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that did not begin until 2000, after the filing of respondent’s
motion for summary judgment. We agree with respondent.2
Section 10-12, as amended in 1999, unlike the version of
that statute in effect before such amendment, distinguishes
between work-related injuries and nonwork-related injuries, which
is necessary to qualify as a worker’s compensation statute under
section 104(a)(1) and section 1.104-1(b), Income Tax Regs.
Respondent does not dispute that benefits received for
occupational disability pursuant to section 10-12, as amended in
1999, fall under the section 104(a)(1) exemption if the benefits
are paid for a period that postdates the amendment.
Therefore, our discussion now turns on the retroactive
effect, if any, of amended section 10-12 on payments previously
received by petitioner.
It is a long-standing tenet that “state law creates legal
interests but the federal statute determines when and how they
shall be taxed.” Burnet v. Harmel, 287 U.S. 103, 110 (1932); see
United States v. Mitchell, 403 U.S. 190, 197 (1971); Helvering v.
Stuart, 317 U.S. 154, 162 (1942); Morgan v. Commissioner, 309
U.S. 78, 80-81 (1940).
2 The validity and application of an amended local
ordinance did come before this Court in Levesque v. Commissioner,
T.C. Memo. 1999-57, and McDowell v. Commissioner, T.C. Memo.
1997-500; however, the issue was not fully addressed and the
cases did not decide whether to give the amendment retroactive
effect for Federal tax purposes.
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