SCOTUS Reports

Tag: Sick Pay Exclusion

  • Stout v. Commissioner, 71 T.C. 441 (1978): When Voluntary Retirement Pensions Do Not Qualify for Sick Pay Exclusion

    Stout v. Commissioner, 71 T. C. 441 (1978); 1978 U. S. Tax Ct. LEXIS 5

    Payments from a voluntary retirement pension do not qualify for the sick pay exclusion under IRC Section 105(d) if the recipient is not permanently disabled and retires voluntarily.

    Summary

    John E. Stout, a fireman with over 20 years of service, sought disability retirement but was deemed capable of light duty by three physicians. After his request for disability retirement was denied, Stout voluntarily retired and received a regular pension. The issue before the U. S. Tax Court was whether these pension payments qualified for the sick pay exclusion under IRC Section 105(d). The court held that they did not because Stout’s retirement was voluntary and not due to a permanent disability that prevented all work. This ruling clarifies that voluntary retirement pensions, even for partially disabled individuals, are taxable and do not qualify for the sick pay exclusion.

    Facts

    John E. Stout, a fireman since October 18, 1951, applied for disability retirement from the Indianapolis Fire Department. Three physicians examined him and determined that while he was unable to engage in active firefighting, he could perform light duties. The fire chief denied his request for disability retirement. Stout then voluntarily retired on January 13, 1972, and began receiving a regular pension. For the year 1974, he received $5,074. 92 under protest and claimed a sick pay exclusion of $4,940. 40 on his federal income tax return, which was disallowed by the IRS.

    Procedural History

    Stout and his wife filed a joint federal income tax return for 1974. The IRS determined a deficiency of $430 and disallowed the claimed sick pay exclusion. Stout petitioned the U. S. Tax Court, which heard the case and issued its opinion on December 27, 1978.

    Issue(s)

    1. Whether the payments received by John E. Stout from the Indianapolis Fire Department’s pension fund in 1974 qualify for the sick pay exclusion under IRC Section 105(d).

    Holding

    1. No, because the payments were from a voluntary retirement pension, not a disability pension, and Stout was not permanently disabled and unable to perform all work.

    Court’s Reasoning

    The court analyzed whether Stout’s pension payments qualified for the sick pay exclusion under IRC Section 105(d) and the applicable regulations. The court noted that to qualify for the exclusion, payments must be received in lieu of wages for a period of absence due to personal injury or sickness. Stout’s voluntary retirement and the medical assessments indicating he was capable of light duty led the court to conclude that his pension was not a disability pension but a regular voluntary retirement pension. The court cited Walsh v. United States and O’Neal v. United States to support its view that voluntary retirement pensions are taxable and do not qualify for the sick pay exclusion. The court emphasized the distinction between voluntary retirement and disability retirement, stating, “In this case, the petitioner was not absent from work on account of personal injury or sickness. “

    Practical Implications

    This decision clarifies that voluntary retirement pensions do not qualify for the sick pay exclusion under IRC Section 105(d), even if the retiree is partially disabled but capable of some work. For legal practitioners, this means advising clients who are considering voluntary retirement to understand that their pension payments will be taxable unless they can demonstrate permanent disability preventing all work. Businesses and public sector employers should ensure clear distinctions in their pension plans between voluntary and disability retirement to avoid confusion and potential tax disputes. Subsequent cases, such as Quarles v. United States, have followed this precedent, reinforcing the principle that only payments directly linked to permanent disability qualify for the exclusion.

  • Laverty v. Commissioner, T.C. Memo. 1975-183: Distinguishing Excludable Injury Payments from Taxable Compensation

    T.C. Memo. 1975-183

    Payments received by an employee are not excludable under Section 105(c) as payments for permanent injury if they are deemed compensation for services rendered and lack a direct causal link to the injury itself, particularly when the employee is not demonstrably absent from work.

    Summary

    Robert Laverty, a vice president at Thriftimart, sought to exclude a portion of his salary from gross income under Sections 105(c) and 105(d) of the Internal Revenue Code, claiming it represented “sick pay” related to a permanent injury sustained in a prior airplane crash. The Tax Court denied the exclusion. The court reasoned that Laverty’s salary payments were fundamentally compensation for services rendered, not payments specifically calculated as indemnity for his injury or due to absence from work. The court highlighted that Laverty’s salary remained unchanged despite his condition, his productivity was not shown to be impaired, and the payments were not computed with specific reference to the nature of his injury.

