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.
All compensation received during a police officer or firefighter's leave of absence
under Labor Code § 4850 is tax exempt. When cashed out after a leave of absence, the government can tax vacation and sick time earned during that Labor Code § 4850 leave.
