Clarence William Speer & Susan M. Speer v. Commissioner

CLARENCE WILLIAM SPEER AND SUSAN M. SPEER,
PETITIONERS v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT
Docket No. 581–12. Filed April 16, 2015.
P–H, a retired Los Angeles Police Department detective,
failed to report as gross income payments that, on his retire-
ment, he received from the department cashing out his
unused vacation time and sick leave (leave payments). Ps
argue that some portions of P–H’s unused vacation time and
sick leave accrued when he was on temporary disability leave
from the department pursuant to sec. 4.177 of the Los Angeles
Administrative Code, which, in part, provides that a tempo-
rarily disabled member of the Police Department shall receive
as temporary disability compensation ‘‘an amount equal to his
base salary’’. Ps argue that at least some portions of the leave
payments are excludable from gross income under I.R.C. sec.
104(a)(1) as amounts received under a workmen’s compensa-
tion act as compensation for personal injuries or sickness.
Held: The leave payments were not received under a work-
men’s compensation act as compensation for personal injuries
or sickness and, therefore, no portion is excludable under
I.R.C. sec. 104(a)(1).
Clarence William Speer and Susan M. Speer, pro sese.
Jonathan N. Kalinski, for respondent.
HALPERN, Judge: Respondent determined deficiencies of
$14,832 and $68,179 in petitioners’ 2008 and 2009 Federal
income tax, respectively. The only issue remaining for deci-
279
280 144 UNITED STATES TAX COURT REPORTS (279)
sion is whether petitioners may exclude from their 2009
gross income as workmen’s compensation a lump-sum pay-
ment that petitioner husband (Mr. Speer) received on
account of unused vacation time and sick leave. All other
issues have been settled or are merely computational.
Unless otherwise stated, all section references are to the
Internal Revenue Code of 1986, as amended and in effect for
2009. All dollar amounts and numbers of hours have been
rounded to the nearest dollar or whole hour.
FINDINGS OF FACT
The parties have stipulated certain facts and the authen-
ticity of certain documents. The facts stipulated are so found,
and the documents stipulated are accepted as authentic.
Petitioners resided in California when they filed the peti-
tion.
In 2009, Mr. Speer retired from his job as a detective
employed by the Los Angeles Police Department (LAPD).
During his decades-long service to the LAPD, Mr. Speer was
granted periods of temporary disability leave on account of
duty-related injuries or sickness. The first of those periods
was in 1982, and the last was in 2007. On his retirement
from the LAPD in 2009, the City of Los Angeles (City) paid
to Mr. Speer $30,773 for 541 hours of unused vacation time
and $22,740 for 800 hours of unused sick leave (together,
leave payments). The leave payments (totaling $53,513) were
included in the amount of wages reported by the City to Mr.
Speer on a 2009 Form W–2, Wage and Tax Statement. Peti-
tioners made a joint return of income for 2009 on Form 1040,
U.S. Individual Income Tax Return. They did not include the
leave payments in the income that they reported. In an
attachment to the Form 1040, petitioners explained that they
were excluding the leave payments from income on the
ground that they had been received under a workmen’s com-
pensation act. They identified Cal. Lab. Code sec. 4850 (West
2011) as a workmen’s compensation act. Cal. Lab. Code sec.
4850 provides certain police officers, firefighters, sheriff’s offi-
cers, and other personnel a leave of absence with salary for
a period of up to one year in lieu of temporary disability or
maintenance payments ordinarily payable under California’s
Workers’ Compensation Act. The parties now agree that Cal.
