According to Federal law, 26 U.S.C Section 104(a)(4) excludes from gross income “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.”
David Daniel Robison, Sr. served in the U.S. Marine Corps from 1966 until 1972. From December 1966 until February 1968 he served in Vietnam, where he sustained a variety of combat-related injuries.
He spent a year in the hospital and was later discharged from the Marine Corps because of his injuries. In 1980, Mr. Robison then went to work for the U.S. Postal Service from 1980. He was forced to retire in 1992 as a result of the injuries he had sustained while serving in Vietnam.
Since his forced retirement, Mr. Robison received retirement annuity from U.S. Office of Personnel Management (OPM). During at least some of those years, Mr. Robison never paid taxes on that income.
One would think that Mr Robison was correct in not paying taxes on this annuity. But this is not how the tax court held on March 10, 2011:
"The ambiguous wording of section 104(a)(4) provide some superficial support for the taxpayer’s exclusion, we conclude that the wording was “overshadowed” by the fact that the disability benefits under the Civil Service Retirement Act, 5 U.S.C. secs. 8331 et seq., were not designed to compensate for military injuries. Id. at 866. Rather, the cause of the disability was irrelevant when determining eligibility."
That is, if Mr. Robison received an annuity from the US military for his active duty injuries, that would be taxable. Mr. Robison would have been granted the annuity payments whether or not his injuries were related to combat. And if Mr. Robison was still working for the Post Office, his income would certainly have been taxable.
I follow the court's reasoning. It claimed that the pension was not the result of active service. If Mr. Robison hurt himself while walking his mail route, he would have received the same benefit which would have been taxable.
But still something doesn't seem right. Mr. Robison didn't hurt himself walking his route. He hurt himself in combat. The Court seems to imply that his injuries were happenstance to receiving the compensation. But I think this ignores the obvious.
Source: DAVID DANIEL ROBISON, SR. AND LYDIA A. ROBISON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent