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Distributions from qualified plans such as the ERS are generally
treated as annuities and subject to tax to the extent provided in
section 72. Sec. 402(a). Section 72(a) generally requires any
amount received as an annuity to be included in gross income.
Section 72(b) allows an exclusion by permitting the use of an
exclusion ratio to except from gross income amounts proportionate
to the taxpayer’s investment in the contract. Section 72(c), as
relevant here, defines the investment in the contract to be the
aggregate amount of premiums or other consideration paid for the
contract (or in the instant case, petitioner’s after-tax basis).
As a general rule, section 72 does not apply to any amount
received as an accident or health benefit. Sec. 1.72-15(b),
Income Tax Regs. Amounts received as a result of a disability
are accident or health benefits within the meaning of section
1.72-15, Income Tax Regs. Accident or health benefits may be
excluded from gross income if such income satisfies specific
requirements set forth in either section 104 or 105. Section
104(a), in relevant part, excludes from gross income certain
amounts received as compensation for injuries or sickness
described in paragraphs (1) through (3) of that section.11
Section 105(a) includes in gross income certain amounts received
11 Par. (4) of sec. 104(a), which applies to taxpayers who
have served in the armed forces or certain other organizations,
and par. (5), which applies to victims of terrorist attacks, are,
on their face, inapplicable to the facts before us.
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