T.C. Summary Opinion 2001-103
UNITED STATES TAX COURT
DALE J. AND PHILLIS L. DE BOTH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 438-00S. Filed July 9, 2001.
Dale J. De Both, pro se.
Eric W. Johnson, for respondent.
PAJAK, 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. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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Respondent determined a deficiency in petitioners' 1997
Federal income tax in the amount of $1,316. This Court must
decide whether petitioners must include a workers’ compensation
offset of $5,540.40 as part of their Social Security benefits.
Some of the facts in this case have been stipulated and are
so found. Petitioners resided in Cottage Grove, Minnesota, at
the time they filed their petition.
In September 1994, Phillis De Both (petitioner) was injured
in a workplace accident. Both of petitioner's arms were severed,
and she suffered other serious injuries.
Petitioner received workers' compensation benefits under
Minnesota law for her injuries. She also received Social
Security benefits under Federal law for her injuries.
CompCost, Inc. (CompCost), a State Fund Mutual Company,
handles the Minnesota workers’ compensation claims of petitioner.
On February 23, 1999, CompCost advised that the $25,000 threshold
under Minnesota law was met on May 2, 1996, and since that date
CompCost has been taking a Social Security offset against
petitioner’s workers’ compensation benefit.
The Social Security Administration filed a Form 1099 with
respondent which indicated that in 1997 petitioner received total
benefits of $5,723.90. Of that amount, $5,540 was not paid to
petitioner, but was a "Worker's compensation offset". In 1997,
petitioner received payments totaling $175 from Social Security,
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and an $8.50 Medicare premium was paid on her behalf. During
1997, petitioner also received workers' compensation payments
totaling $15,396.73.
On their 1997 tax return, petitioners reported $184 ($5,724,
rounded amount, minus the workers’ compensation offset of $5,540)
as the amount of benefits they received from Social Security.
They reported $156 as the amount of Social Security benefits
includable in their gross income.
Respondent determined that petitioners failed to report
$5,540 of Social Security benefits and that 85 percent of that
amount, or $4,709, is includable in their gross income.
Petitioners claim that because both workers' compensation and
Social Security benefits were reduced using the same offset,
petitioner did not actually receive the $5,540 from anyone.
Accordingly, petitioners contend that the $5,540 should not be
included as part of petitioner’s Social Security benefits.
Social Security benefits are generally included in income as
provided by section 86. Workers' compensation benefits are
generally not included in income under section 104(a)(1). When
an individual receives both Social Security benefits and workers’
compensation benefits in the same year on account of the same
injury, the Social Security benefits paid to the individual are
generally reduced by a portion of the workers’ compensation
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benefits, and this reduction is the workers’ compensation offset.
20 C.F.R. sec. 404.408(a) (2001). The workers' compensation
offset to Social Security benefits generally is considered as
included in the amount of Social Security benefits received.
Sec. 86(d)(3); Mikalonis v. Commissioner, T.C. Memo. 2000-281.
The relevant House report states in part:
For example, if an individual were entitled to $10,000 of
social security disability benefits but received only $6,000
because of the receipt of $4,000 of workmen’s compensation
benefits, then, for purposes of the provisions taxing social
security benefits, the individual will be considered to have
received $10,000 of social security benefits. [H. Rept. 98-
25, at 26 (1983)].
However, what is vital in this case is that Social Security
benefits are not to be reduced by workers' compensation benefits
if the workers' compensation plan provides for the reduction of
the workers’ compensation benefits by Social Security benefits.
20 C.F.R. sec. 404.408(b)(2) (2001). As respondent puts it, this
prevents a double offset.
Under Minnesota law, after a total of $25,000 of workers'
compensation benefits has been paid, the amount of such benefits
to be received thereafter “shall be reduced” by the amount of
Social Security benefits received on account of the same injury.
Minn. Stat. Ann., sec. 176.101 subdiv. 4 (2001). Thus, under 20
C.F.R. sec. 404.408(b)(2) (2001), petitioner's Social Security
benefits should not have been reduced by a workers' compensation
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offset because petitioner's workers' compensation benefits were
offset by Social Security benefits after May 2, 1996.
The workers' compensation benefits were reduced by the
Social Security benefits throughout 1997. The Form 1099 from the
Social Security Administration shows that petitioner's Social
Security benefits were reduced for the workers' compensation
offset in 1997. There was a double offset. Respondent concedes
that if the Social Security Administration reduced Social
Security benefits to offset workers’ compensation benefits and
CompCost reduced workers’ compensation benefits to offset Social
Security benefits, petitioners would have had a workers’
compensation offset to their Social Security benefits but would
not have received the workers’ compensation benefits on which the
offset was based.
We find that petitioner did not receive the $5,540 amount
from CompCost or from the Social Security Administration in 1997.
Petitioners are not required to include $5,540 as part of their
Social Security benefits in 1997. If the Social Security
Administration pays the amount it owed petitioner in 1997 at some
point in the future, the appropriate amount will be includable in
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petitioners’ gross income at that time. Sec. 86(a).
Accordingly, we hold for petitioners.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for petitioners.