Discussion:Disability as a credit?

But you're saying that he gets a w-2 with no special code for WC, then subtracts the 12.75% because of the ruling?!? I have not heard of this, so I'm interested to find out more as well.

Thank you,

Pete

Thank you very much for the input. Here is the dilema we are facing. We had a correctional officer client audited for the same exact circumstance as I laid out above and that you have correctly identified. The IRS was dening the deduction. We argued that section 104(a)(1) applied. The IRS accepted that argument and allowed the deduction.

What do you make of that?

Any and all input will be greatly appreciated.

Thank you

Pete

The disability is not contingent upon services rendered. For example, an officer will break up a fight with an inmate and injure his leg. He files a claim with the worker's compensation board and is awarded $20,000. In addition he receives a permanent disability rating of let's say 18%. It is a common practice for some tax professionals to deduct 18% from the taxpayers gross income year after year. The 18% is calculated by taking 18% of box 1 on the W-2 and reporting as a deduction to gross income. I was very sceptical of taking this deduction for our correctional officer clients until it became an audit issue with one of our clients. We cited 104(a)(1) and the deduction was allowed.

Any help to find the definitve answer will be greatly appreciated, or do we have the definitive answer by way of the audit results.

Thanks Riley and anyone who can help,

Pete

In Morris, the court reasoned that all salary payments received were for services rendered (instead of injuries) and were totally dependent thereon. In addition, the court held that the 7% excluded amount was not paid under a “worker’s compensation statute.”

Thus, if you can demonstrate that your client is receiving amounts over and above his regular salary to compensate him for on the job injuries, then you have at least a fighting chance to claim that the amounts were paid under a worker’s comp statute.

What do you make of the fact that one of our clients was audited for the same issue you described above and the deduction was allowed by the IRS.

This is very confusing to us and any light you could shed on it would be greatly appreciated.

Thank you for your last post and your assistence,

Pete

If you want, you can send my post to the IRS auditor and see if he would like to reconsider his original position. My advice is to never look a gift horse in the mouth. If the IRS is letting you have an exclusion that is clearly not allowed under the tax law, I don't believe that you have any ethical responsibility to educate the auditor. In fact, it might even be malpractice to bring the Morris decision to the attention of the auditor.

What is interesting about the Morris case is that 4 deputies were included in the Morris decision. All 4 deputies worked out of the same Sheriff's substation, and I would be willing to bet that they all went to the same tax preparer. The tax preparer in question was probably on the hook for penalties and interest, but he probably got away with this scam on many occasions. The tax attorney for the taxpayer made a lame attempt to salvage the case by quoting California Labor Code Sec. 4850 which gives an injured public safety officer a one-year paid leave of absence before going on permanent disability. This was obviously not going to persuade the court since there was no leave of absence granted to any of the taxpayers.

We have been researching this question for some time and have just come across Revenue Ruling 68-10.

Your input is much appreciated.

Pete

Ed

How about this?

Internal Revenue Service Revenue Ruling

TaxLinks.com sm

Rev. Rul. 68-10

1968-1 C.B. 50

Sec. 104

Caution: Distinguished by Rev. Rul. 69-254

IRS Headnote

Total payments made by a California county to an employee under section 4850 and pursuant to section 4853 of the California Labor Code, because of an occupational injury or illness arising out of and in the course of the employee's duties are in the nature of and in lieu of workmen's compensation, and such payments are excludable from the employee's gross income under section 104(a)(1) of the Internal Revenue Code of 1954. The payments are excludable even if they are in excess of the normal disability benefits payable under a workmen's compensation act.

Full Text

Rev. Rul. 68-10

Advice has been requested whether payments made by a California county to an employee under section 4850 of the California Labor Code, because of occupational injury or illness arising out of and in the course of performance of the employee's duties are excludable from gross income under section 104(a)(1) of the Internal Revenue Code of 1954.

Section 4850 of the California Labor Code provides that whenever any city policeman, city fireman, sheriff or any officer or employee of a sheriff's office, or any inspector, investigator, detective or personnel with comparable title in any district attorney's office, who is a member of the State Employees' Retirement System is disabled by injury or illness arising out of and in the course of his duties, he shall become entitled, regardless of his period of service with the city or county, to leave of absence while so disabled without loss of salary, in lieu of normal temporary disability payments under this Code, for the period of not exceeding one year. This section excludes employees (other than city firemen) whose functions do not clearly come within the scope of active law enforcement service. It also excludes city firemen whose functions do not clearly fall within the scope of active fire fighting and prevention service.

Section 4853 of the California Labor Code provides that whenever such disability of any such officer or employee continues for a period beyond one year, such member shall thereafter be subject to disability indemnity under provisions of the California Labor Code other than section 4850 during the remainder of the period of said disability or until the effective date of his retirement under the State Employees' Retirement Act, and the leave of absence shall continue.

Section 104(a)(1) of the Code provides for the exclusion from gross income of amounts received under workmen's compensation acts as compensation for personal injuries or sickness.

Section 1.104-1(b) of the Income Tax Regulations states that section 104(a)(1) of the Code excludes from gross income amounts which are received by an individual under a workmen's compensation act or under a statute in the nature of a workmen's compensation act which provides compensation to the employees for personal injuries or sickness incurred in the course of employment.

In determining whether the payments made under section 4850 of the California Labor Code are actually workmen's compensation benefits, the California District Court of Appeals, Second District, in the case of Hawthorne v. City of Beverly Hills et al. , 245 P.2d 352 (1952), held that salary in lieu of temporary disability payments, to a fireman (under section 4850 of the California Labor Code) who is a member of the State Employees' Retirement System, is not salary as such, but is compensation within the meaning of the workmen's compensation act. This determination also covered that amount which exceeded normal disability benefits under the usual schedules for determining workmen's compensation.

The payments made under section 4850 of the California Labor Code are made because of injuries or illness arising out of and in the course of the employee's duties. The fact that the amount received is equal to the employee's salary does not prevent such payments from being compensation within the meaning of workmen's compensation.

Since these payments are compensation within the meaning of the workmen's compensation act, they cannot be considered payments provided by a wage continuation plan. Therefore, section 105(d) of the Code is not applicable.

Accordingly, the total payments made by a California County to an employee under section 4850 and pursuant to section 4853 of the California Labor Code because of an occupational injury or illness arising out of and in the course of the employee's duties are in the nature of and in lieu of workmen's compensation, and such payments are excludable from the employee's gross income under section 104(a)(1) of the Code. The payments are excludable even if they are in excess of the normal disability benefits payable under a workmen's compensation act.

thanks

ed