(279) SPEER v. COMMISSIONER 281
Lab. Code sec. 4850 was inapplicable to Mr. Speer during his
years of service with the LAPD and that when, during those
years, he was on temporary disability leave, the provision of
law governing his compensation was section 4.177 of the Los
Angeles Administrative Code (LAAC). LAAC sec. 4.177 is
entitled ‘‘Compensation to Be Paid to Members of the Fire
Department and Police Department Who Are Disabled in the
Performance of Their Duties.’’ 1 Subsection (a) thereof deals
with temporary disability and provides:
Any member of the Fire Department or Police Department who is tempo-
rarily disabled by reason of illness or injury proximately caused by,
arising out of, and in the course and scope of his employment, shall
receive as temporary disability compensation (Division IV of the Labor
Code of the State of California) an amount equal to his base salary less
the sum that would be deducted therefrom pursuant to Section 4.2014
of this Code or Charter Sections 1324, 1420, 1514, or 1614, as applicable,
if he were actively performing his duties. Provided, however, that in no
event shall any member of the Fire Department or Police Department
receive any temporary disability compensation pursuant to this sub-
section after he has been granted a pension, or for a period longer than
one (1) year. In the event that the member is temporarily disabled and
prevented by such temporary disability from returning to duty at the
expiration of one (1) year, and said member has not been granted a pen-
sion prior to that time, he shall then receive temporary disability com-
pensation at the rate provided in Division IV of the Labor Code of the
State of California.
When Mr. Speer retired in 2009, his entitlement to pay
and benefits was governed by Memorandum of Under-
standing No. 24 (MOU 24) between the City and the Los
Angeles Police Protective League. 2 MOU 24 is a collective
bargaining agreement, and the league is the recognized bar-
1 We found Los Angeles Administrative Code sec. 4.177 at http://
www.amlegal.com/library/ca/losangeles.shtml (follow ‘‘Charter and Admin-
istrative Code’’ hyperlink; then expand ‘‘ADMINISTRATIVE CODE’’ menu;
then expand ‘‘DIVISION 4 EMPLOYMENT - GENERAL’’ menu; then ex-
pand ‘‘CHAPTER 3 SALARY STANDARDIZATION FOR FIREFIGHTERS
AND POLICEMEN’’ menu; then expand ‘‘ARTICLE 6 VACATIONS,
LEAVES’’ menu; then follow ‘‘Sec. 4.177. Compensation to Be Paid to
Members of the Fire Department and Police Department Who Are Dis-
abled in the Performance of Their Duties’’ hyperlink) (last visited Mar. 1,
2015).
2 We found Memorandum of Understanding No. 24 (entered into Oct. 29,
2009) at http://cao.lacity.org/MOUs/MOU24–11.pdf (last visited Mar. 1,
2015).
282 144 UNITED STATES TAX COURT REPORTS (279)
gaining organization representing Los Angeles police officers
from the rank of police officer to lieutenant. 3 Section 7.0 of
MOU 24, entitled ‘‘Benefits’’, is divided into 18 articles.
Article 7.1 addresses vacations and vacation pay. Article
7.1.A establishes the employee’s entitlement to vacations
with full pay. Article 7.1.B establishes the right to accumu-
late unused vacation time. Article 7.1.E addresses payments
for unused vacation time on termination of service. It pro-
vides:
In the event any employee, after the completion of the employee’s initial
year of service, becomes separated from the service of the Department
by reason of resignation, discharge, retirement, death, or for any other
reason, cash payment of a sum equal to all earned, but unused vacation,
including vacation for the proportionate part of the year in which the
separation takes place, shall be made at the salary rate current at the
date of the separation to the employee * * *
Article 7.4 addresses the accrual of sick leave and establishes
the employee’s right to sick leave with full pay. Article 7.5
addresses sick leave use. Article 7.6.A addresses accumulated
sick leave, establishing the right to carry unused sick leave
over from year to year. Article 7.6.B addresses payments for
unused sick leave on termination of service. In pertinent
part, it states: ‘‘If any employee becomes separated from the
service of the Department by reasons of retirement or death,
any balance of accumulated sick leave at full pay remaining
unused at the time of separation shall be compensated to the
employee * * * by cash payment of 50% of the employee’s
salary rate current at such date of separation.’’
Amerika Tagaloa is a payroll supervisor employed by the
LAPD. Respondent called him as a witness, and he testified
as to certain aspects of the LAPD payroll system. On the
basis of his testimony, we make the following findings. Of the
541 hours of vacation time that Mr. Speer had accumulated
at the time of his retirement in 2009, 400 hours had carried
over to 2009 from 2008 and the remainder, 141 hours, was
earned in 2009. Four hundred hours of vacation time is the
maximum that an employee can carry from one year to the
next. Mr. Speer earned 96 hours of sick leave a year. The 800
hours of sick leave that he had accumulated at the time of
his retirement is the maximum balance that an employee can
3 See http://lapd.com/about/history/ (last visited Mar. 1, 2015).
(279) SPEER v. COMMISSIONER 283
accumulate. An employee is paid for any sick leave accrued
in excess of 800 hours. Mr. Speer earned vacation and sick
leave during periods of both active service and temporary
disability. While on temporary disability leave, Mr. Speer
could not take vacation time or sick leave.
OPINION
I. Introduction
Gross income means all income from whatever source
derived, including, but not limited to, compensation for serv-
ices. Sec. 61(a). Lump-sum payments received by an
employee for accrued vacation and sick leave are compensa-
tion for services and therefore gross income. See Acquisto v.
Commissioner, T.C. Memo. 1991–293 (holding lump-sum pay-
ment for unused sick leave immediately taxable in full as
compensation), aff ’d without published opinion, 972 F.2d
1349 (11th Cir. 1992); Davis v. Commissioner, T.C. Memo.
1979–478 (holding lump-sum payment for accrued annual
leave taxable in full as compensation). With an exception not
here relevant, section 104(a)(1) provides that gross income
does not include ‘‘amounts received under workmen’s com-
pensation acts as compensation for personal injuries or sick-
ness’’. Section 1.104–1(b), Income Tax Regs., provides that
the exclusion includes amounts received under ‘‘a statute in
the nature of a workmen’s compensation act’’.
California’s general scheme for workmen’s compensation is
provided by Division IV of the California Labor Code, enti-
tled ‘‘Workers’ [formerly Workmen’s] Compensation and
Insurance’’ (Workers’ Compensation Act). Cal. Lab. Code div.
4 (West 2011). LAAC sec. 4.177 discharges the obligations of
the City under the Workers’ Compensation Act to members
of its fire and police departments who are either temporarily
or permanently disabled by reason of duty-connected illness
or injury. See Radesky v. City of Los Angeles, 112 Cal. Rptr.
444, 447 (Ct. App. 1974). Cal. Lab. Code sec. 4850 provides
disability compensation similar to that provided in LAAC sec.
4.177, but, during Mr. Speer’s employment by the LAPD, it
did not apply to LAPD officers. See Cal. Lab. Code sec. 4850
(West 2003) (amended by Stats. 2009, c. 389 (A.B. 1227), sec.
1, effective in January 2010, which removed a pension
284 144 UNITED STATES TAX COURT REPORTS (279)
requirement that previously excluded LAPD officers). The
City drafted LAAC sec. 4.177 in order to provide LAPD offi-
cers and City firefighters with similar disability compensa-
tion. See Radesky, 112 Cal. Rptr. at 448. Respondent con-
cedes, and we agree, that Cal. Lab. Code sec. 4850 is a
statute in the nature of a workmen’s compensation act. See
Givens v. Commissioner, 90 T.C. 1145, 1148 n.9 (1988)
(apparently accepting that Cal. Lab. Code sec. 4850 is a
statute in the nature of a workmen’s compensation act); see
also Rev. Rul. 68–10, 1968–1 C.B. 50 (holding that payments
made under Cal. Lab. Code sec. 4850 because of an occupa-
tional injury or illness are in the nature of and in lieu of
workmen’s compensation and excludable under section
104(a)(1)). Given the similarity between Cal. Lab. Code sec.
4850 and LAAC sec. 4.177, we conclude that the latter is
equally a statute in the nature of a workmen’s compensation
act (hereafter, simply, workmen’s compensation act).
Cal. Lab. Code sec. 4850(a) entitles a covered employee to
a disability leave of absence ‘‘without loss of salary’’. That
phrase has been interpreted to mean that, during that
absence, the employee continues to accrue benefits such as
vacation time and sick leave. See Austin v. City of Santa
Monica, 44 Cal. Rptr. 857, 861 (Dist. Ct. App. 1965) (‘‘The
word ‘salary’ as used in section 4850, must be understood as
encompassing the entire compensation to which the employee
is entitled[.]’’). Given (1) the stated similarity in purpose
between LAAC sec. 4.177 and Cal. Lab. Code sec. 4850 and
(2) Mr. Tagaloa’s testimony that Mr. Speer earned vacation
time and sick leave during periods of both active service and
temporary disability, we conclude that the ‘‘amount equal to
his base salary’’ provided for in LAAC sec. 4.177 likewise
includes the accrual of vacation time and sick leave.
The question we must address is not whether Mr. Speer’s
accrual of vacation time and sick leave when he was tempo-
rarily absent from work on disability leave gave rise to
income for those years (it did not) but whether the payments
that he received on cashing out his leave balances in 2009
were received by him pursuant to a workmen’s compensation
act as compensation for personal injuries or sickness. We
agree with respondent that they were not. They are, there-
fore, not excludable from petitioners’ 2009 gross income
under section 104(a)(1).
(279) SPEER v. COMMISSIONER 285
II. The Parties’ Arguments
Petitioners’ principal argument is that, to the extent that
the leave payments can be allocated to vacation and sick
leave benefits earned while Mr. Speer was on temporary dis-
ability leave pursuant to LAAC sec. 4.177, those portions of
the leave payments must be excluded from their 2009 gross
income under section 104(a)(1) as amounts received under a
workmen’s compensation act on account of personal injuries
or sickness. 4
Respondent’s principal argument is that Mr. Speer
received the leave payments not pursuant to LAAC sec.
4.177, a workmen’s compensation act, but, rather, pursuant
to MOU 24, which is not a workmen’s compensation act.
Respondent further argues that, if the Court determines that
payments in the nature of the leave payments could have
been paid pursuant to a workmen’s compensation act (and
could, therefore, be excludable pursuant to section 104(a)(1)),
petitioners have not substantiated how many hours, if any,
were accrued during Mr. Speer’s disability leaves of absence
or, if so accrued, how many remained unused at the time of
Mr. Speer’s retirement.
III. Discussion
A. Compensation for Personal Injuries or Sickness
A plain reading of LAAC sec. 4.177 demonstrates that it
does not establish the salary of an employee (covered
employee) whose salary is continued pursuant to that provi-
sion while the employee is absent from work on a disability
leave of absence. There is little authority interpreting LAAC
sec. 4.177, but, given its similarity to Cal. Lab. Code sec.
4850, we believe that authority interpreting the latter section
may be equally applied to the former. In Campbell v. City of
Monrovia, 148 Cal. Rptr. 679, 684 (Ct. App. 1978), the court
4 On brief, petitioners apparently concede that not all of the $53,513 of
leave payments is allocable to benefits earned while Mr. Speer was on tem-
porary disability leave. They claim that 422 out of Mr. Speer’s retirement-
date balance of 541 vacation hours were earned when he was on such
leave, which they calculate results in an exclusion of $23,979. They also
claim that 207 out of his retirement-date balance of 800 sick leave hours
were earned during those leaves, which results in an exclusion of $16,925
(the two amounts totaling $40,904). Since we allow them no exclusion, we
need not be concerned with petitioners’ computations.
286 144 UNITED STATES TAX COURT REPORTS (279)
of appeal stated: ‘‘[Cal. Lab. Code sec. 4850] says no more
than that during the period of disability of a member as
defined in the section there shall be no loss of salary
(including sick leave benefits), but it does not create the
salary or any other benefit, nor purport to continue entitle-
ment to any benefit beyond the period of disability it
defines.’’ In Boyd v. City of Santa Ana, 491 P.2d 830, 832
(Cal. 1971), the Supreme Court of California held: ‘‘Payments
pursuant to section 4850 are not salary but workmen’s com-
pensation benefits.’’ It found that the purpose of the provi-
sion was to continue a covered employee’s salary during the
hiatus between the disability onset and the employee’s dis-
ability retirement (or, we assume, some other event termi-
nating his leave of absence). Id. at 832–833. Lower California
courts have made clear that payments pursuant to the provi-
sion are not remuneration for work done but, rather, indem-
nification for injury or sickness. See, e.g., Hawthorn v. City
of Beverly Hills, 245 P.2d 352, 355 (Cal. Dist. Ct. App. 1952).
That court held: ‘‘Wages and salary may, under some cir-
cumstances, be paid as compensation in lieu of the normal
temporary disability payments prescribed by the [Workmen’s
Compensation] Act. Such payments do not constitute salary
or gratuities, but are payments of compensation under the
Act.’’ Id. (fn. ref. omitted). It concluded: ‘‘The payment
required by section 4850 is not salary as such; it is com-
pensation for injury received * * *. It is in place of the
normal temporary disability allowance under * * * [the
Act].’’ Id. at 356.
During each of his disability leaves of absence, Mr. Speer
received periodic payments of his base salary and he accrued
fringe benefits, such as vacation time and sick leave, that
would translate into additional payments to him only after
his disability leave of absence ended. Indeed, if a covered
employee were to forgo the vacation time and the sick leave
accrued during a disability leave of absence (as Mr. Speer
claims he did), decades might pass until the employee retired
and cashed out the forgone benefits. Mr. Speer’s accrual of
vacation time and sick leave while on temporary disability
leave did not provide him with an immediate benefit that he
could use to support himself while on such leave. The fringe
benefit represented by the accrual was, thus, fundamentally
different from the normal temporary disability allowance
(279) SPEER v. COMMISSIONER 287
payable under the Workers’ Compensation Act and for which
the continuation of his base salary under LAAC sec. 4.177
substituted. See id. The Workers’ Compensation Act does not
provide for any payments after the period of disability ends
and, in fact, instructs that payments shall stop or be
amended upon a finding that the disability has terminated or
been diminished. See Cal. Lab. Code sec. 5803 (West 2011);
Sogov v. Indus. Accident Comm’n, 9 P.2d 592, 593 (Cal. Dist.
Ct. App. 1932) (sustaining a finding that disability termi-
nated on specified date and so compensation also terminated
as of that same date). Thus, any payments Mr. Speer
received after his temporary disability ended cannot be part
of the City’s substitute for the Workers’ Compensation Act.
Petitioners place great weight on our report in Givens v.
Commissioner, 90 T.C. 1145. In Givens, a Los Angeles
County deputy sheriff was injured in the course of his duties
and was on disability leave for more than a year. The Los
Angeles County Code set forth a workmen’s compensation
system that incorporated Cal. Lab. Code sec. 4850 for those
eligible and provided additional compensation after expira-
tion of the first year of disability. Specifically, it provided
that the deputy would receive payments out of his accumu-
lated sick leave. We held those payments to be excludable
from gross income under section 104(a)(1). Givens is distin-
guishable. In Givens, we found that the county had adopted
a comprehensive workmen’s compensation scheme incor-
porating not only the provisions of Cal. Lab. Code sec. 4850
but also sick leave provisions provided for in the Los Angeles
County Code. Petitioners have failed to show that the sick
and vacation leave cashout provisions in MOU 24 were part
of a comprehensive workmen’s compensation scheme covering
Mr. Speer.
Finally, we point out that, in determining whether income
is excludable under section 104(a)(1), the treatment of one
benefit in the nature of workmen’s compensation does not
control the treatment of a separate and distinct benefit that
may be payable under the same statutory scheme. In Allison
v. Commissioner, T.C. Memo. 1986–346, we addressed
‘‘salary continuation payments’’ made to an employee under
the Federal Employees’ Compensation Act (FECA), 5 U.S.C.
secs. 8101–8193 (1982). In addition to other payments, FECA
provides for the continuation of an employee’s salary for a
288 144 UNITED STATES TAX COURT REPORTS (279)
period of 45 days commencing on the date the employee files
a claim involving an occupational injury. FECA appeared to
us to be a statute in the nature of a workmen’s compensation
act, but we found the payments at issue to be for the delay
that usually preceded the commencement of disability pay-
ments and not for the disability itself. We held the payments
did not qualify for exclusion from the taxpayer’s gross income
pursuant to section 104(a)(1). Likewise, we conclude that the
leave payments, which compensated Mr. Speer for his failure
to take the vacation with pay that he had earned or the sick
leave that similarly he had earned (even if in part traceable
to benefits accrued during periods of disability leaves of
absence), were not paid as workmen’s compensation under
the Workers’ Compensation Act and are not excludable from
petitioners’ gross income pursuant to section 104(a)(1).
