Court Opinion

ID: 9717013
Source: CourtListenerOpinion
Date Created: 2023-08-26 06:56:14.125641+00
Date Added: 2024-06-11T18:23:50.677948
License: Public Domain

JUSTICE RAKOWSKI, specially concurring in part and dissenting in part: The majority has determined that the employer’s credit under section 8(j)(l) is limited to the net amount of disability benefits after taxes are withheld rather than the gross amount of benefits before taxes are withheld. For the following reasons, I respectfully submit that this determination is contrary to logic, the unambiguous language of section 8(j)(l), and the Internal Revenue Code (26 U.S.C. § 105 (1994)). Additionally, the majority fails to cite authority for such a determination while ignoring contrary holdings from North Carolina and New York. The language of section 8(j)(l) is clear: “In the event the injured employee receives benefits, including medical, surgical or hospital benefits under any group plan covering non-occupational disabilities contributed to wholly or partially by the employer, which benefits should not have been payable if any rights of recovery existed under this Act, then such amounts so paid to the employee from any such group plan as shall be consistent with, and limited to, the provisions of paragraph 2 hereof, shall be credited to or against any compensation payment for temporary total incapacity for work or any medical, surgical or hospital benefits made or to be made under this Act.” (Emphasis added.) 820 ILCS 305/8(j)(l) (West 1998). In the instant case, the employer paid claimant $21,439 in group disability benefits. Because those disability benefits are taxed by federal and state governments (see 26 U.S.C. § 105 (1994); 35 ILCS 5/701(b) (West 1998)), and because “every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures” (26 U.S.C. § 3402(a)(1) (1994); see 35 ILCS 5/701(a) (West 1998)), employer was obligated to withhold $6,565.33 from claimant. It is clear employer withheld and remitted this amount to federal and state governments on behalf of claimant to satisfy claimant’s potential tax obligation, which is not only determined by bis income from employer, but is also determined by a myriad of other factors, including other income, itemized deductions, and the number of claimant’s dependants. The majority claims that the $21,439 in disability benefits, however, was not actually “paid” to claimant. This view is overly simplistic. It is axiomatic that there could not be withholding taxes set aside based on the $21,439 in benefits unless claimant was actually “paid” that amount. Although claimant contends that he will not receive the full benefit of his workers’ compensation award if the gross amount of his disability benefits is credited to employer, such a view is clearly erroneous. Again, section 8(j)(l) states in part: “In the event the injured employee receives benefits *** under any group plan covering nonoccupational disabilities contributed to *** by the employer, which benefits should not have been payable if any rights of recovery existed under this Act, then such amounts so paid *** shall be credited to or against any [workers’] compensation [award] ***.” (Emphasis added.) 820 ILCS 305/8(j)(l) (West 1998). This language effectively transforms disability benefits paid under a group plan covering nonoccupational disabilities into workers’ compensation benefits when an award has been made. It also has the legal effect of transforming the amounts paid as disability benefits from taxable income to nontaxable workers’ compensation benefits. See 26 U.S.C. § 104(a)(1) (1994) (taxable gross income does not include “amounts received under work[ers’] compensation acts”). Thus, as a consequence of the legal effects of section 8(j)(l), there remain amounts withheld from claimant’s income which should not have been withheld as taxes and remitted to federal and state governments. A claimant, however, can easily remedy this situation by filing an Internal Revenue Service form (currently the 1040X) and the pertinent state income tax form that request a refund due to an overpayment of taxes. The refund of withholding taxes will then place the claimant in the same position he would have been in if he had been receiving workers’ compensation benefits from the outset. Claimant receives the same amount in workers’ compensation benefits under the majority approach or my approach. The majority approach, however, is flawed in that it fails to give the employer its full section 8(j)(l) entitlement for disability benefits paid to claimant while it gives federal and state governments taxes to which they are not entitled. In this case, the majority approach gives employer only $14,873.67 in credit against the workers’ compensation award instead of the $21,439 to which it is entitled. The $6,565.33 difference remains with federal and state governments. The fatal flaw is that federal and state governments are not entitled to this or any amount because the operation of section 8(j)(l) transformed taxable disability benefits into nontaxable workers’ compensation benefits. The net effect then is that employer will have paid $6,565.33 more toward compensating claimant for his injuries. Under