The fact that the IRS had granted the taxpayer’s position on three prior returns that his military retirement was not subject to tax did not require the IRS to accept that same position on a later return. The case of Taylor v. Commissioner, TC Summary Opinion 2017-4 dealt with this issue of how much reliance a taxpayer can place on the IRS’s acceptance of a return position in an earlier year.
The taxpayer in this case had retired from the Army after completing the length of time necessary to qualify for retirement in 2002. Although he did not separate due to disability, he did file an application with the VA in 2002 for compensation for service related disabilities. He was awarded such compensation which was not reported by the VA to the IRS, which he did not report as taxable on his return for the year in question (2010) and which the IRS was not arguing was taxable compensation to him.
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