Chief Leader

The city will split a $280-million refund with uniformed employees who had FICA taxes wrongfully withheld from their line-of-duty injury earnings at any time from 1989 through 2005. The settlement applies to uniformed members of the Fire, Police, Sanitation and Correction departments.

IRS Sees the Light

The settlement arose from a legal claim filed by the Law Department in July 2003, but the city's battle with the IRS over the issue stretches back more than a decade.

"We are very pleased that, because of this suit, the IRS recognized that these taxes were wrongfully imposed," said Corporation Counsel Michael A. Cardozo. "The IRS has now agreed to repay the city and its employees this very substantial sum." The IRS had insisted that Social Security and Medicare contributions (often known as the FICA tax) be deducted from line-of-duty pay earned by injured uniformed workers. The city had argued that LODI pay should be exempt from FICA tax in the same way that Workers' Compensation checks were exempted. But the IRS said that unless a uniformed worker is out for six months or longer on LODI, the FICA tax applied.

Uniformed workers who get hurt on the job can't collect Workers' Compensation because their agencies are self-insured. Instead they get LODI pay, which the city argued fills the same role as Workers' Compensation.

As a result of the IRS settlement, the city will be refunded $140 million. Approximately 73,000 eligible uniformed workers will share another $140 million.

Karen M. Griffin, Senior Counsel of the Law Department's Appeals Division, has been working on the issue with the IRS for more than 10 years.

"This has been a huge portion of my life. I'm elated with the decision," she said. "It's great for the city and great for the uniformed services."

Ms. Griffin said the city first filed an IRS appeal against the FICA deductions on LODI payments in 1992, but sought retroactive reimbursement as far back as was allowed, to 1989.

After several years of attempting to resolve the issue with the IRS, the city sought a judgment awarding a refund of the employer's and the employees' share of FICA tax paid for the years 1989 through 1998, but no progress was made until it filed its 2003 lawsuit.

Will Pay Interest

The IRS has now agreed that affected employees and the city will be reimbursed for all Social Security taxes taken from LODI payments received for a period of six months or less during the period from 1989 through 2005, plus interest from the date the payment was made.

LODI payments made for a period of six months or more were granted FICA tax exemption by the IRS under a separate statutory provision, and therefore aren't part of this settlement. The IRS isn't allowed to make the refund payments directly to affected employees, however, so employees expecting a refund must submit signed consent forms permitting the city to claim a refund on their behalf.

The city's Office of Payroll Administration has worked closely with the Law Department in pursuing these refunds, and will shortly be contacting the approximately 73,000 affected employees directly with details on how to collect their reimbursement checks. City officials will only contact employees for whom they have a last known address - anyone who has moved and not informed the city should immediately contact OPA.

Contact details and additional information can be found on OPA's Web site at www.nyc.gov/payroll.

Individual refunds will depend on the number of times an employee collected LODI payments for six months or less during the years involved. Therefore, amounts could range from a small number to many thousands of dollars each. The city does not anticipate receiving these refunds from the IRS until July or August 2007 at the earliest.

Ms. Griffin received help in pursuing the city's claim against the IRS from John E. Beerbower, a litigation partner with the private firm of Cravath, Swaine & Moore. The firm volunteered in 2003 to assist in the litigation phase as part of the Law Department's Public Service Program, which to date has received more than $35 million in free legal services for the city.