Gerard Dowling, a NYC Transit Police sergeant, received full salary while out on sick leave in 1990 for two service-connected injuries. Can that sick pay be excluded from his federal and New York taxable income as "workmen's compensation" under IRC section 104(a)(1), given that his union's collective bargaining agreement (not a formal statute) is what actually spells out the sick-pay entitlement?

Plain-English summary

Gerard J. Dowling was a sergeant with the New York City Transit Police Department. During 1990 he was out on the Department's sick list for service-connected injuries during two separate stretches: January 22 to April 8, and October 12 to December 31. He asked the Department whether that sick pay could be excluded from his taxable income as "workmen's compensation" under IRC § 104(a)(1) - a provision that excludes from gross income amounts received under a workmen's compensation act, or a statute in the nature of one.

The catch is that Dowling's entitlement to full salary while out on line-of-duty sick leave doesn't come from an ordinary standalone statute - it comes from Public Authorities Law § 1204-c combined with his union's (the Sergeants' Benevolent Association's) collective bargaining agreement, which a Department Operations Order said should be treated as excludable "sick exclusion" pay under IRS Revenue Ruling 83-77. That combination mattered a great deal, because the case law draws a sharp line: payments made under a genuine statute or regulation with the force of law can qualify for the § 104(a)(1) exclusion (as in Dyer v. Commissioner, where NYC Board of Education sick-leave regulations qualified), but payments made under a mere labor contract do not, because a labor contract is "modifiable at any time" and isn't a statute even when the employer is a public agency (Rutter v. Commissioner, involving an NYPD officer's sick leave under a union contract; and Revenue Ruling 83-77 itself, which held that a PBA-City union contract wasn't a "statute" either).

The Department found that Dowling's situation was different from Rutter, and closer to Revenue Ruling 81-47, where a county law required collective bargaining agreements to be adopted by legislative act and incorporated by reference into the county code - which gave those agreements the force of law. Here, Public Authorities Law § 1204-c itself provides that a Transit Authority police sergeant is entitled to full salary during a line-of-duty incapacity, but only once a collective bargaining agreement granting that entitlement has been executed between the Authority and the union - and that the entitlement commences on the date that agreement is executed. Because the statute itself incorporates the collective bargaining agreement's terms and conditions its very existence on execution of that agreement, the Department held that § 1204-c is "a statute in the nature of a workmen's compensation act." That means Dowling's line-of-duty sick pay is excludable from federal gross income under § 104(a)(1), and correspondingly excludable from New York adjusted gross income (since Tax Law §§ 611 and 612 build New York taxable income from federal adjusted gross income, with no modification adding back § 104(a)(1)-excluded amounts) - but only starting on the date in 1990 that the Sergeants' Benevolent Association's collective bargaining agreement was actually executed. Pay received for a line-of-duty injury before that execution date remains fully taxable. The opinion doesn't state the exact execution date, so Dowling's own two 1990 sick-leave stretches may straddle the cutoff, with only the portion after execution date qualifying for the exclusion.

What this means for you

Transit Police, NYPD, and other public-safety union members on line-of-duty sick leave

Whether your line-of-duty sick pay is tax-excludable under IRC § 104(a)(1) doesn't just depend on whether you're a public employee - it depends on the precise legal mechanism behind your paycheck. If your entitlement rests on a bare collective bargaining agreement or union contract, case law (Rutter, Revenue Ruling 83-77) says it generally does not qualify, no matter how public your employer is. If, like the Transit Police Sergeants' Benevolent Association here, your union's agreement has been incorporated into an actual statute (here, Public Authorities Law § 1204-c), the exclusion can apply - but only from the date that specific agreement was executed, not retroactively to when you started the job or when your sick leave began.

Accountants and payroll administrators for public-safety unions

When advising a client on excluding line-of-duty sick pay, don't assume a favorable answer for one union or bargaining unit automatically extends to another, or to periods before their particular contract was signed. This opinion turned entirely on the specific statutory language of Public Authorities Law § 1204-c and the execution date of the Sergeants' Benevolent Association's specific agreement - other bargaining units under the same operations order (Order No. 50) may have different execution dates, and pay received before execution is fully taxable even for the same employee, potentially splitting a single sick-leave period into taxable and excludable portions.

Anyone comparing this to a plain union-contract situation

This ruling should not be read to say all public-employee union contracts create excludable "workmen's compensation" pay. The opinion is explicit that a labor contract by itself - even between a city and a police or fire union - is not a "statute" for this purpose. What made the difference here is that the New York Legislature wrote the collective-bargaining-based entitlement directly into Public Authorities Law § 1204-c, giving it the force and effect of law in a way an ordinary labor contract lacks.

Common questions

Q: Why does it matter whether the sick pay comes from a "statute" versus a "labor contract"?
A: IRC § 104(a)(1) and Treas. Reg. § 1.104-1(b) only exclude amounts received under a workmen's compensation act or "a statute in the nature of" one. Courts have read "statute" broadly enough to include agency regulations with the force of law (Dyer v. Commissioner), but not bare labor contracts, because a labor contract is just an agreement between union and employer that's "modifiable at any time" (Rutter v. Commissioner) - even when the employer is a government entity.

