                        T.C. Memo. 2005-5



                  UNITED STATES TAX COURT



THOMAS G. WRIGHT AND ESTATE OF ROSEMARY K. WRIGHT, DECEASED,
 THOMAS G. WRIGHT, PERSONAL REPRESENTATIVE, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



  Docket No. 9988-03.                Filed January 13, 2005.


       Ps excluded a portion of H’s disability benefits
  from gross income for the 1999 and 2000 taxable years.
  R determined that Ps were required to include in gross
  income an additional portion of H’s benefits.

       Held: Ps are not entitled under sec. 105,
  104(a)(3), or 72, I.R.C., to exclude from gross income
  disability retirement benefits in an amount greater
  than permitted by R.

       Held, further, R is not precluded from making
  adjustments to Ps’ gross income by reason of R’s
  decision not to adjust prior years’ income.


  James R. Cooper, for petitioners.

  Richard J. Hassebrock, for respondent.
                                - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes for their 1999 and 2000 taxable

years in the amounts of $3,347 and $4,570, respectively.   The

issues for decision are:

     (1) Whether, pursuant to section 1051, 104(a)(3), or 72

petitioners may exclude from gross income a portion of payments

received by Thomas G. Wright (Mr. Wright) from the State Teachers

Retirement System of Ohio (STRS) in excess of the amount

determined by respondent to be nontaxable; and

     (2) if not, whether respondent is nonetheless barred from

making adjustments to petitioners’ gross income with respect to

Mr. Wright’s STRS payments for the taxable years 1999 and 2000

since respondent had previously declined to make similar

adjustments in prior tax years.

                           FINDINGS OF FACT

I.   Background

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

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference.    At the time the petition

was filed, petitioners resided in Granville, Ohio.


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -

     Mr. Wright was born on September 22, 1930.    Mr. Wright

worked for the Ohio Public School System for 21 years, the first

10 years as a high school teacher and the remaining 11 years as a

high school principal.   During his tenure, Mr. Wright was a

member of STRS.   In February 1977, Mr. Wright suffered a mental

and emotional breakdown which left him permanently disabled with

respect to his teaching profession.    Mr. Wright was granted

disability retirement in August of 1977 from the Ohio Public

School System and his job as the principal of Granville High

School in Granville, Ohio.

     From 1977 to 1983, Mr. Wright reported disability retirement

benefits received from STRS primarily as ordinary income in

accordance with the Forms 1099-R, Distributions from Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRA’s, Insurance

Contracts, Etc.   In 1983, after talking to friends and family

members and after his own investigation of Internal Revenue

Service (IRS) publications, Mr. Wright decided to treat his

benefits as 60 percent includable in gross income and 40 percent

excludable from gross income based on his alleged 8-percent

contribution rate and an alleged 12-percent contribution rate by
                                - 4 -

his employer.2   This exclusion rate, thus determined, was much

greater than the exclusion rate determined by STRS.

     In 1999, Mr. Wright received $33,123.90 in distributions

from STRS.   A Form 1099-R issued to Mr. Wright for 1999 indicated

a taxable distribution in the amount of $32,128.50 and employee

contributions or insurance premiums in the amount of $995.40.

In 2000, Mr. Wright received $45,506.66 in distributions from

STRS. The Form 1099-R issued to Mr. Wright for 2000 indicated a

taxable distribution in the amount of $44,511.26 and employee

contributions or insurance premiums in the amount of $995.40.

The $995.40 amounts listed on the Forms 1099-R represent a tax-

free recovery of previously taxed employee contributions to the

plan.    STRS used the exclusionary ratios under section 72(b) in

calculating the amount of disability retirement benefits paid to

Mr. Wright attributable to his contributions to STRS.

