Putnam: Wounded Army vet wins the battle but loses the tax war

Note: Story has been updated to reflect one deployment to Afghanistan and five soldiers who died. A sixth was seriously injured but lived.

BATH TWP. – The federal government forgave wounded veteran Will Milzarski’s sizable student debt but, in an ironic twist, the IRS wants him to pay $62,000 in income taxes on the loan cancellation.

A Michigan State University College of Law tax professor who is trying to help him said it “seems incredible” while a state senator dubbed the situation “the definition of insanity.”

Retired 1st Lt. Milzarski, 47, is a lawyer from Bath Township who specialized in disability rights. At 40, he took a leave from his state job to return to the Army to attend Officer Candidate School.

His nine months in Afghanistan left him with a traumatic brain injury, post traumatic stress disorder and hearing loss. The Department of Veterans Affairs considers him totally and permanently disabled, leading to a cancellation of nearly a quarter-million in student loans.

Joshua Wease, a clinical associate professor of law who directs MSU’s low-income tax clinic, said the tax in this case is not logical.

"If an individual has been deemed disabled and unable to pay their student loans, it seems incredible that they wouldn’t also be deemed unable to pay the taxes on the forgiveness of those same student loans,” he said.

Milzarski returned to a state job but retired last year after he struggled with concentration and memory. Because he couldn’t afford to pay his student loans while living on disability pay, he was happy to get the news that the U.S. Department of Education was cancelling $223,000 in debt.

But the IRS notice that followed floored him.

He’s also facing $8,000 in Michigan taxes, penalties and interest in addition to the federal taxes. That’s $70,000 in all.

“One part of government says, 'We recognize your service, we recognize your inability to work',” Milzarski said. “The other branch says, ‘Give us your blood.’ Well, the U.S. Army already took a lot of my blood.”

Milzarski said he led 24 soldiers on 244 combat missions and 43 engagements with the enemy. Five soldiers were killed and one seriously injured. He was awarded a Purple Heart for a ricocheted bullet that hit him in the face during combat in Afghanistan. Among his 18 awards is a Meritorious Service medal.

Related:

Bath Township veteran wins battle with state
Bath Township resident awarded Purple Heart

He receives disability pay from his state job and the military.

Milzarski's high student debt was largely attributed to his law degree, which he earned in 2002 from Cooley Law School.

He was able to subtract his other debts to bring down the amount of income attributed to the loan forgiveness to $161,000. Still, that pushed him into the top tax brackets.

He contacted Wease’s MSU Low-Income Tax Clinic earlier this year, which agreed to take on his case. Sixteen second- and third-year law school students work in the clinic. Wease said an offer to pay a lower amount was rejected by the IRS and that is being appealed.

Wease said the clinic is first working with the federal government because Michigan taxes are based on federal decisions about income.

Milzarski’s case may be unusual because the high amount of debt, Wease said. While there are some exceptions, cancelled debt is generally considered income.

“It’s kind of a weird area of law. A lot of people don’t think when your debt’s cancelled that it's income because you don’t have the money in your pocket,” Wease said.

He said he doesn’t think federal law intentionally included wounded veterans who have their loans forgiven.

“Sometimes the law can’t always conceive of every single circumstance that comes up,” Wease said.

He said it may take two or three months to go through appeals.

An IRS spokeswoman said the agency is prohibited from commenting on specific taxpayers. She sent a link to a publication about debt cancellation as way of comment.

Milzarski said he’s facing garnishment of his disability pay and a lien against his home in Bath Township. His wife attends Lansing Community College and the couple is helping raise three grandchildren.

He’s turned to his state and congressional representatives about the situation.

State Sen. Rick Jones, R-Grand Ledge, said Thursday that a bill is being drafted to exempt loan forgiveness for wounded vets under state law. That wouldn’t affect federal tax liability and probably wouldn’t help Milzarski because it won’t be retroactive.

He said forgiving loans because of disability but taxing cancelled loan as income is “pretty much the definition of insanity.”

“Why should it suddenly become income? It absolutely makes no sense,” Jones said.

Milzarski said he’ll be glad to see the legislation passed.

“It’s bittersweet. It will make sure that some of the other veterans out there never have it happen to them, but it won’t help me,” he said.

Judy Putnam is a columnist with the Lansing State Journal. Contact her at (517) 267-1304 or at jputnam@lsj.com. Follow her on twitter @judyputnam.