                          T.C. Memo. 1999-348



                     UNITED STATES TAX COURT



         DALE C. AND JACQUELINE L. HOLT, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 187-98.                Filed October 20, 1999.

     Stephen D. Willey, for petitioner.

     James F. Prothro, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     PAJAK, Special Trial Judge:     Respondent determined a

deficiency in petitioners' Federal income tax in the amount of

$6,748, together with an accuracy-related penalty under section

6662(a) in the amount of $1,350, for the taxable year 1995.      All

section references are to the Internal Revenue Code in effect for

the year in issue.

     On brief, respondent conceded that petitioners are not

liable for the accuracy-related penalty.     Therefore, the only
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issue which the Court must decide is whether a disability

percentage rating issued by the Veterans' Administration entitles

petitioners to exclude any portion of a "length of service

military retirement pension" (service pension) under section

104(a)(4).   If the exclusion is denied, then, due to the

resultant increase in income, petitioners' Schedule A limitation

must be adjusted by the amount of $234 in accordance with

respondent's determination in the notice of deficiency.

(Petitioners did not contest this issue at trial or on brief.)

                           FINDINGS OF FACT

     Some of the facts in this case have been stipulated and are

so found.    Petitioners resided in Arlington, Texas, at the time

they filed their petition.    They filed a joint Federal income tax

return for 1995.

      In 1987, petitioner Dale C. Holt (petitioner) retired from

the United States Air Force (Air Force) as a Colonel.    Petitioner

served on active duty from January 1957 until August 1987.    He

received a retirement pension for his length of service and not

for any disability.

     After retirement, petitioner applied for nontaxable

disability benefits from the Veterans' Administration (VA).

Petitioner executed a VA form, Veteran's Application for

Compensation or Pension.    In doing so, petitioner waived that

portion of his service pension from the Air Force which was equal
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to the compensation which might be awarded by the VA.      This

waiver is required to prevent veterans from receiving double

benefits from both the VA and a branch of the military for the

same military service.   The VA awarded petitioner an initial

disability rating of VA 10 percent for a chronic back ailment.

The VA percentage rating equals a dollar amount based on VA

charts.    This service-connected disability rating was

subsequently increased to a VA 40 percent in 1995.      In addition

to the back ailment, petitioner has degenerative arthritis and

spinal disk shrinkage with a bulging disk.

     In 1995, petitioner received $45,847 in service pension pay

from the Air Force.    The Defense Finance and Accounting Service

sent petitioner statements on which the $45,847 figure was

clearly labeled as taxable income.      Petitioner also received

$5,926 from the VA for disability benefits.      In a notice dated

September 28, 1988, from the VA, the VA stated that VA

compensation (disability benefits) is not taxable, but that

retirement pay (service pensions) which is based on age or length

of service is taxable.

     On their 1995 return, petitioners reported total income of

$99,240.    Apparently, petitioner's ailments did not prevent him

from working in 1995.    Petitioner earned $25,015.74 from American

Airlines, Inc., $8,090 from Aviation Crew Training, Inc., and

$1,260 from American Trans Air., Inc.
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     Petitioners excluded from gross income the full amount of

the VA disability benefits, $5,926, and $23,857 of the service

pension income.    Petitioners utilized the following formula.

Petitioners took their gross retirement pay of $55,195 and

divided it by 75 percent to reach $75,593.    This $75,593 was then

multiplied by the VA 40 percent determined disability to reach a

disability exclusion of $29,437.    This amount was adjusted by

subtracting the amount of retirement pay that had been waived due

to VA disability benefits of $5,580.     The resulting $23,857 was

characterized as an "adjusted exclusion" by petitioners.

Petitioners then subtracted the $23,857 from Form 1099-R taxable

income of $45,847 to reach a calculated "taxable" amount of

$21,990.

     Respondent determined that the total taxable pension from

the Defense Finance and Accounting Service Cleveland Center was

$45,847, which is the amount reported on the Form 1099-R from

that source.    Respondent also determined that petitioners

underreported their service pension by $23,857.

                               OPINION

     Petitioners believe that they were entitled to exclude the

service pension payments from their income based on conferences

with Internal Revenue Service (IRS) personnel that occurred in

1992 or 1993.    From those conversations, petitioners thought that

they could follow a "Sergeant Jones" example from IRS Publication
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17, Your Federal Income Tax (1976) (Publication 17) that was

distributed for the preparation of 1975 tax returns.      In 1992,

petitioners amended their returns for 1989, 1990, and 1991 in

accordance with their beliefs.    Thereafter, they filed each

year's return in the same manner.    Until the 1995 taxable year,

the IRS accepted these computations.      On the 1995 return,

petitioners continued their course of action, but, as noted,

respondent disallowed the exclusion of $23,857 from their gross

income.

