refers us to a set

of his revenue rulings exemplifying payments excludable from

gross income not pursuant to the provision of any statute but
                              - 9 -

pursuant to the Commissioner’s policy to exclude from income most

Government benefits and other welfare payments.   That set of

revenue rulings comprises Rev. Rul. 63-136, 1963-2 C.B. 19

(benefit payments made to individuals undergoing employment

training or retraining under certain Federal acts dealing with

unemployment and underemployment), Rev. Rul. 57-102, 1957-1 C.B.

26 (payments to the blind), Rev. Rul. 74-74, 1974-1 C.B. 18

(awards to crime victims and their dependents), Rev. Rul. 74-205,

1974-1 C.B. 21 (replacement housing payments to aid displaced

individuals and their families), Rev. Rul. 75-271, 1975-2 C.B. 23

(assistance payments to lower income families enabling them to

acquire homes), and Rev. Rul. 98-19, 1998-1 C.B. 840 (relocation

payments made to flood victims).

     Respondent distinguishes the payments addressed in those

rulings from distributions made under the CWT program on the

ground that a recipient must work in order to receive a

distribution in the latter case.   That, argues respondent, places

the payment squarely within the definition of income found in

section 61 and section 1.61-2(a)(1), Income Tax Regs.

     Respondent also relies on Rev. Rul. 65-18, 1965-1 C.B. 32.

That ruling addresses the inclusion in income of remuneration a

patient or member receives for the work he performs for the

Veterans’ Administration under 38 U.S.C. section 618 (Supp. V,
                                - 10 -

1962), a predecessor provision to section 1718.2     It holds that

the receipt is a payment for services rendered even though it is

intended for therapeutic or rehabilitative purposes, and, because

it is a payment for services, it is included in the recipient’s

gross income.

III.       Discussion

       A.     Exemption

       We are faced with a question of statutory construction.

While section 61(a) states that the term “gross income” means

“all income from whatever source derived”, and specifically

includes within that meaning “[c]ompensation for services”,

section 139(a)(3) exempts “[b]enefits under laws administered by

the Veterans’ Administration”, and directs us to 38 U.S.C.

section 5301 (2000).3     If the distribution petitioner received

does in fact constitute a “benefit” payable under a law

administered by the VA, then, by law, it is excludable from

petitioner’s gross income as a tax-exempt veterans’ benefit.

Because the parties are in agreement that: (1) petitioner


       2
        The Veterans’ Administration was redesignated the
Department of Veterans Affairs by the Department of Veterans
Affairs Act, Pub. L. 100-527, sec. 2, 102 Stat. 2635 (1988).        We
shall use the initials “VA” to refer both to the Veterans’
Administration and the Department of Veterans Affairs, the
referent being determined by context.
       3
        We assume that Congress’s failure to amend sec. 139(a)(3)
to redesignate the Veterans’ Administration the Department of
Veterans Affairs is an oversight that is of no significance to
this case.
                                 - 11 -

participated in the CWT program, a veterans’ program administered

by the VA, and, on account thereof, (2) he received a

distribution from the VA Special Therapeutic and Rehabilitation

Activities Fund established pursuant to section 1718(c)(1)

(sometimes, simply, the distribution), we are left only to

determine whether the distribution constitutes a veterans’

“benefit” within the meaning 38 U.S.C. section 5301(a) (2000).

     B.    Principles of Statutory Construction

     As a general matter, if the language of a statute is

unambiguous on its face, we apply the statute in accordance with

its terms, without resort to extrinsic interpretive aids such as

legislative history.      E.g., Garber Indus. Holding Co. v.

Commissioner, 124 T.C. 1 (2005), affd. 435 F.3d 555 (5th Cir.

2006).    Accordingly, our initial inquiry is whether the language

of 38 U.S.C. section 5301(a) is so plain as to permit only one

reasonable interpretation insofar as the question presented in

this case is concerned.     See, e.g., Robinson v. Shell Oil Co.,

519 U.S. 337, 340 (1997).     That threshold determination must be

made with reference to the context in which such language

appears.    Id. at 341.

     We also keep in mind that, when interpreting statutes

relating to veterans, Federal veterans’ benefit statutes are to

be liberally construed for the benefit of a returning veteran,

see Coffy v. Republic Steel Corp., 447 U.S. 191, 196 (1980), and
                                - 12 -

any interpretive doubt is to be resolved in the veteran’s favor,

e.g., Natl. Org. of Veterans’ Advocates, Inc. v. Secy. of VA, 330

F.3d 1345, 1350 (Fed. Cir. 2003), so long as that interpretation

does not override the clear meaning of a particular provision,

e.g., Disabled Am. Veterans v. Gober, 234 F.3d 682, 692 (Fed.

Cir. 2000).

