                            T.C. Summary Opinion 2014-109



                            UNITED STATES TAX COURT



     KEVIN M. CAMPBELL AND PAMELA J. CAMPBELL, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 29222-13S.                           Filed December 22, 2014.



      Carol Ann Szczepanik, for petitioners.

      Nancy P. Klingshirn, for respondent.



                                 SUMMARY OPINION


      GUY, 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.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by


      1
          Unless otherwise indicated, section references are to the Internal Revenue
                                                                          (continued...)
                                         -2-

any other court, and this opinion shall not be treated as precedent for any other

case.

        Respondent determined a deficiency of $2,800 in petitioners’ Federal

income tax for 2011. Petitioners, husband and wife, filed a timely petition for

redetermination with the Court pursuant to section 6213(a). At the time the

petition was filed, petitioners resided in Ohio.

        The sole issue remaining for decision is whether petitioners may exclude

from gross income retirement pay of $9,210 that Mr. Campbell received from the

U.S. Coast Guard (Coast Guard) during 2011.2 To the extent not discussed herein,

other issues are computational and flow from our decision in this case.

                                     Background

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

facts and the accompanying exhibits are incorporated herein by this reference.




        1
        (...continued)
Code, as amended and in effect for 2011, and Rule references are to the Tax Court
Rules of Practice and Procedure. Monetary amounts are rounded to the nearest
dollar.
        2
        Petitioners reported that Mr. Campbell received wages of $75,366 from the
Cuyahoga County Sheriff’s Department during 2011. Respondent concedes that
petitioners are entitled to reduce Mr. Campbell’s wages by $9,360.
                                          -3-

I. Mr. Campbell’s Coast Guard Service and Disability Retirement

      Mr. Campbell enlisted in the Coast Guard on July 12, 1987. His military

service was cut short in 1990, however, when he was diagnosed with insulin-

dependent diabetes mellitus. The Coast Guard concluded that Mr. Campbell’s

illness rendered him unfit for duty.

      A. Statutory Provisions

      At all times relevant to this case, chapter 61 of title 10 of the United States

Code established the standards and processes by which the armed forces

(including the Coast Guard)3 determine whether a service member may be retired

or separated from service because of a medical disability. Generally speaking, a

service member found unfit for duty because of a permanent and stable physical

disability is eligible to receive retirement pay if the member has at least 20 years

of service or his disability is rated at least 30% under the Department of Veterans

Affairs standard schedule of rating disabilities (VASRD). See 10 U.S.C. sec. 1201

(2012).4 A service member otherwise entitled to retire permanently under the

provisions of 10 U.S.C. sec. 1201, but whose disability is not determined to be



      3
       The Coast Guard is a military service and a branch of the armed forces of
the United States. See 14 U.S.C. sec. 1 (2012).
      4
          The VASRD is set forth at 38 C.F.R. part 4 (2012).
                                        -4-

permanent and stable, is eligible to be placed in temporary disability retirement

status. See 10 U.S.C. sec. 1202 (2012). A service member in temporary disability

retirement status must submit to periodic physical examinations, and a

determination whether a particular disability is permanent and stable must be made

within five years. See 10 U.S.C. sec. 1210(a) and (b) (2012).

      B. Temporary Disability Retirement

      After his diagnosis the Coast Guard evaluated Mr. Campbell and, effective

August 5, 1990, placed him in temporary disability retirement status. At the time

the Coast Guard assigned Mr. Campbell a VASRD rating of 40%.

      By letter dated September 20, 1990, the Coast Guard informed Mr.

Campbell that he was entitled to monthly retirement pay equal to the product of

his base pay multiplied by his disability rating. See 10 U.S.C. sec. 1401 (2012).

The letter further stated that the Coast Guard would withhold Federal income tax

from his monthly retirement payments. Mr. Campbell subsequently began to

receive monthly retirement pay of $403 (offset by $50 allotted to survivor benefits

and $20 for Federal income tax withholding).
                                         -5-

      C. Mr. Campbell’s Communications With the Coast Guard

      From early 1992 through 1995 Mr. Campbell attempted to convince the

Coast Guard that his retirement pay was exempt from Federal income tax. During

this period he submitted numerous Forms W-4, Employee’s Withholding

Allowance Certificate, stating that he was exempt from income tax withholding.

