Tax Court Says Judge’s Benefits from Mental Disability OK to Exclude from Gross Income

25 for 25 in '25

We've been going back through the years since 2000 to reminisce about what the last quarter century has brought in the way of notable cases. This one harkens back to 2002 and why tax attorneys might need to know a thing or two about workers' compensation benefits. Simply Research subscribers have access to the full text of the ruling.

Case

Byrne v. Commissioner of Internal Revenue, T.C. Memo 2002-319 (U.S. Tax Ct. 12/30/02)

What Happened

A municipal court judge suffered a permanent disability that arose out of and in the course of his employment. Specifically, the judge suffered a mental injury that was caused by an exceptionally heavy workload and his inability to cope with the ramifications of his judicial decisions. As result of job-related stress, the judge sank into major depression, which prevented him from performing his job.

The judge was awarded disability retirement benefits under California's Judges' Retirement Law, which provided for a disability retirement if a judge had been credited with at least two years of judicial service or the disability was a result of injury or disease arising out of and in the course of judicial service.

For tax purposes, the judge sought to exclude from gross income the disability retirement payment he received, while the IRS argued that the Judge's Retirement Law was not in the nature of a workers' compensation act and the payment was not excludable.

Rule of Law

Under federal tax law, gross income does not include amounts received under workers' compensation acts as compensation for personal injuries or sickness. Also not included are benefits received under statutes "in the nature of" a workers' compensation act that provides compensation to employees for personal injuries or sickness incurred in the course of employment.

A statute is "in the nature of" a workers' compensation act if it allows disability payments solely for service-related personal injury or sickness.

What the Tax Court Said

According to the tax court, the Judges' Retirement Law was not a workers' compensation act nor was it -- in its entirety -- a statute in the nature of a workers' compensation act. However, benefits received under the law qualified for exclusion because it was a "dual-purpose" statute in that it authorized payments for work-related as well as non-work-related disabilities.

The court explained that the law contained a specific provision that awarded benefits solely for a work-related disability and the judge, in this case, received those benefits based on a finding that he was unable to discharge the duties of his office by reason of his mental disability and that disability was or was likely to become permanent.

Takeaway

Benefits received under a "dual-purpose statute," which is one that authorizes payments for work-related and non-work-related disabilities, may qualify for exclusion from gross income if they are received under a specific provision that restricts the payment of benefits to cases of work-related disabilities. Such benefits may be excluded from gross income for federal income tax purposes.

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