SCOTUS Reports

Tag: Section 105

  • Gordon v. Commissioner, 88 T.C. 630 (1987): Taxation of Disability Distributions from Profit-Sharing Plans

    Gordon v. Commissioner, 88 T. C. 630 (1987)

    Distributions from a profit-sharing plan, even those triggered by disability, are taxable as deferred compensation and not excludable under Section 105 as health or accident benefits unless the plan clearly indicates a dual purpose.

    Summary

    George Gordon received a $102,098 lump-sum distribution from his employer’s profit-sharing plan upon resignation due to disability. He argued the payment should be excluded from gross income as a disability payment under Section 105(c) of the Internal Revenue Code. The Tax Court held that the distribution was taxable as deferred compensation, not excludable as a health or accident benefit. The court reasoned that a profit-sharing plan does not serve a dual purpose as a health or accident plan without clear indicia, and the distribution amount was not calculated based on the nature of the injury. This ruling impacts how disability-related distributions from profit-sharing plans are treated for tax purposes.

    Facts

    George Gordon, co-owner and former president of United Baking Co. , resigned in December 1978 after the company ceased operations due to labor issues. In March 1980, Gordon requested a lump-sum distribution from the company’s profit-sharing plan, citing total disability due to arteriosclerotic heart disease, angina, and hypertension. The plan allowed for full vesting upon disability, and Gordon received $102,098, the total amount credited to his account. He did not report this distribution on his 1980 tax return, asserting it was excludable under Section 105(c) as a payment for permanent loss of bodily function.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Gordon’s 1980 federal income tax, leading to a dispute over the tax treatment of the $102,098 distribution. Gordon petitioned the United States Tax Court for a redetermination of the deficiency. The Tax Court, in a decision by Judge Nims, held for the Commissioner, ruling that the distribution was taxable as deferred compensation.

    Issue(s)

    1. Whether the $102,098 lump-sum distribution from the profit-sharing plan can be deemed received under an accident or health plan within the contemplation of Section 105 of the Internal Revenue Code.
    2. If so, whether the distribution satisfies the conditions for exclusion from income contained in Section 105(c).

    Holding

    1. No, because the profit-sharing plan did not serve a dual purpose as a health or accident plan without clear indicia to that effect.
    2. No, because even if it were considered under a health or accident plan, the payment amount was not computed with reference to the nature of the injury as required by Section 105(c)(2).

    Court’s Reasoning

    The court emphasized that a profit-sharing plan is primarily a plan of deferred compensation. It rejected the notion that such a plan could serve a dual purpose as an accident or health plan without clear provisions indicating this intent. The court distinguished prior cases where plans were found to have a dual purpose, noting the absence of any health or accident provisions in the United Baking plan. Furthermore, the court found that the distribution amount was not calculated based on the nature or severity of Gordon’s disability but was simply the total amount credited to his account. The court also referenced Revenue Ruling 69-141, which supports the position that distributions from profit-sharing plans are taxable as deferred compensation, not as health or accident benefits.

    Practical Implications

    This decision clarifies that disability-related distributions from profit-sharing plans are generally taxable as deferred compensation unless the plan explicitly indicates a dual purpose to provide health or accident benefits. Tax practitioners must carefully review plan documents to determine if they contain the necessary indicia of a dual purpose plan. This ruling may affect how employers structure their profit-sharing plans and how employees plan for potential disability distributions. Subsequent cases, such as Caplin v. United States and Christensen v. United States, have followed this reasoning, reinforcing the principle that the source and structure of the plan, not the circumstances of distribution, determine its tax treatment.

  • Woodford v. Commissioner, 71 T.C. 991 (1979): Tax Treatment of Disability Retirement Benefits Before Normal Retirement Age

    William I. Woodford and Madge L. Woodford, Petitioners v. Commissioner of Internal Revenue, Respondent, 71 T. C. 991 (1979)

    Disability retirement payments received before normal retirement age are treated as wages or payments in lieu of wages, subject to tax under section 105(a) rather than as a recovery of employee contributions under section 72(d).

    Summary

    William I. Woodford, a retired federal employee, received disability retirement payments before reaching the normal retirement age of 70. He sought to exclude these payments from his gross income both as sick pay under section 105(d) and as a recovery of his contributions to the Civil Service Retirement Fund under section 72(d). The Tax Court held that these payments could not be split for tax purposes and were taxable as wages under section 105(a), thus disallowing the exclusion under section 72(d). Additionally, the court ruled that these payments constituted earned income, disqualifying Woodford from claiming a retirement income credit under section 37. This decision clarifies the tax treatment of disability retirement benefits received before normal retirement age and impacts how such benefits are reported on tax returns.

    Facts

    William I. Woodford retired from the Internal Revenue Service at age 67 after 29 years of service. Initially, his retirement was classified as nondisability, but it was later reclassified to disability retirement effective November 4, 1974. In 1975, he received $10,879 in disability retirement benefits and excluded $5,200 as sick pay under section 105(d). He also sought to exclude an additional $5,679 as a recovery of his contributions to the Civil Service Retirement Fund under section 72(d). Woodford and his wife also claimed a retirement income credit of $228. 60 for 1975.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in the Woodfords’ 1975 federal income tax and disallowed the exclusion of the $5,679 and the retirement income credit. The Woodfords petitioned the Tax Court, which upheld the Commissioner’s determination, ruling that the disability retirement payments were taxable under section 105(a) and constituted earned income, thus disallowing the claimed exclusions and credit.

    Issue(s)

    1. Whether petitioners are entitled to exclude from their gross income the $5,679 in excess of the sick pay exclusion as a recovery of their contributions to the Civil Service Retirement Fund under section 72(d)(1).
    2. Whether petitioners are entitled to a retirement income credit under section 37 for 1975.

    Holding

    1. No, because the disability retirement payments in excess of the sick pay exclusion are treated as wages under section 105(a) and cannot be excluded under section 72(d)(1).
    2. No, because the disability retirement payments constitute earned income under section 37(d)(2)(B), disqualifying petitioners from the retirement income credit.

    Court’s Reasoning

    The Tax Court applied sections 105(a) and 105(d) to determine that the disability retirement payments were wages or payments in lieu of wages, taxable under section 105(a) and not subject to exclusion under section 72(d). The court relied on section 1. 72-15(b) of the Income Tax Regulations, which states that section 72 does not apply to amounts received as accident or health benefits, and on the DePaolis and Brownholtz cases, which established that such payments cannot be split for tax purposes. The court also found that these payments were earned income under section 37(g), thus disqualifying the Woodfords from the retirement income credit. The decision reflects the policy of taxing wage continuation benefits provided by untaxed employer contributions during periods of absence due to sickness.

    Practical Implications

    This decision affects how federal employees and other taxpayers report disability retirement benefits received before normal retirement age on their tax returns. It clarifies that such benefits are taxable as wages under section 105(a) and cannot be excluded under section 72(d) as a recovery of contributions. Taxpayers must be aware of the limitations on exclusions and credits, such as the retirement income credit, when receiving disability benefits. This ruling may influence the structuring of retirement plans and the tax advice given to employees considering disability retirement. Subsequent cases have followed this precedent, reinforcing the tax treatment of disability retirement benefits before normal retirement age.