By letter dated June 18, 1994, Mr. Campbell provided the Coast Guard with a

copy of a publication titled “PHYSICAL DISABILITY EVALUATION

SYSTEM” which was provided to him by Coast Guard legal counsel at the time of

his retirement. The publication stated that Coast Guard disability retirement pay is

not taxable. The record does not include any response from the Coast Guard to

Mr. Campbell’s entreaties, and the Coast Guard continued to withhold Federal

income tax from his monthly retirement payments.

      D. Permanent Disability Retirement

      By letter dated April 6, 1995, the Coast Guard notified Mr. Campbell that

his diabetes qualified as a permanent physical disability, he was unfit for duty, and

he would be permanently retired from the Coast Guard effective May 4, 1995. At

that time the Coast Guard assigned Mr. Campbell a VASRD rating of 60%, and he

retired under the provisions of 10 U.S.C. sec. 1201. His retirement pay was

computed by multiplying his base pay by 60% (his disability rating). The Coast
                                         -6-

Guard again informed Mr. Campbell that his retirement pay was taxable and that it

would withhold Federal income tax from his monthly payments.

II. Department of Veterans Affairs

       Mr. Campbell testified that at the time he was permanently retired from the

Coast Guard, he contacted the Department of Veterans Affairs (VA), submitted to

a physical examination, and received a VA disability rating. He could not recall

the percentage of his VA disability rating but remembered that it was less than the

disability rating that he received from the Coast Guard. Mr. Campbell was unable

to produce any documents from the VA related to his physical examination or

disability rating.

III. Mr. Campbell’s Employment as a Deputy Sheriff

       Shortly after he was placed in temporary disability retirement status by the

Coast Guard, Mr. Campbell was hired by the Cuyahoga County Sheriff’s Office as

a deputy sheriff. He continued to be employed by the sheriff’s office at the time of

trial and testified that he was able to perform his duties without any special

accommodations.
                                        -7-

IV. Tax Reporting

      A. Forms 1099-R

      Over the years, the Coast Guard routinely issued to Mr. Campbell Forms

1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing

Plans, IRAs, Insurance Contracts, etc., reporting that he had received taxable

retirement pay. It was Mr. Campbell’s practice to provide the Forms 1099-R to his

accountant, Ralph DeLuca, who prepared and filed petitioners’ tax returns. Mr.

DeLuca testified at trial that he routinely reviewed the Forms 1099-R, concluded

that the retirement payments were not includable in income, and excluded the

payments from petitioners’ gross income.

      B. Contact With the Internal Revenue Service (IRS)

      Every few years, the IRS issued to Mr. Campbell a Notice CP-2000

proposing to increase his taxable income by the amount of his Coast Guard

retirement pay. Mr. Campbell forwarded the notices to Mr. DeLuca, who would

promptly contact the IRS and assert that the retirement pay was exempt from

Federal income tax. After this exchange, Mr. Campbell normally received a “No

Change” letter from the IRS accepting his tax return as filed.

      The record includes a “No Change” letter that the IRS issued to Mr.

Campbell for the taxable year 1991. Although the letter invited Mr. Campbell to
                                          -8-

submit an official request for a letter ruling regarding the status of his retirement

pay, he failed to do so.

V. Petitioners’ 2011 Tax Return

      In 2011 Mr. Campbell received Coast Guard retirement pay of $9,210.

Petitioners timely filed a joint Federal income tax return for 2011 reporting the

retirement pay on line 16a of their return as pension and annuity income, but they

excluded that amount from the taxable amount of pension and annuity income

reported on line 16b. As previously discussed, respondent issued a notice of

deficiency to petitioners determining that Mr. Campbell’s retirement pay is

required to be included in their gross income.

