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account for the differing tax treatments of the separation and
disability payments. See Berger v. Commissioner, 76 T.C. 687,
691-692 (1981) (quoting S. Rept. 1096, 87th Cong., 1st Sess.
(1961), 1961 U.S.C.C.A.N. 1783, 1786).
In 1980, Congress enacted the Defense Officer Personnel
Management Act, Pub. L. 96-513, 94 Stat. 2835, which amended the
separation pay recoupment statute, replacing the 75-percent
recoupment with total recoupment. See Pub. L. 96-513, Title I,
sec. 109(c), 94 Stat. 2870, 2871 (1980) (effective Sept. 15,
1981) (codified at 10 U.S.C. sec. 1174(h)(2)). No alternative
provision was established to relieve the imbalance of recouping
taxable separation pay with nontaxable disability compensation,
indicating that Congress’ intent was to eliminate the tax relief
for recoupment.
Petitioner’s being diagnosed with the disability during his
military service does not change the analysis under 10 U.S.C.
1174(h). Petitioner originally received taxable separation
benefits, and no provision for reclassifying the separation pay
is provided by any applicable statute. Therefore, the character
of the separation benefits remained taxable even after petitioner
became eligible for disability compensation. Petitioners must
include the $99,434.30 separation payment in income on their 1992
Federal income tax return.
Petitioner has asserted that he knows of two fellow
veterans, who were initially awarded separation pay and were
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