But Not Disabled Enough

This is a case of the misalignment between the armed services and the Veterans’ Administration, brought to you by the United States Congress. As this is, and I hope always shall be, a non-political blog, I will say no more.

But here is a small-claimer in point, Kevin M. Campbell and Pamela J. Campbell, 2014 T. C. Sum. Op. 109, filed 12/22/14.

It’s really Kev’s story. Kev entered the United States Coast Guard, but three years out, he was diagnosed with diabetes mellitus, and discharged on medical grounds.

The USCG’s medics gave Kev a 60% disability rating, but a later trip to the VA resulted in a lower number. Kev doesn’t remember what the number was, and has no proof.

I note Kev was represented by counsel. What does it take to subpoena VA records for trial?

I ask, because the VA number is the key.

Here’s STJ Daniel A. (“Yuda”) Guy: “Section 104(a)(4) provides the general rule that 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 are not included in gross income. Section 104(b)(1) and (2), however, limits the exclusion prescribed in subsection (a)(4), as relevant here, to an individual who ‘on application therefor* * * would be entitled to receive disability compensation from the Veterans Administration.’ Section 104(b)(4) further provides that if an individual is described in subsection (b)(2), the amount excludable from gross income under subsection (a)(4) for any period ‘shall not be less than the maximum amount which such individual, on application therefor, would be entitled to receive as disability compensation from the Veterans’ Administration.’” (2014 T. C. Sum. Op. 109, at pp. 9-10. (Footnotes omitted).

Congress put in this limitation because the armed services were giving about-to-retire servicepeople big disability ratings to shield retirement pay from taxes. Those servicepeople then went on to earn decent money in “retirement”, notwithstanding their “disabilities”.

And we all know how the VA treats veterans. But I must remember that this is a non-political blog.

I’m not saying Kev didn’t have diabetes, but he did work as a deputy in the Cuyahoga County Sheriff’s Office with no apparent ill effects.

Anyway, Kev and his trusty CPA jousted with the USCG, who kept sending Kev 1099-Rs, while Kev and CPA claimed the payments should be excluded. And IRS issued Kev a bunch of “no change” letters.

Finally, IRS hits Kev with a SNOD. Kev’s Section 104 argument fails.

STJ Yuda: “We are unable to determine, on this record, that Mr. Campbell would be entitled to receive disability compensation from the VA. Although the Coast Guard and the VA apply the same rating standards–the VASRD– the Coast Guard and the VA approach the question of disability ratings from different perspectives. Whereas the Coast Guard focuses on whether a service member is able to perform his or her miliary [sic] duties at a given time, the VA rates disabilities by weighing the impact of an injury or illness on a veteran’s earning capacity in a civil occupation over his or her lifetime.” 2014 T. C. Sum. Op. 109, at p. 16.

As for past “no change” letters, each year stands on its own; with Federal taxation, the past is not even prologue, The Bard of Avon (Tempest, Act II, Scene 1) to the contrary notwithstanding.

Without the VA number, Kev is hard aground. But it might be well for him to get the VA number, even if it’s lower than the USCG’s. There may be other years where it would help.

Takeaway–Practitioners dealing with taxpayer-veterans, watch it. Here be dragons.