                                      Discussion

      The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer normally bears the burden of proving those

determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,

115 (1933).5

      Section 61(a) provides that gross income means “all income from whatever

source derived”. Pensions and retirement allowances constitute gross income


      5
      Petitioners do not contend that the burden of proof should be shifted to
respondent under sec. 7491(a).
                                         -9-

unless excluded by law. Sec. 61(a)(11); sec. 1.61-11(a), Income Tax Regs.

Military retirement pay is pension income within the meaning of section 61(a)(11).

Wheeler v. Commissioner, 127 T.C. 200, 205 n.11 (2006), aff’d, 521 F.3d 1289

(10th Cir. 2008).

      It is well established that statutory exclusions from income are narrowly

construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995). Taxpayers

seeking an exclusion from income must demonstrate that they are eligible for the

exclusion and “bring themselves within the clear scope of the exclusion.” Dobra

v. Commissioner, 111 T.C. 339, 349 n.16 (1998).

I. Exclusion for Military Retirement Pay

      Section 104(a)(4) provides the general rule that amounts received as a

pension, annuity, or similar allowance for personal injuries or sickness resulting

from active service in the armed forces of any country are not included in gross

income. Section 104(b)(1) and (2), however, limits the exclusion prescribed in

subsection (a)(4), as relevant here, to an individual who “on application therefor

* * * would be entitled to receive disability compensation from the Veterans

Administration.”6 Section 104(b)(4) further provides that if an individual is

      6
      With limited exceptions, benefits administered by the VA have long been
exempt from taxation. See 38 U.S.C. sec. 3101(a) (1958) (the predecessor to 38
                                                                   (continued...)
                                        -10-

described in subsection (b)(2), the amount excludable from gross income under

subsection (a)(4) for any period “shall not be less than the maximum amount

which such individual, on application therefor, would be entitled to receive as

disability compensation from the Veterans’ Administration.”7

      The restrictions imposed in section 104(b) are better understood in the light

of the legislative history underlying the Tax Reform Act of 1976, Pub. L. No. 94-

455, sec. 505(b), 90 Stat. at 1567. At that time Congress recognized that the

exclusion from gross income prescribed in section 104(a)(4) invited taxpayer

abuse, which it described in relevant part as follows:

             Criticism of the exclusion of armed forces disability pensions
      from income focuses on a number of cases involving the disability
      retirement of military personnel. In many cases, armed forces


      6
       (...continued)
U.S.C. sec. 5301(a)(1) (2012)); Wallace v. Commissioner, 128 T.C. 132, 141 n.5
(2007).
      7
       In Reimels v. Commissioner, 123 T.C. 245, 257 (2004), aff’d, 436 F.3d 344
(2d Cir. 2006), we stated in relevant part:

      [A]lthough section 104(b)(4) is not a model of clarity, its legislative
      history suggests that it was intended to apply with respect to retired
      military personnel who do not receive the Veterans’ Administration
      benefits to which they are otherwise entitled. In certain
      circumstances, section 104(b)(4) provides such persons with a tax
      benefit at least as great as the tax exemption that would have been
      available for the forgone Veterans’ Administration benefits.
                                       -11-

      personnel have been classified as disabled for military service shortly
      before they would have become eligible for retirement principally to
      obtain the benefits of the special tax exclusion on the disability
      portion of their retirement pay. In most of these cases the individuals,
      having retired from the military, earn income from other employment
      while receiving tax-free ‘disability’ payments from the military. The
      committee questions the equity of allowing retired military personnel
      to exclude the payments which they receive as tax-exempt disability
      income when they are able to earn substantial amounts of income
      from civilian work, despite disabilities such as high blood pressure,
      arthritis, etc.

            *         *         *          *         *         *         *

             The committee amendment eliminates the exclusion of
      disability payments from income for those covered under section
      104(a)(4), that is, members of the armed forces of any country,
      NOAA, the Public Health Service and the Foreign Service. This
      change applies only prospectively to persons who join these
      government services after September 24, 1975. Specific exceptions
      continue the exclusion in certain cases for future disability payments
      for injuries and sickness resulting from active service in the armed
      forces of the United States.