     Petitioners timely filed a joint Form 1040, U.S. Individual

Income Tax Return, for each of the years 1999 and 2000.   On these

returns, they reported as taxable $19,278 and $26,707 of the

distributions received by Mr. Wright from STRS in 1999 and 2000,


     2
       Mr. Wright’s testimony on this point is contradictory. He
initially indicated that he contributed 12 percent and that the
six various school boards for which he worked contributed 8
percent in the latter years of his employment. But later in his
testimony, he indicated that he contributed 8 percent and the
school boards contributed 12 percent. It appears that the latter
testimony is his position based on Mr. Wright’s reaffirmation of
these percentage allocations during trial.
                               - 5 -

respectively. On April 1, 2003, respondent issued to petitioners

the notice of deficiency underlying the instant proceeding,

determining that petitioners were required to include in income

STRS distribution amounts in excess of those reported by

petitioners.   The statutory notice indicated that only $995.40

was nontaxable for each of the years in issue.

      Prior to issuing the notice of deficiency for 1999 and 2000,

respondent had contacted petitioners on four occasions

questioning whether petitioners were properly excluding the

correct portion of Mr. Wright’s disability retirement payments

from their gross income for the taxable years 1989, 1994, 1997,

and 1998.   In each of those instances, respondent chose not to

adjust petitioners’ taxable income.

II.   The State Teachers (Disability) Retirement System of Ohio

      In order to be eligible for disability retirement under

STRS, a member must be:   (1) Under the age of 60 and no longer

teaching; (2) have 5 or more years of Ohio service credit; (3) be

disabled, physically or mentally, for teaching service; (4) if

mentally and physically able to do so, file an application with

STRS within 2 years from the date contributing service is

terminated, unless the disability is manifested in some degree

(as evidenced by medical records) before the contributing service

is terminated; and (5) may not be receiving service retirement

benefits.   The evidence indicates that Mr. Wright satisfied these
                               - 6 -

eligibility requirements.   He applied for disability retirement

benefits from STRS in February 1977, and his application was

approved that same year.

     The STRS Employer’s Manual sets forth the required

contribution rates for STRS members and their employers.     These

contribution rates show the percentage of each member’s

compensation contributed to STRS by the member and by the

employer.   STRS also published a brochure entitled “Disability

Retirement” describing the program, including sections on

eligibility requirements and taxes.    Notably, the STRS

publications do not indicate any specific portion of an

employee’s contribution which funds the disability benefit.

     Neither the extent nor severity of the disability affects

the computation of the amount of disability benefits.      Ohio Rev.

Code Ann. section 3309.40 (Anderson 2002) directs calculation of

the benefit based on the sum of the following:    (1) The number of

Ohio service credits actually earned by the member, and (2) the

difference between the member’s age upon disability retirement

and age 60.3   The resulting sum is then multiplied by the “final

average salary”, which is the average of the 3 highest years of

earnings, and a specified factor.   Therefore, the amount that a


     3
       The total disability retirement benefit cannot be less
than 30 percent nor more than 75 percent of the member’s final
average salary. Ohio Rev. Code Ann. sec. 3309.40 (Anderson
2002).
                               - 7 -

member contributes to the disability benefit program is not a

factor in the benefit calculation.

                              OPINION

I.   Contentions of the Parties

     Both parties agree that at least a portion of Mr. Wright’s

disability retirement payments is includable in his gross income

and that a portion of the payments may be excludable for the 1999

and 2000 taxable years.4   The parties disagree as to the

exclusion ratio for the payments.

     Petitioners principally contend that the disability

retirement payments are subject to the rules set forth under

section 105(a) and (e) for amounts received under accident and

health plans and are, therefore, excludable from gross income to

the extent of employee contributions to the plan.     Petitioners

further maintain that their calculations based on a 40-percent

employee contribution are correct.     In the alternative,

petitioners argue that because respondent chose not to contest

petitioners’ treatment in prior taxable years, respondent is

precluded from attempting to make adjustments to their 1999 and

2000 returns.


     4
       At trial, respondent initially stated that petitioners
were not allowed to exclude any disability payments received in
1999 or 2000 from gross income. However, the notice of
deficiency allowed an amount excludable from gross income as
determined by STRS, and respondent has not sought an increase in
the amount of deficiency.
                                 - 8 -

      Respondent’s primary position is that petitioners must

include in gross income the amount of disability payments

designated as taxable by STRS because they failed to prove a

greater exclusion ratio or amount excludable from gross income.5

In addition, respondent argues that respondent should not be

estopped from asserting deficiencies in petitioners’ 1999 and

2000 taxable years merely because respondent declined to make

adjustments in prior years.    In support of this claim, respondent

points out that petitioners do not satisfy the requirements of

laches, equitable estoppel, or collateral estoppel.

