Few would argue that soldiers and military personnel, especially veterans, should be afforded certain privileges. In American society as of late these benefits have included free or reduced cost education, health benefits, and in some cases, retirement benefits.
Yet, the courts, and ultimately Congress, have been less giving with regard to the tax treatment of retirement benefits for disabled soldiers. The Reimels v. United States, 97 AFTR 2d 2006-820 (2nd Cir. 2007) highlights this issue.
Facts & Procedural History
Reimels was a soldier who was exposed to Agent Orange while serving in Vietnam. In the late 90’s Reimels was unable to work due to the lung cancer he developed as a result of being exposed to Agent Orange.
Reimels was awarded compensation from the Veteran’s Affairs Office and Social Security benefits. Reimels did not report either payment on his 1999 tax return, arguing that the payments were to be excluded from his gross income as amounts paid on account of his physical injury or sickness resulting from active military duty (section 104(a)).
The court had to decide whether the Social Security payments were excluded from the taxpayer’s income.
Damages for Physical Injuries or Sickness
Our tax laws include several exclusion provisions. These provisions say that certain amounts one receives are not subject to income tax.
Section 104 is one such exclusion provision. It excludes certain types of compensation for injuries or sickness. There have been quite a few court cases that consider this exclusion.
But buried within this exclusion is language for injuries from armed services. It says that gross income does not include “amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country.”
The taxpayer in this case asked the court to rule that his Social Security payments were within this armed forces part of the exclusion.
Social Security Payments for Military Disabilities
The U.S. Tax Court held that the benefits were to be included in Reimels income because Social Security “was not designed to compensate for military injuries.”
The logic is that Social Security benefits could be paid for other injuries, not just military injuries. In this case (as in Haar case cited in this court opinion), the benefits were actually paid on account of military injuries. Thus, the standard is not what actually happened, but what could have happened.
Here is a quote from the Haar opinion: “Because disability payments under the Civil Service Retirement Act are not paid for personal injuries or sickness incurred in military service, we conclude that section 104(a)(4) did not entitle petitioner to exclude the disability payments he received in the years in issue.” Yet the benefits in the Haar case were paid for personal injuries incurred in military service. The same goes for the Reimels case.
On appeal, the appeals court upheld the trial court’s decision. While it may have been sympathetic to Reimels, it followed prior precedent in narrowly construing Section 104.
The result is that Social Security payments received by military personnel for on-the-job injuries are not excluded under this part of Section 104. This differs from other payments, such as Army pension payments.