120 T.C. No. 1
UNITED STATES TAX COURT
THOMAS D. TUKA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12224-01. Filed January 6, 2003.
P excluded from gross income certain disability benefits that he received under a pilot disability plan funded by his employer, U.S. Airways, Inc. P alleges that in prior collective bargaining negotiations, the Airline Pilots Association and U.S. Airways pilots made wage concessions in exchange for the pilot disability plan. P argues that, in reality, the concessions he and the other pilots made represent the contributions to the pilot disability plan for purposes of sec. 104(a)(3), I.R.C.
Held: P’s employer, U.S. Airways, funded the pilot disability plan for purposes of sec. 104(a)(3), I.R.C. Contributions to the plan were not includable in P’s gross income. Accordingly, the disability benefits are not excluded under sec. 104(a)(3), I.R.C. - 2 -
Thomas D. Tuka, pro se.
Julia L. Wahl, for respondent.
RUWE, Judge: Respondent determined a deficiency of $19,565
in petitioner’s Federal income tax for 1999 and an accuracy-
related penalty under section 6662(a)1 of $3,913. Respondent
concedes the accuracy-related penalty, and the issue for decision
is whether certain disability benefits that petitioner received
in 1999 were properly excluded from gross income under section
104(a)(3).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of filing the
petition herein, petitioner resided in Beaver Falls,
Pennsylvania.
Petitioner was employed as an airline pilot for U.S.
Airways, Inc., from 1972 until July 1995, when he left work
because of carpal tunnel syndrome. U.S. Airways paid petitioner
hourly wages. The hourly rate of compensation was established in
collective bargaining negotiations between U.S. Airways and the
Airline Pilots Association (ALPA). Petitioner’s disability
1 All section references are to the Internal Revenue Code in effect for the taxable year at issue. - 3 -
benefits package was also established through collective
bargaining negotiations. ALPA negotiated with U.S. Airways for
disability benefits for its member pilots.
As a result of petitioner’s carpal tunnel syndrome, he was
eligible for disability benefits under the pilot disability plan.
In 1999, U.S. Airways, through Reliastar Life of New York, paid
to petitioner $83,046.54 in disability benefits. Petitioner’s
disability benefits were paid on the basis of his age, years of
service, and salary. The disability benefits were not paid on
the basis of his medical condition.
Reliastar issued a Form W-2, Wage and Tax Statement, on
which it reported the disability benefits that petitioner
received in 1999 as taxable income (“Wages, tips, other
compensation”). Petitioner did not report the disability
benefits as income on the Form 1040, U.S. Individual Income Tax
Return, that he filed with respect to taxable year 1999.
Petitioner alleges, and he introduced testimony to show,
that U.S. Airways pilots made wage concessions of approximately
$20 million in exchange for the pilot disability plan.
Petitioner’s disability benefits package under that plan did not
result in any separate deductions out of his pay, and its cost
was not incorporated in his union dues. Instead, petitioner
alleges that the pilot disability plan was “paid for at the
negotiating table” through the wage concessions. - 4 -
OPINION
Petitioner argues that the disability benefits that he
received in 1999 are excluded from gross income under section
104(a)(3). Respondent determined that those amounts are not
excluded from gross income.
Gross income includes income from whatever source derived.
Sec. 61(a). However, gross income does not include amounts
received through accident and health insurance for personal
injuries or sickness other than amounts received by an employee,
to the extent such amounts: (1) Are attributable to
contributions by the employer which were not includable in the
gross income of the employee or (2) are paid by the employer.
Sec. 104(a)(3).2
2 Sec. 105(a) specifically includes in gross income amounts received by an employee through accident or health insurance for personal injuries or sickness to the extent such amounts: (1) Are attributable to contributions by the employer which were not includable in the gross income of the employee, or (2) are paid by the employer. However, sec. 105(b) limits the application of sec. 105(a) for certain amounts which are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care of the taxpayer, his spouse, and his dependents. Further, gross income does not include disability benefits to the extent that they constitute 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, and which are computed with reference to the nature of the injury without regard to the period the taxpayer is absent from work. Sec. 105(c). The exclusions under sec. 105(b) and (c) do not apply to the facts in the instant case and petitioner has made no argument that they do. - 5 -
The amounts that petitioner received under the pilot
disability plan were received through accident and health
insurance for personal injuries or sickness within the meaning of
section 104(a)(3). Trappey v. Commissioner, 34 T.C. 407 (1960);
Andrews v. Commissioner, T.C. Memo. 1992-668. Thus, petitioner
may exclude those amounts if he paid premiums for the disability
plan or if his employer paid premiums and the premiums were
includable in his gross income. See Miley v. Commissioner, T.C.