             At all times, Veterans’ Administration disability payments will
      continue to be excluded from gross income. In addition, even if a
      future serviceman who retires does not receive his disability benefits
      from the Veterans’ Administration, he will still be allowed to exclude
      from his gross income an amount equal to the benefits he could
      receive from the Veterans’ Administration. Otherwise, future
      members of the armed forces will be allowed to exclude military
      disability retirement payments from their gross income only if the
      payments are directly related to ‘combat injuries.’ * * *

S. Rept. No. 94-938, at 138-139 (1976), 1976-3 C.B. (Vol. 3) 49, 173-177; see

Kiourtsis v. Commissioner, T.C. Memo. 1996-534.
                                          -12-

II. Disability Ratings

      A. VA

      The United States will compensate a veteran of the armed forces for a

disability resulting from personal injury suffered or disease contracted in the line

of duty and in active service if the veteran was discharged or released under

conditions other than dishonorable and if the disability is not the result of the

veteran’s own willful misconduct or abuse of alcohol or drugs. See 38 U.S.C.

secs. 1110, 1131 (2012). In this regard the VA is authorized to adopt a schedule

of ratings of reductions in earning capacity from specific injuries based, as far as

practicable, upon the average impairments of earning capacity resulting from such

injuries in civil occupations. See 38 U.S.C. sec. 1155 (2012) (providing in

pertinent part that the VASRD shall be constructed so as to provide only 10 grades

of disability, e.g., 10%, 20%, and so on, upon which payments of compensation

shall be based). Compensation amounts for each of the VA’s 10 grades of

disability are fixed by statute. See 38 U.S.C. secs. 1114, 1134 (2012).

      In 1995 the VASRD (Diagnostic Code 7913) provided the following five

disability levels and rating criteria for diabetes mellitus:
                                                    -13-

      7913 Diabetes mellitus                                                                 Rating

      Requiring more than one daily injection of insulin, restricted
      diet, and regulation of activities (avoidance of strenuous
      occupational and recreational activities) with episodes of
      ketoacidosis or hypoglycemic reactions requiring at least
      three hospitalizations per year or weekly visits to a diabetic
      care provider, plus either progressive loss of weight and
      strength or complications that would be compensable if
      separately evaluated......................................................................      100

      Requiring insulin, restricted diet, and regulation of activities
      with episodes of ketoacidosis or hypoglycemic reactions
      requiring one or two hospitalizations per year or twice a month
      visits to a diabetic care provider, plus complications that would
      not be compensable if separately evaluated...................................                   60

      Requiring insulin, restricted diet, and regulation of activities.......                         40

      Requiring insulin and restricted diet, or; oral hypoglycemic
      agent and restricted diet..................................................................     20

      Manageable by restricted diet only.................................................             10

See 38 C.F.R. sec. 4.119 (1996).

      B. Coast Guard

      As previously mentioned, to qualify for disability retirement from the armed

forces a service member generally must be found unfit to perform the duties of his

office, grade, or rank because of physical disability, see 10 U.S.C. sec. 1201(a)

(2012); Parks v. Commissioner, T.C. Memo. 1979-182, and must have at least 20
                                        -14-

years of service or a disability that is rated at least 30% under the VASRD at the

time of the determination, see 10 U.S.C. sec. 1201(b)(3).

III. Mr. Campbell’s Retirement Pay

      Respondent determined that Mr. Campbell’s Coast Guard retirement pay is

not excludable from gross income. Mr. Campbell disputes respondent’s

determination and contends that his retirement pay qualifies for exclusion under

section 104(a)(4) because he otherwise would be entitled to VA disability benefits

within the meaning of section 104(b).

      When Mr. Campbell’s disability was diagnosed, he did not have the years of

service needed to qualify for a disability retirement. The Coast Guard nevertheless

concluded that he was entitled to a disability retirement because his VASRD rating

exceeded 30%. Indeed, the Coast Guard ultimately concluded that Mr. Campbell’s

VASRD rating was 60%.

