Certain payments may seem like WC, but in reality, are not. For example, Morris, (1987) TC Memo 1987-7, 87007 said that payments to a disabled worker while performing light duty were not excludable--they are considered regular salary. In another case (Blackburn, (1950) 15 TC 336), continuation of a highway patrolman’s salary was compensation for the hazardous nature of his work, not for his injury--the compensation was taxable. Pagliano (1994) TC Memo 1994-506 found that interest on a WC award to compensate for delay of payment was not excludable. However, in another case, (Brabson) a District Court (Colorado) ruled that prejudgment interest was tied to the concept of fault, and therefore, was excludable as part of damages. The Tenth Circuit Court of Appeals reversed this decision. (Brabson, (CA10 1/11/96))

When benefits are computed based on an employee’s length of service or age rather than on injury, they are not excludable. A firefighter’s disability pension that converted to normal retirement benefits after 25 years of service lost its character as WC at the time of conversion. Reason: At that time, the payments were based on length of service and were considered retirement benefits. (Wiedmater (1984) TC Memo 1987-540) and Picard v. Comm. (CA9, 1/26/99) 83 AFTR 2d 99-616)

The Tax Court properly determined that disability retirement payments received by a former county sheriff's department employee who retired with “service-connected” disability didn't qualify for Code Sec. 104(a)(1) income exclusion to the extent the payments exceeded the amount he would have received based solely on disability. Although California’s statute authorizing payments was in the nature of a worker’s compensation act, the amount in dispute/“additional amount” was determined by length of service and thus subject to tax under Reg. § 1.104-1(b)'s limitation. (Sewards v. Comm., CA 9, 115 AFTR 2d ¶2015-733)

In a private letter ruling (PLR), IRS has concluded that, where a plan for state employees qualifies as a worker’s compensation plan for federal tax purposes, a payment from the plan, that is made pursuant to a domestic relations order to the ex-spouse of a state employee who was disabled on the job, does not qualify for exclusion from gross income (PLR 201521009).

It is not uncommon for protective services personnel benefits to first be paid as retirement payments and then subsequently after board hearings, legal action, etc., be ruled as worker’s compensation. Generally, in those cases the retirement income is repaid, and worker’s compensation paid. The repayment of the retirement benefit paid in a prior year gives rise to a “claim of right” deduction or credit (see chapter 9.05).

California conforms to the Federal treatment. Where the payments are made from the State’s Public Employees’ Retirement System (PERS), no 1099R will be issued for the excludable amounts. Generally, if there is a 1099 issued, the income is taxable.