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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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