T.C. Memo. 1996-209
UNITED STATES TAX COURT
ROGER G. AND LILIANNE J. G. MAKI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3797-95. Filed April 30, 1996.
Roger G. and Lilianne J. G. Maki, pro sese.
Keith G. Medleau, for respondent.
MEMORANDUM OPINION
DINAN, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable year in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
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Respondent determined a deficiency in petitioners' 1991
Federal income tax in the amount of $882 and an accuracy-related
penalty pursuant to section 6662(a) in the amount of $176.
The issues for decision are: (1) Whether $3,150 of Social
Security disability benefits received by petitioners during 1991
constitutes gross income; and (2) whether petitioners are liable
for the accuracy-related penalty pursuant to section 6662(a).
Some of the facts have been stipulated and are so found.
The stipulations of fact and attached exhibits are incorporated
herein by this reference. Petitioners resided in Des Moines,
Washington, on the date the petition was filed in this case.
Hereinafter, references to petitioner in the singular are to
petitioner Roger G. Maki.
In 1991, petitioner received Social Security disability
benefits in the amount of $6,299. On their 1991 Federal income
tax return, petitioners identified this amount as "Social
Security benefits" with an added notation "Disability payments
see enclosure" on line 21a of the return; however, the amount was
not entered as taxable income on the adjacent line 21b of
petitioners' income tax return. Petitioners' adjusted gross
income for 1991, without the inclusion of the Social Security
disability benefits, was $53,321.
Petitioner contends that his Social Security disability
benefits are not taxable. Petitioner's position is based on Form
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886-A,2 involving an audit of petitioners' 1987 tax year. Form
886-A, was a handwritten statement addressed to petitioners and
stated the following:
The enclosed information indicates that the income
is considered taxable Social Security Benefits and not
disability payments that are non-taxable. You will
receive a refund for the amount you overpaid if you owe
no other taxes.
The Form 886-A was the enclosure referenced on petitioners' 1991
Federal income tax return. Respondent contends that Social
Security disability benefits are taxed pursuant to section 86 and
that one-half of the amount received is taxable to petitioner
during the year in issue.
The first issue for decision is whether petitioner's Social
Security disability payments are taxable pursuant to section 86.
We begin by noting that petitioners have the burden of proving
that respondent's determination is in error. Rule 142(a); Welch
v. Helvering, 290 U.S. 111 (1933).
Before 1984, certain payments made in lieu of wages to an
employee who was retired by reason of permanent and total
disability were excludable from the employee's gross income under
section 105(d).3 However, the Social Security Act Amendments of
1983 repealed the limited exclusion of disability payments
2
Agreement as to Final Determination of Tax Liability.
3
Sec. 105(d) was repealed effective for taxable years
after 1983 by the Social Security Act Amendments of 1983, Pub. L.
98-21, sec. 122(b), 97 Stat. 85.
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provided by section 105(d), effective with respect to taxable
years beginning after 1983.4 Therefore, since 1984 Social
Security disability benefits have been treated in the same manner
as other Social Security benefits. See sec. 86(d)(1).5 These
benefits are subject to tax under the provisions of section 86.
See Ernzen v. United States, 875 F.2d 228 (9th Cir. 1989);
Wallers v. United States, 847 F.2d 1279 (7th Cir. 1988); Gibson
v. Commissioner, T.C. Memo. 1996-140; Bradley v. Commissioner,
T.C. Memo. 1991-578.
Section 61(a) provides that gross income includes all income
from whatever source derived, unless excludable by a specific
provision of the Code. Moreover, section 86(a) for the year in
issue, provides that gross income includes Social Security
benefits in the amount equal to the lesser of : (1) one-half of
the Social Security benefits received during the year, or (2)
one-half of the excess over certain base amounts. The base
amount for the year in issue for a joint return is $32,000. Sec.
86(c)(2).
4
Under sec. 22, an individual who is retired on account
of permanent and total disability is allowed a credit equal to 15
percent of the individual's "section 22 amount" for the taxable
year. Based on petitioners' level of income, they do not qualify
for the sec. 22 credit for the year in issue.
5
Sec. 86(d)(1) defines "Social Security benefit" as
amounts received under title 11 of the Social Security Act which
includes Social Security disability benefits.
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Therefore, we hold that one-half of petitioner's Social
Security disability benefits, in the amount of $3,150 is taxable
for the year in issue. Sec. 86(a). Petitioners failed to
present any evidence contrary to respondent's position. Rule
142(a). Accordingly, respondent is sustained on this issue.
The final issue for decision is whether petitioners are
liable for the section 6662(a) accuracy-related penalty. Section
6662(a) imposes a 20-percent penalty on the portion of an
underpayment attributable to any one of various factors, one of
which is negligence. Respondent determined that petitioners are
liable for the accuracy-related penalty imposed by section
6662(a), and that the entire underpayment of tax was due to
negligence. "Negligence" includes a failure to make a reasonable
attempt to comply with the provisions of the Internal Revenue
laws or to exercise ordinary and reasonable care in the
preparation of a tax return. Sec. 6662(c); sec. 1.6662-3(b)(1),
Income Tax Regs. "Disregard" includes any careless, reckless, or
intentional disregard of rules or regulations. Sec. 6662(c);
sec. 1.6662-3(b)(2), Income Tax Regs.
However, section 6664(c)(1) provides that the penalty under
section 6662(a) shall not apply to any portion of an
underpayment, if it is shown that there was reasonable cause for
the taxpayer's position with respect to that portion and that the
taxpayer acted in good faith with respect to that portion. Sec.
6664(c)(1). The determination of whether a taxpayer acted with
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reasonable cause and in good faith within the meaning of section
6664(c)(1) is made on a case-by-case basis, taking into account
all the pertinent facts and circumstances. Sec. 1.6664-4(b)(1),
Income Tax Regs. The most important factor is the extent of the
taxpayers' effort to assess their proper tax liability for the
year. Id.
Petitioners prepared their 1991 Federal income tax return.
Although we found petitioner to be a credible witness, the record
fails to establish that petitioners acted with reasonable cause
and in good faith in assessing whether petitioner's Social
Security disability benefits were taxable. Social Security
disability payments have been subject to tax since 1984. The
record shows that respondent has challenged petitioner's failure
to include his Social Security disability benefits as taxable
income in the past. Other than their reliance on the Form 886-A,
petitioners offered no proof that they made good faith efforts to
assess their proper tax liability.
Based on this record, we conclude that petitioners are
liable for the section 6662 accuracy-related penalty.
To reflect the foregoing,
Decision will be entered
for respondent.