Toll Free: 877.880.

4477
Phone: 281.880.6525

Tax Court Retired Cop's Cash for

Unused Leave Wasn't Excludible

www.hrp.net

The U.S. Tax Court has held that payments received by a police detective on
his retirement -- for unused sick and vacation time -- were includible in
income. Based on that conclusion, the court rejected the taxpayer's argument
that a portion of the vacation time and sick leave should be excludible. That
portion of the payments, said the taxpayer, was accrued while he was on
temporary disability leave and therefore was received under a workers'
compensation law for personal injuries or sickness.
Background. Gross income includes all income from whatever source derived,
unless specifically excluded. The Internal Revenue Code says, "Amounts
received under workmen's compensation acts" to compensate for personal
injuries or sickness are excluded from income. The exclusion includes amounts
received under "a statute in the nature of" a workers' compensation law,
according to Internal Revenue Code Section 104(a)(1).

www.hrp.net

Facts of the Case

The taxpayer had a decades-long career as a detective at the Los Angeles
Police Department. During his service, he was granted periods of temporary
disability leave because of duty-related injuries or sicknesses.

www.hrp.net

When the detective was on temporary disability leave, the specific workers'
compensation law that governed compensation of city police and firefighters
was Section 4.177 of the Los Angeles Administrative Code (LAAC). This is the
city's substitute for California state law. The provision says that a temporarily
disabled member of the Los Angeles Police Department receives as temporary
disability compensation "an amount equal to his base salary." Under this
policy, the taxpayer continued to earn vacation and sick leave during periods
of temporary disability. His entitlement to pay and benefits upon his
retirement was governed by a collective bargaining agreement between the
city and the Los Angeles Police Protective League. The agreement was known
as Memorandum of Understanding No. 24 (MOU 24).
Among other things, MOU 24 established his entitlement to a cash payout for
earned but unused vacation and sick time. On his retirement from the police
department in 2009, the City of Los Angeles paid the detective a total of
$53,513. That payment included $22,740 for 800 hours of unused sick leave
and $30,773 for 541 hours of unused vacation time (400 carried over from
2008 and 141 earned in 2009).

www.hrp.net

The leave payments were included in the amount of wages reported by the
city to the detective on a 2009 Form W-2, Wage and Tax Statement. However,
he and his wife didn't include the leave payments in income.
The taxpayers' main argument was this: Following the LAAC provision, the
portions of vacation and sick leave payments that were earned while the
detective was on temporary disability leave were received under a workers'
compensation law. Therefore, the taxpayers claimed that those payments
were excludible from their 2009 gross income under the Internal Revenue
Code.

www.hrp.net

Tax Court Conclusions

The Tax Court first decided that the LAAC provision was a statute in the nature
of a workers' compensation law. It also determined that the "amount equal to
his base salary" stipulated in the LAAC provision includes the accrual of
vacation time and sick leave. However, the court then turned to the issue of
whether the payments made to the detective were received pursuant to a
workers' compensation law or as compensation for personal injuries or
sickness.

www.hrp.net

Ultimately, the court determined the payments were received by the taxpayer
not under the LAAC provision, but under MOU 24 -- which is not a workers'
compensation law. And the court rejected the taxpayer's argument that the
leave earned while on disability should be excludible from gross income,
noting, among other things, that the state workers' compensation act doesn't
provide for any payments after the period of disability ends. Therefore, any
payments received by the taxpayer after his temporary disability was over
could not be part of the city's substitute for the state law.
The court also agreed with the IRS that, even if it were to hold that the leave
payments could be payments under a workers' compensation law, the
taxpayer failed to show how many hours, if any, were accumulated during his
leaves of absence and how many remained at his retirement. This
determination would require the court to know the taxpayer's entire sick and
vacation leave histories (which it did not). Accordingly, the IRS's inclusion of
the leave payments in the taxpayers' 2009 gross income was sustained. (Speer
vs. Commissioner, 114 TC No. 14, April 16, 2015)

www.hrp.net

14550 Torrey Chase Blvd., Ste. 360 Houston, TX 77014 USA

Toll Free : 877.880.4477
Phone : 281.880.6525
Fax
: 281.866.9426

E-mail : info@hrp.net

www.hrp.net