IRS’s Acceptances of Taxpayer’s Position In Prior Exams Did Not Stop IRS From Prevailing in Fourth Attempt

The taxpayer in the case of Lukovsky v. Commissioner, TC Memo 2010-117 had three times before been challenged by the IRS regarding the status of his pension income.  The taxpayer was receiving retirement income related to his service as a police officer.  However when he had left the police force he had applied for and been denied disability benefits, rather receiving the retirement benefits to which he became eligible to receive.  The retirement plan appears to have continued to report these amounts as taxable pension retirement payments rather than as disability payments, and had denied the taxpayer’s appeals to obtain disability payments.

In the prior three cases, the IRS had agreed to stipulated decisions that resulted in no deficiency.  However, the Tax Court pointed out that because the court had never ruled on the issue of whether his pension was disability income, the IRS was not precluded from carrying that position in this case, despite the taxpayer’s protests to the contrary.

The Court, which this time was asked to rule, found that the taxpayer had never received disability payments.  Rather, he had asserted he should have received disability, but he never was able to prevail in efforts to get the amounts converted to payments under the disability provisions of the retirement plan.  Therefore, the amounts were not excludable from income as payments of a nature similar to workers compensation under §104(a)(1).

While IRS exam outcomes may be an indicator of the validity of a position, they are not the final word–even if the prior exam is for the same taxpayer.  While such information imparts some “practical” knowledge to us, we still need to be aware of the underlying strengths of weaknesses of positions on returns filed in the future.

Advertisement