Sewards v. CIR

Workmen's compensation exclusions do not apply to retirement pensions calculated by reference to the employee's age and length of service, and therefore are taxable under the Internal Revenue Code.

Jay Sewards received a disability pension and a service retirement allowance, which was greater than the disability pension. The Los Angeles County Employees Retirement Association (“LACERA”) notified Sewards that part of his retirement allowance was taxable, and the Internal Revenue Service (“IRS”) issued a deficiency notice. The tax court held the extra amount was taxable. On appeal, the Ninth Circuit reviewed the tax court’s interpretation and application of Treasury Regulation § 1.104-1(b). Sewards argued that the regulation did not apply to his payments because they were solely calculated using his service related disability. However, the Commissioner of Internal Revenue argued that the taxation limitation applies when the service connected disability was partly calculated using years of service. The panel noted that §1.104-1(b) limits § 104(a)(1) because workmen's compensation exclusions do not apply to retirement pensions calculated by reference to the employee's age and length of service. The panel also reasoned that the Commissioner's interpretation was consistent with interpretations adopted over the last 40 years, and is entitled to deference. The panel used a two-step analysis to determine whether Congress directly addressed the issue at question, and if Congress had not, the panel would find a reasonable interpretation. The panel found that Congress had not addressed the issue of tax payments triggered from work related injuries, or illnesses that were based on years of service. Furthermore, the panel concluded that the regulation was reasonable because it clarified between a payment for personal injuries and a payment for other reasons. Therefore, the panel agreed with the tax court and found that the additional amount received was calculated from his years of service, and not part of his injuries. Thus, since the additional allowance was not based on Sewards’s injuries, the panel held it was properly taxed. AFFIRMED.