Most government pensions and retirement allowances are included in gross income. Section 104(a)(4), however, excludes amounts received as a pension, annuity or similar allowance for personal injuries or sickness resulting from active service in the armed forces. IRC section 104(b) further restricts this exclusion to amounts received by individuals who were members of the armed forces or reserves before September 24, 1975, suffered a combat-related injury or are entitled to disability compensation from the U.S. Veterans Administration.
In Shawn Jeffery Hintz v. Commissioner, TC Summary Opinion 2005-43, the court determined that Hintz had to include his disability pension income in his gross income. Hintz had been a U.S. Army infantryman from August 27, 1980, to March 26, 1984. He served as a presidential guard, in battle reenactments and in operations/field duty, but never in combat. In February 1984 he was diagnosed as having bipolar disorder with manic and “mood-congruent psychotic” features, and placed on temporary disability retirement. On November 26, 1985, he retired because of a permanent disability.
In 2001 Hintz excluded from gross income $3,468 of disability pension income from the Defense Finance and Accounting Service, claiming the pension resulted from a combat-related injury. The IRS issued a notice of deficiency.
The IRS argued Hintz’s disability pension income was part of his gross income under section 104(b)(2)(C) because the term combat-related injury refers to personal injury or sickness that is (1) incurred as a direct result of armed conflict, while engaged in extra hazardous service, or under conditions simulating war or (2) caused by an instrumentality of war.
Result. For the IRS. Hintz had not been in actual combat; thus he could not prove his illness directly resulted from a combat-related activity or from conditions simulating war. Therefore, the court held that under section 104(b)(3) it was not a combat-related injury.
Shawn Jeffery Hintz v. Commissioner, TC Summary Opinion 2005-43.
Prepared by Claire Y. Nash, CPA, PhD, associate professor of accounting, Christian Brothers University, Memphis, and Tina Quinn, CPA, PhD, associate professor of accounting, Arkansas State University, Jonesboro.