AELE LAW LIBRARY OF CASE SUMMARIES:
Employment & Labor Law for Public Safety Agencies


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Taxation

    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).
     

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