In the line of duty.

The Second Circuit Court of Appeals ruled against a military veteran's income-exclusion claim, affirming the Tax Court's distinction of taxable disability benefits versus exempt benefits paid for a service-connected injury

William D. Reimels was exposed to Agent Orange during service in Vietnam in the 1970s. He then worked in the private sector until 1993, when he was diagnosed with lung cancer caused by his wartime exposure to the defoliant and had his left lung removed. The Department of Veterans Affairs awarded Reimels compensation for a service-connected total disability. On his joint tax return for 1999, Reimels excluded from his gross income both the VA payments and $12,194 in Social Security disability benefits. In 2002, the IRS sent him and his wife a notice of deficiency based on the amount of the SSA disability benefits. They filed a petition in the Tax Court.

Reimels argued that the SSA disability benefits fit the description in IRC section 104(a)(4) as amounts received for an injury or sickness resulting from active military service. The IRS argued that SSA disability benefits are wage-replacement benefits granted on the basis of a person's general inability to work, not as compensation for military injuries.

For disability payments to be exempt, the program awarding them must require the recipient to have an injury or sickness resulting from active military service, the Tax Court said.

* William D. & Joyce M. Reimels v. Commissioner, 97 AFTR 2d 2006-820.

Prepared by Gloria Smart, instructor, and Cheryl T. Metrejean, CPA, Ph.D., assistant professor of accounting both of Georgia Southern University, Statesboro, Ga.