AELE LAW LIBRARY OF CASE SUMMARIES:
Employment & Labor Law for Public Safety Agencies
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Taxation
A state corrections employee who claimed that he had been improperly terminated was awarded a lump sum back pay and lost benefits award of almost $500,000 along with reinstatement, which resulted in him incurring increased income tax liability. The state personnel board denied his motion for recovery for increased tax liability, a result upheld by the trial court. He appealed, claiming that awarding him such relief was consistent with the remedial statutory purpose of Government Code section 19584,2 of making an improperly terminated employee whole by restoring the employee to the financial position he or she would otherwise have occupied had employment not been wrongfully interrupted. An intermediate California state appeals court rejected this argument, ruling that he was not entitled to increased tax liability recovery because such relief was not statutorily authorized. Barber v. Calif. State Personnel Bd., #E068719, 35 Cal. App. 5th 500, 2019 Cal. App. Lexis 457, 2019 WL 2150925.
After a man retired from the U.S. Marshals, his home state of West Virginia imposed state income taxes on his federal pension benefits, as it does on all former federal employees. Pension benefits of certain former state and local law enforcement employees, however, are exempt from state taxation under a West Virginia statute. The retired Marshal argued that the state statute violates the intergovernmental tax immunity doctrine of 4 U.S.C. 111, under which the United States consents to state taxation of the pay or compensation of federal employees, only if the state tax does not discriminate on the basis of the source of the pay or compensation. The West Virginia Supreme Court of Appeals rejected this argument, but a unanimous U.S. Supreme Court reversed. A state violates section 111 when it treats retired state employees more favorably than retired federal employees and no significant differences between the two classes justify the differential treatment. West Virginia expressly affords state law enforcement retirees a tax benefit that federal law enforcement retirees cannot receive. The state’s interest in adopting the discriminatory tax is irrelevant, the Court stated. The Court noted that the West Virginia statute does not draw lines involving job responsibilities and that the state courts agreed that there are no “significant differences” between the retired Marshal’s former job responsibilities and those of the tax-exempt state law enforcement retirees. Dawson v. Steager, #17-419, 203 L. Ed. 2d 29, 2019 U.S. Lexis 1349, 2019 WL 691579.
A former employee of a Sheriff's
Department was entitled to receive a disability pension of half his prior
salary. Based on his 34 years of service, he was receiving an additional amount
increasing his pension to the amount he would have received as a service
pension. The IRS rejected his argument that the entire amount of his retirement
allowance should be regarded as excluded from taxation because it was a
workers' compensation program. The Tax Court and a federal appeals court held
that the additional amount of his retirement allowance exceeding what he would
have received based solely on his disability was taxable. The additional
amounts were not paid on the basis of his injuries, but solely on the basis of
his years of service, and therefore were taxable. Sewards v. CIR, #12-72985, ,
2015 U.S. App. Lexis 7821 (9th Cir.).
A former state employee
was awarded back and front pay in a successful Title VII wrongful termination
lawsuit. He claimed that he had been fired in unlawful retaliation for cooperating
in an investigation of race discrimination by his supervisors. The state
deducted state and federal income taxes and Federal Insurance Contributions Act
(FICA) from the amounts awarded and only paid him the remainder of the awards,
reasoning that the amounts awarded constituted taxable wages. A federal appeals
court agreed, finding that the amounts awarded were subjected to withholding.
It overturned a trial court decision that the awards were not subject to
withholding. It also ordered the former employee to repay to the state the
amounts previously withheld, which had been repaid to him after the trial
court's ruling. Noel v. N.Y. State Office of Mental Health Central N.Y.
Psychiatric Center, #10–3483, 2012 U.S. App. Lexis 18526 (2nd Cir.).
Injured firefighter must pay taxes
on the gross income that he received from the city while home for two years,
because under the collective bargaining agreement he remained on full payroll.
Bayse v. Commissioner of Internal Revenue, #2010-118, #22322-09S, 2010 Tax Ct.
Summary Lexis 142 (Unpub. U.S. Tax Court).
Federal appeals panel upholds a post-trial motion to
augment a backpay award to offset the negative tax consequences a litigant
would incur from receiving a lump-sum back pay award. The ruling follows a
similar 10th Circuit decision but is contra to a holding in the D.C. Circuit.
Eshelman v. Agere Systems, #05-4895, 2009 U.S. App. Lexis 1947 (3d Cir.).
Although a reinstated
federal employee might have increased tax liability because his back pay award
was lumped with medical expenses, the combined award was reported on his W-2
was not retaliatory action. because the BoP management acted in compliance with
the EEOC order. McDonald v. Gonzales (Fed. Bur. Prisons), #7:05-CV-55, 2007
U.S. Dist. Lexis 21720 (N.D.N.Y.).