Q: How is Dowling's situation different from Rutter, where an NYPD officer's union-contract sick pay was NOT excludable?
A: In Rutter, the officer's sick-leave entitlement came only from a labor contract with no independent statutory backing. Here, Public Authorities Law § 1204-c itself creates the sick-pay entitlement and expressly ties it to - and conditions it on - execution of a collective bargaining agreement, with the statute specifying that the entitlement commences on the date of execution. That legislative incorporation gave the arrangement the force and effect of law, similar to Revenue Ruling 81-47, where a county law required collective bargaining agreements to be adopted by legislative act and incorporated into the county code.

Q: From what date is Dowling's sick pay actually excludable?
A: Starting on the date the Sergeants' Benevolent Association's collective bargaining agreement was executed in 1990. The Department Operations Order listed the order's effective date for SBA members simply as "March 1990," but the ruling itself doesn't state the precise execution date of the underlying agreement, and holds that pay received before that execution date - even for a line-of-duty injury - is not excludable.

Q: Does New York State follow the same exclusion as the IRS?
A: Yes. Tax Law § 611 defines New York taxable income starting from New York adjusted gross income, and Tax Law § 612 defines New York adjusted gross income as federal adjusted gross income with only specified modifications - none of which add back amounts excluded from federal gross income under IRC § 104(a)(1). So whatever is excludable federally under § 104(a)(1) is automatically excludable for New York purposes too, with no separate New York analysis required.

Q: Does this exclusion apply to police officers generally, or just NYC Transit Police sergeants?
A: This particular opinion is limited to Public Authorities Law § 1204-c, which governs New York City Transit Authority police officers, detectives, sergeants, and higher ranks. Other public-safety employees would need their own statute (not just a labor contract) incorporating their collective bargaining agreement's sick-pay terms to qualify under the same reasoning - as the ruling shows with Rutter and Revenue Ruling 83-77, a comparable NYPD union contract without that statutory incorporation did not qualify.

Citations and references

• Public Authorities Law § 1204-c - entitles NYC Transit Authority police officers, detectives, and sergeants to full salary during line-of-duty incapacity, but only once a collective bargaining agreement granting that entitlement has been executed, with entitlement commencing on the execution date
• IRC § 61(a) - gross income includes all income from whatever source derived
• IRC § 104(a)(1) - excludes from gross income amounts received under workmen's compensation acts for personal injury or sickness
• Treas. Reg. § 1.104-1(b) - requires payment under a workmen's compensation act or a statute in the nature of one
• Tax Law § 611 - defines New York taxable income of a resident individual
• Tax Law § 612 - defines New York adjusted gross income starting from federal adjusted gross income, with no add-back for § 104(a)(1)-excluded amounts
• Dyer v Commissioner, 71 TC 560 (1979) - NYC Board of Education sick-leave regulations had the force and effect of law and qualified as a "statute"
• Rutter v Commissioner, 760 F2d 466 (2d Cir 1985), cert denied 474 US 848 (1985) - an NYPD officer's line-of-duty sick pay under a mere labor contract did not qualify, because a labor contract is modifiable at any time and is not a statute even with a public employer
• Rev Rul 83-77, 1983-1 CB 37 - a union contract between NYC and the Patrolmen's Benevolent Association is not a "statute" for § 104(a)(1) purposes
• Rev Rul 81-47, 1981-1 CB 55 - where county law required collective bargaining agreements to be adopted by legislative act and incorporated by reference into the county code, the agreement has the force of law and is a "statute"
• IRS Ltr Rul 9031017 (August 3, 1990) - payments must be paid pursuant to a "statute" to qualify for the § 104(a)(1) exclusion

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a92_12i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-92 (12) I
Income Tax
December 15, 1992

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I920910A

On September 10, 1992, a Petition for Advisory Opinion was received from
Gerard J. Dowling, Box 623 RD #1 McVeigh Road, New Hampton, New York 10958.
The issue raised by Petitioner, Gerard J. Dowling, is whether pay received
by him for an injury incurred in the line of duty may be treated as workman's
compensation pursuant to section 104(a)(1) of the Internal Revenue Code
(hereinafter "IRC").
During taxable year 1990, Petitioner was a sergeant with the New York City
Transit Police Department (hereinafter "Department". For the periods January 22,
1990 to April 8, 1990 and October 12, 1990 to December 31, 1990 Petitioner was
on the Department sick list for service connected injuries.
The Department Operations Order Number 50, dated December 19, 1990 states
that:
Section 1204-c of the Public Authorities Law, combined with the
current collective bargaining agreements, provides a statutory basis
for members of the force in all ranks to treat pay received while on
sick leave as the result of a line of duty illness or injury as
compensation in lieu of salary also referred to as "sick exclusion"
pay by IRS Revenue Ruling 83-77 which interprets Internal Revenue
Code Section 104(a)(1).
The provisions of this order become effective as follows:
. . .

