|U.S. DEPARTMENT OF LABOR||OFFICE OF WORKERS' COMPENSATION PROGRAMS |
DIVISION OF ENERGY EMPLOYEES OCCUPATIONAL
FINAL ADJUDICATION BRANCH
October 20, 2010
NOTICE OF FINAL DECISION FOLLOWING A HEARING
This is the decision of the Final Adjudication Branch (FAB) concerning the above claim for compensation under the Energy Employees Occupational Illness Compensation Program Act of 2000, as amended (EEOICPA), 42 U.S.C. § 7384 et seq. For the reasons stated below, the claim for wage-loss benefits is accepted under Part E for calendar years 2005, 2006, 2007 and 2008.
STATEMENT OF THE CASE
On September 27, 2006, the employee filed a Form EE-1 claiming benefits under EEOICPA for non-Hodgkin’s lymphoma and skin cancer. On April 25, 2008, FAB issued a final decision accepting the claim under Part E based on six primary skin cancers (squamous cell carcinoma or SCC) in situ of the right eyelid, basal cell carcinoma (BCC) of the shoulder, BCC of the chest, SCC of the right lower eyelid, and SCC of the cheek. In that final decision, FAB determined that he was a covered Department of Energy (DOE) contractor employee at the Mound Plant, a DOE facility, from November 23, 1966 to September 1, 1967.
On July 9, 2008, the employee filed a claim for wage-loss benefits under Part E, stating that he began to lose wages as a result of his covered illness in the first quarter of 2005. He also submitted medical reports from Dr. Nicholas T. Ilif dated August 18, 2008 and November 18, 2008, who stated that as a result of his cancers and consequential conditions, he began incurring wage-loss in February 2005 and took early retirement in November 2007.
On November 7, 2008, the employee filed another claim and identified additional skin cancers. On April 16, 2009, FAB issued a final decision accepting his claim under Part E based on these additional skin cancers (SCC of the left lower eyelid, SCC of the tip of the nose, SCC of the right preauricular). On July 30, 2009, the district office accepted that the employee had consequential conditions of blindness of the right eye, photophobia and right eye pain.
On August 7, 2009, the district office issued a recommended decision to deny the claim under Part B for multiple skin cancers and large B-cell lymphoma, and under Part E for lymphoma. The district office further recommended that the claim for impairment benefits based on the employee’s skin cancers be approved under Part E, based on a whole-person impairment rating of 24%.
With respect to the employee’s wage-loss claim, the district office recommended that it be accepted for the period 2005 through 2008. The district office determined that he had an average annual wage (AAW) of $66,801.21 in the 36 months prior to February 2005. This figure was based on his earnings as reported in annual tax returns. Specifically, the district office combined the employee’s total “dividend” income reported annually on Line 1 of IRS Schedule K-1 (Shareholder’s Share of Income, Credits, Deductions, etc.), which lists “Ordinary income from trade or business activities” as 100% Shareholder of [Employee’s company], with the amount listed in Box 1 (wages, tips, other compensation) of Form W-2 (Wage and Tax Statement), which is the salary he paid himself as an employee of [Employee’s company]. The district office included his dividend income because he explained that these were “pass through” earnings he paid to himself as the owner of 100% of the shares of [Employee’s company], which is classified as a “subchapter S” corporation for purposes of the Internal Revenue Code. The district office’s AAW calculation made no deduction for the health insurance premiums the employee paid out of his S corporation dividend income. Using this method, the district office determined that his inflation-adjusted earnings for the period 2005 through 2008 were as follows: for 2005, $37,989.00 (57% of his AAW); for 2006, $21,124.33 (32%); for 2007, $17,249.19 (26%); and for 2008, $0 (0%). Based on these figures, the district office recommended that the employee receive $10,000.00 in wage-loss benefits for calendar year 2005, and $15,000.00 for calendar years 2006, 2007 and 2008. The total compensation recommended was $55,000.00.
On November 16, 2009, FAB issued a final decision denying the claim for multiple skin cancers and lymphoma under Part B, and for lymphoma under Part E. The final decision accepted the claim for impairment benefits based on a 24% impairment rating, and awarded the employee compensation of $60,000.00. With respect to his wage-loss claim, FAB determined that the district office’s calculation of his entitlement to wage-loss benefits was incorrect. Specifically, FAB determined that the district office should not have included dividend income in the employee’s AAW for the 36 months prior to February of 2005, or in his earnings during and after calendar year 2005. The case was therefore remanded to the district office for recalculation of the employee’s entitlement to wage-loss benefits for the period 2005-2008.
