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