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Sewards v. Commissioner of Internal Revenue

United States Court of Appeals, Ninth Circuit

May 12, 2015

JAY AND FRANCES SEWARDS, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee

Argued and Submitted, Pasadena, California April 10, 2015

Appeal from the United States Tax Court. T.C. No. 24080-08. Maurice B. Foley, Tax Court Judge, Presiding.

SUMMARY [**]

Tax

The panel affirmed the Tax Court's denial of a petition for redetermination of a 2006 federal income tax deficiency based on the failure to report disability retirement payments.

Income is excluded from taxation under 26 U.S.C. § 104(a)(1) if it is received under workmen's compensation acts as compensation for personal injuries or sickness. Taxpayer retired due to a service-connected disability and received a disability pension equal to one-half his previous salary. Based on his years of service, he received an additional amount to bring his pension up to what he would have received as a service pension. The panel held that this additional amount was taxable because it was paid not based on taxpayer's injuries, but based on his years of service.

Marshall W. Taylor (argued), Taylor, Simonson & Winter, LLP, Claremont, California, for Petitioner-Appellant.

Kathryn Keneally, Assistant Attorney General, Robert Metzler (argued), and Melissa Briggs, Tax Division, Department of Justice, Washington, D.C., for Respondent-Appellee.

Before: Barry G. Silverman and Carlos T. Bea, Circuit Judges, and Gordon J. Quist, Senior District Judge.[*]

OPINION

Page 1332

QUIST, Senior District Judge:

This case involves the taxation of retirement payments made to Jay Sewards, a former employee of the Los Angeles County Sheriff's Department. Like all County employees who retire with a service-connected disability, Sewards was entitled to receive a disability pension equal to one-half his previous salary. Because Sewards had completed 34 years of service, however, he received an additional amount to

Page 1333

bring his pension up to what he would have received as a service pension. The question presented in this case is whether that additional amount is taxable under the Internal Revenue Code. Sewards argues that the entire amount of the retirement allowance may be excluded from taxation because it is a worker's compensation pension.[1] The Tax Court rejected Sewards's argument, concluding that the portion of Sewards's retirement allowance exceeding what he would have received solely based on disability is subject to taxation. Sewards now appeals that ruling. We have jurisdiction under 26 U.S.C. § 7482(a)(1), and we affirm the judgment of the Tax Court.

I.

The Los Angeles County Employees Retirement Association (LACERA) manages retirement assets and payments for retired Los Angeles County employees. Los Angeles County employees who sustain service-connected injuries may retire on account of a service-connected disability. Cal. Gov't Code ยง 31720. The California statute that ...


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