Gary E. and Rebecca L. Hurley - Page 4

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               Petitioner husband (Mr. Hurley) was employed as a                      
          correctional officer for the California Department of Corrections           
          (CDC), at the California Training Facility (CTF) in Soledad,                
          California, since 1990.  Sometime during 1995, Mr. Hurley                   
          sustained a back injury while lifting a heavy coffee urn at work.           
          He was required to undergo surgery to replace several disks in              
          his back, and, as a result, the California workers’ compensation            
          board determined he sustained a 30-percent permanent disability.            
          Mr. Hurley received the full amount of a lump-sum workers’                  
          compensation settlement payment prior to the taxable years at               
               During 1998 and 1999, Mr. Hurley had returned to work full             
          time as a correctional officer at the CTF.  In spite of his 30              
          percent disability, Mr. Hurley worked a full 40 hours a week and            
          was no longer receiving any workers’ compensation benefits.  The            
          CDC paid Mr. Hurley at the same rate during 1998 and 1999 as it             
          did prior to his 1995 injury, and he had the same work duties.              
          On their 1998 and 1999 Federal income tax returns, petitioners              
          excluded 30 percent of his salary from gross income because of              
          Mr. Hurley’s continuing disability.  Respondent disallowed this             

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