The Internal Revenue Service says it will continue to ignore a 1976 court order that it refund taxes on payments to retired veterans who are later found eligible for tax-free disability benefits.
The Fourth U.S. Circuit Court of Appeals ruled on behalf of retired Army Col. Zebulon Strickland, of McLean, who challenged a 1967 IRS decision that he pay $381 in back taxes for nine months of payments.
A veteran who retires after 20 or more years can file for disablity benefits, but it takes time - often six months or more - for the Veterans Administration to rule on the claim.
Meanwhile, the veteran receives a taxable monthly pension. Once the disability claim is approved, the dollar award is made retroactive to the date of the application, in effect converting a portion of the veteran's monthly income from taxable to tax free, and the taxable pension is reduced by the amount of the increase in tax-free disability payment.
In Strickland's case, his disability pay was raised from $32 a month to $240 a month and his taxable pension was reduced accordingly.
It took nine months from the time of Strickland's application for more disability pay and the time the application was approved and the change made retroactively by the VA. The Internal Revenue Service argues that the higher disability made retroactively for nine months is taxable pension income, not tax-free disability.
In the Strickland case, which was not a class action suit, the court held that if a taxpayer is found to be entitled to retroactive disability pay, "it is the VA's determination of entitlement which should control, and not the mere form in which the monies are received."
An IRS spokesman said the tax-collecting agency does not "acquiesce" in the court's ruling, which means that it is not applying the ruling in any of the nation's 11 appeals circuits, including the fourth.
The spokesman said IRS can conclude the court is "wrong" and announce that it does not acquiesce in the decision "because there can be conflicting opinions in different appeals courts." That means that any veteran, even with the same facts and circumstances as Strickland, must take IRS to court to win. The spokesman conceded, however, that if other appeals courts issue similar rulings, IRS could change its mind and apply the rulings nationwide.
"IRS continues to screw disabled veterans out of benefits provided by law," Strickland said in a telephone interview. The 62-year-old colonel won his case on appeal after losing in tax court and no longer has a vested interest in the matter. But he continues to press the issue on behalf of other veterans.
"There is no reason on God's earth," he said, "why you should let these cotton-pickin', big brother bureaucrats rob veterans."
A lawyer on the House Veterans Affairs Committee said the committee "feels IRS is taking a fairly restrictive reasoning" in refusing to allow the tax exemption. He estimated that, of the several thousand veterans who retire each year, several hundred "get caught in the Catch-22."
Rep. J.J. Pickle (D.Tex: has introduced legislation to force the IRS to honor the Tax exemption.