The United States Tax Court recently decided that not all benefits earned during a leave of absence under Labor Code § 4850 are tax exempt. In Clarence William Speer v. Commissioner of Internal Revenue, the Tax Court ruled that the government can tax accrued vacation and sick leave earned during a disability leave of absence.
After serving the citizens of Los Angeles for over 25 years, LAPD Detective Clarence Speer retired from public service in 2009. On account of duty related injury, Speer took temporary disability twice during his decade’s long career. Speer first took temporary disability leave in 1982. In 2007, Speer used temporary disability leave for the second time.
At retirement in 2009, Speer had accumulated 541 hours of unused vacation time. Speer also accrued 800 hours of unused sick leave. Combined, the unused benefits had a value of $53,513. After cashing out the $53,513 at retirement, the City of Los Angeles reported that amount as income on Speer’s 2009 W-2. Since Speer earned some of the cashed out benefits while on temporary disability, Speer excluded the $53,313 from his 2009 income tax return.
Labor Code § 4850 allows police officers and firefighters a one year leave of absence in lieu of workers' compensation. When the disability ends, compensation for that disability also stops. The government cannot tax workers’ compensation income under 26 United States Code § 104(a)(1). As a statute that resembles a workers’ compensation statute, the income tax exemption applies to Labor Code § 4850.
Not only is disability pay exempt from income tax, but Labor Code § 4850(a) entitles police officers to temporary disability leave without any loss of salary. This means that vacation and sick leave continue to accrue during paid disability leave. Naturally, Speer claimed the benefits earned during his disability time as exempt from income tax.
The Tax Court disagreed with Speer. Citing Boyd v. City of Santa Ana, the Tax Court stated that compensation paid while on disability leave was not salary, but compensation for injuries. Since Speer could not take vacation or sick time during his temporary disability, he could not benefit from the accrued vacation or sick time while on disability. Speer’s only benefit from the accrued vacation and sick time came after his disability ended. The Tax Court ruled that any payments received by Speer after his disability ended were not part of Speer’s Labor Code § 4850 compensation. Thus, the income tax exemptions did not apply to Speer’s cashed out leave.