On January 29, 2010, the district office issued a recommended decision in which it determined that the employee’s AAW for the 36 months prior to February 2005 was $25,714.21. This was based solely on his wages as reported in Box 1 of his Form W-2 for the years 2002, 2003 and 2004. Using the information reported in Box 1 of his W-2s for 2005 through 2008, the district office determined that the employee’s inflation-adjusted earnings were as follows: $15,780.00 in 2005 (61% of his AAW); $20,376.00 in 2006 (77%); $9,744.00 in 2007 (38%); and $0 in 2008 (0% of AAW). The district office further concluded that the employee’s health insurance costs should not be considered in determining his AAW or calculating his calendar years of qualifying wage-loss during and after 2005.
On March 16, 2010, the employee filed objections to the recommended decision and requested a hearing. However, the objections were not addressed and no hearing was scheduled. On April 13, 2010, FAB issued a final decision accepting the claim for wage-loss benefits for the calendar years 2005 through 2008, concluding that the employee’s AAW for the 36 months prior to February 2005 was $25,714.21. FAB further concluded that his inflation-adjusted earnings were $15,780.00 in 2005 (61% of AAW); $20,376.00 in 2006 (77%); $9,744.00 in 2007 (38%); and $0 in 2008 (0%). Accordingly, FAB concluded that the employee was entitled to wage-loss benefits of $10,000.00 for 2005, $15,000.00 for 2007 and $15,000.00 for 2008. FAB further concluded that the employee had no entitlement to wage-loss benefits for 2006, since his inflation-adjusted wages during that year were greater than 75% of his AAW.
On June 4, 2010, FAB issued an order granting reconsideration of the employee’s wage-loss claim, because the April 13, 2010 final decision did not address his objections. The case was subsequently referred for a hearing.
In his written objections and at a hearing held on August 5, 2010, the employee raised two arguments against the wage-loss calculation in the January 29, 2010 recommended decision. These are summarized below:
1. He argued that all of his income from [Employee’s company] constituted payments received from employment or services. He reiterated that he was the sole proprietor of [Employee’s company], explaining that this was a small company that distributed packaged food products to convenience stores. For tax purposes, he organized the business as a subchapter S corporation, which allowed the company’s earnings to be passed through to him, the owner, as ordinary income. He stated that each year he paid himself a small salary (known as a “draw”). Any profits over and above that salary were reported to the IRS as dividends.
Therefore, the employee argued that such income met the definition of “wages” under the EEOICPA regulations, and should be included in both the AAW calculation and in determining his inflation-adjusted earnings for subsequent years. He also submitted copies of his Form 1040 Schedule E for the years in question, which lists his S corporation income from [Employee’s company] for the years 2002 to 2007. For purposes of his tax returns, his S Corporation income is listed under “nonpassive” income according to Schedule K-1.
2. The employee further argued that his health insurance premiums should be deducted from his income for purposes of calculating his AAW and his inflation-adjusted earnings in subsequent years. He stated that such premiums should be excluded from the wage-loss calculation, since they are tax-deductable.
After reviewing the evidence in the case file, and considering the objections and the testimony at the oral hearing, FAB hereby makes the following:
FINDINGS OF FACT
1. By final decisions dated April 25, 2008 and April 16, 2009, FAB determined that the employee is a covered DOE contractor employee who contracted the covered illness of multiple skin cancers through exposure to a toxic substance at a DOE facility.
2. On July 30, 2009, the district office determined that he sustained the consequential conditions of blindness of the right eye, photophobia and right eye pain.
3. The employee filed a claim for wage-loss benefits for the period beginning February 2005. His date of birth is September 24, 1944, and he will reach normal retirement age for unreduced Social Security retirement benefits at age 66 on September 29, 2010.
4. His AAW for the 36-month period prior to February 2005 is $66,801.21. His adjusted earnings in 2005 were $37,989.00 (57% of his AAW); for 2006, $21,124.33 (32% of AAW); for 2007, $17,249.19 (26% of AAW); and for 2008, $0 (0% of AAW).