Memo. 2002-236.
Petitioner suggests that, in reality, the employees of U.S.
Airways, including petitioner, paid the contributions that were
made to the pilot disability plan. He cites the negotiations
between ALPA and U.S. Airways wherein ALPA and the U.S. Airways
pilots made wage concessions in exchange for the disability
benefits package. Petitioner suggests that the wage concessions
the U.S. Airways employees made funded the contributions to the
pilot disability plan. Petitioner argues that the disability
benefits that he received under that plan are excludable from
gross income under section 104(a)(3). We disagree.
There is no dispute in this case that any contributions to
the pilot disability plan were actually paid by U.S. Airways,
petitioner’s employer. Consequently, any benefits received under
that plan are includable in petitioner’s income unless the
contributions were includable in petitioner’s gross income. We - 6 -
cannot accept petitioner’s argument that, in reality, the
contributions were made by U.S. Airways employees, including
petitioner, via the wage concessions. To accept petitioner’s
position would essentially qualify any negotiated disability
package for exclusion under section 104(a)(3) since any such
package could be construed as a substitute for wages that
employees might otherwise receive. We cannot agree that Congress
intended section 104(a)(3) to be read so broadly as to exclude
accident or health insurance benefits attributable to wage
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120 T.C. No. 1
UNITED STATES TAX COURT
THOMAS D. TUKA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12224-01. Filed January 6, 2003.
P excluded from gross income certain disability benefits that he received under a pilot disability plan funded by his employer, U.S. Airways, Inc. P alleges that in prior collective bargaining negotiations, the Airline Pilots Association and U.S. Airways pilots made wage concessions in exchange for the pilot disability plan. P argues that, in reality, the concessions he and the other pilots made represent the contributions to the pilot disability plan for purposes of sec. 104(a)(3), I.R.C.
Held: P’s employer, U.S. Airways, funded the pilot disability plan for purposes of sec. 104(a)(3), I.R.C. Contributions to the plan were not includable in P’s gross income. Accordingly, the disability benefits are not excluded under sec. 104(a)(3), I.R.C. - 2 -
Thomas D. Tuka, pro se.
Julia L. Wahl, for respondent.
RUWE, Judge: Respondent determined a deficiency of $19,565
in petitioner’s Federal income tax for 1999 and an accuracy-
related penalty under section 6662(a)1 of $3,913. Respondent
concedes the accuracy-related penalty, and the issue for decision
is whether certain disability benefits that petitioner received
in 1999 were properly excluded from gross income under section
104(a)(3).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of filing the
petition herein, petitioner resided in Beaver Falls,
Pennsylvania.
Petitioner was employed as an airline pilot for U.S.
Airways, Inc., from 1972 until July 1995, when he left work
because of carpal tunnel syndrome. U.S. Airways paid petitioner
hourly wages. The hourly rate of compensation was established in
collective bargaining negotiations between U.S. Airways and the
Airline Pilots Association (ALPA). Petitioner’s disability
1 All section references are to the Internal Revenue Code in effect for the taxable year at issue. - 3 -
benefits package was also established through collective
bargaining negotiations. ALPA negotiated with U.S. Airways for
disability benefits for its member pilots.
As a result of petitioner’s carpal tunnel syndrome, he was
eligible for disability benefits under the pilot disability plan.
In 1999, U.S. Airways, through Reliastar Life of New York, paid
to petitioner $83,046.54 in disability benefits. Petitioner’s
disability benefits were paid on the basis of his age, years of
service, and salary. The disability benefits were not paid on
the basis of his medical condition.
Reliastar issued a Form W-2, Wage and Tax Statement, on
which it reported the disability benefits that petitioner
received in 1999 as taxable income (“Wages, tips, other
compensation”). Petitioner did not report the disability
benefits as income on the Form 1040, U.S. Individual Income Tax
Return, that he filed with respect to taxable year 1999.
Petitioner alleges, and he introduced testimony to show,
that U.S. Airways pilots made wage concessions of approximately
$20 million in exchange for the pilot disability plan.
Petitioner’s disability benefits package under that plan did not
result in any separate deductions out of his pay, and its cost
was not incorporated in his union dues. Instead, petitioner
alleges that the pilot disability plan was “paid for at the
negotiating table” through the wage concessions. - 4 -
OPINION
Petitioner argues that the disability benefits that he
received in 1999 are excluded from gross income under section
104(a)(3). Respondent determined that those amounts are not
excluded from gross income.
Gross income includes income from whatever source derived.
