T.C. Summary Opinion 2001-62
UNITED STATES TAX COURT
FRANK J. ZAVATTO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12576-99S. Filed April 24, 2001.
Frank J. Zavatto, pro se.
Caroline Tso Chen, for respondent.
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for 1997. The decision to be entered is
not reviewable by any other court, and this opinion should not be
cited as authority.
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Respondent determined a deficiency of $3,348 in petitioner’s
1997 Federal income tax. The issue for decision is whether any
portion of the Social Security benefits paid to petitioner in
1997 are includable in his income for that year.
Background
Some of the facts have been stipulated and are so found. At
the time the petition was filed, petitioner resided in Mountain
View, California.
After he retired in 1992 at the age of 62, petitioner
applied for and began to receive Social Security benefits. In
1995, petitioner became reemployed and continued working
throughout 1997, during which period he also continued to receive
Social Security benefits. During the year in issue, he was paid
Social Security benefits totaling $13,865.
As a result of the other income earned by petitioner each
year during the years 1995 through 1997, petitioner was overpaid
Social Security benefits of $20,395.30 (the overpayment), which
included the amount of benefits petitioner received in 1997.
Consequently, the Social Security Administration (SSA) began to
withhold Social Security benefits to which petitioner was
otherwise entitled in order to recover the overpayment. The SSA
recovered $1,702 of the overpayment in 1997 and continued to
withhold all or part of petitioner’s Social Security benefits in
1998 and 1999. As of the date of trial, petitioner had not
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repaid the entire amount of the overpayment.
On his 1997 Federal income tax return, petitioner reported
adjusted gross income of $102,279, which does not include any of
the Social Security benefits paid to petitioner during that year.
In the notice of deficiency, respondent determined that a
portion of the Social Security benefits received by petitioner in
1997 are includable in his income for that year. Other
adjustments made in the notice of deficiency are not in dispute.
Discussion
The extent to which Social Security benefits are includable
in a taxpayer’s income is determined pursuant to a formula that
takes into account the amount of the taxpayer’s Social Security
benefits, the amount of the taxpayer’s other income, and the
taxpayer’s filing status. See sec. 86. For purposes of the
computation contemplated by the formula, the amount of Social
Security benefits received by a taxpayer during any taxable year
is “reduced by any repayment made by the taxpayer during the
taxable year of a social security benefit previously received by
the taxpayer (whether or not such benefit was received during the
taxable year).” Sec. 86(d)(2).
The deficiency here in dispute was properly computed in
accordance with section 86, and petitioner does not contend
otherwise. Instead, petitioner disputes the deficiency because
it is based upon Social Security benefits that he is required to
repay. According to petitioner, because of his obligation to
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repay it, the overpayment is, in effect, a loan to him that
should not be included in his income.
Generally, loan proceeds are not income to the borrower.
Although we understand why petitioner might view the overpayment
as a loan, for Federal income tax purposes, an overpayment of
Social Security benefits is not treated as a loan to the
recipient.
An individual’s Social Security benefits are subject to
reduction if the individual’s other income exceeds a certain
level during a particular year. See 42 U.S.C. sec. 403. The
extent of the reduction often cannot be determined until year’s
end when the individual’s other income for the entire year is
known. Similarly, the extent of an overpayment of Social
Security benefits resulting from such a reduction often cannot be
determined until year’s end. Under those circumstances, an
overpayment of Social Security benefits made in one year would
have to be recovered in subsequent years. See 42 U.S.C. sec.
404. The legislative history accompanying section 86(d)
indicates that the Congress was mindful of the potential negative
Federal income tax consequences facing a taxpayer in such a
situation and in the enactment of section 86(d)(2) intended to
provide a mechanism “to prevent a taxpayer from being subject to
taxation on his benefits in those situations in which a taxpayer
must repay a portion of those benefits because he has been
overpaid previously.” S. Rept. 98-23 at 27 (1983), 1983-2 C.B.
326, 329.
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We understand that under the circumstances of this case, the
relief mechanism provided by section 86(d)(2) might not seem
meaningful to petitioner. Nevertheless, the deficiency here in
dispute properly takes into account the provisions of section
86(d)(2), as well as the other applicable provisions of section
86. Therefore, the deficiency must be sustained, and we so hold.
To reflect the foregoing,
Decision will be
entered for respondent.