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November 18, 1970

Joseph H. and Anne M. WALSH, Plaintiffs,
UNITED STATES of America, Defendant

Judd, District Judge.

The opinion of the court was delivered by: JUDD


JUDD, District Judge.

 This is an action for a tax refund of $576.21 for income taxes alleged to have been wrongfully collected from the plaintiffs. Jurisdiction is conferred on this court by Section 1346 (a) (1) of Title 28 of the United States Code.

 The case presents the question whether pension payments based on a disability retirement shortly before eligibility for service retirement are deductible as "sick pay" after the taxpayer becomes eligible for service retirement.


 Most of the facts have been stipulated, the stipulation being supplemented by official documents received as exhibits and by testimony concerning the operation of the retirement system.

 Payments to plaintiff Joseph H. Walsh from the New York City Fire Department Pension Fund (hereinafter called the Pension Fund) in the sum of $3,226.32 were included in the adjusted gross income and taxable income in the joint income tax return of Walsh and his wife for the year 1965. An amended return was filed on June 12, 1967, claiming a refund of $576.21, attributable to the exclusion from gross income of the total payment received from the Pension Fund. The claim was disallowed by the District Director of Internal Revenue, and this refund suit was timely filed thereafter.

 Walsh had been employed by the New York City Fire Department in the position of motor pump operator. Under the rules and regulations of the Department, he was required to submit to an annual medical examination. On October 4, 1962, after the regular annual physical examination disclosed that he had a heart condition which rendered further employment as a fireman impossible, he was granted disability retirement.

 At the time of his retirement, plaintiff was fifty years old and had nineteen years and four months of service with the Department. He would have been eligible for service retirement after twenty years of service.

 Pension payments for disability retirement after more than ten years of service are at the rate of half the employee's annual salary at the date of retirement. N.Y.C.Admin.Code, § B19-7.88. Pension payments for service retirement after twenty years are also at the rate of half the employee's annual salary at the time of retirement. Admin.Code, § B19-7.87.

 The Pension Fund imposes restrictions on the right to continue receiving disability pension before a beneficiary reaches the minimum period to qualify for service retirement. Prior to reaching the minimum period for service retirement, he is required to submit to annual physical examinations to determine whether he is able to engage in a "gainful occupation." Admin.Code, § B19-7.86. If he is found able to engage in any gainful occupation, his name is added to preferred eligible civil service lists for the positions for which he is found qualified, and his disability retirement allowance is reduced by the amount of his earnings. The Fire Department officer who runs the pension plan testified, however, that he knew of no case in which a fireman retired for disability had returned to work as a fireman after his disability terminated.

 Walsh has in fact been employed on a full-time basis since leaving the Fire Department. He reported wage earnings of $6,348.02 on his 1965 income tax return, which listed his occupation as "chauffeur" and showed a deduction for union dues to the Teamsters Union.

 The New York City Fire Department considers a fireman to be actually retired when he has passed the minimum period for service retirement even though he is receiving a disability pension. Walsh is still listed as disabled.

 Firemen are not urged to retire when they have completed their twenty-year minimum period for service retirement. In fact, the Fire Department encourages its employees to continue in service, if they are physically able to do so. Retirement is compulsory at age sixty-five.

 Only about 12 1/2% of the firemen eligible to retire after twenty years of service did in fact retire within one year after becoming eligible, according to statistics covering the period January 1, 1964 to June 30, 1967. As of June 30, 1967, 1,666 members of the retirement system, from a total of 12,190 members, had completed twenty years of service. However, only fifty-four members of the system (including fourteen medical officers) had completed twenty-seven years of service, and very few were above age fifty-eight.

 Plaintiff expected to continue in service until he reached age sixty-five if he had not been retired for disability.

 A fireman who does not retire after twenty years of service receives the benefit of salary increases which may take place in succeeding years, and also benefits from an increase of pension amounting to $50.00 for each year after the minimum period of service retirement, up to a maximum of $500.00 additional. Admin.Code, § B19-7.87.

 The medical board which passed on Walsh's disability was composed of the Chief Medical Examiner of the Municipal Civil Service Commission, a physician appointed by the Board of Trustees of the Pension Fund, and a physician appointed by the Commissioner of Hospitals. Admin.Code, § B19-7.63. The government does not dispute the finding of the medical board that plaintiff was in fact disabled to continue work as a fireman.

 The Pension Fund is a contributory fund, with firemen contributing 25% of the necessary payments and the city the remaining 75%. Admin.Code, § B19-7.65. (The member contribution was 45% before 1951.) When a fireman becomes entitled to pension benefits or other benefits, an amount equal to his retirement allowance reserve is transferred from the retirement allowance accumulation fund to the retirement allowance reserve fund. Ibid. All retirement allowances, whether for disability, accident or service, are paid from the same retirement allowance reserve fund. Admin.Code, § B19-7.66.

 Members of the Fire Department are entitled to unlimited sick leave during absence caused either by injury or sickness. Admin.Code, § 487a-7.1.

 Statute and Regulations

 Deductions for sick pay are governed by Section 105 of the Internal Revenue Code of 1954, which provides in part:

"§ 105. Amounts Received Under Accident and Health Plans.
(a) Amounts Attributable to Employer Contributions. -- Except as otherwise provided in this section, amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were ...

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