Note: Section 112 combat pay exclusion does not apply to separation payment: Waterman v. Commissioner

In Waterman v. Commissioner (1998), the Tax Court was presented with an issue of first impression: whether a separation payment from the US Navy to an enlisted person was excludable from gross income as combat zone compensation under Section 112. In holding the separation payment was not excludable, the court stated that a military separation payment would never qualify for the Section 112 combat zone exclusion. This decision has ramifications for military separation payments and perhaps other forms of combat zone compensation.