      C.    Language of 38 U.S.C. Section 5301(a) (2000)

      With limited exceptions, section 5301(a) of title 38 (2000)

exempts from taxation benefit payments made pursuant to any law

administered by the VA.     One exception (inapplicable here) is

that “the exemption * * * as to taxation [shall not] extend to

any property purchased in part or wholly out of such payments.”

Id.   A second exception (also inapplicable here) exposes payments

of veterans’ benefits to levy for unpaid Federal taxes.     38

U.S.C. sec. 5301(d).     There are no other exceptions to the

exemption from taxation, and title 38 (2000) contains no

definition of the term “benefit” particular to the exemption.

The text of 38 U.S.C. section 5301(a) (2000) is set forth in the

margin.4


      4
           Sec. 5301(a) of title 38 (2000) reads in full:

      Sec. 5301.    Nonassignability and exempt status of
                    benefits

           (a) Payments of benefits due or to become due
      under any law administered by the Secretary shall not
      be assignable except to the extent specifically
                                                    (continued...)
                             - 13 -

     Since there is nothing on the face of 38 U.S.C. section

5301(a) (2000) that indicates that Congress intended the term

“benefit” to have anything other than a common meaning, we

consider dictionary definitions of the term to inform ourselves

of the definition that Congress may have had in mind.   Excluding

meanings that are obviously inappropriate (e.g., “an

entertainment or social event”), Webster’s Third New

International Dictionary defines the term “benefit” as (1)

“something that guards, aids, or promotes well being” or “useful

aid”, and (2) “PAYMENT, GIFT, as a : financial help in time of

sickness, old age, or unemployment * * * c : a cash payment or

service provided for under an annuity, pension plan, or insurance


     4
      (...continued)
     authorized by law, and such payments made to, or on
     account of, a beneficiary shall be exempt from
     taxation, shall be exempt from the claim of creditors,
     and shall not be liable to attachment, levy, or seizure
     by or under any legal or equitable process whatever,
     either before or after receipt by the beneficiary. The
     preceding sentence shall not apply to claims of the
     United States arising under such laws nor shall the
     exemption therein contained as to taxation extend to
     any property purchased in part or wholly out of such
     payments. The provisions of this section shall not be
     construed to prohibit the assignment of insurance
     otherwise authorized under chapter 19 of this title, or
     of servicemen's indemnity. For the purposes of this
     subsection, in any case where a payee of an educational
     assistance allowance has designated the address of an
     attorney-in-fact as the payee's address for the purpose
     of receiving a benefit check and has also executed a
     power of attorney giving the attorney-in-fact authority
     to negotiate such benefit check, such action shall be
     deemed to be an assignment and is prohibited.
                              - 14 -

policy”.   Webster’s Third New International Dictionary 204

(2002).

     The relevant definitions in The American Heritage Dictionary

of the English Language are similar, but with some variation in

the second case, viz:   “(2) A payment made or an entitlement

available in accordance with a wage agreement, an insurance

policy, or a public assistance program.”    The American Heritage

Dictionary of the English Language 168 (4th ed. 2000).

     Both Merriam-Webster’s Collegiate Dictionary and Merriam-

Webster’s Online Dictionary include the following definition:      “a

service (as health insurance) or right (as to take vacation time)

provided by an employer in addition to wages or salary”.

Merriam-Webster’s Collegiate Dictionary 114 (11th ed. 2003) and

Merriam-Webster’s Online Dictionary, http://aolsvc.merriam-

webster.aol.com/mwwod-aol.htm (last visited Feb. 26, 2007).

     Those definitions are instructive.    We conclude the

following:   The term “benefit” is commonly understood to include

things both tangible and intangible.   Independence and vocational

functioning are among the intangible benefits intended for

participants in the CWT program.   Although the term “benefit” is

not synonymous with the term “payment”, many payments are

benefits, including payments that constitute items of gross

income, e.g., fringe benefits, pensions and annuities.       See sec.

61(a)(1) (fringe benefits), (9) (annuities), (11) (pensions).
                               - 15 -

Whether payments for services are considered benefits appears an

open question, though at least The American Heritage Dictionary

of the English Language supports that view.    Dictionary

definitions of the term “benefit” do not allow us to eliminate

from the meaning of the term “payments received in connection

with the performance of services” (as respondent implicitly

argues).    We next look to see whether Congress understood the

term “benefit” to include a payment of the sort at issue here.

     D.    Context

     While the titles of statutes and statutory headings cannot

limit the plain meaning of statutory text, they are of some use

for interpretative purposes when they shed some light on

ambiguous words or phrases.    Bhd. of R.R. Trainmen v. B&O R.R.

Co., 331 U.S. 519, 528-529 (1947).