Based on the above findings of fact, FAB hereby also makes the following:
CONCLUSIONS OF LAW
Part E provides for payment of compensation to covered DOE contractor employees who experience wage-loss as a result of a covered illness, and defines wage-loss as any year in which the employee’s wages did not exceed 75% of his average annual wage in the 36-month period prior to the month compensable wage-loss began. Compensable wage-loss may include any year occurring up to and including the calendar year that a covered Part E employee reaches normal retirement age under the Social Security Act. To establish eligibility for wage-loss benefits, the evidence must show that the period of wage-loss at issue is causally related to the employee’s covered illness. 42 U.S.C. § 7385s-2(a)(2).
The implementing regulations provide that in determining an employee’s AAW and any subsequent adjusted earnings, DEEOIC “will consider all monetary payments that the covered Part E employee received in a quarter from employment or services, except for monetary payments that were not taxable as income during that quarter under the Internal Revenue Code, to be ‘wages.’” 20 C.F.R. § 30.805(a) (2009). Under EEOICPA procedures, wages are defined to include salaries, overtime compensation, sick leave, vacation leave, tips and bonuses received for employment services. Income specifically excluded from the definition of wages includes capital gains, IRA distributions, pensions, annuities, unemployment compensation, state workers’ compensation benefits, medical retirement benefits and Social Security benefits. Federal (EEOICPA) Procedure Manual, Chapter 2-1400.8 (2009). The regulations and the procedures do not specifically exclude dividends from the definition of “wages.”
In this case, the recommended decision issued on January 19, 2010 is based on a calculation of AAW that excludes the employee’s dividend earnings as the 100% shareholder of [Employee’s company]. He has objected to this calculation, arguing that his dividend earnings qualify as wages under the definition cited above. The issue, therefore, is whether those dividends are “monetary payments. . .from employment or services” under § 30.805 of the regulations, and if so, whether they are taxable as income under the Internal Revenue Code.
The employee’s tax records show that his income from [Employee’s company] is classified as “non-passive” income according to Schedule K-1. Under IRS rules, passive income is defined as earnings derived from a business in which a person “does not materially participate.” Since the employee’s hearing testimony and tax records make clear that he materially participated in the operation of [Employee’s company] as the sole proprietor and 100% shareholder, I conclude that these earnings constitute monetary payments from employment or services. His tax records further show that these earnings were taxable as income under the Internal Revenue Code. Accordingly, I conclude that the employee’s dividend income as 100% shareholder of [Employee’s company], a subchapter S corporation, are “wages.”
In response to the second objection, I have reviewed the tax records submitted in support of the employee’s claim, which includes Form 1040 Schedule E, Schedule K-1 and his W-2 statements covering the period 2001 through 2008. I have also reviewed IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits (2010), which is part of the record and was cited by the district office in its recommended decision, as well as other IRS guidance concerning subchapter S corporations.
IRS Publication 15-B states that although the value of S corporation employees’ health benefits are generally excluded from the employees’ wages, this exclusion does not apply to shareholders owning 2% or more of the corporation (“2% shareholders”). According to the IRS, for 2% shareholders who are also employees, the value of the health benefits premiums must be included in the employee’s wages subject to federal income tax withholding. IRS Publication 15-B, p. 6 (2010). A review of the employee’s Form 1040 shows that the value of his health benefits is included in his S corporation earnings (line 17), and is therefore an element of his total income (line 22). If he were an employee and less than a 2% shareholder, the value of his health benefits would be excluded entirely from his taxable wages. As a 2% shareholder, he qualifies for a self-employed health benefits insurance deduction (line 29), which is deducted from his total income to derive his adjusted gross income. In other words, the value of the employee’s health benefits is included in calculating his taxable income, but is not included in his adjusted gross income. The health benefits deduction is therefore no different than the other deductions available to taxpayers listed on Form 1040, such as student loan interest expenses, educator expenses, or IRA contributions, which are not taken into account when calculating an employee’s AAW.
Accordingly, the evidence establishes that the employee experienced wage-loss as a result of his covered illness during calendar years 2005 through 2008. I further conclude that his AAW for the 36 months prior to February 2005 is $66,801.21; that his adjusted earnings for calendar year 2005 were between 50 and 75% of his AAW; and that his adjusted earnings for calendar years 2006, 2007 and 2008 were less than 50% of his AAW. Therefore, in accordance with 42 U.S.C. § 7385s-2(a)(2), the employee is entitled to wage-loss benefits of $10,000.00 for 2005, and $15,000.00 per year for 2006 through 2008, totaling $55,000.00.
Final Adjudication Branch
 See http://www.irs.gov/businesses/small/article/0,,id=146833,00.html (retrieved October 18, 2010).