      As discussed above, section 104(b)(2) limits the exclusion from gross

income for disability payments to individuals who would be entitled to receive

disability compensation from the VA upon application. Section 104(b)(4) further

provides that the amount excluded under section 104(a)(4) will not be less than the

maximum amount which the individual would be entitled to receive as disability

compensation from the VA on application.
                                         -15-

      Mr. Campbell testified that at the time the Coast Guard determined that he

was temporarily disabled, he submitted to a physical examination at the VA and

was awarded a disability rating. He could not remember the precise VA disability

rating and only recalled that it was less than the 60% disability rating that the

Coast Guard awarded.

      We are unable to determine, on this record, that Mr. Campbell would be

entitled to receive disability compensation from the VA. Although the Coast

Guard and the VA apply the same rating standards--the VASRD-- the Coast Guard

and the VA approach the question of disability ratings from different perspectives.

Whereas the Coast Guard focuses on whether a service member is able to perform

his or her miliary duties at a given time, the VA rates disabilities by weighing the

impact of an injury or illness on a veteran’s earning capacity in a civil occupation

over his or her lifetime. See Stine v. United States, 92 Fed. Cl. 776, 795 (2010)

(“[A] rating disparity between the two systems is not unusual because of the

differing standards that must be applied.”), aff’d, 417 Fed. Appx. 979 (Fed. Cir.

2011); Lockwood v. United States, 90 Fed. Cl. 210, 219 (2008) (“Both the

Department of Veterans Affairs and the military service branches rely on the

* * * [VASRD], however, they do so in different ways.”); see also Cleary v.

Commissioner, 60 T.C. 133, 140 n.10 (1973) (‘“[T]he basis for * * * [VA] action
                                         -16-

is different from the basis upon which a retiring board determines whether or not

an officer is entitled to retirement for physical disability[.]”’ (quoting Furlong v.

United States, 153 Ct. Cl. 557, 565 (1961))).

      Although we recognize the seriousness of Mr. Campbell’s illness, we have

no way of knowing whether the VA would award him disability compensation,

and if so, the amount that he would be compensated. Consequently, we are unable

to conclude that any amount of his Coast Guard retirement pay is excludable from

gross income under section 104(a)(4).

IV. Estoppel

      In the alternative, petitioners point to the IRS’ “course of conduct” over

many years and assert that respondent should be precluded from determining that

Mr. Campbell’s retirement pay is taxable in this case. Specifically, petitioners

emphasize that the IRS issued numerous “No Change” letters to Mr. Campbell

over the years acknowledging that his retirement pay is exempt from Federal

income tax. As petitioners see it, Mr. Campbell is entitled to closure at this point.

      It is well settled that each tax year is the origin of a new tax liability, and

each year stands on its own. Auto. Club of Mich. v. Commissioner, 353 U.S. 180,

183-184 (1957). The Commissioner is not required for any given year to allow a

tax benefit permitted for a previous or subsequent year. See, e.g., Pekar v.
                                        -17-

Commissioner, 113 T.C. 158, 166 (1999). The acceptance of or acquiescence in

returns filed by a taxpayer in previous years creates no estoppel against the

Commissioner, nor does the overlooking of an error in a return upon audit create

any such estoppel. See Dixon v. United States, 381 U.S. 68, 72-73 (1965); Auto.

Club of Mich. v. Commissioner, 353 U.S. at 183-184; McGuire v. Commissioner,

77 T.C. 765, 779-780 (1981). In short, neither respondent nor the Court is

constrained in this case by “No Change” letters or closing notices issued to Mr.

Campbell for taxable years not before the Court. See, e.g., Gould v.

Commissioner, 139 T.C. 418, 445 (2012), aff’d, 552 Fed. Appx. 250 (4th Cir.

2014); Holt v. Commissioner, T.C. Memo. 1999-348; Kiourtsis v. Commissioner,

T.C. Memo. 1996-534. Accordingly, although Mr. Campbell was allowed to

exclude his Coast Guard retirement pay from gross income for earlier taxable

years, petitioners may not exclude any portion of his retirement pay from gross

income for 2011.

      To reflect the foregoing,


                                               Decision will be entered

                                       under Rule 155.