Sec. 61(a). However, gross income does not include amounts
received through accident and health insurance for personal
injuries or sickness other than amounts received by an employee,
to the extent such amounts: (1) Are attributable to
contributions by the employer which were not includable in the
gross income of the employee or (2) are paid by the employer.
Sec. 104(a)(3).2
2 Sec. 105(a) specifically includes in gross income amounts received by an employee through accident or health insurance for personal injuries or sickness to the extent such amounts: (1) Are attributable to contributions by the employer which were not includable in the gross income of the employee, or (2) are paid by the employer. However, sec. 105(b) limits the application of sec. 105(a) for certain amounts which are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care of the taxpayer, his spouse, and his dependents. Further, gross income does not include disability benefits to the extent that they constitute 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, and which are computed with reference to the nature of the injury without regard to the period the taxpayer is absent from work. Sec. 105(c). The exclusions under sec. 105(b) and (c) do not apply to the facts in the instant case and petitioner has made no argument that they do. - 5 -
The amounts that petitioner received under the pilot
disability plan were received through accident and health
insurance for personal injuries or sickness within the meaning of
section 104(a)(3). Trappey v. Commissioner, 34 T.C. 407 (1960);
Andrews v. Commissioner, T.C. Memo. 1992-668. Thus, petitioner
may exclude those amounts if he paid premiums for the disability
plan or if his employer paid premiums and the premiums were
includable in his gross income. See Miley v. Commissioner, T.C.
Memo. 2002-236.
Petitioner suggests that, in reality, the employees of U.S.
Airways, including petitioner, paid the contributions that were
made to the pilot disability plan. He cites the negotiations
between ALPA and U.S. Airways wherein ALPA and the U.S. Airways
pilots made wage concessions in exchange for the disability
benefits package. Petitioner suggests that the wage concessions
the U.S. Airways employees made funded the contributions to the
pilot disability plan. Petitioner argues that the disability
benefits that he received under that plan are excludable from
gross income under section 104(a)(3). We disagree.
There is no dispute in this case that any contributions to
the pilot disability plan were actually paid by U.S. Airways,
petitioner’s employer. Consequently, any benefits received under
that plan are includable in petitioner’s income unless the
contributions were includable in petitioner’s gross income. We - 6 -
cannot accept petitioner’s argument that, in reality, the
contributions were made by U.S. Airways employees, including
petitioner, via the wage concessions. To accept petitioner’s
position would essentially qualify any negotiated disability
package for exclusion under section 104(a)(3) since any such
package could be construed as a substitute for wages that
employees might otherwise receive. We cannot agree that Congress
intended section 104(a)(3) to be read so broadly as to exclude
accident or health insurance benefits attributable to wage
concessions made in a negotiated bargaining process.
Although section 104(a)(3) is not explicit on the subject,
it clearly contemplates that exemption of benefits depends on
whether contributions to an accident and health insurance plan
involve after-tax dollars. Indeed, if an employee is to exclude
disability benefits attributable to employer contributions, those
contributions must have been includable in the employee’s gross
income. Sec. 104(a)(3). Petitioner asks this Court to accept
that wage concessions, which reduced the wages he might have
otherwise received, but which were not taxed, represent
contributions that he made to an accident or health insurance
plan for purposes of section 104(a)(3). This would be contrary
to the underlying intent that Congress had in enacting that Code
section and the limitations that it imposed on exclusion therein. - 7 -
Petitioner also contends that regardless of whether U.S.
Airways in fact funded the disability plan, any contributions
that U.S. Airways made to the plan “would be constructive income
to the Petitioner, and thus includible in the Petitioner’s gross
income for each year the contributions were made.” However, as a
general matter, the gross income of an employee does not include
employer-provided coverage under an accident or health plan.
Sec. 106(a). Thus, we cannot agree that any contributions that
U.S. Airways made to the disability plan were properly includable
in petitioner’s gross income.
The benefits that petitioner received in 1999 are not
excludable under section 104(a)(3).3 Accordingly, we hold that
the payment received in 1999 constitutes gross income, and we
sustain respondent’s determination of a deficiency.
Decision will be entered
for respondent except for the
accuracy-related penalty under
section 6662(a).
3 Petitioner also argues that the “US Air, Inc. Pilot’s Working Agreement” must be construed in conformance with the laws of the Commonwealth of Pennsylvania, which prohibit taxation on disability payments because they are not considered to be the property of the beneficiary. This case raises a question regarding the application of sec. 104(a)(3) of the Internal Revenue Code. Whether the Commonwealth of Pennsylvania expressly prohibits taxation of disability payments has no relevance in deciding the issue before us.