                        T.C. Memo. 2000-52



                      UNITED STATES TAX COURT



           LARRY G. AND HELEN M. HORST, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent.



     Docket No. 11665-98.                 Filed February 18, 2000.



     Larry G. and Helen M. Horst, pro se.

     Bradley C. Plovan, for respondent.



                        MEMORANDUM OPINION


     PANUTHOS, Chief Special Trial Judge:    Respondent determined

a deficiency of $926 in petitioners’ Federal income tax for the

taxable year 1996.   Unless otherwise indicated, 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.
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     The issues for decision are:    (1) Whether, and to what

extent, payments received by petitioner Larry G. Horst from the

Railroad Retirement Board in 1996 constitute taxable income; and

(2) whether petitioners failed to report taxable dividend and

interest income received in 1996.    At the time of filing the

petition, petitioners resided in Sharpsburg, Maryland.

                            Background

     Petitioner Larry G. Horst (petitioner) was employed by CSX

Transportation (CSX).   On August 3, 1993, petitioner ceased work

with CSX due to injuries sustained in his employment.       Petitioner

filed a claim for disability annuity payments with the U.S.

Railroad Retirement Board (RRB).    Prior to 1996, petitioner

received interim payments totaling $9,492 pending resolution of

the claim.   On July 1, 1996, petitioner was advised by the RRB

that he was entitled to receive an annuity.       The monthly annuity

payments were classified by the RRB as follows:

     Effective Date       Tier I       Tier II          Total

         2/1/94           $1,071       $185.10        $1,256.10
        12/1/94            1,101        186.77         1,287.77
        12/1/95            1,130        188.26         1,318.26

     In 1996, petitioner received $34,341 ($43,833 less the

interim payments of $9,492) from the RRB.        The annuity benefits
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were allocated as follows:

      Date             Tier I       Tier II         Total

      1994             $10,710      $1,851        $12,561
      1995              13,212       2,241         15,453
      1996              13,560       2,259         15,819

      Total            $37,482      $6,351        $43,833

     The RRB submitted Forms 1099-SSA and 1099-R to the Internal

Revenue Service (IRS) reporting that RRB paid Tier I and Tier II

benefits to petitioner in 1996 in the amounts of $37,482 and

$6,351, respectively.    CSX submitted a Form 1099-DIV to the IRS

reporting that CSX paid $44 in dividends to petitioners in 1996,

and Hagerstown Trust submitted a Form 1099-INT to the IRS

reporting that Hagerstown Trust paid $21 in interest to

petitioners in 1996.

      Petitioners did not report any of the above amounts on their

1996 Federal income tax return.       In the notice of deficiency,

respondent determined that petitioners were required to report

(1) Tier I benefits in the amount of $1,572 and Tier II benefits

of $6,351 received from the RRB, and (2) dividend and interest

income, as noted above, received from CSX and Hagerstown Trust.

                                 Discussion

I.   RRB Payments

      The first issue for decision is whether petitioners were

required to include in income $1,572 in Tier I benefits and

$6,351 in Tier II benefits received from the RRB in 1996.       At
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trial, respondent conceded that $1,572 in Tier I benefits

represented payment for a disability and is, therefore,

nontaxable.   With respect to the Tier II benefits, respondent

conceded that the 1996 taxable benefit should be reduced by

$1,375, an amount received by petitioner prior to 1996, and by

$782, an amount which represents petitioner’s contribution.

Therefore, respondent’s position at trial was that $4,194 of Tier

II benefits is taxable income in 1996.   Petitioner did not

present any legal or factual argument in opposition to

respondent’s position.

     Since 1974, benefits received by railroad retirees have been

divided into two programs, identified as Tier I and Tier II

benefits.   Tier I benefits are essentially the equivalent of

Social Security benefits and are distributed in the same amount

as Social Security benefits.   Tier I benefits are taxed under the

provisions of section 86.   If, however, Tier I benefits are paid

as compensation for injuries or sickness, the payments are not

taxable pursuant to section 104.   Tier II benefits, which are in

the nature of pension benefits, are taxed under the provisions of

section 72(r).   See Ernzen v. United States, 875 F.2d 228 (9th

Cir. 1989); Wallers v. United States, 847 F.2d 1279 (7th Cir.

1988); Bradley v. Commissioner, T.C. Memo. 1991-578.

     Analyzing the corresponding amounts of payments received by

petitioner, as listed above, we note that petitioner’s Tier II
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payments consist of 14.49 percent of the total amount received.

Applying this percentage to the amounts received by petitioner in

1996, we conclude petitioner received $4,976 in Tier II payments

($34,341 x 14.49% = $4,976).    Subtracting from this amount $782

for contributions made by petitioner, we conclude petitioner

received $4,194 in taxable Tier II benefits in 1996, and

respondent is sustained on this issue to the extent of $4,194.

II.    Dividend and Interest Income

       The next issue for decision is whether petitioners were

required to include in income dividends and interest received in

1996.    Gross income includes all income from whatever source

derived, including interest and dividends.         See sec. 61(a)(4),

(7).    It is not entirely clear from this record whether

petitioners dispute the omitted dividend and interest income

issue.    Since no evidence was presented by petitioners, we

sustain respondent on this issue.      See Rule 142(a).

       To reflect the foregoing,



                                                Decision will be entered

                                           under Rule 155.
