County Employee’s Disability Retirement Payments Determined by Length Service Not Entirely Excluded from Gross Income; Individual Not Liable for Accuracy-Related Penalty

The portion of a county government employee's disability retirement benefits that was based on the length of his service was not excludable from gross income. The payments were taxable to the recipient to the extent that they were determined by reference to his age or length of service even if his retirement was the result of an occupational injury. The statute authorizing payments to the employee was in the nature of a worker's compensation act; therefore, only the benefit that exceeded the guaranteed amount was not excludable from the taxpayer's gross income.

The county employee and his spouse made reasonable efforts to assess their proper tax liability; therefore, they were not liable for the accuracy-related penalty. The guidance provided by the agency that managed county employees' retirement payments with respect to the disability benefits varied over the course of several years, and the couple acted in good faith and they had reasonable cause for their underpayment of tax.