     Title 38 (2000) is entitled “VETERANS’ BENEFITS”.      Section

1718 falls within the following subdivisions of title 38:     part

II, “GENERAL BENEFITS”; chapter 17, “HOSPITAL, NURSING HOME,

DOMICILIARY, AND MEDICAL CARE”; and subchapter II, “HOSPITAL,

NURSING HOME, OR DOMICILIARY CARE AND MEDICAL TREATMENT”.     As

stated, section 1718 is entitled “Therapeutic and rehabilitative

activities”.    As pertinent to the statutory hierarchy, section

1718 therapeutic work programs clearly fall within the ambit of

medical benefits (medical care and medical treatment) provided to

veterans.    Distributions from the VA Special Therapeutic and
                               - 16 -

Rehabilitation Activities Fund are nested within a series of

provisions dealing with benefits.   There is a canon of

construction, noscitur a sociis (Latin: “it is known by its

associates”), holding that the meaning of an unclear word or

phrase should be determined by the words immediately surrounding

it.   Black’s Law Dictionary 1087 (8th ed. 2004); see also, e.g.,

Jarecki v. G.D. Searle & Co., 367 U.S. 303, 307 (1961).      While

Congress has failed to tell us whether distributions from the VA

Special Therapeutic and Rehabilitation Activities Fund are to be

considered benefits, the placement of section 1718 in the midst

of so many benefit provisions supports the inference that such

distributions are to be considered benefits.      Contextually, the

distributions are benefits.

      E.   History of 38 U.S.C. Section 5301(a)

      The history of a statute may be helpful in resolving

ambiguities therein.   E.g., Anderson v. Commissioner, 123 T.C.

219, 233 (2004), affd. 137 Fed. Appx. 373 (1st Cir. 2005).

      Section 5301 (2000) of title 38 both limits the

assignability of veterans’ benefits and exempts those benefits

from taxation.   While the provision has deep roots,5 its


      5
        The tax exemption for VA benefits originated as an
amendment to the Bureau of War Risk Insurance Act, which,
beginning in 1917, provided certain benefits for members of the
Armed Forces. See Act of Oct. 6, 1917, ch. 105, sec. 311, 40
Stat. 408. The initial amendment, which provided an exemption
from tax for certain death and disability benefits, was later
                                                   (continued...)
                               - 17 -

legislative history is sparse.    What history there is recognizes

two purposes:    to “‘avoid the possibility of the Veterans’

Administration * * * being placed in the position of a collection

agency’” and to “‘prevent the deprivation and depletion of the

means of subsistence of veterans dependent upon these benefits as

the main source of their income.’”      Rose v. Rose, 481 U.S. 619,

630 (1987) (addressing the assignability limitations of the

provision and quoting S. Rept. 94-1243, at 147-148 (1976),

reprinted in 1976 U.S.C.C.A.N. 5241, 5369, 5370).     While the

second of those purposes is somewhat helpful to petitioner, we do

not believe that the legislative history of 38 U.S.C. section

5301 (2000) resolves the question before us.

     We proceed to consider what we can determine about section

1718.    In comparison to the legislative history of 38 U.S.C.




     5
      (...continued)
enlarged to include all allotments and family allowances,
compensation, and insurance payable under the Act. See Act of
June 25, 1918, ch. 104, sec. 2, 40 Stat. 609. That exemption
subsequently became sec. 22 of the World War Veterans’ Act, 1924,
ch. 320, 43 Stat. 607, 613, which consolidated several different
veterans’ benefits laws into a single statute. Ch. 320, sec. 22,
43 Stat. 613, however, was repealed in 1935, and in its place
Congress enacted a new statute providing a broad tax exemption
for benefits payable “under any of the laws relating to
veterans.” See Act of Aug. 12, 1935, ch. 510, sec. 3, 49 Stat.
609. That provision was codified in 38 U.S.C. sec. 3101(a)
(1958), the predecessor statute to 38 U.S.C. sec. 5301(a)(1)
(2000). See Manocchio v. Commissioner, 78 T.C. 989, 996 (1982)
(setting forth the history of the exemption through its
appearance in 38 U.S.C. sec. 3101(a) (1958)), affd. 710 F.2d 1400
(9th Cir. 1983).
                                - 18 -

section 5301 (2000), the legislative history of section 1718 is

abundant.

     F.    History of Section 1718

            1.   Public Law 87-574

     In 1991, 38 U.S.C. section 1718 was redesignated as such by

Department of Veterans Affairs Codification Act, Pub. L. 102-83,

section 5(a), 105 Stat. 406 (1991).      Prior to its redesignation,

the section was 38 U.S.C. section 618.

     Section 618 was added to title 38 by Act of Aug. 6, 1962,

Pub. L. 87-574, section 2(1), 76 Stat. 308.     As so added, 38

U.S.C. section 618 is set forth in the margin.6     In pertinent

part, it authorizes the Administrator of the VA to utilize the

services of patients in VA hospitals for “therapeutic and

rehabilitative purposes at nominal remuneration”, but without

giving them status as employees of the United States.




