Subtle differences in facts can be very important when attempting to apply the opinion in a prior court decision to a client’s current situation. This is rather clearly illustrated by looking at the result in the case of Speer v. Commissioner, 144 TC No. 4 and contrasting his result with the result in a case he was relying upon, Givens v. Commissioner, 90 TC 1145.
Both cases involved disabled police officers in Southern California and, both cases, their salaries had been continued following disability under programs that the IRS and taxpayers agreed were in the nature of workers compensation programs and those amounts were excludable from income under §104(a)(1) which provides income does not include “amounts received under workmen's compensation acts as compensation for personal injuries or sickness…”
In both cases the taxpayers were paid for accrued sick leave as part of their compensation. In the case of Mr. Speer he received a payout of accrued, but unused, sick leave when he retired. He had been on temporary disability twice during his career and had accrued sick leave during those periods. His employer had a policy, agreed to in a memorandum of understanding with the union representing the officers of the agency, that the sick pay would be accrued during disability periods and, at retirement, a portion of the unused sick leave would be paid out.
Based on that, Mr. Speer argued that a portion of the cash out payment he received on retirement represented sick leave accrued as part of his workers compensation periods and, as such, were excludable from income.
The taxpayer relied on the Givens case, cited above, for the proposition that such a benefit could be excluded under §104(a)(1) even though it was “like” a benefit available outside workers’ compensation.
The Court summarized the Givens opinion as follows:
In Givens, a Los Angeles County deputy sheriff was injured in the course of his duties and was on disability leave for more than a year. The Los Angeles County Code set forth a workmen's compensation system that incorporated Cal. Lab. Code sec. 4850 for those eligible and provided additional compensation after expiration of the first year of disability. Specifically, it provided that the deputy would receive payments out of his accumulated sick leave. We held those payments to be excludable from gross income under section 104(a)(1).
However, the Court found that the case was factually different—the fact the accrual of sick leave was formally governed by the memorandum of understanding that was part or the collective bargaining agreement was one key issue.
There were other key differences. The timing of the payout was key—while Mr. Givens received his payout during the period of disability, Mr. Speer was being paid out long after his disability ended (and, in fact, under the terms of the program, could not be paid this amount during his disability).
As the Court noted:
During each of his disability leaves of absence, Mr. Speer received periodic payments of his base salary and he accrued fringe benefits, such as vacation time and sick leave, that would translate into additional payments to him only after his disability leave of absence ended. Indeed, if a covered employee were to forgo the vacation time and the sick leave accrued during a disability leave of absence (as Mr. Speer claims he did), decades might pass until the employee retired and cashed out the forgone benefits. Mr. Speer's accrual of vacation time and sick leave while on temporary disability leave did not provide him with an immediate benefit that he could use to support himself while on such leave. The fringe benefit represented by the accrual was, thus, fundamentally different from the normal temporary disability allowance payable under the Workers' Compensation Act and for which the continuation of his base salary under LAAC sec. 4.177 substituted. See id. The Workers' Compensation Act does not provide for any payments after the period of disability ends and, in fact, instructs that payments shall stop or be amended upon a finding that the disability has terminated or been diminished. See Cal. Lab. Code sec. 5803 (West 2011); Sogov v. Indus. Accident Comm'n, 9 P.2d 592, 593 (Cal. Dist. Ct. App. 1932) (sustaining a finding that disability terminated on specified date and so compensation also terminated as of that same date). Thus, any payments Mr. Speer received after his temporary disability ended cannot be part of the City's substitute for the Workers' Compensation Act.
The Court noted that, even if it had accepted the basic premise that some portion of his sick pay payment was in the nature of workers compensation, Mr. Speer had failed to show what portion (if any) of the unused sick leave he had accumulated at retirement actually could be traced to his disability periods.
While there is no reason to believe Mr. Speer was not aware that his situation was not be exactly like that of Mr. Givens and therefore the tax result might be different, it’s also not difficult to see how a taxpayer and even an adviser might have become so enamored with something like the Givens case to become blind to the differences in situation.
A client’s facts in a current situation will never be exactly like those of a taxpayer in a case the adviser uncovers is his/her research. The adviser must carefully consider the differences that exist between the facts outlined in the opinion he/she is reading (and, yes, the adviser needs to read the actual opinion and not just a summary of a case, like those found here) and the facts of his/her client—including making inquiries of the clients for any potentially relevant facts that the client may not have yet revealed.
At that point the adviser can discuss with the client the potential exposure that exists for the IRS to differentiate the taxpayer’s case from that of the case in question. The fact that Givens was a published case involving a taxpayer covered under a “similar” program did not mean there were not differences in the underlying facts—and, in this case, the Court found those differences significant.
The risk to an advisers is trying to derive broad rules from cases—or, to be frank, reading editorial sources (like this one) that may give the impression of such simple, broad rules when summarizing cases to fit summary descriptions like this one. Such overviews are useful, but relying on them to the exclusion of the consideration of primary sources can lead to taxpayers having positions that are more “out there” than the adviser will have lead the taxpayer to believe.