II.   Burden of Proof

      As a general rule, the Commissioner’s determination of a

taxpayer’s liability is presumed correct, and the taxpayer bears

the burden of proving that the determination is improper.    Rule

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

section 7491 may shift the burden to respondent in specified

circumstances, petitioners here have not established that they

meet the prerequisites under section 7491(a)(1) and (2) for such

a shift.     Rather, petitioners did not dispute that they bear the

burden.




      5
          See supra note 4.
                                   - 9 -

III. Taxability of the Disability Retirement Benefit

     A.     Gross Income

     Section 61(a) specifies that, “Except as otherwise

provided”, gross income includes “all income from whatever source

derived”.    The construction of section 61 is broad, and any

“‘exclusions to income must be narrowly construed.’”

Commissioner v. Schleier, 515 U.S. 323, 328 (1995)(quoting United

States v. Burke, 504 U.S. 229, 248 (1992)(Souter, J., concurring

in judgment)).       Taxpayers seeking an exclusion from gross income

must demonstrate 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).

     Annuities and pensions are enumerated among the forms of

income within the purview of section 61(a).      Sec. 61(a)(9), (11).

Section 72 elaborates on section 61(a)(9) and (11) by providing

specific rules applicable to taxation of, inter alia, annuities

and distributions from qualified employer retirement plans.         See

also sec. 402(a).       Section 72(a) reiterates the general rule of

inclusion in gross income, unless otherwise provided.      Section

72(b),6 however, provides otherwise to the extent of permitting

     6
         SEC. 72.    ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND
                     LIFE INSURANCE CONTRACTS.

            (b)     Exclusion Ratio.--

                    (1) In general.--Gross income does not
                                                        (continued...)
                               - 10 -

use of an exclusion ratio to except from gross income amounts

proportionate to the taxpayer’s investment in the contract.

     Ohio Rev. Code Ann. section 3307.63(A) and (B) (Anderson

2002) provides that STRS disability retirement payments comprise

both an annuity and a pension.    STRS calculated the amount

excludable from petitioners’ gross income under section 72(b) to

be $995.40 in each of the years 1999 and 2000.    The notice of

deficiency accepts this computation.

     B.     Section 105

     Petitioners seek to obtain a greater exclusion through the

application of section 105.    Section 105 addresses the treatment

of amounts received under employer-provided accident and health

insurance.7    Courts have recognized that a plan subject to


     6
      (...continued)
          include that part of any amount received as an
          annuity under an annuity, endowment, or life
          insurance contract which bears the same ratio to
          such amount as the investment in the contract (as
          of the annuity starting date) bears to the
          expected return under the contract (as of such
          date).
     7
         SEC. 105. AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH PLANS

          (a) Amounts Attributable to Employer
     Contributions.--Except as otherwise provided in this
     section, amounts received by an employee through
     accident or health insurance for personal injuries or
     sickness shall be included in gross income to the
     extent such amounts (1) are attributable to
     contributions by the employer which were not includible
     in the gross income of the employee, or (2) are paid by
     the employer.
                                                   (continued...)
                              - 11 -

section 105 may be encapsulated in a qualified retirement plan.

See, e.g., Berman v. Commissioner, 925 F.2d 936, 938-939 (6th

Cir. 1991), affg. T.C. Memo. 1989-654; Caplin v. United States,

718 F.2d 544, 548-549 (2d Cir. 1983); Wood v. United States, 590

F.2d 321, 323 (9th Cir. 1979).   Additionally, section 105(e)(2)

provides that amounts received under a disability fund maintained

under State law are treated as received through accident or

health insurance.   See, e.g., Rosen v. United States, 829 F.2d

506, 509 (4th Cir. 1987); Beisler v. Commissioner, 814 F.2d 1304,

1306 (9th Cir. 1987); Trappey v. Commissioner, 34 T.C. 407, 408

(1960).