     6
          38 U.S.C. sec. 618 (Supp. V, 1962) provides:

     Sec. 618.     Therapeutic and rehabilitative activities

          The Administrator, upon the recommendation of the
     Chief Medical Director, may utilize the services of
     patients and members in Veterans’ Administration
     hospitals and domiciliaries for therapeutic and
     rehabilitative purposes, at nominal remuneration, and
     such patients and members shall not under these
     circumstances be held or considered as employees of the
     United States for any purpose. The Administrator shall
     prescribe the condition for the utilization of such
     services.
                                - 19 -

     S. Rept. 1693, 87th Cong., 2d Sess. (1962), reprinted at

1962 U.S.C.C.A.N. 2101, is the report of the Committee on Labor

and Welfare that accompanied H.R. 8992, 87th Cong., 2d Sess.

(1962), which, when enacted, became Pub. L. 87-574, and added 38

U.S.C. section 618.   The report states that the bill (H.R. 8992)

was suggested and formally transmitted to the Congress by the VA.

S. Rept. 1693, supra.   The report further states that the bill

relates entirely to certain administrative provisions affecting

the Department of Medicine and Surgery of the VA, and it

describes the provision that would become 38 U.S.C. section 618

(Supp. V, 1962) as “specifically [authorizing] the use of the

services of patients and members in Veterans’ Administration

hospitals and domiciliaries, for therapeutic and rehabilitative

purposes, without conferring an employment status.”     Id.

     A communication from J.S. Gleason, Jr., Administrator of the

VA, transmitting to the Senate a draft of a bill that became H.R.

8992, is contained in the report.    Id.   In pertinent part,

Administrator Gleason states:

          There is an inconsistency between Federal employee
     status, with its statutory and regulatory requirements,
     and the basic concept of the member-employment program
     as a means toward the medical, psychological, and
     social rehabilitation of the veteran. This
     inconsistency is highlighted by the fact that
     participants in the program are not eligible for such
     Federal employment benefits as retirement, insurance,
     or unemployment compensation, and yet they have been
     held to come within the purview of certain other
     statutory employee programs.
                               - 20 -

          The proposed amendment would avoid confusion and
     controversy which has sometimes arisen in connection
     with the application to such persons of various
     statutes, regulations, or bills relating to Federal
     employees. It would enable the Veterans’
     Administration to prescribe the conditions and benefits
     which will best serve the therapeutic and
     rehabilitative objectives of the program.

S. Rept. 1693, supra, 1962 U.S.C.C.A.N. at 2103 (emphasis added).

          2.   Veterans Omnibus Health Care Act of 1976

     Veterans Omnibus Health Care Act of 1976, Pub. L. 94-581,

section 105(a)(3), 90 Stat. 2845, added to section 618 of title

38 provisions substantially the same as those in subsections (b)

through (e) of section 1718.   S. Rept. 94-1206 (Part I) (1976),

reprinted in 1976 U.S.C.C.A.N. 6355, is a portion of the report

of the Committee on Veterans’ Affairs that accompanied S. 2908,

94th Cong., 2d Sess. (1976), which, substantially in the form of

H.R. 2735, 94th Cong., 2d Sess. (1976), was enacted as Pub. L.

94-581.

     The report states that among the purposes of S. 2908 is the

clarification of the VA’s authority to enter into arrangements

with private industry and nonprofit corporations to supply work

projects for patient workers and to establish a revolving fund to

receive and disburse funds in connection with such work.   S.

Rept. 94-1206 (Part I), supra at 57, 1976 U.S.C.C.A.N. at 6357.

The report refers to such work as being part of the VA’s

compensated work-therapy program and describes that program as

being carried out under the VA’s medical care authority and
                                - 21 -

having existed in some form in the VA since the late 1930s.       Id.

at 113, 1976 U.S.C.C.A.N. at 6405.       The report distinguishes the

CWT program from the incentive therapy (IT) program then

authorized in 38 U.S.C. section 618 (in 2000, substantially,

section 1718(a)).   The report distinguishes the two programs not

on therapeutic and rehabilitative grounds but on the grounds that

patients participating in the IT program are paid from

appropriated funds and generally perform tasks of a custodial or

clerical nature at administration health care facilities.       Id.

     The report describes the operation of the CWT program as

follows:   “VA patients perform work on the projects as a

medically therapeutic activity, and are supervised by VA medical

personnel.   Participating patients are paid from the proceeds of

the contract.”   Id.   Appended to the report is a report of the VA

requested by the Committee on Veterans’ Affairs on medical bills

pending before the committee.    That report (the VA report)

contains a section-by-section analysis of S. 2908, supra.       The VA

Report explains in some detail the goals and value of the VA’s

therapeutic and rehabilitative work programs as medical

treatment:

          The value of compensated work programs as a therapeutic
     modality is widely acknowledged. They provide therapeutic
     (psychosocial and/or physical) rehabilitation of the
     participant. Participation induces motivation, heightens
     self-esteem and breaks institutional patterns through the
     use of remunerative work with the expectation of either
     increasing the participant’s potential for adjustment to the
     community, or preventing regression from present functional
                                 - 22 -

     level. It reinforces through the use of well-established
     motivational principles (‘rewards’), modifications or
     development of attitudes, habits, skills, and behaviors
     necessary to attain or maintain a maximum level of social
     and psychological adjustment.

