Rev. Rul. 72-44

Advice has been requested whether, under various circumstances, amounts received by disabled firemen from the Firemen's Pension and Relief Fund for the City of New Orleans may be excluded from gross income under the provisions of either section 104(a)(1) or section 105(d) of the Internal Revenue Code of 1954.

Sections 33:2113, 33:2117, and 33:2113.1 of the Louisiana Revised Statutes, as cited in West's Louisiana Statutes Annotated (LSA-R.S.), Title 33 (Municipalities and Parishes), govern the granting of disability pensions and are set out below in pertinent part.

Section 2113. Disability Payments; Notice of Injury; Periodic Examination; Order To Return to Active Duty

A. If any member of the fire department of the city, while in the performance of his duty, becomes and is found upon examination, by the department physician to be physically or mentally permanently disabled and incapacitated from performing his duties as a member of the fire department, by reason of service in the fire department, the board on application by the member for disability payments in accordance with this Sub-part on a form provided by the board shall request that the physician certify the fact of disability of said applicant, and the board of trustees by majority vote of its members shall determine whether or not the member should be retired for disability. In making this determination the board of trustees may order the member to submit to other and additional examinations by the department physician or by any other doctor or specialist selected by the board of trustees. Failure of the member to submit to any examination ordered by the board of trustees shall forfeit his and his dependent's right to pension and relief under this Sub-part. When the board of trustees determines that the member should be retired for disability incurred in the performance of his duty or service in the fire department, it shall retire the member, place his name on the pension roll, and order the immediate payment in monthly installments to him from the pension and relief fund of a sum equal to one-half the monthly compensation allowed him as salary at the date of his retirement, or the amount provided in R.S. 33:2117, whichever is greater, provided the other conditions of R.S. 33:2117 are met. * * *

Section 2117. Retirement of Members Having Twenty Years of Service; Mandatory Retirement

A. Any member who has performed faithful service in the fire department for twenty years or more, the last two of which shall be consecutive; shall be placed on the pension roll, whenever he makes application on the form to be provided by the board of trustees. The member so placed on the pension roll, shall receive as a pension one-half of the salary of the officer or grade from which he was retired, or the percentage provided in Subsection (B) of this section, if the member meets the conditions of that subsection, whichever sum is greater. * * *

B. At any time after twenty years of service as a member of the fire department, the last two of which shall be consecutive, a member may elect to retire on a service pension upon application to the board of trustees. For the first twenty years of such service the member shall be entitled to fifty percent of his average compensation during the best year of service preceding the date of retirement. For each year's service in addition to twenty years, the member shall be entitled to a service benefit to be increased by one percent for each year of service before January 1, 1968 and two and one-half percent of average compensation for the best year of service not to include overtime pay (whether voluntary or involuntary) holiday or part time pay for each year of service after June 30, 1967.

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D. Subparagraphs (A), (B) and (C) [relating to mandatory retirement] above notwithstanding, any person who enters the employ of the fire department after December 31, 1967 who has reached the age of fifty years and who has not less than twenty years of service in the fire department, and who is a contributing member of this system, may retire upon his written application to the board setting forth at what time that he desires to be retired, provided that at the time so specified for his retirement he shall have met the requirements as provided in this section. In such event, the applicant shall receive a retirement allowance equal to two and one-half percent of his average salary based on the highest four consecutive years multiplied by the number of years of creditable service, not to exceed seventy-five percent and further provided that in the case of those employees who remain in service beyond twenty years, and who haver reached the age of fifty-five years, the percentage shall be three percent for all years over twenty, with a maximum benefit of eighty percent.

(1) Any member who entered service after December 31, 1967 whose withdrawal from service occurs prior to the attainment of age fifty years, who shall at such time have completed at least twenty years of creditable service, shall remain a member of the retirement system and in such case said member shall receive a service retirement beginning when he attains the age of fifty years.

(2) Any employee of the fire department who was employed before January 1, 1968, and who is a contributing member of this system, may elect to come under the provisions of this Subpart which applies to members of the fire department employed after December 31, 1967, provided that such election shall be submitted in writing to the board of trustees, and provided, further that such member shall not be eligible for any benefits under this new system for at least four years after June 26, 1967 unless he will have attained the age of fifty years; in such event the employee shall be refunded that portion of his contributions to the old system which were derived from overtime earnings.