     The general rule of section 105(a) is that amounts received

by an employee through accident or health insurance are included

in gross income to the extent:   (1) Attributable to contributions

by the employer, not included in the gross income of the

employee, or (2) paid by the employer.   Stated conversely,

amounts received through such insurance are typically excludable




     7
      (...continued)
          (b) Amounts Expended for Medical Care.* * * gross
     income does not include amounts referred to in
     subsection (a) if such amounts are paid, directly or
     indirectly, to the taxpayer to reimburse the taxpayer
     for expenses incurred by him for the medical care * * *
     of the taxpayer * * *
                               - 12 -

to the extent attributable to after-tax contributions by the

employee.8

     However, section 105 provides two additional exceptions to

includability even for amounts attributable to employer

contributions or payments.    Section 105(b) excludes amounts

expended for medical care.    Section 105(c) excludes amounts

constituting “payment for the permanent loss or loss of use of a

member or function of the body, or the permanent disfigurement,

of the taxpayer, his spouse, or a dependent” which are computed

with “reference to the nature of the injury without regard to the

period the employee is absent from work.”    Courts have

interpreted “with reference to the nature of the injury” as

referring to the plan distributions varying with respect to the

type and severity of the injury.    Berman v. Commissioner, supra

at 940; Beisler v. Commissioner, supra at 1307.


     8
         As stated in Merker v. Commissioner, T.C. Memo. 1997-277,

          Section 104(a)(3) excludes from gross income
     amounts received by an employee “through accident or
     health insurance for personal injuries or sickness”
     except to the extent such amounts are (A) attributable
     to contributions made by the employer which were not
     includable in the gross income of the employee, or (B)
     paid by the employer. Section 105(a) is essentially
     the mirror image of section 104(a)(3), and, subject to
     two exceptions, includes in the gross income of an
     employee amounts received through accident or health
     insurance for personal injuries or sickness to the
     extent such amounts are (A) attributable to
     contributions by the employer which were not includable
     in the gross income of the employee or (B) are paid by
     the employer. [Fn. ref. omitted.]
                              - 13 -

     Petitioners acknowledged at trial that the benefits were not

designed to reimburse Mr. Wright for any medical expenses. In

addition, petitioners did not provide any evidence that the

benefit payments received were payments for a permanent loss of

use of a member or function of Mr. Wright’s body.   Further, the

record indicates that the STRS benefits received by petitioners

were not based on or paid with reference to the severity of Mr.

Wright’s injury.   Accordingly, Mr. Wright’s benefits are not

excludable under these two exceptions.

     Mr. Wright testified that he excluded 40 percent of his

benefits from gross income based on his alleged 8-percent of

compensation contribution and his employer’s alleged 12-percent

of compensation contribution to the plan.   Mr. Wright relied on

the idea that, of the total amount contributed, his portion

constituted 40 percent and his employer’s portion was 60 percent.

However, these assertions fall short of demonstrating that 40

percent of the benefits received by Mr. Wright may be excluded

from gross income for several reasons.   First, petitioners’ brief

indicates that their 40-percent exclusion rate, and thus the

underlying 8- and 12-percent contribution split upon which it was

based, was only an approximation derived from various STRS rate

contribution schedules that changed over the period of

Mr. Wright’s employment.   Hence, Mr. Wright’s testimony failed to

substantiate that 40 percent of his benefits were solely the
                               - 14 -

result of his contributions to the plan and that not more than 60

percent of his benefits were attributable to employer

contributions.   See Laws v. Commissioner, T.C. Memo. 2003-21;

Miley v. Commissioner, T.C. Memo. 2002-236.

     Second, petitioners have not shown that any amounts

contributed by STRS were included in petitioners’ gross income.

