Sewards v. CIR, No. 12-72985 (9th Cir. 2015)
Annotate this CaseJay Sewards, a former employee of the Sheriff's Department, was entitled to receive a disability pension equal to one-half his previous salary. Because Sewards completed 34 years of service, he received an additional amount to bring his pension up to what he would have received as a service pension. At issue was whether the additional amount is taxable under the Internal Revenue Code. The Tax Court rejected Sewards' argument that the entire amount of the retirement allowance may be excluded from taxation because it is a worker's compensation program pursuant to 26 U.S.C. 104(a)(1). The court affirmed the Tax Court's conclusion that the portion of Sewards’s retirement allowance exceeding what he would have received solely based on disability is subject to taxation. In this case, Sewards had completed 34 years of service and received additional amounts so that his service-connected disability pension was the same as what he would have received as a service pension. Those additional amounts were paid not based on his injuries, but based on his years of service, and thus were not excludable.
Court Description: Tax. The panel affirmed the Tax Court’s denial of a petition for redetermination of a 2006 federal income tax deficiency based on the failure to report disability retirement payments. Income is excluded from taxation under 26 U.S.C. § 104(a)(1) if it is received under workmen’s compensation acts as compensation for personal injuries or sickness. Taxpayer retired due to a service-connected disability and received a disability pension equal to one-half his previous salary. Based on his years of service, he received an additional amount to bring his pension up to what he would have received as a service pension. The panel held that this additional amount was taxable because it was paid not based on taxpayer’s injuries, but based on his years of service.
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