Disability pay not in the nature of workers' compensation.

P was employed as a case manager with the F County Board of Health and Human Services in Ohio. After a workload increase, P sought counseling to deal with mental stress and took a temporary leave of absence. She was eventually diagnosed as having permanent mental injury, and her employment ended on April 8, 2003. The parties agree that P's disability was employment-related.

P had applied for disability benefits with the Public Employees Retirement System of Ohio, which approved her application on March 23, 1999. In that year, P received total payments of $51,437, which she excluded from gross income on her 1999 return. The IRS determined that the payments should not have been excluded and issued a $9,148 deficiency.

Analysis

Under Sec. 104(a)(1), gross income does not include amounts received under workers' compensation acts for personal injuries or sickness. This section's scope is expanded by Regs. Sec. 1.104-1(b) to include "a statute in the nature of a workmen's compensation act which provides compensation to employees for personal injuries or sickness incurred in the course of employment." However, this does not apply to a retirement pension or annuity to the extent determined by reference to an employee's age or length of service, or prior contributions, even though the employee's retirement is occasioned by an occupational injury or sickness. Nevertheless, a statute that conditions eligibility for benefits on the existence of a work-related injury or sickness may qualify as a workers' compensation act for purposes of Sec. 104, even though those benefits are called "disability retirement benefits"; see Thomas Take, 804 F2d 553 (9th Cir. 1986). A statute that fails to distinguish between work-related and other types of injuries is not in the nature of a workers' compensation act (William A. Rutter, 760 F2d 466 (2d Cir. 1985), aff'g TC Memo 1984-525).

The statute at issue is Ohio Rev. Code Ann. sec. 145.35 (Anderson 2001), which provides:

Sec. 145.35 Disability coverage for on-duty illness or injury; election of coverage; medical examination.

(A) As used in this section, "on-duty illness or injury" means an illness or injury that occurred during or resulted from performance of duties under the direct supervision of a member's appointing authority

(B) The public employees retirement system shall provide disability coverage to each member who has at least five years of total service credit and disability coverage for on-duty illness or injury to each member who is a law enforcement officer, regardless of length of service.

P received her benefits pursuant to the first clause in Ohio Rev. Code Ann. sec. 145.35(B). She could not qualify under the second clause, which is limited to law enforcement officers. The first clause provides disability coverage to employees if they have five years of service credit, regardless of whether the disability was incurred in the course of employment.

In Raymond J. Byrne, TC Memo 2002-319, the Tax Court held that a California statute (CGC Section 75061(a)) was a dual-purpose statute: Payments can be made for work-related, as well as other types of disabilities. The taxpayer was a California municipal court judge who suffered severe mental stress as a result of a heavy workload. He could not continue his judicial responsibilities, due to permanent disability. The Tax Court noted that a dual-purpose statute, in this context, contains some provision that restricts the payment of benefits to cases of employment-related disabilities. In Byrne, the taxpayer received his benefits under the second portion of the California statute, which addresses injuries arising during the course of judicial service, in the nature of a workers' compensation act under Sec. 104(a)(1).

P seeks to liken her case to Byrne, arguing that it is basically a matter of semantics that prompts respondent to disallow her deduction. P would figuratively construe the Ohio statute so as to make it analogous to a dual-purpose statute of the type described in Byrne. However, the statute is not dual-purpose for P, because she was not employed as a law enforcement officer. Thus, only the first clause of Ohio Rev. Code Ann. sec. 145.35(B) applied, which provides identical benefits regardless of the circumstances in which the disability occurred and is simply not a statute in the nature of a workers' compensation act; see Take. Consequently, P cannot prevail.

REFLECTIONS: Proposed regulations in REG-160315-03 (3/10/05) align the interpretation of payments received under a workers' compensation law for FICA purposes under Sec. 3121(a)(2)(A), with the interpretation of amounts received under a workers' compensation law for gross income purposes under Sec. 104(a)(1). Thus, payments made under a statute in the nature of a workers' compensation act will be excluded from wages for FICA purposes. The regulations adopt the same position that was published in Rev. Proc. 82-20, the most contemporaneous guidance to the legislation that created the current statutory scheme.

ALFAYE YOUNGBLOOD, TC Memo 2005-43