B. Substantiation
Even were we to hold that lump-sum payments for unused
vacation and sick leave accrued by an employee pursuant to
MOU 24 could be payments under a workmen’s compensa-
tion act for personal injuries or sickness, petitioners have
failed to show how many hours, if any, Mr. Speer accumu-
lated during his disability leaves of absence and how many
of those hours remained when he retired in 2009.
Petitioners argue that at least a portion of the 541 hours
of unused vacation leave and a portion of the 800 hours of
unused sick leave Mr. Speer had when he retired were
accrued during his disability leaves of absence. Petitioners
have not presented any evidence that clearly shows how
many hours, if any, he accrued during those absences. Offi-
cers are limited to 800 hours of sick leave and are paid for
any additional accrued sick leave. In order to determine
whether on retirement Mr. Speer had accrued but unused
leave from periods of temporary disability we would need to
know his entire sick leave history. The record is devoid of
this information, and it is therefore impossible to determine
whether any of the 800 hours were accrued during periods of
disability leave.
Petitioners similarly cannot demonstrate that any of the
541 hours of unused vacation leave were accrued during his
leaves of absence. Officers are limited to banking 200 hours
of vacation leave per year and a total of 400. Mr. Speer had
(279) SPEER v. COMMISSIONER 289
541 hours of vacation leave at retirement because he had not
yet lost vacation leave accrued during 2009. Just as with the
sick leave, we would need to know Mr. Speer’s vacation his-
tory in order to determine whether any of the unused leave
was accrued during his leaves of absence. Again, the record
does not contain this information. 5
5 In their seriatim reply brief, petitioners ask that we reopen the record
and accord them additional trial time to offer evidence obtained from the
LAPD concerning Mr. Speer’s accumulation of vacation time and sick
leave. At trial, petitioners offered a document (Exhibit 5–P) that Mr. Speer
stated he received from the LAPD showing periods of disability, vacation
hours earned during those periods, and sick time accrued during various
years. In offering Exhibit 5–P, Mr. Speer conceded: ‘‘I’m not sure, to be
honest, that it’s accurate for the amount of time.’’ We sustained respond-
ent’s objection to the exhibit on evidentiary grounds (lack of a showing of
authenticity and inadmissible hearsay) and on the grounds that it had
been neither stipulated nor provided to respondent 14 days in advance of
trial, as provided for by our standing pretrial order (so that respondent
would have time to investigate it). Petitioners again ask us to receive Ex-
hibit 5–P and also an exhibit (Exhibit 1) that they attached to their seri-
atim opening brief but that we detached and returned to them as an im-
proper document in the nature of evidence. Petitioners describe Exhibit 1
in that brief as containing ‘‘a letter from Laura Luna, police administrator,
and charts reflecting sick time and vacation time accrued while petitioner,
Mr. Speer, was on disability during various periods from 1982 through
2007 and paid to petitioner, Mr. Speer, upon his retirement in 2009.’’
Petitioners filed the petition on January 6, 2012. Before we conducted
the trial on February 3, 2014, the case was set for trial three times and
continued three times, each time, it appears, at petitioners’ request, once
so petitioners could undertake prescheduled travel on account of the birth
of a grandchild. At no point before the trial did petitioners indicate to the
Court any difficulty in obtaining evidence to support their case. While peti-
tioners appear pro sese, we think that their lack of demonstrated diligence
in obtaining from the LAPD what evidently they think are important docu-
ments argues against our opening the record and burdening respondent
with additional investigation and another trial session. See, e.g., Haydon
v. Commissioner, T.C. Memo. 1991–42 (denying motion for reconsideration
and declining to accept new evidence where taxpayers made no showing
of due diligence or explained why documents could not have been obtained
earlier). We will not open the record as petitioners requested.
290 144 UNITED STATES TAX COURT REPORTS (279)
IV. Conclusion
Respondent’s adjustment, including in petitioners’ 2009
gross income the leave payments, is sustained.
Decision will be entered under Rule 155.
f