Federal appeals court holds that a whistleblower
who won $70,000 in her suit against the New York Air National Guard was
entitled to a refund of the federal income tax she paid on compensatory damages
awarded by the Labor Dept. Murphy v. Internal Revenue Serv., #05-5139, 460 F.3d
79, 2006 U.S. App. Lexis 21401 (D.C. Cir. 2006). {N/R}
Federal appeals court sides with the plaintiff,
ruling that damages for emotional distress and other intangible injuries are
not taxable income. The plaintiff paid federal taxes on a $70,000 judgment for
emotional distress and injury to reputation following a 1994 whistleblower case
against the New York Air National Guard. Murphy v. IRS, #05-5139, 2006 U.S.
App. Lexis 21401 (D.C. Cir 2006). {N/R}
Federal court in Pennsylvania holds that
settlements under the FMLA are not wages, and are not subject to income taxes.
Carr v. Fresenius Medical Care, #05-2228, 2006 U.S. Dist. Lexis 29627 (E.D. Pa.
2006). {N/R}
A N.Y. City requirement that city workers who
live outside the city limits must pay a city earnings tax on all income, as if
they were residents, is valid. Fleming v. Giuliani, #2004-175, 3 N.Y.3d 544,
821 N.E.2d 959 (2004; rptd. 2005). {N/R}
Section 703 of the American Jobs Creation Act of
2004 wipes out the double taxation of attorney contingency fees. In the past,
both the lawyer and a successful plaintiff paid income taxes on that portion of
a damage award which is recovered by the lawyer. Whistleblowers and victims of
workplace discrimination will benefit from the change. The amendment does not
affect cases that were pending before the law took effect. H.R.4520. {N/R}
Federal court holds that New York City can
require city employees who live outside the city limit to make a differential
payment to equalize the amount of municipal personal income taxes that would be
due if had they resided in the city. PBA of the City of N.Y. v. City of New
York, #02-CV-3976, 2004 U.S. Dist. Lexis 18172 (S.D.N.Y 2004). {N/R}
National Guard and reserve members now may take
an above-the-line deduction for overnight travel expenses, provided the
destination is at least more than 100 miles from their primary residence.
Military Family Tax Relief Act of 2003, Pub. Law No. 108-121. {N/R}
State prison guard who was injured while
restraining an inmate, sued for lost wages. His front and back pay awards are
taxable under sec. 104 of the IRC, because the awards were not paid to
compensate him for the injury itself. Johnson v. U.S., #02-1330, 2003 U.S. App.
Lexis 18733 (unpubl. 10th Cir. 2003). {N/R}
Effective Jan. 1, 2003, the optional standard
mileage rate for taxpayers to use in deducting vehicle costs will decrease from
36.5 cents a mile to 36.0 cents a mile, due to lower gasoline prices in the
past year. IRS Rev. Proc. 2002-61 (Sep. 18, 2002). {N/R}
IRS ruling provides that N.Y.C. accidental death
benefits payable to a spouse are not includible in the gross estate of a police
officer or firefighter because they are payable pursuant to state laws, do not
represent the value of contributions to a pension fund, and the deceased had no
interest in them at the time of death. Rev. Rul. 2002-39, Internal Revenue
Bulletin 2002-27. {N/R}
Police association was liable for unrelated
business income taxes for "royalty" received from the publication of
"The Arkansas Trooper," even though the parties labeled their
agreement a "Royalties and Licensing Agreement." Arkansas State
Police Assn. v. Cmsnr. of Internal Rev., #01-2255, 282 F.3d 556, 2002 U.S. App.
Lexis 3480 (8th Cir. 2002). [N/R]
Where statutory attorney's fees are awarded to
the prevailing party and not directly to the lawyer, the litigant is liable for
the payment of income taxes on that award. Sinyard v. C.I.R., #99-71369, 268
F.3d 756, 2001 U.S. App. Lexis 20886 (9th Cir. 2001). [N/R]
A successful plaintiff in a federal age
discrimination lawsuit is responsible for paying taxes on the amount of
attorney's fees awarded. Sinyard v. Cmsnr. Internal Rev., #99-71369, 268 F.3d
756, 86 FEP Cases (BNA) 1417, 2001 U.S. App. Lexis 20886 (9th Cir.); affirming
T.C. Memo 1998-364, 1998 Tax Ct. Memo Lexis 365 (Tax Ct. 1998). {N/R}
A state income tax law that taxes mandatory
contributions by federal employees, but does not tax similar contributions of
state and local employees does not violate the federal law prohibiting
discriminatory taxation against federal workers, 4 U.S. Code §111. Kerr v.
Killian, #1-CA-TX-00-0023, 32 P.3d 408, 2001 Ariz. App. Lexis 122 (Ariz. App.
2001). {N/R}
Federal Tax Court rules that loans from a
governmental retirement system are not a “return of contributions” to the plan.
