This member of the famous trio (could’a, should’a, would’a) is no help to Cynthia L. Hailstone and John Linford, T. C. Sum. Op. 17, filed 4/24/23. It’s John’s story, as Cynthia is innocent spoused out; IRS can’t prove Cynthia has actual knowledge that John received unreported disability insurance proceeds, and John doesn’t contest Cynthia’s Section 6015(c)(3)(C) exit.

John was an ex-insurance salesman during year at issue. While he was an insurance salesman, his employer provided disability insurance for its employees; John was one such. Although the insurance policy allowed the employer to require participating employees to pay up to 25% of the premiums, the employer elected not to.

You’ve probably already guessed the rest. John got disabled, and got $105K from the disability insurer, which he did not report. John did get a W-2 showing the payment.

STJ Diana L (“Sidewalks of New York”) Leyden has this one, and she gets to the point fast.

“Section 105 governs amounts received under accident and health plans. While the statutory framework is admittedly confusing, section 105 works as follows. First, section 105(a) provides a more specific rule than the general income inclusion rule under section 61 for when amounts received by an employee through accident or health insurance for personal injuries or sickness are excludable from income. If a disability payment under a disability insurance policy is not attributable to contributions by an employer or paid by the employer and the payment meets the requirement of section 105(c), then it is excludable from gross income.” T. C. Sum. Op. 17, at pp. 4-5. (Citation and footnote omitted).

As for contributions by the employer, that means contributions not included in employee’s gross income. If employee paid tax on the employer’s contributions, the proceeds are excludable.

“While petitioner argues that the policy allowed the company to choose an option to permit an employee to pay part of the premiums, the record is clear that the company did not choose that option and did not allow employees to pay any amount of the premiums. Rather, the record shows that the policy premiums were paid by the company. Therefore, under section 105(a) the amounts of the disability payments were paid under a policy for which the contributions (premiums) were paid by the company, and the exclusion under section 105(c) does not apply. Rather,  under section 61 the disability payments petitioner husband received… are includible in his gross income.” T. C. Sum. Op[. 2023-17, at p. 5.

Unfortunately for John, the “confusing statutory framework” doesn’t prevent a Section 6662(a) five-and-ten understatement chop if the Rule 155 beancount breaks bad.

“Petitioner husband asserts that he should not be liable for the penalty because he ‘did not feel that taxes were due on that disability amount.’ However, petitioner husband does not dispute that he received the disability payments nor that he received the Form W–2 that reported them. Petitioner husband did not rely upon a tax adviser or accountant to prepare petitioners’ tax return. Rather, he used a commercial tax return preparation software program. He testified that he did not see a prompt for reporting the disability payments, and thus, he did not report them.” T. C. Sum. Op. 17, at p. 6.

I will refrain from commenting upon a tax system that requires disabled persons to engage tax advisers or accountants. Some of my best friends are tax advisers or accountants.