(3) On account of each member who comes under the provisions of this section applying to persons employed after December 31, 1967, either because of date of employment or due to election as provided herein, there shall be paid annually by the city and credited to the pension accumulation account a certain percentage of the earnable compensation of each member, to be known as the "normal contribution", and an additional percentage of this earnable compensation to be known as the "accrued liability contribution". The rates percentum of such contribution shall be fixed on the basis of the liabilities of the retirement system as shown by actuarial valuation.

Section 2113.1 Retirement for Non-service Connected Disability: Method of Establishing Pension

A. If any member of the fire department shall become physically or mentally permanently disabled and incapacitated to perform his duties, and such disability is not the direct result of a service-incurred injury or illness, then, upon application filed by the member in accordance with R.S. 33:2113, the board of trustees, by a majority vote of its members, shall determine whether or not such member shall be retired for disability. Provided, that the procedure to establish such disability and to determine the continuance thereof shall be the same as that prescribed in R.S. 33:2113. The amount of the pension to be received by any member retired in accordance with the provisions of this section shall be based on the following schedule:

(1) If the disabled member has performed faithful service in the fire department for a period of ten years or less, he shall receive a pension in the amount of thirty percent of his average compensation during the last year of service immediately preceding the date of establishing his disability in accordance with the provisions of this section.

(2) If the disabled member has performed faithful service in the fire department for a period of more than ten years, but not more than fifteen years, he shall receive a pension in the amount of forty percent of his average compensation during the last year of service immediately preceding the date of establishing his disability in accordance with the provisions of this section.

(3) If the disabled member has performed faithful service in the fire department for a period of more than fifteen years, he shall receive a pension in the amount of fifty percent of his average compensation during the last year of service immediately preceding the date of establishing his disability in accordance with the provisions of this section.

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Section 104(a)(1) of the Code provides, in pertinent part and with certain exceptions not here pertinent, that gross income does not include amounts received under workmen's compensation acts as compensation for personal injuries or sickness. Under section 1.104-1(b) of the Income Tax Regulations, the exclusion provided for in section 104(a)(1) also extends to amounts received under a statute "in the nature of" a workmen's compensation act, which provides compensation to employees for personal injuries or sickness incurred in the course of employment.

However, section 1.104-1(b) of the regulations also states that this exclusion does not apply to the amount received either (1) to the extent that it is determined by reference to the employee's age or length of service, or the employee's prior contributions, even though the employee's retirement is occasioned by an occupational injury or sickness, or (2) to the extent that it is in excess of the amount provided in the applicable workmen's compensation act or acts.

The significance of length of service in the instant case is that the disability pension received by a fireman with less than 20 years of service is not determined by reference to age or years of service, whereas the completion of 20 years or more of service may entitle a disabled fireman to receive an ordinary retirement pension based on age or years of service, which may be larger than the guaranteed disability pension. Thus, any exclusion allowable to the recipient under section 104(a)(1) of the Code is limited by that portion of section 1.104-1(b) of the regulations that prohibits the exclusion of the amount received "to the extent that it is determined by reference to the employee's age or length of service" (that is, to that portion of the service-incurred pension that results from a computation based on years of service). Section 105(d) of the Code provides that gross income does not include amounts, subject to certain limitations, which 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. Section 1.105-4(a)(3)(i)(a) of the regulations provides, in effect, that section 105(d) is applicable to disability pension payments only until the employee reaches "retirement age."

In the State of Louisiana, compensation paid to employees for personal injuries or sickness incurred in the course of employment (which may qualify for exclusion under section 104(a)(1) of the Code) is also subject to the Louisiana Workmen's Compensation Act, LSA-R.S. 23:1021 through 23:1351. The schedule of compensation under the Workmen's Compensation Law of Louisiana, which is set out in LSA-R.S. 23:1221.(2), provides that an individual who is entitled to receive workmen's compensation for an injury that produces permanent total disability to do work of any reasonable character shall be paid 65 percent of wages during the period of disability not beyond 500 weeks. However, the Louisiana courts have interpreted "work of any reasonable character" to mean work of the general kind for which the employee was qualified at the time of his disability.