    Facts

    Robert Laverty was a vice president and director at Thriftimart, a large grocery chain. In 1957, Laverty sustained serious injuries in an airplane crash while on company business, resulting in permanent vision loss in one eye and partial disability. To manage his ongoing physical condition, Laverty adhered to a daily exercise routine, which required him to be away from the office for several hours each day. Despite this, Thriftimart continued to pay Laverty his full salary, which increased over time as he advanced within the company. Laverty claimed that 25% of his salary constituted excludable “sick pay” related to his injury, representing the estimated time spent on his daily exercise regimen. Thriftimart had a wage continuation plan for salaried employees and an informal arrangement to continue full salary for long-term employees returning after illness or injury. Laverty did not file for state disability insurance or workmen’s compensation for the years in question concerning the injury.

    Procedural History

    This case originated in the U.S. Tax Court. Laverty petitioned the court to dispute the Commissioner of Internal Revenue’s determination of deficiencies and additions to his income tax for 1965 and 1966. Laverty sought to exclude a portion of his salary under Sections 105(c), 105(d), and initially Section 106 of the Internal Revenue Code.

    Issue(s)

    1. Whether payments received by Laverty from Thriftimart are excludable from gross income under Section 105(c) as payments for the permanent loss of a bodily function, computed with reference to the nature of the injury and without regard to absence from work.

    2. Whether payments received by Laverty from Thriftimart are excludable from gross income under Section 105(d) as wage continuation payments for a period during which the employee is absent from work on account of personal injuries or sickness.

    3. Whether Section 106 applies to exclude employer contributions to accident and health plans from Laverty’s gross income.

    Holding

    1. No, because the payments were not demonstrably computed with reference to the nature of Laverty’s injury but were fundamentally regular compensation for services rendered. The causal link between the injury and the salary amount was not sufficiently established.

    2. No, because Laverty was not considered “absent from work” within the meaning of Section 105(d). His regular salary was deemed compensation for services rendered, despite his daily exercise routine.

    3. No, because Section 106 pertains to employer contributions to accident and health plans, not direct salary payments made to employees.

    Court’s Reasoning

    The court reasoned that for Section 105(c) to apply, payments must “constitute payment for the permanent loss…of a member or function of the body….” The court emphasized that the loss must be the direct cause of the payment. It found no evidence that Laverty’s salary was determined or increased specifically due to his injury. The court noted that Laverty’s productivity was not shown to be impaired, evidenced by his career advancement. Furthermore, Thriftimart’s intention was to compensate Laverty for his services. The court stated, “Subsection (1) of section 105(c) requires that the amount ‘constitute payment for the permanent loss or loss of use of a member or function of the body, or the permanent disfigurement of the taxpayer.’ (Emphasis supplied.) In other words, the loss must be the cause of the payment.” Regarding Section 105(d), the court held that Laverty was not “absent from work” as required for exclusion. His daily exercise routine, while necessary, did not constitute an absence from work in the statutory sense because he continued to perform substantial services for Thriftimart and was compensated for those services. Finally, the court dismissed the Section 106 claim, clarifying that it applies to employer contributions to health plans, not direct salary payments.

    Practical Implications

    Laverty v. Commissioner provides important clarification on the scope of income exclusions under Sections 105(c) and 105(d) for employer-provided accident and health benefits. It underscores that simply labeling a portion of salary as “sick pay” or related to an injury is insufficient for tax exclusion. To qualify for exclusion under Section 105(c), payments must be demonstrably linked to a permanent injury and computed with reference to the nature of that injury, not merely be a continuation of regular salary. The case also clarifies that “absence from work” under Section 105(d) requires a genuine absence, not just adjustments to a work schedule to accommodate health needs while still performing regular job duties. This case emphasizes the necessity for employers to clearly document the intent and basis for payments related to employee health conditions to ensure proper tax treatment. It highlights that courts will scrutinize the causal relationship between the injury and the payment, as well as the nature of the payment as either indemnity for injury or compensation for services rendered. Subsequent cases would likely distinguish situations where specific, separate payments or plans are established for permanent injury indemnity, distinct from ongoing salary compensation.

