The Tax Court has held that payments made by a city to a firefighter injured in the line of duty had to be included in his gross income. The payments, which were made under a collective bargaining agreement, weren't made under a workmen's compensation act as compensation for personal injuries or sickness, and so weren't excludable under Code Sec. 104(a)(1).
Background. Payments qualifying as workers' compensation are excludable from gross income unless the compensation offsets previously deducted medical expenses. Not only must an injury or illness be job-related, but also the statute (under which payment is made) must restrict the benefit to injuries or sickness related to the job. Thus, amounts that are received (1) under a workers' compensation act (such as the Longshore and Harbor Workers Compensation Act, 33 USC 901), or under a statute “in the nature of a workers' compensation act,” (2) as compensation for personal injuries or sickness, (3) where the personal injuries or sickness were related to the employee's occupation, are excluded from the employee's income. (Code Sec. 104(a)(1), Reg. § 1.104-1(b))
In Rev Rul 81-47, 1981-1 CB 55, IRS concluded that a collective bargaining agreement that was adopted and approved by a local (county) legislature and incorporated by reference into the local legislative code qualified as a statute in the nature of a worker's compensation act. The collective bargaining agreement involved had been entered into pursuant to a county statute which provided that all collective bargaining agreements entered into by the county had to be approved by “legislative acts” of the county council and incorporated by reference in the county code. Accordingly, IRS ruled that payments made to disabled county safety officials (e.g., firefighters and police officers) under the terms of the collective bargaining agreement were excludable under Code Sec. 104(a)(1).
In Rev Rul 83-77, 1983-1 CB 37, IRS held that a collective bargaining agreement, even if it was consistent with a municipal code, wasn't itself a statute. Accordingly, IRS ruled that payments made to a police officer, who was injured in the line of duty and was determined to be unable to perform regular police duties, weren't excludable from his gross income.
Facts. John T. Bayse, who worked as a firefighter for Cleveland, Ohio, was injured in the line of duty while responding to an automobile accident. For purposes of his firefighting duties, he was deemed to have suffered a “hazardous duty injury.” From the day of the accident through his retirement from the fire department (with the exception of 2 days when he attempted to resume work), he was on hazardous duty injury status and was paid pursuant to the terms of a collective bargaining agreement between Cleveland and the union, Cleveland Fire Fighters, Local 93. Under the terms of the collective bargaining agreement, he eventually applied for and was granted a disability retirement pension.
On audit of Bayse's return, IRS determined that the disability payments received from the City of Cleveland had to be included in his gross income because they weren't received under a workmen's compensation act as compensation for personal injuries or sickness under Code Sec. 104(a)(1).
Not workers' compensation. The Tax Court concluded that the payments Bayse received while on hazardous duty injury status had to be included in his gross income because the disability payments weren't received under a worker's compensation act or a statute in the nature of a worker's compensation act.
The Court reasoned that the collective bargaining agreement entered into between the City of Cleveland and the union was a labor contract which did not rise to the force and effect of law. When the language of a collective bargaining agreement is by legislative act incorporated by reference or otherwise into a municipal code, and so enacted into law, it meets the requirements of Code Sec. 104(a)(1). But mere approval by the mayor or the city council of a collective bargaining agreement negotiated by a city and a union doesn't meets the requirements, without explicit incorporation into the city's code.
The Court concluded that although this collective bargaining agreement was presumably ratified by the Cleveland City council, even such ratification wouldn't convert the collective bargaining agreement into legislation because (1) the collective bargaining agreement was modifiable under its own terms, and (2) unlike the county statute in Rev Rul 81-47, there was no showing that the State of Ohio had a statute that required the collective bargaining agreement to be incorporated into the Cleveland City Code.
Research References: For the exclusion for workers' compensation payments, see FTC 2d/FIN ¶ H-1351; United States Tax Reporter ¶ 1044.01; TaxDesk ¶ 133,049.
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