Rev. Rul. 68-10

Advice has been requested whether payments made by a California county to an employee under section 4850 of the California Labor Code, because of occupational injury or illness arising out of and in the course of performance of the employee's duties are excludable from gross income under section 104(a)(1) of the Internal Revenue Code of 1954.

Section 4850 of the California Labor Code provides that whenever any city policeman, city fireman, sheriff or any officer or employee of a sheriff's office, or any inspector, investigator, detective or personnel with comparable title in any district attorney's office, who is a member of the State Employees' Retirement System is disabled by injury or illness arising out of and in the course of his duties, he shall become entitled, regardless of his period of service with the city or county, to leave of absence while so disabled without loss of salary, in lieu of normal temporary disability payments under this Code, for the period of not exceeding one year. This section excludes employees (other than city firemen) whose functions do not clearly come within the scope of active law enforcement service. It also excludes city firemen whose functions do not clearly fall within the scope of active fire fighting and prevention service.

Section 4853 of the California Labor Code provides that whenever such disability of any such officer or employee continues for a period beyond one year, such member shall thereafter be subject to disability indemnity under provisions of the California Labor Code other than section 4850 during the remainder of the period of said disability or until the effective date of his retirement under the State Employees' Retirement Act, and the leave of absence shall continue.

Section 104(a)(1) of the Code provides for the exclusion from gross income of amounts received under workmen's compensation acts as compensation for personal injuries or sickness.

Section 1.104-1(b) of the Income Tax Regulations states that section 104(a)(1) of the Code excludes from gross income amounts which are received by an individual under a workmen's compensation act or under a statute in the nature of a workmen's compensation act which provides compensation to the employees for personal injuries or sickness incurred in the course of employment.

In determining whether the payments made under section 4850 of the California Labor Code are actually workmen's compensation benefits, the California District Court of Appeals, Second District, in the case of Hawthorne v. City of Beverly Hills et al. , 245 P.2d 352 (1952), held that salary in lieu of temporary disability payments, to a fireman (under section 4850 of the California Labor Code) who is a member of the State Employees' Retirement System, is not salary as such, but is compensation within the meaning of the workmen's compensation act. This determination also covered that amount which exceeded normal disability benefits under the usual schedules for determining workmen's compensation.

The payments made under section 4850 of the California Labor Code are made because of injuries or illness arising out of and in the course of the employee's duties. The fact that the amount received is equal to the employee's salary does not prevent such payments from being compensation within the meaning of workmen's compensation.

Since these payments are compensation within the meaning of the workmen's compensation act, they cannot be considered payments provided by a wage continuation plan. Therefore, section 105(d) of the Code is not applicable.

Accordingly, the total payments made by a California County to an employee under section 4850 and pursuant to section 4853 of the California Labor Code because of an occupational injury or illness arising out of and in the course of the employee's duties are in the nature of and in lieu of workmen's compensation, and such payments are excludable from the employee's gross income under section 104(a)(1) of the Code. The payments are excludable even if they are in excess of the normal disability benefits payable under a workmen's compensation act.