S. Rept. 94-1206 (Part I), supra at 181, 1976 U.S.C.C.A.N. at

6472.

             3.   Veterans’ Benefits Improvement and Health-Care
                  Authorization Act of 1986

        Veterans’ Benefits Improvement and Health-Care Authorization

Act of 1986, Pub. L. 99-576, section 205, 100 Stat. 3256, amended

38 U.S.C. section 618 in response to a concern among veterans

that payments for participation in incentive therapy and CWT

programs were considered as income in determining eligibility

for, or monthly rates of, non-service-connected disability

pensions paid under chapter 15 of title 38.     See Senate/House

Explanatory Statement of the Proposed Compromise Agreement on

H.R. 5299, The Proposed Veterans’ Benefits Improvement and Health

Care Authorization Act of 1986, 132 Cong. Rec. 29451, 29453 (Oct.

8, 1986).     The amendments identified funds received by

individuals as a result of their participation in therapeutic or

rehabilitative activities carried out under 38 U.S.C. section 618

as “distributions” (in substitution for the terms “payments”,

“wages”, or “remuneration”) and provided that, for purposes of

chapter 15 of title 38, those distributions be considered

donations from public or private relief organizations, which, for

purposes of former section 503(a)(1) of title 38, are not
                               - 23 -

considered income for pension purposes.      Id.   Those amendments

survive in section 1718.

          4.   Discussion

     Our examination of the history of section 1718 convinces us

that, while the VA expects a participant in the CWT program to

work, and in exchange for that work agrees to pay him a sum of

money, the point of the exchange is not to effect a market-driven

exchange of labor for value.    Indeed, a VA staff manual

describing the CWT program describes it as providing assistance

to veterans unable to work and support themselves.      The manual

further states that many of the veterans in the program have

histories of one or more conditions such as psychiatric illness,

substance abuse, and homelessness.      We need no authority for the

proposition that an employer does not normally engage an

individual to work in order to provide him with therapy or to

rehabilitate him.    That, however, is the point of the VA’s work

therapy programs, as the VA Administrator, J.S. Gleason, Jr., is

quoted above as stating:    “[T]he basic concept of the member-

employment program [is] as a means toward the medical,

psychological, and social rehabilitation of the veteran”.      S.

Rept. 1693, supra.    That point was understood in 1976 by the

Committee on Veterans Affairs, which, as set forth above, in

reporting favorably on S. 2908 (which established a statutory

basis for the CWT program), stated:     “VA patients perform work on
                              - 24 -

the projects as a medically therapeutic activity, and are

supervised by VA medical personnel.”   The VA report, appended to

the committee’s report, describes the compensatory aspect of the

CWT program as “[reinforcing] through the use of well-established

motivational principles (‘rewards’), modifications or development

of attitudes, habits, skills, and behaviors necessary to attain

or maintain a maximum level of social or psychological

adjustment.”   S. Rept. 94-1206 (Part I), supra at 181, 1976

U.S.C.C.A.N. at 6472.   We believe that, over the years, Congress

has understood that the principal benefits to participants in VA

therapeutic work programs are medical and not pecuniary.    It is

reasonable to assume that that understanding played a role in

Congress’s 1986 decision to recast payments made to participants

in VA therapeutic work programs as “distributions” (and not

“payments”, “wages”, or “remuneration”) and to provide that those

distributions not be considered income for certain pension

purposes.   See discussion of Veterans’ Benefits Improvement and

Health-Care Authorization Act of 1986 supra in section III.F.3.

of this report.

     While petitioner was compensated with a distribution from

the VA Special Therapeutic and Rehabilitation Activities Fund for

the services he rendered, we are inclined to conclude that

distributions of that class are not simply payments for services

rendered.   There is a welfare (noncompensatory) aspect to them
                               - 25 -

that inclines us to classify them as benefits along with other

payments, such as education, training, and subsistence allowances

(including work-study allowances, see 38 U.S.C. sec. 3537), that

are tax-exempt on account of 38 U.S.C. section 5301(a) (2000).7

Before we reach a final conclusion, however, we look to

additional interpretative guidance available to us.