Loans over $50,000 or those not repaid in 5 years are taxable distributions.
Campbell v. Cmsnr. Int. Rev., #3826-00, T.C. Memo 2001-118, 2001 Tax Ct. Memo
Lexis 144, 81 T.C.M. (CCH) 1641, 39 (1914) G.E.R.R. (BNA) 655 (Tax Court,
2001). [2001 FP 124-5]
Volunteer fire company's placement of tip jars in
local taverns were not sufficiently extensive to constitute a “trade or
business” so as to make the income taxable. Vigilant Hose Co. of Emmitsburg v.
U.S. (D.Md.). {N/R}
A full-time city police officer who performed
security services for a school district should have paid self-employment income
taxes on the $2,198 he received from the school, despite his argument that he
performed the services as a city employee. Milian v. Cmsnr. Int. Rev., T.C.
Memo. 1999-366, 1999 Tax Ct. Memo Lexis 421, 78 T.C.M. (CCH) 738 (U.S.Tax.Ct.
1999). {N/R}
A city may levy a special assessment for fire
protection, but can't do so for Emergency Medical Services, as they provide no
specific benefit to taxpayers' property. SMM Properties. v. City of North
Lauderdale, 760 So.2d 998 (Fla.App. 2000).{N/R}
U.S. Supreme Court rules that punitive damage
awards are taxable income. O'Gilvie v. U.S., #95-966, 117 S.Ct. 452 (1996).
[1997 FP 29]
IRS P.L. Ruling classifies health insurance
benefits provided for the "domestic partners" of employees as taxable
income. I.R.S. Private Ruling 9603011, 1995 PRL Lexis 1846. [1996 FP 93]
GSA and IRS amend regulations to increase
expenses allowable without receipts from $25 to $75. IRS Notice 95-50 and
G.S.A. Federal Travel Regulation, 60 FR 62332 (1995); 33 (1644) G.E.R.R. (BNA)
1545. [1996 FP 46]
Federal court issues opinion on taxability of
pensions received by disabled fire and police officers. Stanley v. U.S., 1995
U.S. Dist. Lexis 5894 (D.Colo.). {N/R}
Supreme Court rules that damages recovered for
age discrimination claims constitute taxable income under Int. Rev. Code Sec.
104(a)(2). Cmsnr. Int. Rev. v. Schleier, 115 S.Ct. 2159 (1995). {N/R}
Seventh Circuit holds that back pay and
liquidated damages do not compensate for intangible elements of a personal
injury claim and are taxable income. Downey v. Cmsnr. Internal Revenue, 63 LW
2141 (7th Cir. 1994), citing U.S. v. Burke, 112 S.Ct. 1867 (1992). Burke held
that Title VII awards are taxable. The Ninth and Sixth Circuits have ruled the
exact opposite; see Schmitz v. Cmsnr., 63 LW 2142 (9th Cir. 1994) and Horton v.
Cmsnr., 63 LW 2142 (6th Cir. 1994). {N/R}
State may lawfully exempt police and fire
retirement payments from income tax, while partially taxing military and other
state pensions. Brown v. Mierkle, 443 S.E.2d 462 (W.Va. 1994). [1994 FP 158]
U.S. Supreme Court holds that Title VII back pay
awards are taxable. U.S. v. Burke, 112 S.Ct. 1867 (1992). [1992 FP 125-6]
Extra pension benefits awarded retired state
employees did not violate Davis v. Michigan, even though the increase was
motivated by that decision which forced states to tax their retired employees
pensions. Although the raise "perpetuated" the discrimination, it was
not illegal to do so. Ragsdale v. Dept. of Revenue, Ore. Tax Ct. #3535, 1994
(149) D.Lab.Rep. (BNA) A-19.
Age discrimination damages are not taxable under
Internal Revenue Code. 1991 Master Tax Guide (CCH) 181 (¶ 702).
New federal tax law now includes as taxable
income, all damages and settlements that are not related to "physical
injury or sickness." 26 U.S. Code Sec. 104(a) Pub. Law 101-239.
I.R.S. disavows intent to tax unused vacation or
comp time as "deferred compensation." See 102 STAT. 3701-2; P.L.
100-647, Sec. 6064 [amending 26 U.S. Code Sec. 457, the Tax Reform Act of
1986].
Supreme Court rules that federal government
retirees must receive the same state income tax benefits allowed state
government retirees. Davis v. Michigan, 489 U.S. 804 (1991).
Troopers required to eat at certain restaurants
could deduct the cost of meals as a business expense. In re S.L. Pillsbury,
86-2 U.S. Tax Ct. ¶ 9594; also see Christey v. U.S., 841 F.2d 809 (8th Cir.
1988); cert. den., 489 U.S. 1016, 109 S.Ct. 1131 (1989).