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A. Disability Benefits
Petitioner D. Lloyd Thomas (petitioner) was employed by the
Texas Department of Criminal Justice as an associate clinical
psychologist from August 1994 through February 1999.
In or about February 1997, petitioner suffered a herniated
disk. Petitioner’s injury was sufficiently severe as to require
bed rest and home confinement for a continuous period of time
that extended through July 1997.
During the first 2 months of his 6-month absence from work,
petitioner utilized his accumulated sick leave and annual leave.
After exhausting his leave, petitioner began receiving disability
benefits. For the period from April 2 through July 30, 1997,
petitioner received disability benefits in the amount of $4,964.
Petitioner received disability benefits pursuant to a plan
of disability insurance that was sponsored by his employer.
However, the premiums for such insurance were paid solely by
petitioner with after-tax dollars. In this regard, petitioner
specifically elected, in August 1994, not to pay the premiums for
disability insurance with pre-tax dollars pursuant to “premium
conversion”. This election remained in effect throughout 1997.
Petitioners did not report on their Federal income tax
return the disability benefits received by petitioner in 1997.
In the notice of deficiency, respondent determined that such
benefits were includable in petitioners’ gross income for the
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