                        T.C. Memo. 1999-313



                      UNITED STATES TAX COURT



                  GREGG CHERNIK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5244-97.             Filed September 23, 1999.



     Gregg Chernik, pro se.

     Nancy C. McCurley and Ronald M. Rosen, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   Respondent determined a deficiency of

$16,976 in petitioner's 1994 Federal income tax, and an accuracy-

related penalty of $2,753 under section 6662(a)1.



     1
      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. Monetary amounts are
rounded to the nearest dollar.
                              - 2 -


     After concessions,2 the sole issue for decision is whether

$6,000 of short-term disability benefits and $10,124 of long-term

disability benefits that petitioner received in 1994 pursuant to

employer-sponsored disability plans were includable in gross

income under section 105(a), or were excludable from gross income

under either section 104(a)(3) or section 105(c).

                        FINDINGS OF FACT

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

The stipulation of facts is incorporated herein by this

reference.

     Petitioner resided in San Quentin Prison, Tamal, California,

on the date he filed his petition.

     From March 18, 1980, to January 21, 1994, petitioner was

employed full time by the City of Newport Beach, California (the

City), as a member of the City's tree maintenance crew.




     2
      Petitioner concedes that the following items must be
included in his taxable income for 1994: (1) Payments in the
amount of $40,635 from the California Public Employees'
Retirement System (CALPERS); (2) wage income of $2,738, and (3)
vacation pay of $8,845.

     Respondent concedes that (1) petitioner is not liable for
the 10-percent tax on a premature distribution from a qualified
retirement plan under sec. 72(q)(1) with respect to the CALPERS
payments to petitioner in 1994; (2) petitioner does not have
discharge of indebtedness income in the amount of $5,191 under
sec. 61(a)(12); (3) petitioner is not liable for the accuracy-
related penalty for substantial understatement of income taxes
under sec. 6662(a) and (d).
                               - 3 -


     Sometime prior to 1991, the City established a short-term

disability plan and a long-term disability plan (collectively,

the disability plans) for certain qualified employees, one of

whom was petitioner.3   The short-term disability plan benefits

were paid directly by the City and were not funded through third-

party insurance.   The long-term disability plan benefits were

provided through third-party insurance.   During the years 1991

through 1993 and continuing through January 1994 when petitioner

became disabled, the City paid all of the premiums with respect

to petitioner's long-term disability coverage.

     A qualified City employee was entitled to receive benefits

under the disability plans after a determination of disability

was made and a qualifying claim was filed.   The amount of

disability benefits an employee would receive under the

disability plans was calculated based on the employee's salary

and the number of years of service that the employee had with the

City prior to the date of his disability.

     From at least January 1991 to the date of petitioner's

disability in 1994, petitioner's participation in the long-term

disability plan was financed solely through premiums paid by the

City; petitioner did not contribute any portion of the premiums.


     3
      The record is not clear as to whether there were two
separate disability plans or simply two types of coverage under
one disability plan. However, for purposes of this opinion, the
distinction is not material.
                                    - 4 -


In addition, none of the premiums paid by the City were included

in petitioner's gross income.

     Sometime prior to January 1994, petitioner began to develop

various medical ailments which severely impacted his job

performance.   In January 1994, petitioner's employment with the

City ended after petitioner was classified as disabled.    At that

time, petitioner was suffering from several medical problems

including an inability to stay awake and gall bladder problems.

     Because of his disability, petitioner qualified for short-

term and long-term disability benefits under the disability

plans.   During 1994, petitioner was paid, pursuant to the plans,

short-term disability benefits of $6,000 and long-term disability

benefits of $10,124.    The benefits were calculated based on

petitioner's salary and his length of service with the City but

not on the type of illness causing petitioner's disability.

     For 1994, the City reported the following payments to

petitioner:

                       Wages                   $2,738
                       Vacation pay             8,845
                       Long-term disability    10,124
                       Short-term disability    6,000

                            Total              27,707

Federal income taxes of $3,085 were withheld from the above-

listed amounts.
                                - 5 -


     During 1994, petitioner also received a distribution of

$40,635 from the California Public Employees' Retirement System

(CALPERS).    This amount consisted of $23,192 in tax-deferred

contributions and $17,444 of interest.    Federal income taxes of

$8,127 were withheld from the distribution.

     Sometime prior to August 1995, petitioner was convicted of a

crime and incarcerated.    While he was in prison, petitioner

prepared and filed his 1994 Form 1040A, U.S. Individual Income

Tax Return.    Because of his incarceration, petitioner was unable

to consult his tax records and had to estimate his gross income.

On his 1994 return, petitioner reported gross income of $48,280

(wages of $48,000 and interest income of $280).    After

subtracting the standard deduction and dependency exemptions

claimed, petitioner reported taxable income of $37,330.

     Petitioner made a mathematical error on the return which

subsequently was corrected, decreasing petitioner's taxable

income by $2,000 to $35,330.

