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November 9, 1971

Irving N. SIDMAN and Celia C. Sidman, Plaintiffs,
The UNITED STATES of America, Defendant

Lasker, District Judge.

The opinion of the court was delivered by: LASKER

LASKER, District Judge.

Plaintiff moves for summary judgment on his complaint pursuant to Rule 56 of the Federal Rules of Civil Procedure, seeking a refund of certain income taxes paid by him on income received by plaintiff Irving N. Sidman ("taxpayer") *fn1" for the years 1959 and 1960. Defendant argues in its answering memorandum that the complaint should be dismissed. There is no factual dispute. The issue is whether payments received by Irving Sidman upon termination of his employment qualify for exclusion as sick pay under § 105 of the Internal Revenue Code of 1954. (26 U.S.C. § 105).

 The record establishes the following facts: Sidman had been a full-time employee of the United Jewish Appeal until December 13, 1958, when he suffered a severe heart attack, rendering it impossible for him ever to work again. He was maintained on the payroll of his employer until November 1, 1959, at which time he requested payment of his "retirement allowance." In accordance with the terms of the United Jewish Appeal Field Union Contract, Sidman was paid $9,190.00 on October 15, 1959, and $9,185.00 on January 6, 1960.

 He excluded $100 of salary received per week for each week in the period January 1 through October 31, 1959. He did not exclude any part of the $9,190.00 severance payment received in 1959. In his 1960 return, taxpayer did not claim any sick pay but included as income the full $9,185.00 payment received in 1960.

 Thereafter Sidman timely filed a claim for refund on the basis that the severance payments received in 1959 and 1960 were excludible sick pay (to the amount of $800 in 1959, as he had already taken $4,400.00 for the period his salary was continued in that year, and to the amount of $5,200.00 in 1960). At first, the government rejected taxpayer's claim on the ground that the payments did not fall within exclusion (d) of § 105 because taxpayer had reached the voluntary retirement age of his company (age 60) and hence was not "absent from work on account of . . . sickness." However, in light of adverse rulings in Commissioner of Internal Revenue v. Winter, 303 F.2d 150 (3d Cir. 1962), and Stewart v. United States, 313 F. Supp. 195 (W.D.Pa.1970), *fn2" the government conceded that the taxpayer was "absent from work" within the meaning of § 105 (d), since he had not yet reached the ordinary retirement age of his company. Commissioner of Internal Revenue v. Winter, supra, 303 F.2d at 152.

 The government now argues in its answering memorandum that, even conceding that the taxpayer was absent from work because of sickness, he may still not exclude such payments because he was not paid pursuant to a "wage continuation plan," in accordance with the requirements of § 105 (d) of the Code. The government contends that taxpayer received "severance pay" which, by definition, is paid by reason of termination of the employment relation and not by reason of the "continuation" of such relation.

 We agree with the government that the payments received by the taxpayer are not excludible under § 105 (d) because he was not paid pursuant to a "wage continuation plan." However, finding the rationale of Winter, supra, persuasive, we do not adopt the government's position that termination of employment necessarily disqualifies a taxpayer from excluding payments received after termination of employment. We state the issue differently: whether the provisions of the United Jewish Appeal Field Union Contract, pursuant to which taxpayer was paid, constituted a "wage continuation plan" within the meaning of the statute. We hold that they do not. The taxpayer has failed to prove by a preponderance of the evidence that the payments fall within the "wage continuation plan" exception of § 105.

 Section 105 (a) states the general rule:

"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 . . ."

 Section 105 (d) carves out an exception to the general rule:

"Gross income does not include amounts referred to in subsection (a) if such amounts constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of personal injuries or sickness; but this subsection shall not apply to the extent that such amounts exceed a weekly rate of $100."

 While there is no definition of "wage continuation plan" provided in the statute, Treasury Regulation § 1.105-4(2) (i) (1964) states that a "wage continuation plan" means an accident or health plan as defined in Treasury Regulation § 1.105-5 (a). *fn3"

 The regulation states that a "plan" may be either "insured or noninsured," meaning that the plan need not be funded by an insurance company but may be funded by the employer himself. See H.R.Rep. No. 1337, 83d Cong., 2d Sess. A33 (1954). U.S.Code Cong. & Admin.News, p. 4025. But it is clear from Treasury Regulation § 1.105-5 (a) that the plan in question must be in the nature of insurance or indemnification against illness or injury. At the least, a "plan" must contain the general indicia of insurance -- that is, a contract by which one party undertakes to indemnify another against loss arising from an unknown or contingent event. Law Dictionary, Ballantine's 1938 Ed., p. 660. Epmeier v. United States, 199 F.2d 508, 509-510 (7th Cir. 1952), and cases cited therein. By reading sections 105 (a) and 105 (d) together (as they must be since subsection (d) simply carves an exception from the general case dealt with in subsection (a)), it is clear that a "wage continuation plan" is subsumed under the general category of "accident or health insurance." Moreover, the phrase "in lieu of" in subsection (d) indicates that the payments to be excludible must be for the purpose of compensating the employee while he is unable to earn income and must pay substantial medical expenses.

 The legislative history of the section also indicates that the exclusion provisions of § 105 (d) were intended to apply to plans which insure or indemnify the employee for losses caused by his illness. The "sick pay" exclusion was first effectuated in § 22 (b) (5) of the Internal Revenue Code of 1939, which provided that compensation for injuries or sickness were excludible if received through accident or health insurance or workmen's compensation acts. The Internal Revenue Service's position with regard to this section was that employees who received benefits under a formal insurance policy were allowed to exclude such payments under § 22 (b), while employees who received benefits on a less formal self-insured plan were not allowed to do so. Rev.Rul. 208, 1953-2 Cum.Bull. 102. Recognizing this distinction as an inequity, the Seventh Circuit in Epmeier v. United States, supra, and later the Supreme Court in Haynes v. United States, 353 U.S. 81, 77 S. Ct. 649, 1 L. Ed. 2d 671 (1957), interpreted "health and accident insurance" broadly to include plans which, though lacking the formal indicia of an insurance policy, were, nevertheless, "an undertaking by one person for reasons satisfactory to him to indemnify another for losses caused by illness." Haynes v. United States, supra, at 83, 77 S. Ct. at 650. At the same time Congress took note of the inequitable distinction. Consequently, in 1954, § 105 (d) was enacted to permit payments made directly by an employer under an uninsured plan to be excluded in the same manner as payments under an insured plan. ...

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