T.C. Summary Opinion 2002-157
UNITED STATES TAX COURT
PETER JOHN MIHOK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5260-01S. Filed December 26, 2002.
Peter John Mihok, pro se.
Brook D. Remick, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect when the petition was filed.1
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
Respondent determined a deficiency of $2,391 in petitioner's
1998 Federal income tax.
1
Unless otherwise indicated, section references
hereafter are to the Internal Revenue Code in effect for the year
at issue.
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After concessions by petitioner of unreported interest
income, a State income tax refund, and a retirement income
distribution, the sole issue for decision is whether, under
section 86(a), Social Security benefits for the year at issue are
includable in petitioner's gross income where a portion of such
benefits includes overpayments that must be repaid to the Social
Security Administration due to excess earnings by petitioner
during the year at issue.
Some of the facts were stipulated. Those facts and the
accompanying exhibits are so found and are incorporated herein by
reference. Petitioner's legal residence at the time the petition
was filed was Weslaco, Texas.
Petitioner attained the age of 65 on July 1, 1996. He
applied for and began receiving retirement Social Security
benefits as of that date. Petitioner continued in gainful
employment as an aeronautical engineer and was employed through
the remainder of 1996, 1997, 1998, and 1999. At the time of
trial, petitioner was no longer employed.
Because of petitioner's continued employment, his Social
Security benefits were overpaid in each of the years 1996, 1997,
and 1998. The overpayments were paid back through a reduction in
petitioner's monthly Social Security benefits. From August 1998
through August 1999, all of petitioner's monthly benefits were
applied toward the accumulated overpayment. From October 1999
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through September 2000, no reductions were made to his benefits;
however, in October 2000, regular reductions of $100 per month
were made to apply against new overpayments in benefits. At the
time of trial, petitioner still owed a balance of approximately
$1,000, which was being reduced by the $100 monthly deduction
from his Social Security benefits.
For the year at issue, 1998, petitioner's Social Security
benefits for that year totaled $22,547 before any reductions to
offset prior overpayments of benefits. For that year, $12,355
was withheld from petitioner's benefits and applied to the
overpayments. Thus, petitioner was paid a net amount of $10,192
during 1998. Because petitioner was gainfully employed during
1998, and his earnings that year, as in past years, exceeded the
allowable amount under Social Security, he continued accruing an
overpayment of benefits. The amount of the overpayments for 1998
could not be determined until the succeeding year, 1999.
For the year 1998, the Social Security Administration issued
a Form SSA-1099, Social Security Benefit Statement, to
petitioner, which reflected total benefits to him of $22,547 for
1998 less reductions of $12,355 that were applied to reduce the
overpayments in benefits to petitioner in prior years. The Form
SSA-1099 reflected net taxable benefits of $10,192 ($22,547 less
$12,355).
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On his Federal income tax return for 1998, petitioner did
not include in gross income any Social Security retirement
benefits for that year. In the notice of deficiency, respondent
determined that the net Social Security benefits of $10,192 paid
to petitioner during 1998 constituted income, and, pursuant to
section 86(a), $8,663.20 of that amount was taxable income.
Petitioner does not dispute the net amount of $10,192 he received
during 1998. He argues, however, that the net amount paid to him
includes amounts representing an overpayment to him for his
excess earnings during 1998, and, therefore, he should not be
liable for income tax on benefits that have to be paid back to
the Social Security Administration through reductions in his
Social Security benefits in subsequent years.
There is no dispute that, under the formula provided in
section 86(a), the taxable portion of petitioner's Social
Security benefits for 1998 is $10,192, the net amount petitioner
received after the reduction of $12,355 for overpayments in
benefits for years prior to 1998. Additionally, there is no
dispute that petitioner's earnings during 1998 were also in
excess of allowable earnings for that year that would cause
Social Security benefits payable in future years to be reduced to
offset the excess benefits paid to petitioner during 1998. As
noted above, petitioner's argument is that, because some of the
net benefits paid to him during 1998 will be affected because of
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his excess earnings during 1998, he should not be required to
include in income the net benefits paid to him during 1998.
The Court rejects petitioner's argument. Section
86(d)(2)(A) provides:
(2) Adjustment for repayments during year.--
(A) In general.–-For purposes of this section, the
amount of social security benefits received during any
taxable year shall be 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).
Thus, it is evident from section 86(d)(2)(A) that a taxpayer is
allowed a reduction, for tax purposes, of any repayment of
benefits made during the taxable year; however, there is no
provision in the statute that allows an additional reduction for
excess benefits paid that year due to the taxpayer's excess
earnings that year. Petitioner's employment earnings during 1998
were not known until the close of that year and only then could
it be determined whether those earnings constituted excess
earnings that would cause an overpayment of Social Security
benefits. It is well settled that income is taxable when it has
been actually or constructively received. Poczatek v.
Commissioner, 71 T.C. 371, 376 (1978) (citing N. Am. Oil Consol.
Co. v. Burnet, 286 U.S. 417 (1932)). Petitioner actually
received $10,192 in Social Security benefits during 1998. That
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amount is includable in petitioner's income for 1998. To the
extent any portion of that amount represented an overpayment due
to petitioner's excess employment earnings, petitioner is
provided relief in the following year by a reduction in the
taxable portion of his benefits.2 Respondent, therefore, is
sustained on this issue.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.
2
The Form SSA-1099 issued by the Social Security
Administration to petitioner for 1999 reflected total benefits of
$31,688, benefits repaid to the Social Security Administration of
$28,792, and net taxable benefits of $2,896. Thus, for the year
1999, petitioner was allowed an offset or reduction of his Social
Security benefits for the overpayments to him during 1998 and
prior years.