     In his notice of deficiency, respondent listed the income

paid to petitioner during 1994 as reported on information returns

filed by third-party payors, stated that he could not match

income from the information returns to petitioner's 1994 Federal

income tax return, and determined that petitioner had failed to

report his CALPERS distribution and some cancellation of

indebtedness income.    Respondent has now conceded that
                               - 6 -


petitioner's gross income for 1994 includes only the following

items:

           Wages                        $2,738
           Vacation pay                  8,845
           Short-term disability         6,000
           Long-term disability         10,124
           CALPERS                      40,635

           Corrected gross income       68,342

                              OPINION

     Whether the disability benefits paid to petitioner in 1994

are subject to Federal income tax as respondent claims or are

excludable in whole or in part from petitioner's income as

petitioner claims requires an examination of sections 104, 105,

and 106.   Respondent contends that the benefits in question are

includable in income under section 105(a).       Petitioner argues

generally that the benefits are not taxable.       Although petitioner

does not cite specific sections to support his position, it is

clear on the record before us that, if the benefits are

excludable from income, it is only because the requirements of

either section 104(a)(3) or section 105(c) are met.
                                - 7 -


     As a general rule, section 104(a)(3)4 excludes from gross

income compensation received through accident or health insurance

for personal injuries or sickness.      See sec. 104(a)(3); sec.

1.104-1(a), Income Tax Regs.    Similar treatment is accorded to

amounts received under accident or health plans or from sickness

or disability funds.   See Trappey v. Commissioner, 34 T.C. 407

(1960)(disability income is received through accident or health

insurance for personal injuries or sickness within meaning of

sec. 104(a)(3)); sec. 1.104-1(d), Income Tax Regs.; 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); sec.

1.105-5, Income Tax Regs.   However, the parenthetical language of

section 104(a)(3) provides an exception for amounts received by

an employee to the extent they either are paid directly by the


     4
      SEC. 104.   COMPENSATION FOR INJURIES OR SICKNESS.

          (a) In General.-- * * * gross income does
          not
     include--

                  *    *    *     *      *    *    *

               (3) amounts received through accident or
     health insurance * * * for personal injuries or
     sickness (other than amounts received by an employee,
     to the extent such amounts (A) are attributable to
     contributions by the employer which were not includible
     in the gross income of the employee, or (B) are paid by
     the employer);
                               - 8 -


employer, or are attributable to employer contributions which

were not includable in the employee's gross income.   See sec.

104(a)(3); Trappey v. Commissioner, supra; sec. 1.104-1(d),

Income Tax Regs.

     Sections 105(a) and 104(a)(3) are related in that the two

sections "deal with the same subject matter and are in substance

but two sides of the same coin."    Winter v. Commissioner, 36 T.C.

14, 18 (1961), affd. 303 F.2d 150 (3d Cir. 1962).   Under section

105(a) amounts received by an employee through accident or health

insurance for personal injuries or sickness must be included in

gross income to the extent such amounts are attributable to

contributions by the employer which were not included in the

employee's gross income or are paid by the employer, unless such

amounts are excluded under section 105(b) or (c).   See sec. 105;

sec. 1.105-1(a), Income Tax Regs.   Only section 105(c) is

relevant here.

     Section 106 "works in conjunction with section 104(a)(3) and

section 105(a)" by excluding from an employee's gross income the

cost of employer-provided coverage under an accident or health

plan.   Rabideau v. Commissioner, T.C. Memo. 1997-230; see sec.

1.106-1, Income Tax Regs.   If employer contributions are excluded

from gross income under section 106, then the benefits

attributable to such contributions are governed by section

105(a), rather than by section 104(a)(3).   Petitioner bears the
                              - 9 -


burden of proof regarding his claim that the disability benefits

should be excluded from income.   Rule 142(a); Welch v. Helvering,

290 U.S. 111 (1933).

     Petitioner's primary argument is that the disability

benefits he received in 1994 are attributable to contributions

made by him to the disability plans, and, therefore, are excluded

from his gross income under section 104(a)(3).    Specifically,

petitioner alleges that he contributed to the disability plans by

paying premiums for disability coverage during the 1980's under a

prior disability plan that the City maintained (the prior plan).

Petitioner argues, in effect, that his investment in coverage

under the prior plan qualifies, in effect, as his contribution to

the successor plans (which provided his disability benefits in

1994) when he agreed to convert to the successor plans and give

up his coverage under the prior plan.5    Based on this theory,

petitioner concludes that the disability benefits paid to him in

1994 are attributable to contributions by him, and, therefore,

must be excluded from his gross income.


     5
      Petitioner also argues that the City did not pay the
premiums for about 6 weeks in early 1991, but he failed to prove
that this was so. Even if petitioner had proved that the City
failed to pay certain premiums for a short time in 1991, the
critical fact is that the only disability plan premiums paid from
1991 to the date of petitioner's disability were paid by the
City.
                               - 10 -


     Petitioner has failed to prove that the short-term

disability benefits paid to him in 1994 were attributable, in

whole or in part, to any contributions he made under the City's

short-term disability plan.   All of the short-term disability

benefits petitioner received were paid directly by the City.

