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taxable; however, they have challenged the amount of the
deficiency determined by respondent. Therefore, an examination
of the taxable amount of petitioners’ Tier 2 and supplemental
annuity benefits is necessary.
Tier 2 railroad retirement benefits are treated for tax
purposes as provided under an employer plan that meets the
requirements of section 401(a). See sec. 72(r)(1). Section
402(a) provides that such benefits are subject to tax to the
extent provided in section 72, which relates to annuities.
Section 72(a) generally requires any amount received as an
annuity to be included in gross income. Section 72(d), however,
allows taxpayers to exclude the benefits which represent a return
of their own investment in their employer’s plan. The method for
recovery of investment provided for in section 72(d)(1)(B)
excludes from gross income the amount of any monthly annuity
payment that does not exceed the amount obtained by dividing the
taxpayer’s contribution to the plan by the number of anticipated
payments.
Section 1.72-15(b), Income Tax Regs., provides that section
72 does not apply to any amount received as an accident or health
benefit. The pension benefits petitioners received as a result
of petitioner’s disability are accident or health benefits within
the meaning of section 1.72-15, Income Tax Regs. See sec. 1.72-
15(a), Income Tax Regs. If a plan provides that any portion of
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