In view of the provision of LSA-R.S. 33:2113 for payment of a pension to any member of the fire department who is retired because he is physically or mentally permanently disabled and incapacitated from performing his duties as a member of the fire department by reason of service in the fire department, it is held that this statute is "in the nature of" a workmen's compensation act.

The specific questions presented and the answers thereto are set out below.

Question (1).--Whether payments from the Firemen's Pension and Relief Fund for the City of New Orleans pursuant to LSA-R.S. 33:2113, which are received by a fireman retired for a disability incurred in the performance of his duties, are excludable from his gross income under section 104(a)(1) of the Code if--

(A) he had not completed 20 years of service; or

(B) he had completed 20 years or more of service.

Answer.--Payments from the Firemen's Pension and Relief Fund for the City of New Orleans pursuant to LSA-R.S. 33:2113, which are received by a fireman retired for a disability incurred in the performance of his duties, are (A) fully excludable from gross income under section 104(a)(1) of the Code in the case of a fireman who had not completed 20 years of service; and (B) are excludable from gross income only to the extent that the pension does not exceed one-half of the monthly compensation allowed as salary at the date of disability retirement, in the case of a fireman who had completed 20 years or more of service.

Question (2).--Whether payments from the Firemen's Pension and Relief Fund for the City of New Orleans pursuant to LSA-R.S. 33:2113.1, which are received by a fireman retired for a disability not incurred in the performance of his duties, are excludable from gross income under the provisions of either section 104(a)(1) or section 105(d) of the Code if--

(A) he had not completed 20 years of service; or

(B) he had completed 20 years or more of service.

Answer.--Payments from the Firemen's Pension and Relief Fund for the City of New Orleans pursuant to LSA-R.S. 33:2113.1, which are received by a fireman retired for a disability that was not incurred in the performance of his duties, are excludable from gross his income to the extent provided by section 105(d) of the Code until such time as the fireman reaches retirement age, regardless of whether the fireman is one (A) who had not completed 20 years of service; or (B) who had completed 20 years or more of service.

Such payments are not excludable from gross income under the provisions of section 104(a)(1) of the Code (inasmuch as this exclusion applies only to compensation to employees for personal injuries or sickness incurred in the course of employment), regardless of whether the fireman was one (A) who had not completed 20 years of service; or (B) who had completed 20 years or more of service.

Question (3).--What is "retirement age" for a participant in the Firemen's Pension and Relief Fund for the City of New Orleans, beyond which the exclusion from gross income provided by section 105(d) of the Code is no longer applicable to his disability pension payments?

Answer.--Those firemen who retire for disability as members of the pre-1968 plan, reach retirement age at such time as they would have completed 20 years of service had they not been disabled and had they continued to work for the New Orleans Fire Department (R.S. 33:2117 A and B). Those firemen who retire for disability as members of the new 1968 plan, however, reach retirement age at age 50 provided they would have had at least 20 years of service at such age, or at the age beyond age 50 when they would have completed 20 years of service had they remained in the service of the Fire Department (LSA-R.S. 33:2117 D).

Question (4).--Whether the disabled fireman's ability to work in some other capacity and earn money elsewhere would affect the taxability of his disability pension.

Answer.--A disabled fireman may work in some other capacity and earn money elsewhere without affecting the taxability of his disability pension under section 104(a)(1) of the Code.

With regard to any exclusion from gross income allowable under section 105(d) of the Code with respect to such payments, the effect of the individual's ability to work and earn money elsewhere has been stated in Revenue Ruling 57-178, C.B. 1957-1, 71, which holds that an employee who is receiving a disability pension excludable from gross income subject to the limitations provided in section 105(d) of the Code, may be engaged in a gainful occupation as a self-employed individual or as an employee of another employer without affecting the tax treatment of his disability pension. However, such a course of conduct is a factor in determining whether the employee's absence is due to personal injury or sickness, or to some other reason.