Under section 105(a), benefits paid by the employer must be

included in the employee's income.      See also sec. 104(a)(3); sec.

1.105-1(a) and (b), Income Tax Regs.

     Similarly, petitioner has failed to prove that the long-term

disability benefits paid to him in 1994 were attributable, in

whole or in part, to any contributions he made under the City's

long-term disability plan.    Indeed, the record reflects that all

of the premiums with respect to the plan from at least January

1991 through the date when petitioner separated from service due

to disability were made by the City.     Daniel Matusiewicz, the

acting deputy director of administrative services for the City,

testified at trial regarding the City's method of accounting for

its premium contributions to the long-term disability plan and

referred to payroll records which were admitted into evidence

without objection.   The payroll records show that, for each pay

period ending in January 1991 through the date of petitioner's

disability in January 1994, the City made all premium payments to

the third-party insurer providing the long-term disability

coverage for petitioner, and that no portion of those premiums
                             - 11 -


was deducted from petitioner's wages or included in his gross

income during that period.

     Whether the long-term disability benefits are “attributable

to contributions by the employer" within the meaning of both

sections 104(a)(3) and 105(a) depends upon the type of plan

involved and the source of contributions made to the plan.    See

secs. 1.104-1(d), 1.105-1, Income Tax Regs.   Regardless of the

type of plan involved, however, contributions made to a prior

disability plan outside the relevant look-back period6 are not

taken into account in making the required analysis. See id.

     In this case, petitioner made no contributions to his long-

term disability coverage for any period from at least January

1991 through the date of his disability.   Although the record is

far from clear regarding the type of long-term disability plan

implemented by the City, the record is clear that petitioner did

not contribute to his long-term disability coverage as required

by section 104(a)(3) and 105(a).   See also sec. 1.105-1, Income

Tax Regs.



     6
      Sec. 1.105-1(d) Income Tax Regs., uses different tests to
determine whether, and to what extent, benefit payments are
"attributable to the employer's contributions" for insured plans
using individual policies and group policies. For each plan,
premium payments over a fixed period of time (the look-back
period) are examined, but the look-back period differs depending
on the type of plan involved. In the case of the City's long-
term disability plan, which is a group plan, the look-back period
is limited to 3 years.
                               - 12 -


     Since the City's contributions for petitioner's long-term

disability coverage were not includable in petitioner's income,

see sec. 106, and since the City made all of the contributions

toward petitioner's long-term disability coverage from at least

January 1991 to the date of petitioner's disability, it follows

that the long-term disability benefits received by petitioner

from the plan are not excluded from his gross income under

section 104(a)(3).   Rather, the benefits must be included in

petitioner's gross income under section 105(a) unless the

requirements of section 105(c) are satisfied.

     Petitioner argues, in essence, that both his short-term and

long-term disability benefits are excludable from his gross

income under section 105(c).   Respondent contends that section

105(c) does not apply.   We agree with respondent.

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

inclusionary rule of section 105(a).    It provides that gross

income does not include amounts received through accident or

health insurance for personal injuries or sickness to the extent

the amounts (1) constitute payment for the permanent loss or loss

of use of a member or function of the body of the employee, and

(2) are computed with reference to the nature of the injury

without regard to the period of time the employee is absent from

work.   See also sec. 1.105-3, Income Tax Regs.
                              - 13 -


     For disability benefits to qualify for exclusion under

section 105(c), three requirements must be met.   See Beisler v.

Commissioner, 814 F.2d 1304, 1306-1308 (9th Cir. 1987), affg. en

banc T.C. Memo. 1985-25.   We address only one--whether the

payments are computed with reference to the nature of the injury.

See sec. 105(c).   This requirement is satisfied only if benefits

under the plan vary according to the type and severity of the

injury.   See Beisler v. Commissioner, supra; Rosen v.

Commissioner, 829 F.2d 506, 510 (4th Cir. 1987); Hines v.

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

     Although petitioner unquestionably suffered from serious

medical ailments in 1994 and thereafter, the record does not

support a finding that the disability benefits received by

petitioner were calculated with reference to the type and

severity of the injury suffered.   Rather, the evidence is clear

that the disability benefits were calculated with reference to

the petitioner's salary and his years of service with the City

and did not vary depending on the injury or illness suffered.

     Because petitioner's disability benefits were not calculated

with reference to the nature of petitioner's injury as required

by section 105(c)(2), petitioner's disability benefits do not

fall within the section 105(c) exception.   Accordingly, we

conclude that the short-term and long-term disability benefits
                             - 14 -


received by petitioner from the City are includable in

petitioner's gross income for 1994 under section 105(a).

     We have carefully considered all remaining arguments made by

the parties for a result contrary to that expressed herein, and,

to the extent not discussed above, find them to be irrelevant or

without merit.

     To reflect the foregoing and the concessions of

both parties,

                                  Decision will be entered

                              under Rule 155.
