                   T.C. Summary Opinion 2007-87



                      UNITED STATES TAX COURT



    SANDREA MARYANN AND ROBERT MAYNARD WOEHL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2735-05S.              Filed May 29, 2007.




     Glen L. Moss, for petitioners.

     Stephanie M. Profitt, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.   Unless otherwise indicated,

all section references are to the Internal Revenue Code, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.   Pursuant to section 7463(b), the decision to be
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entered is not reviewable by any other court, and this opinion

shall not be treated as precedent for any other case.

     Respondent determined for 2002 a deficiency of $4,627 in

petitioners’ Federal income tax.   The sole issue for decision is

whether petitioner Sandrea Maryann Woehl properly excluded from

gross income under section 104(a)(1) a portion of her disability

retirement distributions received from the California Public

Employees’ Retirement System.

                            Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.   At the time the

petition in this case was filed, petitioners resided in Newark,

California.

     Sandrea Maryann Woehl (petitioner) became employed as a

public safety dispatcher by the City of San Leandro Police

Department in March of 1972.    Upon employment, petitioner became

a member of the California Public Employees’ Retirement System

(CalPERS).

     As time progressed, petitioner developed diabetes.     On

January 25, 2000, petitioner was placed on administrative leave

because of her illness.   Petitioner subsequently sent an

application to CalPERS to request disability retirement, and she

underwent a medical examination to verify her eligibility.

Petitioner’s medical report noted that “job stress contributs
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[sic] to uncontrollable diabetes”.      Petitioner retired and

received disability retirement benefits from CalPERS effective

August 1, 2000.

     During 2002, petitioner received distributions of $49,639

from CalPERS (distributions).   The distributions were not

designed to reimburse petitioner for any medical expenses.        The

parties stipulated that the distributions were characterized as

disability retirement benefits based on petitioner’s diabetic

condition.   The parties further stipulated that the distributions

were based on factors such as the length of her employment with

the City of San Leandro and the last position she held while

employed by the city.

     CalPERS issued to petitioner a Form 1099-R, Distributions

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

IRAs, Insurance Contracts, etc., for 2002.      The Form 1099-R

reported that petitioner received in 2002 total distributions of

$49,638.68, consisting of a taxable amount of $48,725.72 and

employee contributions or insurance premiums of $912.96.

Petitioners filed for 2002 a joint Form 1040, U.S. Individual

Income Tax Return, reporting only half, or $24,819, of the total

distributions as taxable.

     Petitioner currently has a proceeding pending before the

Worker’s Compensation Appeals Board in California challenging the

nature of the distributions.
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     Respondent subsequently issued to petitioners a statutory

notice of deficiency determining that all the distributions,

except for the portion attributable to employee contributions or

insurance premiums, were taxable.

                            Discussion

     The Commissioner’s determinations are presumed correct, and

generally taxpayers bear the burden of proving otherwise.1    Rule

142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Gross income includes all income from whatever source

derived, unless excludable by a specific provision of the

Internal Revenue Code.   Sec. 61(a).    The Supreme Court has held

that section 61 reflects Congress’s intent to use the full

measure of its taxing power.    Helvering v. Clifford, 309 U.S.

331, 334 (1940).   Therefore, statutes granting tax exemptions

should be strictly construed.    Kane v. United States, 43 F.3d

1446, 1449 (Fed. Cir. 1994).

     Section 104(a)(1) provides that gross income does not

include “amounts received under workmen’s compensation acts as

compensation for personal injuries or sickness”.    The regulations

expand the scope of section 104(a)(1) to exclude also from gross

income amounts received under “a statute in the nature of a


     1
      Petitioner has not raised the issue of sec. 7491(a), which
shifts the burden of proof to the Commissioner in certain
situations. This Court concludes that sec. 7491 does not apply
because petitioner has not produced any evidence that establishes
the preconditions for its application.
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workmen’s compensation act which provides compensation to

employees for personal injuries or sickness incurred in the

course of employment.”    Sec. 1.104-1(b), Income Tax Regs.   The

regulations also provide that section 104(a)(1) “does not apply

to a retirement pension or annuity to the extent that it is

determined by reference to the employee’s age or length of

service, or the employee’s prior contributions, even though the

employee’s retirement is occasioned by an occupational injury or

sickness.”    Sec. 1.104-1(b), Income Tax Regs.

     Respondent argues that pursuant to section 1.104-1(b),

Income Tax Regs., the distributions are not excludable from gross

income under section 104(a)(1) because petitioner has stipulated

that the distributions in this case were determined with

reference to petitioner’s length of service.      Respondent contends

that Benjamin v. Commissioner, T.C. Memo. 1993-575, is directly

on point.