Consequently, petitioners have not established that they are

entitled to exclude portions of the benefits under section 105.9

     Third, petitioners’ contention is contrary to the applicable

regulations discussed below.   The regulations under section 72

explain the applicability of section 72 to accident and health

plans, as well as to distributions from profit sharing plans




     9
       In their petition, petitioners also cited sec. 104 in
support of the alleged nontaxable nature of the disability
payments. Since petitioners mentioned sec. 104 at trial only in
their opening statement and did not address it on brief, the
Court assumes that petitioners either have concluded that sec.
104 arguments are subsumed by sec. 105(a) or have abandoned
and/or conceded any sec. 104 issue. In any event, sec. 104 would
be inapplicable here. Sec. 104(a)(3) excludes from gross income
those amounts received by an employee “through accident or health
insurance”. However, amounts are not excluded to the extent that
these amounts were either: (1) Attributable to contributions paid
by the employer which were not included in the employee’s gross
income, or (2) paid by the employer. Petitioners would not be
entitled to exclude Mr. Wright’s benefits under sec. 104(a)(3)
because they failed to establish that Mr. Wright’s contributions
to STRS were used to fund his disability retirement benefits,
much less the portion of the benefits that were funded by his
employee contributions. Conroy v. Commissioner, 41 T.C. 685,
692-693 (1964), affd. 341 F.2d 290 (4th Cir. 1965); Merker v.
Commissioner, T.C. Memo. 1997-277; Shaffer v. Commissioner, T.C.
Memo. 1994-618.
                                - 15 -

under section 401.    Sec. 1.72-15(a), Income Tax Regs.10

Specifically, section 1.72-15(c), Income Tax Regs., provides for

a method of determining the taxation of amounts received as

accident or health benefits, and it describes the relationship of

section 72 with sections 104 and 105.     In general, the framework

established under section 72 applies where no exclusion is

available under section 104 or 105.      As such, section 1.72-15(c),

Income Tax Regs., applies to distributions from the STRS plan.

     In a contributory plan, where accident, health, and

retirement benefits are all included, the accident and health

benefits attributable to employee contributions are tax free.

Sec. 1.72-15(c)(1), Income Tax Regs.     Where an employee

contributes to such a combined accident, health, and retirement

plan, any accident and health benefits are presumed to have been

made by the employer’s contributions and not the employee’s

contributions.    Sec. 1.72-15(c)(2), Income Tax Regs.11     However,


     10
          Sec. 1.72-15(a), Income Tax Regs., states:

     This section provides the rules for determining the
     taxation of amounts received from an employer-
     established plan which provides for distributions that
     are taxable under section 72 (or for distributions that
     are taxable under section 402(a)(2) or (e), or section
     403(a)(2), in case of lump sum distributions) and which
     also provides for distributions that may be excludable
     from gross income under section 104 or 105 as accident
     or health benefits. * * *
     11
          Sec. 1.72-15(c)(2), Income Tax Regs., provides:

                                                       (continued...)
                               - 16 -

this presumption can be rebutted.    Accident and health benefits

will be attributed to employee contributions where the plan

expressly provides:   (1) That the accident or health benefits are

provided in whole or in part by employee contributions; and (2)

the portion of employee contributions to be used to provide the

accident or health benefits.   Id.   Accordingly, absent an

explicit plan provision, section 1.72-15(c)(2), Income Tax Regs.,

deems that the accident and health payments are attributable to

the employer contributions and, therefore, taxable to the

employee.

     While petitioners tried to show, rationally, through their

alleged 8-percent contribution that they were entitled to their

chosen exclusion percentage, their rationale does not address the

requirements of the controlling regulation.    The record does not

indicate that the STRS plan provided that accident or health

benefits were provided in whole or in part by Mr. Wright’s

contributions, nor did the plan specify any portion of Mr.

Wright’s contributions to be used for accident or health


     11
      (...continued)
     However, if the plan does not expressly provide that
     the accident or health benefits are to be provided with
     employee contributions and the portion of employee
     contributions to be used for such purpose, it will be
     presumed that none of the employee contributions is
     used to provide such benefits. Thus, in the case of a
     contributory pension plan, it will be presumed that the
     disability pension is provided by employer
     contributions, unless the plan expressly provides
     otherwise * * * [Emphasis added.]
                                 - 17 -

benefits.   Thus, pursuant to section 1.72-15(c)(2), Income Tax

Regs., Mr. Wright’s accident and health benefits are deemed

wholly attributable to his employer’s contributions.

IV.   Preclusion of Adjustments in 1999 and 2000 Taxable Years

      Petitioners did not specifically articulate the theory on

which they rely to bar respondent from pursuing the deficiencies.

Thus, the Court shall consider laches, equitable estoppel, and

collateral estoppel in light of petitioners’ argument.