my approach, employer receives its full $21,439 credit for disability benefits that were paid to claimant. Claimant is then entitled to recoup $6,565.33 he paid in taxes on the disability benefits since those benefits were retroactively transformed into nontaxable workers’ compensation benefits. Thus, under my approach, both employer and claimant receive the amounts to which they are entitled. Federal and state governments do not, however, receive money to which they are not entitled. It is without question that, in enacting section 8(j)(l), the legislature could not have intended the result reached by the majority wherein monies due the employer (the intended beneficiary of section 8(j)(l)) are given to federal and state governments which are not entitled to the tax. The very purpose of section 8(j)(l) is defeated. Two other jurisdictions that have reviewed substantially similar provisions and issues have reached the same conclusion. In Evans v. AT&T Technologies, Inc., 332 N.C. 78, 418 S.E.2d 503 (1992), the second of two issues was whether the amount of employer’s credit toward workers’ compensation benefits is in the amount of the gross before-tax amount paid by employer’s “Sickness and Accident Disability Plan” to the claimant or is in the amount of the net after-tax amount received by the claimant. In concluding that the credit should be the gross before-tax amount paid by employer’s disability plan, the court observed that disability benefits are taxed, that workers’ compensation benefits are not, and that claimant was entitled to the withholding taxes on the disability benefits after the disability benefits were transformed into workers’ compensation benefits following an award of compensation. Evans, 332 N.C. at 88-89, 418 S.E.2d at 510. The court further observed: “In addition, if employers were allowed a deduction equal to the net after-tax amount [of disability benefits] ultimately received by the employee, administration of this part of our Workers’ Compensation Act would be almost impossible for the Industrial Commission. The withholding of taxes by the employer is based on an estimate of the employee’s ultimate tax liability; an employee’s tax liability is not established until the employee files a tax return for the particular tax year. The actual tax liability may vary depending on numerous factors, such as the amount of any itemized deductions, the number of the taxpayer’s dependents, and the amount of any other income. If the credit given employers should be held to be equal to the net after-tax amount ultimately retained by the employee, the Industrial Commission would be required to calculate the tax liability of each recipient in order to credit the employer with the proper after-tax amount. Allowing a credit equal to the amount of gross before-tax payments made to the employee avoids these complexities and facilitates the efficient administration of the Act.” Evans, 332 N.S. at 89-90, 418 S.E.2d at 510. The New York case of Graham v. Lipe Rollway Corp., 114 A.D.2d 570, 494 N.Y.S.2d 431 (1985), also provides guidance, although it deals with FICA withholdings and not income tax withholdings. There, the claimant argued the same simplistic reasoning processes employed by the majority in the instant case — that, since FICA taxes were withheld from him when he was receiving disability benefits, those amounts so withheld were not actually paid to him. As such, claimant contended that the workers’ compensation provisions did not authorize reimbursement of the amount withheld. The court rejected claimant’s argument, asserting: “The FICA taxes withheld from the payments to claimant were remitted to the Federal government on behalf of claimant and satisfied an obligation owed by claimant. The employer, of course, also paid its own share of FICA taxes. Accordingly, the Board could rationally conclude that the full amount of the award was effectively paid to claimant within the meaning [of the] Workers’ Compensation [Act] ***. *** The effect of the retroactive award of workers’ compensation benefits, which are not subject to FICA taxes, together with the nonduplication of benefits provision of [the Act], is to render the FICA taxes withheld from claimant’s disability award overpayments which are refundable.” Graham, 114 A.D.2d at 570-71, 494 N.Y.S.2d at 432. I find the reasoning of Evans and Graham to be on point and supportive of my approach. Moreover, it appears to me that the majority’s approach belies public policy. In essence, the majority’s approach penalizes employers that provide disability benefits .to its employees by denying employers a full credit for disability benefits that were paid to an injured employee before a workers’ compensation award was rendered. Thus, considering the unambiguous language of section 8(j)(l), the fact a claimant can seek reimbursement of the taxes that were withheld from the disability benefits after an award of workers’ compensation retroactively includes those benefits, and the case law that supports my view, I conclude that section 8(j)(l) requires a credit in favor of employer for the gross, before-tax amount in disability benefits. I concur in all other aspects of the majority decision.