Rev. Rul. 67-222

Advice has been requested whether a lump-sum payment received by a taxpayer from the Civil Service Commission in 1965, when he filed a claim for a period of disability covering the years 1955 through 1959, qualifies for the sick pay exclusion allowed by section 105(d) of the Internal Revenue Code of 1954 under the circumstances described below.

The taxpayer, who reports his income on the cash receipts and disbursements method of accounting, had been in Government employment for a number of years when in 1955 he was hospitalized with a 100-percent non-service-connected disability which continued and prevented his return to work at least through the year 1959. In 1965 the Civil Service Commission determined that he was entitled to a disability annuity under the Civil Service Retirement Act for these years of his incapacity and paid him in a lump sum an amount equaling the total of the disability annuity payments which would have been paid to him during this period if it had instead actually been paid to him during that time. The taxpayer had not reached normal retirement age during 1965.

Section 105(d) of the Code, with certain limitations, provides that gross income does not include amounts attributable to employer contributions or amounts paid by the employer if such amounts constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of personal injuries or sickness.

The fact that payment was made in a lump sum rather than periodically does not disqualify the payment for the sick pay exclusion, since the amount received represented wages or payments in lieu of wages which the taxpayer was entitled to under a wage continuation plan during a period when he was actually absent from work because of his personal injury or sickness. Accordingly, the lump sum received qualifies for the sick pay exclusion allowed by section 105(d) of the Code.

Since the payment received in 1965 was attributable to periods of absence occurring before 1960, the limitations of section 105(d) of the Code resulting from the amendment of that section by the Revenue Act of 1964, Public Law 88-272, C.B. 1964-1 (Part 2), 6, are inapplicable.

The terms of the plan under which the lump-sum disability payment was made contained no provision that any portion of the disability pension would be purchased with taxpayer's contributions. Taxpayer's contributions to the plan, therefore, will be recovered tax free with respect to Civil Service retirement payments received under the plan after reaching normal retirement age.