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Ex-spouse’s disability pay counts for income tax purposes, rules Tax Court

A divorced taxpayer was required to report as income her share of her former husband’s disability pay, the U.S. Tax Court has ruled in upholding a $3,587 deficiency assessment.

The taxpayer’s former husband was a Los Angeles County, Calif., employee. The taxpayer’s divorce decree awarded her a share of the man’s disability pay. During the 2007 tax year, the taxpayer received $11,691 as her share of the benefits.

According to the taxpayer, the $11,691 was excludable from her gross income under §104 of the Internal Revenue Code. The statute generally authorizes an exclusion with respect to compensation for injuries or sickness.

But the court concluded that the exclusion did not apply.

“A version of §104(a)(1) allowing an injured person to exclude disability income from his or her taxable income has been in the Code since the Revenue Act of 1918. … In all of the years since, to our knowledge, [the taxpayer’s] particular issue has not been before the Court. We note that [the taxpayer] did not suffer an injury, and the Senate explicitly stated ‘as compensation for personal injury.’ In the case at hand the compensation was not for [the taxpayer’s] personal injury, but that of her former husband,” the court said.

The court also rejected that taxpayer’s argument that the disability pay was excludable because she qualified as an “alternate payee” under §402(e)(1)(A).

U.S. Tax Court. Fernandez v. Commissioner, No. 3143-10.


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