T.C. Summary Opinion 2002-144
UNITED STATES TAX COURT
MONA L. PURCELL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11613-01S. Filed November 7, 2002.
Mona L. Purcell, pro se.
Marc L. Caine and Maureen T. O'Brien, for respondent.
DEAN, 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 the year in issue. 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 in petitioner's Federal
income tax for 1999 of $3,780 and an accuracy-related penalty
under section 6662(a) of $756. The issues for decision are:
(1) Whether any portion of the Social Security benefits
petitioner received during 1999 is includable in her gross
income; and (2) whether petitioner is liable for a section
6662(a) accuracy-related penalty as determined by respondent.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated herein by reference. At the time the petition was
filed, petitioner resided in Natick, Massachusetts.
Petitioner reported wages of $54,726 for 1999. Respondent
issued a notice of deficiency determining that petitioner failed
to report Social Security benefits received in 1999. The Social
Security Administration (SSA) informed the Commissioner that it
had distributed $15,955 in benefits to petitioner in 1999.
The SSA has informed petitioner that she has received a
total overpayment of $36,982.30 in Social Security benefits.
This amount is presently being disputed by petitioner. She does
not object to repaying the benefits if the SSA determines that
she received an overpayment or paying the taxes if there is
determined not to be an overpayment. Petitioner argues, however,
that she should not have to pay both.
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Section 61(a) provides that, except as otherwise provided by
law, gross income includes all income from whatever source
derived. Section 86(a)(1) generally requires the inclusion of
Social Security benefits in gross income. Section 86
specifically provides the taxpayer with a formula to determine
what percentage of her Social Security benefits are includable in
gross income. Because petitioner had modified adjusted-gross
income plus one-half of the Social Security benefits received in
excess of $34,000, section 86(a)(2) controls the determination of
the amount of her Social Security benefits that are includable in
gross income. Section 86(a)(2)(B) applies to this case. Section
86(a)(2)(B) provides that the amount of Social Security benefits
included in gross income here is "85 percent of the social
security benefits received during the taxable year."
Social Security benefits are included in the recipient's
gross income in the taxable year in which the benefits are
received. Sec. 86(a)(1). Petitioner admits receiving Social
Security benefits in 1999. If petitioner is required to repay
the Social Security benefits, she may be entitled to a deduction
in the year of repayment. N. Am. Oil Consol. Co. v. Burnett, 286
U.S. 417, 424 (1932). If the deduction fails to make petitioner
whole because the applicable tax rate was higher in the year of
recognition than it was in the year of return, section 1341 may
apply. See United States v. Skelly Oil Co., 394 U.S. 678, 681
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(1969). Section 1341 provides relief to a taxpayer who has
received income under the claim of right doctrine and applies
only if the amount of repayment exceeds $3,000 in the taxable
year. Sec. 1341(a)(3). Additionally, section 86(d)(2)(A) allows
a taxpayer to reduce the amount of Social Security benefits
includable in income, if, during the same year, the taxpayer was
required to make repayments on Social Security benefits
previously received.
While petitioner's situation is not an enviable one, this
Court is bound by the language of the Code. Because petitioner
received her Social Security benefits in 1999, she was obligated
to report them on her 1999 Federal income tax return. The Court
holds, therefore, that respondent's determination that petitioner
failed to report $13,561.75 as income on her 1999 tax return is
correct.
Respondent also determined that a section 6662 accuracy-
related penalty is due with respect to petitioner's tax return
for 1999.
Section 6662 imposes a penalty equal to 20 percent of the
portion of the underpayment attributable to negligence or
disregard of rules or regulations. See sec. 6662(a) and (b)(1).
Negligence is defined as any failure to make a reasonable attempt
to comply with the provisions of the Internal Revenue Code, and
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the term "disregard" includes any careless, reckless, or
intentional disregard. Sec. 6662(c).
The accuracy-related penalty will not apply if petitioner
demonstrates that there was reasonable cause for the underpayment
and that she acted in good faith with respect to the
underpayment. See sec. 6664(c). Whether a taxpayer acted with
reasonable cause and good faith depends on the pertinent facts
and circumstances. See McCallson v. Commissioner, T.C. Memo.
1993-528; sec. 1.6664-4(b)(1), Income Tax Regs.
Neither petitioner nor respondent argued or produced any
evidence indicating that petitioner had knowledge of the
overpayments prior to filing her 1999 Federal tax return. During
trial the Court asked petitioner why she did not report the
Social Security benefits. Petitioner's response provided no
legally significant reason; she claimed that she did not know she
needed to report Social Security benefits as income and that she
was "naive". She concluded by stating that "I'm definitely at
fault for that."
The Court finds that petitioner failed to make a reasonable
attempt to determine whether she should report any portion of the
Social Security benefits she received in 1999. Further,
petitioner failed to produce any evidence to show that she acted
with reasonable cause and good faith for the year at issue. The
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Court sustains respondent's determination that petitioner is
liable for the accuracy-related penalty for 1999.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.