- quote -

There is apparently some confusion here between workers comp
and disability retirement. Workers comp for safety personnel
is tax-free up to a year for 100% of salary and thereafter
in many places may be extended (still tax-free) by the use
of sick time. This is prior to a disability retirement and
also applies to safety personnel who return to full duty.
(Givens case)Workers comp is only paid to active employees.

A disability retirement is for life and is excludable up to
50% of final comp in the state of California. This portion
never becomes taxable. (Picard case) The only relevance of
workers comp to the pension is the legal basis requiring the
statute granting the disablity retirement be exclusively
available to service connected injuries or illness, referred
to as a statute in the "nature of a workers compensation"
act. (Take case)

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- quote -

Probably not. There was a one year limit to the period the
amount could remain non-taxable (in full). Beyond that, it
became a "regular" retirement, subject to the usual IRC
Section 72 recovery of basis rules (otherwise fully
taxable).

Another response has already described CA Labor Code 4800 in
more detail than I went into.

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- quote -

Under 1937 Act retirement systems and CalPERS statutes, the
service connected disability retirement payments for police
officers and firefighters do not ever change - they are
granted for life. Therefore, for life, they are based upon
fifty percent of final comp-not age or length of service.

The citation you are looking for is the Ninth Circuit's
opinion in Picard v. Commissioner (165 F.3d 744)(1999),
reversing the Tax Court. That case, which involved the
Oakland City retirement system, is directly applicable to
CalPERS and 1937 Act systems as well because none of the
California service connected disability statutes under these
acts change the status of a disability retirement to a
regular service retirement at any time. There is no federal
authority to recharacterize the retirement from disability
to service, so the 104 exclusion remains for life, but only
for that fifty percent of final comp. When officers retire
with enough years to get more than fifty percent, the
balance is taxable because age and service do control for
that portion.

Timothy E Kelly, Esq.
Certified Specialist
State Bar of Califonia
Board of Legal Specialization

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"D. Stussy" <kd6lvw[at]bde-arc.ampr.org> wrote:
- quote -

Let me try to clarify my point. I am familiar with the
Givens case, a case of first impression and Labor Code
Section 4850. Where my confusion comes from, is when the
individual reaches normal retirement age and the disability
payments change. Say an LA policeman is injured on the job
and collects sick pay and disability payments. They would
be excludable from income. Upon reaching normal retirment
age, the retirement disability pension payments change.
I've always thought that if any part of that payment is
based on age or service, that part would be taxable.

I can't find a case that says the payments are 100%
excludable regardless of how they are calculated.

Alan
http://taxtopics.net

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D. Stussy <kd6lvw[at]kd6lvw.ampr.org> wrote:
- quote -

Just so I understand, if a 79 year old former firefighter
who retired on a disability pension in lieu of workers comp
is still receiving that same pension, it should be treated
as workers comp and is not taxable for federal purposes?

__
Art Kamlet ArtKamlet [at] AOL.com Columbus OH K2PZH

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Cliff <cliffp[at]REMOVETHIScox.net> wrote:

- quote -

The state of the law under the California Government Code is
that LE/Fire service connected disabilities are excludable
up to fifty percent of final compensation. When an officer
or firefighter has service credit entitling them to service
credit over fifty percent of final comp that portion is
taxable.

Sections 4800 and 4850 of the Labor Code do not apply to
retirement, they are the actual workers comp statutes
allowing these same personnel up to one year of full salary
which is excludable. In addition, in some jurisdictions, the
officer/firefighter may then use sick time to supplement and
extend the workers comp payments beyond a year. This sick
time is also excludable so long as the controlling statute
is in the nature of a workers comp act.

An exception to all of this, in the eyes of the IRS, is
where the public safety personnel retire using what is known
as the "heart presumption," which assumes all heart related
problems are service-connected. The IRS considers these
retirements to be taxable. I do not agree with this (the
Service has issued two PLR's to this effect) but there is no
California case law on point - the Service bases their
opinion on the Ninth Circuit TAKE decision concerning an
Alaska statute.

Many retirement systems have issued 1099-R's with "Taxable
Amount not Determined" because they do not want to assume
responsibility for application of the relevant case law.
Challenges such as CP-2000's should simply be met with a
letter from the retirement system verifying service
connected disability status and asserting the 104 exclusion.

Timothy E Kelly, Esq.
Certified Specialist, Taxation Law
State Bar of California, Board of Legal Specialization

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Cliff <cliffp[at]REMOVETHIScox.net> wrote:

- quote -

After having to respond to IRS notices (re: proposed changes
to the return) for the third time, I now attach Form 8275 to
the return explaining why none (in my client's case) of the
benefits are taxable. In my explanation I refer to all
relevent documents. In this case that amounts to one audit
and three subsequent notices agreeing with the fact that the
benefits are not taxable. So far, so good. Haven't
received another notice proposing changes in six years.

Larry A. Mitchell, E.A.

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A.G. Kalman wrote:
- quote -

Could it be because there have been certain rulings in the
past (circa 1992) regarding the taxability of disability
pensions as they refer to California Labor Code section
4800....? There is case law in this state that the Tax
Court has noted in the past that causes a deviation from the
"normal" expected result had the taxpayer been a
LEO/Firefighter of a different state.

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Dave Woods, EA" <d.woods[at]verizon.net> wrote:
- quote -

I'll need a cite if someone has it. It's my understanding
that at least in the Ninth Circuit, that part of any
retirement benefit that is determined by reference to age or
length of service would be taxable. The remainder of the
benefit would be tax-free. If the whole benefit is based on
a legislative act in the nature of a workers' compensation
act, then the benefit is tax-free.

Alan
http://taxtopics.net

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"A.G. Kalman" <agk202[at]netscape.net> wrote:
- quote -

The original posters concerns aside, if a retirement pension
is issued because of disability under applicable state law
particularly with police officers, the pension is not
taxable and is treated as a workers compensation benefit.
There was a court ruling addressing this within the last
month although there had been precedent for some time.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.

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Cliff <cliffp[at]REMOVETHIScox.net> wrote:

- quote -

I'm confused. Why do you believe that the issuing authority
is going to send the taxpayer a 1099-R with the incorrect
taxable amount? Any part of a retirement plan benefit that
a person receives that is based on age, length of service,
or prior pre-tax contributions to the plan, would be taxable
even though that person "retired" because of an occupational
injury. That said, if you believe that a 1099-R has
incorrectly stated the taxable amount, the first thing to do
is to have the issuing authority correct the 1099 based upon
the same proof you intend to provide to the IRS to show it
should be tax-free.

Alan
http://taxtopics.net

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Cliff <cliffp[at]REMOVETHIScox.net> writes:

- quote -

Wait. No human being is really going to look at the return
before a CP-2000 notice is sent, so save the paper of an
initial explanation that no one will read.

Phil Marti
Topeka, KS

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I am a California tax preparer. Starting in January 2004
many of my clients who are retired on law enforcement
disability pensions will begin receiving a 1099-R which
states the taxable amount received. Up until now they were
"taxable amount not determined" with an identifier number 3
[disabilty] and statement "SVC CONNECTED DISABILITY" These
pensions are generally tax excludable [in the nature of a
workers compensation law] per IRS 104(a)(1). I expect that
many, if not most, of the stated amounts will be incorrect
and I will be filing what we believe to be the correct
amounts. This will most certainly be questioned by the IRS
and the State. QUESTION: What would you consider to be the
most efficient method of notification and reconcilation; (1)
File an explanation with the initial return or (2) Wait
until the IRS makes its determination that there is a
discrepancy. THanks in advance.

Cliff Powell

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