      A.    Doctrine of Laches

      Laches is an equitable doctrine which “prohibits a party

from asserting a claim following an unreasonable delay by such

party when there has been a change in circumstances during such

delay which would result in severe prejudice against an opposing

party should the claim be permitted.”     Tregre v. Commissioner,

T.C. Memo. 1996-243, affd. without published opinion 129 F.3d 609

(5th Cir. 1997).    It is well settled that the United States is

not subject to the doctrine of laches in enforcing its rights.

United States v. Summerlin, 310 U.S. 414, 416 (1940); Guaranty

Trust Co. v. United States, 304 U.S. 126, 132-133 (1938).

Instead, the “timeliness of Government claims is governed by the

statute of limitations enacted by Congress.”    Fein v. United

States, 22 F.3d 631, 634 (5th Cir. 1994).    Respondent asserted

petitioners’ deficiencies within the period of limitations.      Even

though respondent did not seek to adjust petitioners’ 1989, 1994,
                               - 18 -

1997, and 1998 returns, respondent is not barred by the doctrine

of laches from asserting deficiencies for the 1999 and 2000 years

in issue.

     B.     Doctrine of Equitable Estoppel

     Equitable estoppel is a judicial doctrine that precludes a

party from denying his or her own acts or representations which

induced another to act to his or her detriment.     Hofstetter v.

Commissioner, 98 T.C. 695, 700 (1992); Graff v. Commissioner, 74

T.C. 743, 761 (1980), affd. 673 F.2d 784 (5th Cir. 1982); Megibow

v. Commissioner, T.C. Memo. 2004-41.     The Supreme Court has held

that the Government may not be estopped “on the same terms as any

other litigant.”    OPM v. Richmond, 496 U.S. 414, 419 (1990);

Heckler v. Cmty. Health Servs., 467 U.S. 51, 60 (1984).

Equitable estoppel is applied “against the Government with utmost

caution and restraint”.    Schuster v. Commissioner, 312 F.2d 311,

317 (9th Cir. 1962), affg. 32 T.C. 998 (1959).    Any successful

attempt to invoke equitable estoppel against the Commissioner

must outweigh the policy consideration in favor of “an efficient

collection of the public revenue”.      Id.

     In order to invoke the doctrine of equitable estoppel

against the United States, petitioners must satisfy all the

traditional elements:    (1) A false representation or wrongful,

misleading silence by the party against whom estoppel is to be

invoked; (2) an error in a statement of fact and not an opinion
                              - 19 -

or statement of law; (3) ignorance of the true facts by the

taxpayer; (4) reasonable reliance on the act or statement by the

taxpayer; and (5) detriment suffered by the taxpayer because of

the false representation or wrongful, misleading silence.

Norfolk S. Corp. v. Commissioner, 104 T.C. 13, 60 (1995), affd.

140 F.3d 240 (4th Cir. 1998); Megibow v. Commissioner, supra;

Miller v. Commissioner, T.C. Memo. 2001-55.   In addition,

estoppel requires at least a minimum showing of some affirmative

misconduct by a Government agent.   United States v. Guy, 978 F.2d

934, 937 (6th Cir. 1992).   Moreover, equitable estoppel does not

bar or prevent the Commissioner from correcting a mistake of law.

Auto. Club of Mich. v. Commissioner, 353 U.S. 180, 183 (1957);

Schuster v. Commissioner, supra at 317.

     Petitioners do not meet the requirements to invoke the

doctrine of equitable estoppel against respondent.   At trial, Mr.

Wright testified that he received letters indicating that

respondent was closing audit inquiries on a “no change” basis

regarding the 1989, 1994, 1997, and 1998 taxable years.   However,

Mr. Wright did not introduce any of these letters at trial.

Thus, the record is bereft of evidence that respondent made

misrepresentations or misleading statements that would have

engendered any detrimental reliance on the part of petitioners.

Furthermore, petitioners’ reliance on the alleged letters would

be unjustified.   Mr. Wright candidly testified that an IRS
                                - 20 -

Appeals officer told him that “closed does not mean closed” but

that it could mean “abandoned for the time being”.     This

conversation should have been an indication to petitioners that

their disability payment exclusions were at least questionable.