• Sergeants' Benevolent Association

-

March 1990

... (Emphasis added.)
Section 1204-c of the Public Authorities Law states that

1. A member of the New York city transit authority police
   force in the rank of police officer or a member of such force who is
   detailed or designated as a detective or who holds the position of
   sergeant or any position of higher rank, shall be entitled pursuant
   to this section to the full amount of his or her regular salary for
   the period of any incapacity due to illness or injury incurred in
   the performance and discharge of duty as a member of the force, as
   determined by the authority, only in the event that a collective
   bargaining agreement granting such entitlement pursuant to this
   section has been entered into by the authority and the certified
   employee organization representing such member. The first
   entitlement of any such member of the New York city transit
   authority police force to the full amount of regular salary under

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Income Tax
December 15, 1992

this section shall commence on the date of execution of the
collective bargaining agreement providing for such entitlement with
respect to such member .... (Emphasis added.)
Section 61(a) of the IRC provides that, except as otherwise provided by
law, gross income includes all income from whatever source derived.
Section 104(a)(1) of the IRC provides, with exceptions not pertinent here,
that gross income does not include amounts received under workmen's compensation
acts as compensation for personal injuries or sickness.
Section 1.104-1(b) of the Treasury Income Tax Regulations provides that
section 104(a)(1) of the IRC excludes from gross income amounts received under
a workmen's compensation act or 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.
Thus, a prerequisite to the exctudibility of payments under section
104(a)(1) of the IRC is that the payments be paid pursuant to a "statute".
(IRS Ltr Rul 9031017, August 3, 1990.)
Interpretation of the term "statute" for purposes of section 104(a)(1) of
the IRC has not limited that term to state or federal statutes or city
ordinances.
For example, in Dyer v Commissioner, 71 TC 560, 562 (1979), a
teacher received sick leave payments pursuant to regulations of the Board of
Education of the City of New York. Reasoning that the regulations had the force
and effect of law, the Tax Court found that the payments were made pursuant to
a "statute" for purposes of section 104(a)(1) of the IRC.
However, in Rutter v Commissioner, 760 F2d 466, 468 (2d Cir 1985), cert den
474 US 848 (1985), payments received pursuant to a labor contract by a New York
City police officer while on sick leave as a result of injury received in the
line of duty were not excludible from the officer's gross income under section
104(a)(1) of the IRC. The Court distinguished payments made pursuant to a labor
contract from those made pursuant to a "statute":
A regulation, like a statute, is a rule of general applicability
promulgated by a public agency to govern conduct within the agency's
jurisdiction. A labor contract, unlike a statute, is an agreement between union
and employer, modifiable at any time.
That this particular labor contract
involved a public employer is irrelevant to the legislative purposes behind the
workmen's compensation exclusion, and does not convert the contract into a
"statute" ....
Similarly, Revenue Ruling 83-77, 1983-1 CB 37, concluded that a union
contract does not qualify as a "statute". The ruling holds that a disabled police
officer employed by the City of New York may not exclude from gross income, under
section 104(a)(1) of the IRC, any payments received under the terms of a union
contract between the City and the Patrolmen's Benevolent Association.
Where county law provides that all collective bargaining agreements entered
into by the county shall be adopted and approved by legislative acts of the
county council and that such agreements are incorporated by reference into the
county code, payments made to disabled police officers under the agreements may

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Income Tax
December 15, 1992

be excludible from gross income under section 104(a)(1) of the IRC. Under these
circumstances, the collective bargaining agreement has the force and effect of
law and, therefore, is considered a "statute" for purposes of section 104(a)(1)
of the IRC. (Rev Rul 81-47, 1981-1 CB 55.)
Herein, the collective bargaining agreement with the Sergeants' Benevolent
Association has been incorporated into section 1204-c of the Public Authorities
Law. Such statute is 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.
Therefore, commencing on the date of the execution of the Sergeants'
Benevolent Association collective bargaining agreement, Petitioner's pay for the
period of incapacity due to a line of duty injury, is excluded from Federal gross
income pursuant to section 104(a)(1) of the IRC.
Section 611 of the Tax Law provides that New York taxable income of a
resident individual is his New York adjusted gross income less his New York
deduction and New York exemptions.
Section 612 of the Tax Law provides that the
New York adjusted gross income of a resident individual means his federal
adjusted gross income as defined in the Laws of the United States for the taxable
year, modified as required by such section. There is no modification in section
612 of the Tax Law with respect to income that is exempt from Federal gross
income and Federal adjusted gross income pursuant to section 104(a)(1) of the
IRC.
Accordingly, with respect to the periods from January 22, 1990 to April 8,
1990 and October 12, 1990 to December 31, 1990 during which Petitioner was on
sick leave as the result of line of duty injuries, Petitioner may exclude from
his New York adjusted gross income, in accordance with Section 612 of the Tax Law
and section 104(a)(1) of the IRC, that portion of his pay received for such
periods starting on the date the Sergeant's Benevolent Association collective
bargaining agreement was executed in 1990. The pay Petitioner received for a
line of duty injury for the period prior to the date in 1990 that the collective
bargaining agreement was executed, may not be excluded from New York adjusted
gross income.

DATED: December 15, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.