     Petitioners argue that the VA 40 percent disability rating

gives them the opportunity under section 104(a)(4) to exclude

from their service pension an amount based on the 40 percent

disability rating for injuries resulting from active service in

the armed forces.   Petitioners also assert that since they relied

on advice from IRS personnel who directed them to use Publication

17, respondent should not be allowed now to change position

regarding petitioners' use of this computation method.

Respondent's position is that service pensions based on length of

service are not excludable from gross income under section

104(a)(4).

     Section 104(a)(4) provides an exclusion from gross income

for 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.      Under section 104(b),
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section 104(a)(4) will not apply to an individual unless one of

four criteria is satisfied.    One criterion is that the individual

be a member of an organization referred to in section 104(a)(4)

on or before September 24, 1975.    Sec. 104(b)(2)(B).   Because

petitioner was a member of the Air Force on September 24, 1975,

he meets that criterion.    However, section 104(a)(4) applies only

to payments received for personal injuries or sickness.

     Petitioner has the burden of proving that the pension

payments that he received were for a disability incurred during

his active service in the military.     Scarce v. Commissioner, 17

T.C. 830, 833 (1951).    As the Court there stated:   "Retirement

pay for length of service is not exempt from taxation."     Id.

     Petitioner's Air Force record clearly states that his

retirement was based on years of service, not on disability.       The

record contains no evidence that petitioner was on a disability

pension.    Petitioner has attempted to use the VA disability

rating to justify his position that he could have received a

"disability retirement pension" at the time of his retirement.

Petitioner's argument is not supported by the evidence in the

record.    This Court has previously considered similar arguments

and has ruled that payments under service pensions should be

included in income regardless of the existence of a VA disability

determination.    Lambert v. Commissioner, 49 T.C. 57 (1967);

Sidoran v. Commissioner, T.C. Memo. 1979-56, affd. 640 F.2d 231
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(9th Cir. 1981).    In these cases, we held that a VA disability

determination does not prove that a portion of a pension is

received for injuries sustained during active service.    Moreover,

the VA percentage of disability determination and petitioner's

subsequent election have already resulted in a specific benefit

which was excluded from petitioners' income.

     Petitioners cited McNair v. Commissioner, 250 F.2d 147 (4th

Cir. 1957), revg. 26 T.C. 1221 (1956), and Prince v. United

States, 127 Ct. Cl. 612, 119 F. Supp. 421 (1954).    Both cases

involved veterans who retired from active duty and received

service pensions.    However, those veterans were then recalled to

active duty and subsequently found to be incapable of remaining

on active duty due to service-connected injuries.    In the instant

case, petitioner was not recalled to active duty after his

retirement, nor was he ever found to be incapable of remaining on

active duty due to his injuries.    Therefore, these cases are not

controlling.

     Petitioners also relied on Rev. Rul. 78-161, 1978-1 C.B. 31,

and the "Sergeant Jones" example from an outdated IRS Publication

17 as authority for their treatment of the service pension

income.   Rev. Rul. 78-161 is inapplicable on its face since it

relates to a retroactive VA disability rating, which is not

involved in the present case.    Rather, petitioners are trying to

exclude an amount in excess of the amount allowed by the VA.
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     Furthermore, publication 17 clearly states that service

pension payments based on age or length of service are taxable.

It also states that disability retirement pensions based on

percentage of disability are excluded from gross income.    The

"Sergeant Jones" example in Publication 17 is inapplicable to

petitioners.   That example involves disability retirement pay and

in no way supports petitioners' position.     Even if the example in

Publication 17 were applicable, IRS publications are only guides

for taxpayers; statutes, regulations, and judicial decisions will

govern.   Zimmerman v. Commissioner, 71 T.C. 367, 371 (1978),

affd. without published opinion 614 F.2d 1294 (2d Cir. 1979);

French v. Commissioner, T.C. Memo. 1991-417.

     Petitioners' final argument is that respondent should not be

allowed to change the treatment of the service pension, because

petitioners relied on advice from IRS personnel and were

previously allowed the exclusions.     Unfortunately for

petitioners, respondent is not precluded from correcting mistakes

made in the interpretation of the law.     Neri v. Commissioner, 54

T.C. 767, 772 (1970).

     To the extent that any of petitioners' other arguments were

not addressed by this Court, we have considered them and find

them to be without merit.

     Because a VA disability determination does not convert a

service pension into a disability pension, we find that
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petitioner did not receive his service pension for personal

injuries sustained in the course of active duty in the Air Force.

Accordingly, we sustain respondent's determination that the

service pension is taxable to petitioners in its entirety.



                                      Decision will be entered for

                              respondent as to the deficiency,

                              and for petitioners as to the

                              penalty.
