Line-of-duty disability benefits were excluded, but a supplemental benefit was taxable

Plain-English summary

The IRS considered disability and supplemental benefits paid under a state retirement system for police officers and firefighters. It ruled that lifetime line-of-duty disability benefits, including continuation to a survivor, were not gross income under IRC § 104(a)(1) when the disability resulted from a job-related illness or injury and the benefits were not based on age, service length, or prior contributions. The IRS reached a different result for a monthly supplemental benefit paid under a separate statutory formula, which it treated as gross income to the recipient. The ruling expressed no opinion under other Code or regulation provisions.

Ruling snapshot

• Question: How are line-of-duty disability benefits and a related monthly supplemental benefit treated for federal income tax purposes?
• Outcome: Mixed
• Key authorities: IRC § 104(a)(1); Treas. Reg. § 1.104-1(b)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201025038 Third Party Communication: None
Release Date: 6/25/2010 Date of Communication: Not Applicable
Index Number: 104.02-00
Person To Contact:
------------------------------------------------ --------------------------, ID No. ----------------
---------------------------------------------------------- -----------------
------------------------------- Telephone Number:
------------- ---------------------
-------------------------------------- Refer Reply To:
CC:TEGE:EB:HW
PLR-146617-09
Date:
March 22, 2010

Legend

Taxpayer = ------------------------------------------------------------

State = ----------

Statute = -----------------------------------------------------------------------------------------
------------------------------------

Act = ------------------------------------------------------

Dear --------------:

This is in reply to a letter dated October 14, 2009, and subsequent correspondence
from your authorized representatives, requesting rulings on behalf of Taxpayer,
concerning the federal income tax treatment of certain disability benefits paid pursuant
to Statute and Act.

Taxpayer administers the payment of retirement and disability benefits for member
police officers and firefighters employed by cities, towns and counties in State. Benefits
are also available to qualified survivors of deceased members.

Section 12(g)(2) of Statute, as amended by Act, provides that a fund member who is
receiving disability benefits based on a determination under this chapter that the fund
member has a Class 1 or Class 2 impairment; is entitled to receive a disability benefit
PLR-146617-09 2

for the remainder of the fund member’s life in the amount determined under the
applicable sections of this chapter.

Class 1 and Class 2 impairments are the direct result of an injury or illness incurred in
the line of duty and benefits are not based on age, length of service or prior
contributions. Section 13.5(b) and (c) of Statute.

Section 13.5(g) of Statute, as amended by Act, provides that benefits for a Class 1
impairment as determined under this section are payable for the remainder of the fund
member’s life.

Section 13.5(h) of Statute, as amended by Act, provides that benefits for a Class 2
impairment are payable: (1) for a period equal to the years of service of the member if
the member’s total disability benefit is less than thirty (30%) of the monthly salary of a
first class patrolman or firefighter in the year of the local board’s determination of
impairment and the member has fewer than four (4) years of service; or (2) for the
remainder of the fund member’s life if the fund member’s benefit is (A) equal to or
greater than thirty percent (30%) of a first class patrolman or firefighter in the year of the
local board’s determination of impairment; or (B) less than thirty percent (30%) of the
monthly salary of a first class patrolman or firefighter in the year of the local board’s
determination of impairment if the member has at least four (4) years of service.

Section 23 of Statute was added by Act and provides:

   (a) This section applies to a fund member who:

        (1) after June 30, 2009, receives a benefit based on a determination that the
   member has a Class 1 or Class 2 impairment, regardless of whether the
   determination was made before, on, or after June 30, 2009; and
        (2) before July 1, 2009, has not had the member's disability benefit
   recalculated under section 13.5 of this chapter.

   (b) Upon becoming fifty-two (52) years of age, a fund member receiving a Class
   1 impairment benefit or Class 2 impairment benefit under section 13.5(h)(2) of
   this chapter is entitled to receive a monthly supplemental benefit determined in
   STEP THREE of the following formula:

        STEP ONE: Determine the greater of:
           (A) the monthly retirement benefit payable to a fund member with twenty
   (20) years of service; or
           (B) the monthly retirement benefit payable to a fund member with the total
   years of service (including both active service and the period, not to exceed
   twenty (20) years, during which the member received disability benefits) and
   salary, as of the year the fund member becomes fifty-two (52) years of age, that

PLR-146617-09 3

  the fund member would have earned if the fund member had remained in active
  service until becoming fifty-two (52) years of age.
        STEP TWO: Subtract from the amount determined under STEP ONE the
  amount of any monthly benefit determined under section 13.5 of this chapter that
  the fund member is entitled to receive for the remainder of the fund member's
  life.
        STEP THREE: Determine the greater of the following:
          (A) The remainder determined under STEP TWO.
          (B) Zero (0).

  (c) A monthly supplemental benefit determined under this section is payable for
  the remainder of the fund member's life.

Section 104(a)(1) of the Internal Revenue Code (the Code) states that, “Except in the
case of amounts attributable to (and not in excess of) deductions allowed under section
213 (relating to medical, etc. expenses) for any prior taxable year, gross income does
not include--(1) Amounts received under workmen's compensation acts as
compensation for personal injuries or sickness… .”

Section 1.104-1(b) of the Income Tax Regulations states that section 104(a)(1)
excludes from gross income amounts that are received by an employee under a
workmen's compensation act or under a statute in the nature of a workmen's
compensation act that provides compensation to employees for personal injuries or
sickness incurred in the course of employment. Section 104(a)(1) also applies to
compensation which is paid under a workmen's compensation act to the survivor or
survivors of a deceased employee. However, section 104(a)(1) does not apply to a
retirement pension or annuity to the extent that it is determined by reference to the
employee's age or length of service, or the employee's prior contributions, even though
the employee's retirement is occasioned by an occupational injury or sickness.

Accordingly, based on the representations made, and authorities cited above, we
conclude as follows:

(1) Line-of-duty disability benefits paid under sections 12(g)(2) and 13.5 of Statute, as
amended by Act, to a member who suffers a disability due to a job-related illness or
injury and which are paid as lifetime disability benefits (or as a continuation to a
survivor) will not be considered gross income to the recipient under section 104(a)(1) of
the Code.

(2) The monthly-supplemental benefit paid to a member under section 23 of Statute, as
added by Act, will be considered gross income to the recipient.

No opinion is expressed or implied concerning the tax consequences under any other
provision of the Code or regulations other than those specifically stated above.
PLR-146617-09 4

These rulings are directed only to the Taxpayer who requested them. Section
6110(k)(3) of the Code provides that they may not be used or cited as precedent.

                                    Sincerely



                                    Harry Beker
                                    Chief, Health and Welfare
                                    Branch
                                    Office of Division Counsel/Associate
                                    Chief Counsel (Tax Exempt & Government
                                    Entities)