Assume that you’re going on permanent disability. You and your employer reach an agreement, with payments structured as though they were from workers compensation (nontaxable to the recipient). Suddenly, your employer backs out and threatens litigation—litigation that would likely take years to resolve. But your employer offers you a “nonindustrial disability retirement,” with payments that are based on age and length of service. Your employer and an IRS representative tell you that the payments aren’t taxable, so you decide to take the settlement.
Just one problem: You get a notice from the IRS saying that the nonindustrial disability retirement money is taxable.
That’s what brought Steven Diem to Tax Court today. He was employed as a fireman for San Francisco. He’s retired, and on his Form 1040 he deducted the payments of $16,617 (for the year in question) as “nontaxable pension in lieu of workers comp.”
Unfortunately for Mr. Diem, the law is settled in this area. As the Court noted, Section 1.104-1(b), Income Tax Regs., states, in part:
“Section 104(a)(1) excludes from gross income amounts which are received by an employee under a workmen’s compensation act * * * or under 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. * * * 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. * * * [Emphasis added.]”
So the law and many court decisions state that the income is taxable. But the petitioner noted that both the City of San Francisco and the IRS told him it wasn’t taxable. Unfortunately,
“Whatever advice or representation that was made to petitioner has no bearing upon the Court’s decision here. The law is well settled that the Commissioner is not estopped and cannot be bound by erroneous acts or omissions of his agents or representations by other parties such as the employer. Authoritative tax law is contained in statutes, regulations, and judicial decisions. Zimmerman v. Commissioner, 71 T.C. 367, 371 (1978), affd. without published opinion 614 F.2d 1294 (2d Cir. 1979); Green v. Commissioner, 59 T.C. 456, 458 (1972). A taxpayer cannot prevail simply because he relied on incorrect advice from his attorney regarding the tax consequences of the settlement. Coats v. Commissioner, T.C. Memo. 1977-407, affd. without published opinion 626 F.2d 865 (9th Cir. 1980). The representations that were made by the city of San Francisco and an IRS agent do not carry the weight of law.”
Yes, if you get advice from the IRS and it’s wrong, you’re out of luck, as the petitioner discovered.