                          T.C. Memo. 1997-568



                        UNITED STATES TAX COURT



            JAMES BROOKS AND BARBARA BROOKS, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent

                    JOHN J. McMAHON, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket Nos. 20859-95, 20860-95.     Filed December 23, 1997.



        Armondo O. Monaco II, for petitioners.

        Bradford A. Johnson, for respondent.


                MEMORANDUM FINDINGS OF FACT AND OPINION

        DEAN, Special Trial Judge:   These consolidated cases were

heard pursuant to section 7443A(b)(3) and Rules 180, 181, and

182.1

        1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
                                                   (continued...)
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     Respondent determined a deficiency in petitioners James and

Barbara Brooks' 1993 Federal income tax in the amount of $5,214.

Respondent determined a deficiency in petitioner John J.

McMahon's 1992 Federal income tax in the amount of $5,115.

     After a concession by petitioner John J. McMahon that he

received in 1992 unreported interest income of $52, the sole

issue for decision in these consolidated cases is whether

petitioners may exclude from gross income disability-pension

payments received from the City of Cranston, Rhode Island (City).

     All of the facts have been stipulated and are so found.    The

stipulation of facts and exhibits received into evidence are

incorporated herein by reference.   Petitioners James Brooks

(Brooks) and Barbara Brooks resided in Cranston, Rhode Island,

and petitioner John J. McMahon (McMahon) resided in Jamestown,

Rhode Island, at the time they filed their respective petitions.

                        FINDINGS OF FACT

     On July 7, 1972, Brooks and later, on February 11, 1974,

McMahon became uniformed police officers with the City.    Brooks

was also a member of the International Brotherhood of Police

Officers, Local 301 (Union) from 1972 through 1993.

     Brooks and McMahon (petitioners) both retired on account of

work-related injury or sickness.    At the time of his retirement


     1
      (...continued)
Procedure.
                                - 3 -


in 1993, Brooks had attained the rank of sergeant.    McMahon

retired in 1990 having attained the rank of captain.

     Petitioners were eligible for retirement under the City

disability pension plan (plan).    Under the plan employees were

paid at the rate of 50 percent of their salary if the employee

was below the age of 55.    Pursuant to State law, however, the

City was required to settle police employment disputes by binding

arbitration.   In 1989 the City entered into a collective

bargaining agreement (agreement) with the Union to provide

increased benefits to police officers.

     In accordance with the provisions of the agreement,

petitioners received annual disability pension payments equal to

60 percent of their annual salary at the time of their

retirement.

     Brooks for the year 1993 and McMahon for the year 1992 did

not report on their Federal income tax returns any of the

disability-pension payments they received from the City.

                               OPINION

     Respondent contends that petitioners may not exclude from

gross income amounts they received as disability payments because

the City ordinance implementing the plan is neither a workers'

compensation act nor in the nature of a workers' compensation act

as required by statute.    The ordinance does not meet statutory

requirements, according to respondent, because the wording of the

ordinance does not specifically limit benefits to those who are
                                - 4 -


disabled due to work-related injury or sickness.     If petitioners

disability payments were received not under the ordinance but

rather pursuant to the agreement between the City and the Union,

respondent asserts that the agreement is not a "statute" in the

nature of a workmen's compensation act.

       In their brief,2 petitioners make no argument that Cranston

City Code section 24-24, providing for disability payments to

uniformed members of the police department, is by itself a

workers' compensation act3 or in the nature of a workers'

compensation act.    They instead argue:   (a) Petitioners'

disability payments were received pursuant to the collective

bargaining agreement between the City and the Union; (b) the

agreement is incorporated by reference into the City Code, and is

therefore a "statute" in the nature of a workers' compensation

act.

Exemption Under Section 104(a)(1)

       Every item of a person's gross income is subject to Federal

income tax unless there is a statute or some rule of law that

exempts the person or the item from gross income.     HCSC-Laundry


       2
      The parties were ordered to file simultaneous briefs and
reply briefs. No reply brief was filed on behalf of petitioners.

       3
      The Rhode Island Workers' Compensation Act is found at R.I.
Gen. Laws secs. 28-29-1 through 28-29-30. The members of
"regularly organized fire and police departments of any town or
city" are excluded from the definition of "employee" for purposes
of workers' compensation benefits. R.I. Gen. Laws sec. 28-29-
2(4); Vector Health Sys. v. Revens, 643 A.2d 795 (R.I. 1994).
                               - 5 -


v. United States, 450 U.S. 1, 5 (1981).   An exclusion from gross

income can be found at section 104(a)(1) for "amounts received

under workmen's compensation acts as compensation for personal

injuries or sickness".   Section 1.104-1(b), Income Tax Regs.

interprets section 104(a)(1) to exempt amounts received 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."   This exclusion has been strictly

construed to conform with the general rule that all income is

taxable unless it is specifically excluded.   See Kane v. United

States, 43 F.3d 1446, 1449, 1451 (Fed. Cir. 1994);   Take v.

Commissioner, 804 F.2d 553, 558 (9th Cir. 1986), affg. 82 T.C.

630 (1984).   "A statute will not be considered akin to a workers'

compensation act if it allows for disability payments for any

reason other than on-the-job injuries."   Haar v. Commissioner, 78

T.C. 864, 868 (1982), affd. 709 F.2d 1206 (8th Cir. 1983); accord

Take v. Commissioner, supra; Clausse v. Commissioner, T.C. Memo.

1995-198.

     The pertinent language of City Code section 24-24 provides:

        Whenever an officer or member of the permanent
     police department who has not attained fifty-five years
     of age shall become unfit to perform active duty by
     reason of physical infirmity or other causes, such
     officer or member upon the recommendation in writing of
     the mayor, may in the discretion of the city council by
     a majority vote of the city council, be retired from
     active service and placed on the pension list, and when
     so retired he shall be paid annually from the police
                                  - 6 -


       pension fund in equal monthly payments until his fifty-
       fifth birthday a sum equal to one-half of his annual
       salary as defined in subsection (c) of section 24-23.
          Upon attaining fifty-five years of age, such officer
       or member so retired shall be paid annually for the
       remainder of his life in equal monthly installments, a
       sum equal to fifty-five percent of his annual salary.

By not arguing otherwise, petitioners tacitly admit that the City

Code provision, without more, is not in the nature of a workers'

compensation act.    And we further find that since the language of

the City Code disability provision allows disability payments to

police officers for other than on-the-job injuries, it cannot be

found to be a statute in the nature of a workmen's compensation

act.

       The Agreement Between the City and the Union

       Petitioners argue that they were receiving their disability

payments pursuant to the collective bargaining agreement rather

than the City Code.    As evidence of this, they point to receiving

a pension based upon 60 percent of their salary at retirement

while the City Code provides for a maximum 55 percent payment,

depending upon the age of the recipient.        Indeed, the pertinent

provision of the agreement does provide for police pension fund

payments at a rate higher than that of the City Code:

       24.2 Disability Pension:           Job Related

          Whenever an officer or member of the permanent
       police department shall become unfit to perform active
       duty by reason of job related physical and/or
       psychological infirmity, such officer or member upon
       the recommendation in writing of the Mayor, may in the
       discretion of the city council, by a majority vote of
       the city council, be retired from active service and
                                - 7 -


     placed on the pension list, and when so retired he
     shall be paid annually from the police pension fund in
     equal monthly payments a sum equal to sixty percent of
     his annual salary as defined in subsection (c) of
     Section 24-23.

     Since petitioners received disability payments under the

collective bargaining agreement and the agreement specifically

applies only to job-related injuries, they argue that the

agreement is a "statute" in the nature of a workmen's

compensation act.   Citing Rev. Rul. 81-47, 1981-1 C.B. 55,

petitioners argue that collective bargaining agreements are

mandated by a Rhode Island State law that requires enactment by

the City Council, and that the agreement under which they

received their payments is incorporated by reference into the

City Code.

     Rev. Rul. 81-47

     The revenue ruling involved a county police officer injured

in the line of duty.   He did not retire but continued to receive

full pay while incapacitated in accord with the provisions of a

collective bargaining agreement between his union and the county.

State statute provided that all collective bargaining agreements

entered into by the county had to be adopted and approved by

"legislative acts" of the county council and incorporated by

reference into the county code.   Adoption by the council had the

effect of enacting provisions of the collective bargaining

agreement into law.    The collective bargaining agreement at issue

in the ruling was duly incorporated into the county code in
                              - 8 -


accordance with State statutory requirements.   The ruling found

that the officer received disability payments under a statute in

the nature of a workers' compensation act.

     Where administrative rules or regulations have "the force

and effect of law" they will be found to be the equivalent of a

statute for purposes of section 1.104-1(b), Income Tax Regs.,

interpreting section 104(a)(1).   As explained in Rutter v.

Commissioner, 760 F.2d 466, 468 (2d Cir. 1985), affg. T.C. Memo.

1984-525:

     A regulation, like a statute, is a rule of general
     applicability promulgated by a public agency to govern
     conduct within the agency's jurisdiction. A labor
     contract, unlike a statute, is an agreement between
     union and employer, modifiable at any time. * * *

Where the language of a collective bargaining agreement is by

legislative act incorporated by reference into a municipal code,

and by this measure is enacted into law, it meets the statutory

and regulatory requirements described above.    Cf. Givens v.

Commissioner, 90 T.C. 1145, 1149-1151 (1988).

     The Collective Bargaining Agreement

     Petitioners argue that their collective bargaining agreement

is incorporated by reference into the Cranston City Code.     They

point to Rhode Island State law, and the City Charter in

conjunction with the City code.   We examine first the State law

on which petitioners rely.

     The Municipal Police Arbitration Act R.I. Gen. Laws secs.

28-9.2-1 through 28.9.2-16 (1986), establishes for police of the
                               - 9 -


State, "in any city or town all of the rights of labor other than

the right to strike, or engage in any work stoppage or slowdown.

To provide for the exercise of these rights, a method of

arbitration of disputes is hereby established."     R.I Gen. Laws

sec. 28-9-9.2(b).   It is the obligation of each city or town to

meet and confer in good faith with representatives of the

bargaining agent and to cause any agreement to be reduced to a

written contract.   R.I. Gen. Laws sec. 28-9.2-6.    If the city or

town and bargaining agent are unable to reach agreement, all

unresolved issues must be submitted to arbitration.     R.I. Gen

Laws sec. 28-9.2-7.   At R.I. Gen. Laws sec. 28-9.2-12, the Act

provides that when an agreement is actually negotiated, it "shall

constitute the collective bargaining contract governing policemen

and said city or town for the period stated therein, provided

that the period shall not exceed one [1] year."

     We can find nowhere in the Act a requirement that all, or

any collective bargaining agreement entered into by a city must

be adopted and approved by "legislative acts" of the city council

or be incorporated by reference into the city code.     Although the

City was a signatory to the agreement, petitioners have not shown

that it was in fact adopted by "legislative act" of the City

council or incorporated into the City's code, ordinances, or

charter.

     We also can find no support for petitioners' position in

their citation of Chapter 3.16 of the City Charter.     This
                               - 10 -


provision gives the City Council powers over organization of the

City government including the power to control the "number,

qualifications, powers, duties, hours of work and compensation

of" employees of the city.

     The agreement between the City and the Union was not

incorporated by reference into the City ordinance.    It stands by

itself as a collective bargaining agreement, a contract, between

the two entities.   R.I. Gen. Laws sec. 28-9.2-12.   The agreement

does not have the force and effect of law and is modifiable at

any time.    See Rutter v. Commissioner, supra at 468 (labor

contract does not qualify as a "statute" within the meaning of

sec. 1.104-1(b), Income Tax Regs.); Covert v. Commissioner, T.C.

Memo. 1990-598.

Conclusion

     We find that petitioners did not receive disability payments

under a workers' compensation act or a statute in the nature of

workers' compensation act.   Petitioners' disability-pension

payments must be included in gross income.

                                        Decisions will be entered

                                  for respondent.
