Ralph P. Waterman - Page 3

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          designated combat zone, from January 1 through May 4, 1992.  On             
          April 20, 1992, petitioner accepted an early separation offer               
          from the Navy as part of its downsizing program.  Petitioner                
          agreed to leave the Navy.  By accepting the separation offer and            
          payment, petitioner was not entitled to any future benefits,                
          including a pension, which would have first become available                
          after 20 years of service.  The amount of the lump-sum special              
          separation payment was, in part, measured by petitioner's 14                
          years and 3 months of active military service.  Petitioner left             
          the ship pursuant to this agreement and also left the Persian               
          Gulf region on May 4, 1992.  Petitioner received an honorable               
          discharge from the Navy on May 18, 1992, in Norfolk, Virginia.              
          The Navy withheld $9,159 from petitioner's $44,946 separation               
          payment.  In substantial part, the withholding was for Federal              
          income tax.                                                                 
               Upon acceptance of the Navy's offer for early separation,              
          petitioner was advised by the Navy that payments received                   
          pursuant to his early separation would be excludable from gross             
          income if accepted while serving in a designated combat zone.  In           
          accord with that advice, petitioner requested and the Navy issued           
          an $8,951 check to petitioner representing the previously                   
          withheld Federal tax portion of the original $9,159 withholding.            
               Respondent determined that the $44,946 separation payment              
          constituted taxable income and was not excludable under section             





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