     G.    VA Op. Gen. Couns. Prec. 64-90

     The VA is the agency charged with the interpretation and

administration of laws pertaining to veterans’ benefits.   The

general counsel of the VA may issue a written legal opinion (a

General Counsel Precedent Opinion) involving veterans’ benefits

under laws administered by the VA that is conclusive as to all VA

officials and employees with respect to the matter at issue.8    VA


     7
        In IRS Pub. 525, Taxable and Nontaxable Income 14 (2006),
the Service includes among a description of nontaxable veterans’
benefits “[e]ducation, training, and subsistence allowances”.
     8
          See 38 C.F.R. sec. 14.507(b), providing:

     A written legal opinion of the General Counsel
     involving veterans’ benefits under laws administered by
     the Department of Veterans Affairs which, in the
     judgment of the General Counsel or the Deputy General
     Counsel acting as or for the General Counsel,
     necessitates regulatory change, interprets a statute or
     regulation as a matter of first impression, clarifies
     or modifies a prior opinion, or is otherwise of
     significance beyond the matter at issue, may be
     designated a “precedent opinion” for purposes of such
     benefits. Written legal opinions designated as
     precedent opinions under this section shall be
     considered by Department of Veterans Affairs to be
     subject to the provisions of 5 U.S.C. 552(a)(1). An
                                                    (continued...)
                             - 26 -

Op. Gen. Couns. Prec. 64-90, 1990 WL 605252 (the opinion),

addresses the appropriateness of paying directly to incompetent

patients for whom guardians have been appointed the nominal

remuneration to which the patients are entitled for participating

in therapeutic and rehabilitative programs established pursuant

to 38 U.S.C. section 618 (the predecessor of section 1718).    The

opinion concludes that such direct payments are appropriate.   In

reaching that conclusion, the opinion considers the legislative

history of the Act of Aug. 6, 1962, Pub. L. 87-574, section 2(l),

76 Stat. 308, adding 38 U.S.C. section 618 (“legislation * * *

sponsored and enacted at the request of the VA”).   The opinion

states:

          The words “nominal remuneration” as used in the
     statute are interpreted to mean a token grant of money
     in the nature of a “gratuity” or an “award,” in an
     amount to be determined administratively, payable by
     the VA to the patient or member as a part of the
     expense of the therapeutic and rehabilitation program,
     as distinguished from “salary or wages” or “earnings”
     or an additional monetary “benefit” to the veteran.
     The language of section 618 makes it abundantly clear
     that payments thereunder are not intended as a
     consideration for the services rendered but rather as
     an inducement to selected patients and members to enter


     8
      (...continued)
     opinion designated as a precedent opinion is binding on
     Department officials and employees in subsequent
     matters involving a legal issue decided in the
     precedent opinion, unless there has been a material
     change in a controlling statute or regulation or the
     opinion has been overruled or modified by a subsequent
     precedent opinion or judicial decision.
                              - 27 -

     into activities which will assist them in regaining
     self-reliance and aid in their return to normal life.
     In other words, such payments are merely one more
     "tool" available to the professional personnel of DM &
     S for use in the treatment of patients and members.
     Payments under section 618 are an expense for medical
     care and are chargeable to appropriations for the
     medical care program. They do not fall within the
     category of benefits otherwise payable to a guardian.

VA Op. Gen. Couns. Prec. 64-90, supra (emphasis added).

     Veterans Omnibus Health Care Act of 1976, Pub. L. 94-581,

section 105(a)(3), 90 Stat. 2845, replaced the provision calling

for the payment of nominal remuneration with one calling for

payments at rates not less than specified in the Fair Labor

Standards Act of 1938 (29 U.S.C. section 201, et seq.).   We have

found no indication that, by that change, Congress intended to

change the nature of the payment as a gratuity or award, and,

indeed, in the ruling, the VA General Counsel took no notice of

that change in 1990.

     The VA General Counsel’s convictions that patients are not

being recompensed for services and the payments to them are an

expense for medical care reinforces our conclusion that

distributions from the VA Special Therapeutic and Rehabilitation

Activities Fund are not merely payments for services rendered.

     H.   Respondent’s Arguments

     Respondent distinguishes payments made to taxpayers under

legislatively-provided-social-welfare-benefit programs (which

respondent has ruled are excludable from income) from
                              - 28 -

distributions from the VA Special Therapeutic and Rehabilitation

Fund on the ground that a recipient must work in order to receive

a distribution in the later case.   Payments for work, argues

respondent, are squarely within the definition of gross income

found in section 61 and section 1.61-2(a)(1), Income Tax Regs.

     While it is true that the definition of gross income

includes payments for work, see sec. 61(a)(1), respondent’s

argument ignores the introductory language of section 61(a)(1):

“Except as otherwise provided in this subtitle”.   Indeed, section

61(a)(11) includes pensions as an item of gross income.     Section

139(a)(3), however, directs us to 38 U.S.C. section 5301 for an

exemption for benefits under laws administered by the VA.

Respondent has acknowledged that veterans’ pensions are

excludable from gross income as a veterans’ benefit.   Rev. Rul.

72-605, 1972-2 C.B. 35.   The fact that a distribution from the VA

Special Therapeutic and Rehabilitation Fund may fit the

description of an item normally classified as an item of gross

income does not necessarily mean that the distribution is an item

of gross income for which no exemption is afforded by section

139(a)(3) and 38 U.S.C. section 5301 (2000).

