T.C. Summary Opinion 2001-153
UNITED STATES TAX COURT
LEWIS L. REESE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3140-00S. Filed September 25, 2001.
Lewis L. Reese, pro se.
H. Clifton Bonney, Jr., for respondent.
DINAN, 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
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effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioner’s Federal
income tax of $6,591 and an accuracy-related penalty in the
amount of $1,318 for the taxable year 1997.
After concessions,1 the issues for decision are: (1) What
amount of Social Security disability benefits is includable in
petitioner’s gross income; and (2) whether petitioner is entitled
to a deduction for attorney’s fees incurred in obtaining the
Social Security benefits.
Some of the facts have been stipulated and are so found.
The stipulations of fact and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
South San Francisco, California, on the date the petition was
filed in this case.
Petitioner moved from California to the Washington, D.C.,
area in early December 1996 in order to obtain medical treatment.
He maintained a household in Washington, using furniture and
other items moved from California. In late December 1996,
petitioner’s wife moved back to California due to medical
problems experienced by her daughter living there. Because their
1
Petitioner concedes that (1) he is not entitled to a
deduction for any contribution to an Individual Retirement
Account, and (2) a State income tax refund of $1,096 must be
included in his gross income. Respondent concedes that
petitioner is not liable for the accuracy-related penalty.
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belongings had been moved from California, petitioner’s wife
purchased new furniture for use there. She remained in
California, caring for her daughter and granddaughter and working
at San Francisco General Hospital. After petitioner completed
his medical treatment, he moved back to California. He began
driving from Washington, D.C., on or about December 26, 1997,
stopped in Decatur, Georgia, to spend the New Year holiday with
his sister, and arrived in San Francisco on or about January 4,
1998.
Petitioner received Social Security disability benefits of
$26,364 in 1997. These benefits were attributable to 1996 and
1997. Of the total amount, $20,011 was paid to petitioner
directly, $44 was paid on behalf of petitioner for Medicare
premiums, and the remaining $6,309 was paid to petitioner’s
lawyer.
Petitioner filed a Federal income tax return for 1997 as a
married person filing a separate return. He reported $20,490 in
adjusted gross income,2 but has since conceded that his 1997
2
The notice of deficiency reflects taxable income as shown
on petitioner’s return to be $16,389. Petitioner’s return shows
$14,389. This $2,000 discrepancy was apparently an attempt by
respondent to correct a mathematical error in petitioner’s
computation of adjusted gross income. The following computation
appears on petitioner’s return:
(continued...)
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adjusted gross income, exclusive of any Social Security benefits,
is $23,586.3 Petitioner did not include any portion of the
benefits in gross income. Respondent determined that 85 percent
of the benefits, or $22,409, is includable.
The inclusion of Social Security benefits in gross income is
governed by section 86. Social Security disability benefits are
treated in the same manner as other Social Security benefits.
Sec. 86(d)(1); Thomas v. Commissioner, T.C. Memo. 2001-120.
Under the general rule, taxpayers whose modified adjusted gross
income plus half of the Social Security benefits received is
greater than $25,0004 must include a portion of the benefits in
2
(...continued)
Total income 32,389
IRA deduction 2,000
Moving expenses 7,900
Total adjustments (11,900)1
Adjusted gross income 20,489 2
1
This amount was written on top of an entry showing $9,900.
2
This amount was written on top of an entry showing $22,489.
It is evident from petitioner’s return that the error lies not in
the adjusted gross income computation, but in the amount of
moving expenses. According to the Form 3903, Moving Expenses,
filed by petitioner with his return, he incurred a total of
$9,900 in such expenses. This indicates that while petitioner
discovered and corrected the error in the adjusted gross income
computation, he neglected to correct the error in the amount of
moving expenses reflected in the computation. The Rule 155
computation must account for this discrepancy in the notice of
deficiency.
3
This amount is $20,490 plus the $3,096 in concessions made
by petitioner. See supra note 1 for the individual concessions.
4
This amount is $32,000 in the case of joint returns and
zero in the case of taxpayers who are married, who do not file a
(continued...)
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their income. Sec. 86(a) through (c). The portion included in
income, never exceeding 85 percent, varies according to a formula
set forth in section 86(a). This formula uses variables known as
“base amount” and “adjusted base amount”, which are defined under
section 86(c). Under the general rule, the former is $25,000 and
the latter is $34,000. Sec. 86(c)(1)(A) and (2)(A). However,
with respect to a married taxpayer who does not file a joint
return and who “does not live apart from his spouse at all times
during the taxable year,” both of these amounts are zero. Sec.
86(c)(1)(C) and (2)(C).
Respondent argues that petitioner lived with his wife for a
portion of 1997, causing the benefits he received to fall under
the special rule of section 86(c)(1)(C) and (2)(C). To this
effect, respondent asserts that petitioner admitted prior to
trial that he had lived with her for a few days in 1997.
Petitioner denies making such an admission. He testified at
trial that he returned to California on 2 days in connection with
a workers’ compensation issue, but that he did not “live” with
his spouse during that period. No evidence was admitted of an
admission by petitioner or which otherwise contradicts
petitioner’s testimony. We accept petitioner’s testimony and
have found, as detailed above, that petitioner and his wife lived
4
(...continued)
joint return, and who do not live apart from their spouses at all
times during the year. Sec. 86(c)(1).
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apart throughout 1997. The exact amount of the Social Security
benefits which petitioner must include in income will be
calculated in the Rule 155 computation required in this case.
Separately, petitioner argues that only the portion of the
benefits which he received should be included in income, not the
portions paid for Medicare and paid to his lawyer. As a general
rule, income is taxed to the person earning it even if the right
to receive the income is contractually assigned to another person
prior to its being earned. Lucas v. Earl, 281 U.S. 111 (1930);
Kenseth v. Commissioner, 114 T.C. 399 (2000), affd. 259 F.3d 881
(7th Cir. 2001); Banks v. Commissioner, T.C. Memo. 2001-48; see
also S. Rept. 98-23, 26 (1983), 1983-2 C.B. 328 (stating that the
total amount of Social Security benefits received by a taxpayer
is not to be reduced by attorney’s fees or amounts withheld as
medical insurance premiums). Under this principle, the Social
Security benefits are includable in petitioner’s income despite
the fact that these amounts were paid on his behalf rather than
to petitioner directly.
Under section 212(1), taxpayers are “allowed as a deduction
all the ordinary and necessary expenses paid or incurred during
the taxable year * * * for the production or collection of
income”. The amount of the deduction is limited to expenses
related to the collection of income which is required to be
included in gross income for Federal income tax purposes. Sec.
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265(a)(1); sec. 1.212-1(a)(1), Income Tax Regs. Thus, petitioner
is entitled to deduct the same percentage of the legal expenses
incurred in securing the Social Security disability benefits as
the percentage of the benefits which are included in income. See
Andrews v. Commissioner, T.C. Memo. 1992-668. This deduction is
a miscellaneous itemized deduction subject to the 2-percent floor
of section 67(a); whether it reduces petitioner’s taxable income
will be determined in the Rule 155 computation.
Petitioner makes two final arguments. First, petitioner
argued in the petition that he did not receive the Social
Security payments until 1998. However, at trial petitioner
admitted (and the evidence reflects) that he received the
payments in late December 1997. Second, petitioner argues that a
portion of the benefits was attributable to 1996, not 1997.
However, lump-sum benefits generally are taxed in the year
received rather than the year to which they are attributable.
Secs. 86(e), 451(a).
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.