Dyer v. Commissioner, 71 T. C. 560, 1979 U. S. Tax Ct. LEXIS 196 (1979)

Payments made under a regulation with the force and effect of law are excludable from gross income if they are in the nature of workmen’s compensation.

Summary

Madeline G. Dyer, a New York City public school teacher, received full salary while on leave due to an on-the-job injury. The Tax Court ruled that these payments were excludable from her gross income under Section 104(a)(1) of the Internal Revenue Code as compensation under a regulation by the New York City Board of Education, which was deemed equivalent to a workmen’s compensation act. The court rejected the Commissioner’s argument that the payments were merely wage continuation, emphasizing that the regulation’s purpose and effect were to compensate for line-of-duty injuries.

Facts

Madeline G. Dyer, a teacher in the New York City public school system, was injured in the line of duty on November 1, 1971. Pursuant to a regulation by the New York City Board of Education (Special Circular No. 25, issued November 19, 1971), she received her full salary during her absence from November 1, 1971, to October 26, 1973, without any deduction from her sick leave. She retired on a disability pension on October 26, 1973, but did not receive any pension payments in 1973. The Commissioner of Internal Revenue determined a deficiency in her 1973 federal income tax, arguing the payments were taxable.

Procedural History

Dyer filed a petition with the United States Tax Court contesting the deficiency determination. The Tax Court heard the case and issued its decision on January 15, 1979, ruling in favor of Dyer and holding that the payments were excludable from her gross income.

Issue(s)

1. Whether payments received by Dyer while absent due to an injury suffered in the line of duty are excludable from her income under Section 104(a)(1) of the Internal Revenue Code.

Holding

1. Yes, because the payments were made under a regulation of the New York City Board of Education, which has the force and effect of law and is in the nature of a workmen’s compensation act, making them excludable under Section 104(a)(1).

Court’s Reasoning

The court applied Section 104(a)(1) of the Internal Revenue Code and its corresponding regulation, which allows exclusion from gross income of amounts received under workmen’s compensation acts or statutes in the nature thereof. The court reasoned that the regulation by the New York City Board of Education, which provided full salary without sick leave deduction for line-of-duty injuries, had the force and effect of law. It cited New York statutory law and case law to support this view, specifically N. Y. Educ. Law sec. 2554(16) and cases like Edwards v. Board of Education of City of New York. The court distinguished this case from others where payments were considered wage continuation, emphasizing that the purpose of the Board’s regulation was to compensate for injuries, akin to workmen’s compensation. The court also noted that the Commissioner’s own administrative rulings supported the exclusion of such payments from income.

Practical Implications

This decision clarifies that payments made under regulations with the force of law, which serve the same purpose as workmen’s compensation, are excludable from gross income under Section 104(a)(1). Legal practitioners should analyze similar cases by focusing on the purpose and legal authority of the payment system in question. This ruling may encourage employers to establish injury compensation systems that can be treated similarly for tax purposes. For businesses, especially public sector employers, this case underscores the importance of clearly defining compensation policies for work-related injuries to ensure tax compliance and employee benefits. Subsequent cases have applied this principle, reinforcing the significance of Dyer in tax law concerning workmen’s compensation.