     Respondent relies specifically on Rev. Rul. 65-18, 1965-1

C.B. 32, which addresses the inclusion in income of remuneration

a patient or member receives for the work he performs for the VA

under 38 U.S.C. section 618 (Supp. V, 1962), a predecessor
                                - 29 -

provision to section 1718.     It holds that the receipt is a

payment for services rendered even though it is intended for

therapeutic or rehabilitative services, and, because it is a

payment for services, it is included in the recipient’s gross

income.   Revenue rulings are generally not accorded deference by

the Court.   E.g., McLaulin v. Commissioner, 115 T.C. 255, 263

(2000), affd. 276 F.3d 1269 (11th Cir. 2001).     We may, however,

take a revenue ruling into account where we judge the underlying

rationale to be sound.   Id.    We do not judge that to be the case

here.

     Rev. Rul. 65-18, supra, appears to have been issued in

response to the addition of section 618 to title 38 by the Act of

Aug. 6, 1962, section 2(1), 76 Stat. 308 (discussed supra in

section III.F.1 of this report).     The ruling acknowledges

Congress’s purpose, as set out in S. Rept. 1693, 87th Cong., 2d

Sess. (1962), of avoiding confusion and controversy with respect

to the Federal employee status of patients participating in a

therapeutic program and states that the law enables the VA to

prescribe the “conditions and benefits” that will best serve the

therapeutic and rehabilitative objectives of the program.       Rev.

Rul. 65-18, 1965-1 C.B. at 33.     The ruling gives no consideration

to the question of whether the remuneration in question

constitutes an exempt veterans’ benefit within the meaning of the

applicable predecessors of section 139(a)(3) and 38 U.S.C.
                               - 30 -

section 5301(a) (2000); i.e., section 122(a)(4) (1965) of the

Internal Revenue Code of 1954 and 38 U.S.C. section 3101 (1964),

respectively.    Indeed, there is no mention of those provisions or

of respondent’s acknowledgment of the blanket exemption from

taxation of all veterans’ benefits contained in Mim. 4411, XV-1

C.B. 497 (1936) (superseded and reacknowledged in Rev. Rul. 72-

605, 1972-2 C.B. 35).    Lacking any consideration of the exemption

for veterans’ benefits, the analysis of the ruling is neither

complete nor persuasive.

       Finally, respondent argues that, since Congress has amended

what is now 38 U.S.C. section 1718 numerous times since the

Commissioner issued Rev. Rul. 65-18, supra, it must have approved

of the conclusion the Commissioner there reached.    A revenue

ruling incorporating a long-standing administrative practice

sanctioned by the Congress or the Courts may acquire the force of

law.    Am. Campaign Acad. v. Commissioner, 92 T.C. 1053, 1070

(1989).    Nevertheless, we reject respondent’s argument for the

reasons expressed in Ashland Oil, Inc. v. Commissioner, 95 T.C.

348, 363 (1990):

       Respondent has not, however, shown that Congress has
       been even aware of this administrative interpretation,
       which has not been litigated in a reported decision and
       has been cited in only a smattering of private letter
       rulings. Without affirmative indications of
       congressional awareness and consideration, we decline
       to cloak this revenue ruling with the aura of
       legislative approval. See Commissioner v. Glenshaw
       Glass Co., 348 U.S. 426, 431 (1955); Interstate Drop
       Forge Co. v. Commissioner, 326 F.2d 743, 746 (7th Cir.
                             - 31 -

     1964), affg. a Memorandum Opinion of this Court; Sims
     v. United States, 252 F.2d 434, 438-439 (4th Cir.
     1958), affd. 359 U.S. 108 (1959).

     I.   Conclusion

     Taking into account the liberal construction that we are to

apply in construing veterans’ benefit statutes and the extrinsic

sources that we have considered, we conclude that the

distribution in question, a distribution from the VA Special

Therapeutic and Rehabilitation Activities Fund, constitutes the

payment of a benefit within the meaning of 38 U.S.C. section

5301(a) (2000).

     Distributions from VA Special Therapeutic and Rehabilitation

Activities Fund do not resemble common labor for value exchanges.

In our statement of the background of this case, we noted that

petitioner participated in the CWT program pursuant to a

prescription from a physician.   We set forth provisions of the

staff manual governing the program providing that (1) the program

provides assistance to veterans unable to work and support

themselves; (2) many of the veterans in the program have

histories of one or more of psychiatric illness, substance abuse,

and homelessness; and (3) the goal of the program is to assist

participants in attaining independence and vocational functioning

as they return to the work environment.   Indeed, section 1718 is

included in title 38, among the provisions for medical benefits.

Moreover, the history of section 1718 and the analysis contained
                              - 32 -

in VA Op. Gen. Couns. Prec. 64-90, supra, convince us that both

Congress and the VA understood that distributions from the fund

were not a quid pro quo for labor.     In VA Op. Gen. Couns. Prec.

