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trial, respondent conceded that $1,572 in Tier I benefits
represented payment for a disability and is, therefore,
nontaxable. With respect to the Tier II benefits, respondent
conceded that the 1996 taxable benefit should be reduced by
$1,375, an amount received by petitioner prior to 1996, and by
$782, an amount which represents petitioner’s contribution.
Therefore, respondent’s position at trial was that $4,194 of Tier
II benefits is taxable income in 1996. Petitioner did not
present any legal or factual argument in opposition to
respondent’s position.
Since 1974, benefits received by railroad retirees have been
divided into two programs, identified as Tier I and Tier II
benefits. Tier I benefits are essentially the equivalent of
Social Security benefits and are distributed in the same amount
as Social Security benefits. Tier I benefits are taxed under the
provisions of section 86. If, however, Tier I benefits are paid
as compensation for injuries or sickness, the payments are not
taxable pursuant to section 104. Tier II benefits, which are in
the nature of pension benefits, are taxed under the provisions of
section 72(r). See Ernzen v. United States, 875 F.2d 228 (9th
Cir. 1989); Wallers v. United States, 847 F.2d 1279 (7th Cir.
1988); Bradley v. Commissioner, T.C. Memo. 1991-578.
Analyzing the corresponding amounts of payments received by
petitioner, as listed above, we note that petitioner’s Tier II
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