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.
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 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 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.]
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.
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 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 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, 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, 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 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 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, 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.
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.