64-90, supra, the general counsel classifies distributions from

the fund as an expense for medical care, chargeable to

appropriations for the VA medical care program.    Distributions

from the fund constitute payments of benefits.    Because the

distribution here in question constitutes a veterans’ benefit

payable under a law administered by the VA, it is exempt from

taxation under section 38 U.S.C. section 5301(a) (2000) and

section 139(a)(3).

IV.   Conclusion

      To reflect the foregoing,

                                           Decision will be entered

                                     for petitioner.
                              - 33 -

                             APPENDIX

38 U.S.C. Section 1718 (2000):

     Section 1718.   Therapeutic and rehabilitative
                     activities

          (a) In providing rehabilitative services under
     this chapter, the Secretary, upon the recommendation of
     the Under Secretary for Health, may use the services of
     patients and members in Department health care
     facilities for therapeutic and rehabilitative purposes.
     Such patients and members shall not under these
     circumstances be held or considered as employees of the
     United States for any purpose. The Secretary shall
     prescribe the conditions for the use of such services.

          (b)(1) In furnishing rehabilitative services under
     this chapter, the Secretary, upon the recommendation of
     the Under Secretary for Health, may enter into a
     contract or other arrangement with any appropriate
     source (whether or not an element of the Department of
     Veterans Affairs or of any other Federal entity) to
     provide for therapeutic work for patients and members
     in Department health care facilities.

          (2) Notwithstanding any other provision of law, the
     Secretary may also furnish rehabilitative services under
     this subsection through contractual arrangements with
     nonprofit entities to provide for such therapeutic work for
     such patients. The Secretary shall establish appropriate
     fiscal, accounting, management, recordkeeping, and reporting
     requirements with respect to the activities of any such
     nonprofit entity in connection with such contractual
     arrangements.

          (c)(1) There is hereby established in the Treasury
     of the United States a revolving fund known as the
     Department of Veterans Affairs Special Therapeutic and
     Rehabilitation Activities Fund (hereinafter in this
     section referred to as the "fund") for the purpose of
     furnishing rehabilitative services authorized in
     subsection (b) of this section. Such amounts of the
     fund as the Secretary may determine to be necessary to
     establish and maintain operating accounts for the
     various rehabilitative services activities may be
     deposited in checking accounts in other depositaries
     selected or established by the Secretary.
                        - 34 -

     (2) All funds received by the Department under
contractual arrangements made under subsection (b) of
this section, or by nonprofit entities described in
paragraph (2) of such subsection, shall be deposited in
or credited to the fund, and the Secretary shall
distribute out of the fund moneys to participants at
rates not less than the wage rates specified in the
Fair Labor Standards Act (29 U.S.C. 201 et seq.) and
regulations prescribed thereunder for work of similar
character.

     (3) The Under Secretary for Health shall prepare,
for inclusion in the annual report submitted to
Congress under section 529 of this title, a description
of the scope and achievements of activities carried out
under this section (including pertinent data regarding
productivity and rates of distribution) during the
prior twelve months and an estimate of the needs of the
program of therapeutic and rehabilitation activities to
be carried out under this section for the ensuing
fiscal year.

     (d) In providing rehabilitative services under
this chapter, the Secretary shall take appropriate
action to make it possible for the patient to take
maximum advantage of any benefits to which such patient
is entitled under chapter 31, 34, or 35 of this title,
and, if the patient is still receiving treatment of a
prolonged nature under this chapter, the provision of
rehabilitative services under this chapter shall be
continued during, and coordinated with, the pursuit of
education and training under such chapter 31, 34, or
35.

     (e) The Secretary shall prescribe regulations to
ensure that the priorities set forth in section 1705 of
this title shall be applied, insofar as practicable, to
participation in therapeutic and rehabilitation
activities carried out under this section.

     (f)(1) The Secretary may not consider any of the
matters stated in paragraph (2) as a basis for the denial or
discontinuance of a rating of total disability for purposes
of compensation or pension based on the veteran's inability
to secure or follow a substantially gainful occupation as a
result of disability.
                        - 35 -

     (2) Paragraph (1) applies to the following:

     (A) A veteran's participation in an activity
     carried out under this section.

     (B) A veteran's receipt of a distribution as a
     result of participation in an activity carried out
     under this section.

     (C) A veteran's participation in a program of
     rehabilitative services that (i) is provided as
     part of the veteran's care furnished by a State
     home and (ii) is approved by the Secretary as
     conforming appropriately to standards for
     activities carried out under this section.

     (D) A veteran's receipt of payment as a result of
     participation in a program described in
     subparagraph (C).

     (3) A distribution of funds made under this
section and a payment made to a veteran under a program
of rehabilitative services described in paragraph
(2)(C) shall be considered for the purposes of chapter
15 of this title to be a donation from a public or
private relief or welfare organization.