     Mr. Wright’s actions demonstrate no ignorance of the facts.

On the contrary, Mr. Wright testified that he decided to exclude

portions of his disability retirement payments after talking with

family and friends and after his own investigation of IRS

publications.    Petitioners’ actions were initiated before any

examinations.    Petitioners’ exclusion of 40 percent of Mr.

Wright’s disability payments was based not on respondent’s

decision to forgo adjustment of petitioners’ returns; rather, it

was the result of petitioners’ own notions of exclusions to gross

income.   Therefore, equitable estoppel does not apply.

     C.   Doctrine of Collateral Estoppel

     Collateral estoppel is used for the “dual purpose of

protecting litigants from the burden of relitigating an identical

issue and of promoting judicial economy by preventing unnecessary

or redundant litigation.”     Meier v. Commissioner, 91 T.C. 273,

282 (1988).     In collateral estoppel, or issue preclusion, the

judgment in the prior suit precludes, during the subsequent

second suit, the litigation of issues that were actually

litigated and necessary to the outcome of the first suit.

Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979).     Furthermore,
                             - 21 -

the doctrine of collateral estoppel only forecloses relitgation

of an issue previously litigated and decided in a prior suit.

Id. at 326 n.5; United States v. Intl. Bldg. Co., 345 U.S. 502,

505 (1953); Meier v. Commissioner, supra at 282.     In Megibow v.

Commissioner, supra, this Court recently observed:

          From a legal standpoint, income taxes are levied
     on an annual basis, such that each year represents a
     new liability and a separate cause of action.
     Commissioner v. Sunnen, 333 U.S. 591, 598-600 (1948);
     Fla. Peach Corp. v. Commissioner, 90 T.C. [678], 682.
     Given this principle, collateral estoppel would not
     operate to establish entitlement to deductions in one
     year based merely on an allowance of similar deductions
     in a different year or years. See Barmes v.
     Commissioner, T.C. Memo. 2001-155 (rejecting attempts
     to apply collateral estoppel to depreciation deductions
     based on a prior litigated tax year), affd. 89 AFTR 2d
     2002-2249, 2002-1 USTC par. 50,312 (7th Cir. 2002); see
     also, Adolph Coors Co. v. Commissioner, 519 F.2d 1280,
     1283 (10th Cir. 1975)(rejecting an attempt to apply
     collateral estoppel even though the exact issue was
     raised in a prior Tax Court proceeding but, because the
     Commissioner abandoned the issue during the litigation,
     no judicial determination or findings were made), affg.
     60 T.C. 368 (1973).

     In a factual context, for collateral estoppel to apply, the

following requirements are necessary:

          1. The issue in the second suit must be identical
          in all respects with the one decided in the first
          suit.
          2. There must be a final judgment rendered by a
          court of competent jurisdiction.
          3. Collateral estoppel may be invoked against
          parties and their privies to the prior judgment.
          4. The parties must actually have litigated the
          issues and the resolution of these issues must
          have been essential to the prior decision.
          5. The controlling facts and applicable legal
          rules must remain unchanged from those in the
          prior litigation. [Peck v. Commissioner, 90 T.C.
                              - 22 -

          162, 166-167 (1988)(citations omitted), affd. 904
          F.2d 525 (9th Cir. 1990).]

     Petitioners fail to meet the prerequisites to invoke

collateral estoppel.   Although the issue, the controlling facts,

and the parties are identical for each of the 1989, 1994, 1997,

1998 taxable years and for the years 1999 and 2000 in issue,

respondent’s decision not to make adjustments to previous years’

tax returns was not the subject of any litigation.     Thus, there

was no final judgment rendered by any court, much less a court of

competent jurisdiction.   Accordingly, collateral estoppel does

not apply in this case.

V.   Conclusion

     Petitioners are not entitled to exclude disability benefits

payments from their gross income in excess of the amount

determined by STRS and respondent.     Petitioners did not establish

that the additional benefits they sought to exclude were

attributable to Mr. Wright’s after-tax contributions or that

respondent was prohibited from making the adjustments to income

at issue in this case.

     To reflect the foregoing,

                                           Decision will be entered

                                     for respondent.
