Rev. Rul. 80-14

ISSUES

1. Are benefits paid to disabled firefighters, under the circumstances described below, excludable from gross income under section 104(a)(1) of the Internal Revenue Code?

2. Are benefits paid to a firefighter's surviving spouse, under the circumstances described below, excludable from gross income under section 104(a)(1) of the Code?

FACTS

Under statutes adopted by City M, any firefighter in active service who becomes permanently and totally incapacitated for duty as the natural and proximate result of an injury occurring in the actual performance of duty will, upon filing a request for retirement, be entitled to a duty disability retirement allowance provided the medical council after a medical examination of the firefighter certifies that the firefighter is mentally or physically incapacitated for further duty as a result of the injury, the incapacity is likely to be permanent, and the firefighter should be retired.

The statutes provide that any firefighter eligible for duty disability retirement will have the right to receive a benefit during the period of such disability of an amount equal to 75 percent of the current actual salary for the position the firefighter held at the time of the injury. If the firefighter dies while receiving the duty disability allowance, the firefighter's spouse will receive 70 percent of the amount of the allowance the firefighter received at the time of death.

Disabled firefighters continue to receive a duty disability allowance during their period of eligibility until they reace age 62, at which time they begin to receive a normal retirement pension based on years of service with service credit given for time spent on duty disability.

LAW AND ANALYSIS

Section 61(a) of the Code provides that gross income means all income from whatever source derived, unless otherwise excluded by law, including compensation for services.

Section 104(a)(1) of the Code provides, with certain exceptions not relevant to this case, that gross income does not include amounts received under workmen's compensation acts as compensation for personal injuries or sickness.

Section 1.104-1(b) of the Income Tax Regulations provides that section 104(a)(1) of the Code excludes from gross income amounts received by an employee under a workmen's compensation act, or 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. Section 104(a)(1) also applies to compensation that is paid under a workmen's compensation act to the survivor or survivors of a deceased employee. However, section 104(a)(1) does not apply to a retirement pension or annuity 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.

The disability benefits in this case are authorized by a statute that provides benefits to a class restricted to employees with service-incurred disabilities. These benefits are thus payments for those disabilities. Therefore, the statute qualifies as a statute in the nature of a workmen's compensation act. Compare Rev. Rul. 79-291, 1972-1 C.B. 36; Rev. Rul. 72-44, 1972-1 C.B. 31.

Disability benefits received by a disabled firefighter prior to conversion to normal retirement benefits therefore qualify for exclusion under section 104(a)(1). Benefits received after conversion, however, do not qualify for exclusion from gross income because they are determined with reference to years of service and age.

If a disabled firefighter dies while receiving duty disability benefits, the statutes of M authorize payment of a percentage of those benefits to the surviving spouse. The spouse's payments are merely a continuation of the excludable disability benefits received by the decedent and are part of the benefit package granted to an employee as compensation for the employee's occupational disability.

HOLDINGS

Issue 1

Duty disability benefits paid by M to disabled firefighters prior to the time of their conversion to normal retirement are excludable from gross income under section 104(a)(1) of the Code. Benefits paid to disabled firefighters after their conversion to normal retirement are not excludable under section 104(a)(1).

Issue 2

If a disabled firefighter dies prior to the firefighter's conversion to normal retirement the benefits paid to the surviving spouse during that spouse's lifetime are excludable from gross income under section 104(a)(1) of the Code.