  • Weinroth v. Commissioner, 33 T.C. 58 (1959): Sick Pay Exclusion and Vacation Periods

    33 T.C. 58 (1959)

    A taxpayer is not entitled to a sick pay exclusion under section 105(d) of the Internal Revenue Code for wages received during a vacation period when they were not expected to work, even if they voluntarily performed work during a portion of the vacation and became ill.

    Summary

    In Weinroth v. Commissioner, the U.S. Tax Court addressed whether a school teacher could exclude wages received during a summer vacation when they were incapacitated due to illness under section 105(d) of the Internal Revenue Code. The teacher voluntarily agreed to work on tasks during his vacation but became ill. The court held that the sick pay exclusion did not apply because the teacher was not “absent from work” during a period when they were not expected to work. This case clarifies the application of the sick pay exclusion, particularly in the context of vacation periods, highlighting the requirement for the employee to be absent from a time they would otherwise be expected to work due to illness.

    Facts

    Edward I. Weinroth, a high school teacher in New York City, was employed by the Board of Education. His employment was subject to the New York State Education Law, which defined the school year. The school year ran from July 1st to June 30th. The Board of Education bylaws granted teachers specific vacation and holiday periods, including the interval between June 30th and the second Monday in September. In June 1955, Weinroth’s principal asked him to revise lesson plans and review textbooks during the summer. Weinroth agreed to perform these tasks. He began the tasks on July 1, 1955, but ceased work on July 3 due to a back condition. He was hospitalized from July 5 to July 19, 1955, and remained incapacitated through July and August 1955. Classes resumed on September 12, 1955, and Weinroth returned to his teaching duties. The Board of Education bylaws provided for 10 days of sick leave with pay, but Weinroth was not charged with any sick leave during his illness. He received his regular salary during his illness. Weinroth excluded a portion of his income as “sick pay” on his tax return, which the IRS disallowed.

    Procedural History

    The Commissioner of Internal Revenue determined a tax deficiency, disallowing Weinroth’s “sick pay” exclusion. Weinroth petitioned the U.S. Tax Court to challenge the deficiency determination.

    Issue(s)

    Whether Weinroth was “absent from work” during his summer vacation due to illness, thereby entitling him to exclude a portion of his salary as “sick pay” under Section 105(d) of the Internal Revenue Code.

    Holding

    No, because Weinroth was not “absent from work” during a period when he was not expected to work, he was not entitled to the sick pay exclusion.

    Court’s Reasoning

    The Tax Court focused on the interpretation of Section 105(d) of the Internal Revenue Code and its related regulations, which allowed for the exclusion of wages received during a period of absence from work due to personal injury or sickness. The court cited the Commissioner’s regulations, which stated that section 105(d) applies only to periods during which the employee would be at work but for the illness or injury. The regulations specifically stated that an employee is not absent from work if he is not expected to work and that an employee who becomes sick during their paid vacation is not entitled to the exclusion. The court emphasized that Weinroth’s illness occurred during his summer vacation, when he was not required to perform any work duties, and that the work he had volunteered to do was not mandated or expected by the Board. The court found it significant that Weinroth was not charged with any sick leave during this time and that he would have received his full salary even if he had not done anything during his vacation. The court stated, “he cannot qualify for an exclusion under section 105(d) because he cannot be ‘absent from work’ in a period which is not a working period for him.”

    Practical Implications

    Weinroth v. Commissioner provides guidance on interpreting the scope of the sick pay exclusion under Section 105(d) of the Internal Revenue Code. This case is frequently cited in tax disputes, particularly those involving employment contracts and situations where the period of illness coincides with a vacation or other non-working period. It is important to distinguish between cases where the employee is genuinely “absent from work” due to illness during a normal work period and those where the illness occurs during a scheduled vacation. The court’s emphasis on the employer’s expectations, the employee’s contractual obligations, and the application of the employer’s sick leave policy are critical in analyzing similar cases. This case highlights the importance of analyzing the specific terms of employment agreements and whether the employee was, in fact, required to perform work during the period of illness. Also, it is essential for tax practitioners to be aware of the relevant IRS regulations and revenue rulings to advise clients effectively. The court also noted that although the employee volunteered to work, the voluntary nature of the work and the lack of requirement from the employer meant he was not “at work” during the period of his illness.