1099R - Disability Retirement

[BulldogTom]

Taxpayer works for the county and is hurt on the job. County gives the taxpayer a Disability Retirement. 1099R has nothing in box 2a and "Taxable Amount Not Determined" checked. There are employee contributions indicated in box 9b.

The county retirement plan provided the taxpayer with a letter stating that the taxpayer retired on "service related disability". It further states that the disability amount was not calculated on her years of service nor her age at retirement.

I have read pub 525 and §104 and the regs at 1.104(e). I am coming up with taxable, with the exception of the amount attributable to the employee contributions.

The taxpayer insists that the amount is not taxable in full.

Am I missing something?

Tom

Lodi, CA

[kcjenkins]

Also read §22(a) because while the disability income is taxable, it may play into the Credit Of course, almost no one actually qualifies for that credit, but you still have to check it for that rare exception.

[BulldogTom]

Thanks KC. The problem is the county told the taxpayer that because of the way they worded the letter and retirement award, it is not taxable. When I read regulation 1.104-1(e) I come up with that wording, but only if she was a member of the military or one of the listed federal government services in the regulation. When we prepared the return, we followed the general rule. The taxpayer then went to some CPA who told her I didn't know anything about taxes and the way they awarded the pension made it not taxable. So the taxpayer has the word of the county and the word of a CPA against me. I can see how she would think I am full of crap.

I am going to meet with the client, and run through the entire research I have done. I will start with Pub 525, then the Master Tax Guide, then the Code, then the regulations. If she will not accept my tax treatment of this item on her return, I will refund her preparation fees and send her on her way. She can have someone else amend the return if she wishes, but I will not do it.

Thanks for your confirmation KC. I just wanted to be sure I did not miss a code section or a regulation or a court case that would change the result from the general rules.

Tom

Lodi, CA

[TAXBILLY]

Did the county verbally tell her it was not taxable or did they actually give her a written confirmation?

taxbilly

[BulldogTom]

They verbally told her that it would not be taxable. They gave her a letter with verbage right out of regulation 1.104-1(e) as to the manner in which the amount was determined. I think that is what made me quesiton if I treated it correctly. But a close reading of that regulation goes on to say that this exeption applies to members of the US military, the Geological survey, foreign service employees, etc. I don't see any authority for excluding the income based on her job as a county employee.

Tom

Lodi, CA

[jasdlm]

Could there be a possible issue here because of the use of the term 'disability retirement'? If it was disability income, and the client paid the disability premiums, then my understanding is it would not be taxable. (I have no site for this, so blast me if I'm wrong.) If the County paid the premiums, it would be taxable. If it's retirement, theoretically based on the employee's pre-tax contributions to the same, years of service, etc., then it is taxab;e. What, exactly, is 'disability retirement'. Is it the insurance company who's paying, or the company's retirement plan?

[BulldogTom]

It is coming from the County Retirement Plan. The taxpayer does have contributions, which we took into account when we calculated the taxable portion.

It is definately not an insurance benefit paid for by the employee.

Tom

Lodi, CA

[RoyDaleOne]

"the fundamental question in determining whether benefits are excludable under section 104(a)(1) is "upon what basis were the retirement payments in question paid?" Mabry, T.C. Memo 1985-328." from Picard v. Commissioner, KTC 1999-44 (9th Cir. 1999).

See Picard for the complete analysis by the court.

[BulldogTom]

Well, I was wrong. Thanks RoyDaleOne. I learned something new.

I will amend and appologize to the client.

Tom

Lodi, CA

[jasdlm]

Wow. Thanks for the site, RoyDaleOne. I'm sure many of us learned something today. I know I did. Thanks for the original post, Tom.

[BulldogTom]

There is a saying that goes something like this:

What do you get when you don't get paid? Education.

That is what I am getting for this tax return.

Tom

Lodi, CA

[RoyDaleOne]

That is what is wrong, the original use was intended for Police Officers, Fireman, Military, now everyone is trying to get into act.

[kcjenkins]

Yep, based on one single court ruling, which, IMHO, mis-ruled on it by going against the clear, unequivocal language of the statute, which is what both Tom and I were relying on. but I guess that is what makes our jobs so necessary, right? Still, I still don't see how this client, who was not employed under one of the categories that statute lists, would be eligible? Both Mabry and Pickart were police or firemen, which are covered by the statute, while Tom says this client was not.

[Janitor Bob]

Yep, based on one single court ruling, which, IMHO, mis-ruled on it by going against the clear, unequivocal language of the statute, which is what both Tom and I were relying on. but I guess that is what makes our jobs so necessary, right?

I love this board...By reading this posting thread...and subsequently printing and reading about Picard, I leaned something and became a better tax preparer.

[Gail in Virginia]

If only I could remember everything that I read! :rolleyes: