Settlement Payment Included In Income.

The petitioner was diagnosed with a degenerative disease that ultimately prevented him from working.  He had a disability policy through his employer and received short-term disability benefits for the last few months of his employment.  He later applied for long-term disability benefits, but was denied because the insurance company determined that he wasn't totally disabled.  The petitioner sued and obtained a settlement amount of $65,000 that would be reported as long-term disability benefits.  The petitioner claimed that the amount was excluded from income under I.R.C. Sec. 104(a)(2) as payment for physical illness, and would also be excludible under I.R.C. Sec. 104(a)(1) as a worker's compensation payment.  The IRS disagreed and the court upheld the IRS determination.  The amount was not paid for any claim of physical injury or sickness, but for a failure to pay disability benefits that the company had contracted to pay.  The court also noted that under California law a settlement had to be approved by the CA Workers' Compensation Appeals Board, and that the petitioner had not submitted the payment for approval.  The court also noted that the amount was paid for sickness on a disability policy that the employer paid for where the premiums were not included in the petitioner's income.  As such, the amount as included in the petitioner's income.  Ktsanes v. Comr., T.C. Sum. Op. 2014-85.