      In Benjamin, the taxpayer was an accountant employed by the

State of California who incurred a medical disability in the

course and scope of his employment.     Benjamin v. Commissioner,

supra.   The taxpayer was subsequently forced to retire, and

CalPERS determined that he was eligible for disability

retirement.    Although the taxpayer reported the benefit payments

that he received from CalPERS on his return, he failed to include

them in his gross income.    This Court relied on section 1.104-
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1(b), Income Tax Regs., and concluded that the benefits received

by the taxpayer in Benjamin were not excludable from gross income

because the benefits were made with reference to the taxpayer’s

length of service.

     The Court agrees with respondent.    Since petitioner

stipulated that the distributions were made with reference to her

length of service with the City of San Leandro, under section

1.104-1(b), Income Tax Regs., the distributions are not

excludable from gross income.

     Petitioner argues that the distributions nevertheless

qualify for exclusion from gross income because they were made

under Cal. Govt. Code (West 2003), section 21151.    Petitioner

contends that Cal. Govt. Code section 21151 is akin to a worker’s

compensation because it conditions eligibility for benefits on

the existence of a work-related injury or sickness, called

“industrial disability” under the California statute, without

regard to age or amount of service.     “Industrial” in this context

means disability or death as a result of injury or disease

arising out of and in the course of employment.    See Cal. Govt.

Code sec. 20046 (West 2003).

     Cal. Govt. Code sec. 21151 (West 2003), in pertinent part,

provides:

          Section 21151. Patrol, state safety, state
     industrial, state peace officer/firefighter, or local
     safety members; local or state miscellaneous members
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          (a) any patrol, state safety, state industrial,
     state peace officer/firefighter, or local safety member
     incapacitated for the performance of duty as the result
     of an industrial disability shall be retired for
     disability, pursuant to this chapter, regardless of age
     or amount of service.

     Petitioner, however, has not provided any evidence to show

that the distributions were indeed made under Cal. Govt. Code

section 21151.    Respondent contends that petitioner received the

distributions under Cal. Govt. Code sec. 21150 (West 2003) which

awards benefits with reference to the employee’s years of State

service.

     Cal. Govt. Code section 21150, in pertinent part, provides:

          Section 21150. Incapacitated member; state service
     credit; specified election; eligibility

          Any member incapacitated for the performance of
     duty shall be retired for disability * * * if he or she
     is credited with five years of state service * * *.

     Petitioner acknowledges that in order for her to qualify for

benefits under Cal. Govt. Code section 21151, she must have an

“industrial disability”.    In fact, petitioner has a proceeding

pending before the Worker’s Compensation Appeals Board in

California to challenge the State’s failure to consider the

distributions to have been made as a result of an industrial

injury.    The board, however, has not issued a decision.

     At trial, petitioner invited the Court to decide whether the

distributions were made as a result of an industrial injury.

Petitioner argues that to the extent that this Court finds that
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the distributions were paid on account of an industrial injury,

they are excludable from gross income under section 104(a)(1).

     State law creates legal interests and rights; the Federal

revenue acts designate when and how interests or rights, so

created, shall be taxed.    United States v. Mitchell, 403 U.S.

190, 197 (1971); see also Estate of Posner v. Commissioner, T.C.

Memo. 2004-112.    The Form 1099-R issued by the State of

California is evidence that the State determined that

petitioner’s legal right to the distributions were not from an

industrial injury and that the distributions were made under Cal.

Govt. Code sec. 21150.

     The Court’s duty is to ascertain when and how such legal

right, i.e., the distributions, will be taxed.        See Morgan v.

Commissioner, 309 U.S. 78, 80 (1940).        Petitioner has not offered

any evidence to show why the distributions are not of the type

that is taxable.    Therefore, the distributions are includable in

her gross income.    Sec. 61(a).

     Petitioner also argues that under Kane v. United States, 43

F.3d 1446 (Fed. Cir. 1994), the California Employees’ Retirement

Law is in the nature of a workmen’s compensation act because it

is a “dual-purpose statute” that provides payment for both work-

related and non-work related disabilities.        Petitioner’s

argument, however, is unpersuasive.        Even if the California

Employees’ Retirement Law is a “dual purpose statute”, petitioner
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does not prevail because the Court has found that the

distributions were made under Cal. Govt. Code sec. 21150.       In

other words, the distributions were not awarded solely as a

result of injury or sickness arising out of employment.       See Kane

v. United States, supra at 1450.

     Accordingly, this Court sustains respondent’s determination

that petitioners are not entitled to exclude any taxable portion

of the distributions from their gross income under section

104(a)(1).

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
