T.C. Summary Opinion 2005-57
UNITED STATES TAX COURT
ANTHONY M. FLORES AND SANDRA L. FLORES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14147-04S. Filed May 10, 2005.
Anthony M. Flores and Sandra L. Flores, pro sese.
Alan J. Tomsic, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time that the petition was filed.1 The decision to
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2002,
the taxable year in issue. All monetary amounts are rounded to
the nearest dollar.
- 2 -
be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
Respondent determined a deficiency in petitioners’ Federal
income tax for the taxable year 2002 in the amount of $3,011.
The only issue for decision by the Court is whether certain
workers’ compensation benefits received by petitioner Sandra L.
Flores (Mrs. Flores) are taxable as though they were Social
Security benefits. We hold that they are by virtue of section
86(d)(3).
Background
Some of the facts have been stipulated, and they are so
found.
At the time that the petition was filed, petitioners resided
in Las Vegas, Nevada.
The facts are not in dispute.
In October 2000, Mrs. Flores was seriously injured at work
while employed by Citibank. As a result of her injury, Mrs.
Flores began receiving workers’ compensation benefits in November
2000. Mrs. Flores continued to receive workers’ compensation
benefits in 2002, which she received by check biweekly.
At the time of her injury in October 2000, Mrs. Flores was
also covered by a long-term disability policy through her
- 3 -
employment with Citibank.2 Under the terms of the policy, if an
employee’s disability lasted for more than a year, the employee
was obliged to apply for Social Security benefits. Accordingly,
in July 2002, Mrs. Flores applied for Social Security benefits,
and she began receiving benefits in October 2002 by direct
deposit to her bank account. In 2002, Mrs. Flores received
Social Security benefits of $8,820, which included benefits of
$6,772 paid in 2002 for 2001.
Mrs. Flores received a Form SSA-1099, Social Security
Benefit Statement, for 2002. Box 5 of that form reported “net
benefits for 2002" of $20,675, which was described as follows:
Paid by check or direct deposit $8,820
Worker’s compensation offset 11,855
Benefits for 2002 $20,675
Petitioners attached the Form SSA-1099 to their 2002 Federal
income tax return. Believing that the workers’ compensation
offset was not includable in their income, petitioners wrote the
following explanation of their position on the Form SSA-1099:
Box 5 benefits paid 2001 & 2002 is $8,820.00.
$11,854 paid by worker’s compensation not subject
to income taxes, not paid by SSA.
2
Mrs. Flores paid her share of the premiums on this policy
through payroll deductions.
- 4 -
In the notice of deficiency, respondent determined that the
workers’ compensation offset of $11,855 was includable in
petitioners’ income:
Workers’ compensation benefits are generally not
taxable if paid in place of wages lost as a result of
work related accident or injury. However, workers’
compensation benefits may be taxable if paid in place
of retirement benefits such as Social Security or
Railroad Retirement benefits. In this situation, the
taxable portion of your benefits would be computed
using the same method used for Social Security and
Railroad Retirement.
Discussion
Workers’ compensation is generally excludible from a
taxpayer’s gross income. Sec. 104(a)(1). In contrast, Social
Security benefits, including Social Security disability benefits,
may be includable in a taxpayer’s gross income pursuant to a
statutory formula that takes into account a number of factors,
including the amount of Social Security benefits received, the
taxpayer’s other income, and the taxpayer’s filing status. Sec.
86.
If the amount of Social Security benefits that a taxpayer
receives is reduced because of the receipt of workers’
compensation benefits, then the amount of the workers’
compensation benefits that cause the reduction (the so-called
offset amount) is treated as though it were a Social Security
- 5 -
benefit. Sec. 86(d)(3).3 See Mikalonis v. Commissioner, T.C.
Memo. 2000-281; Willis v. Commissioner, T.C. Memo. 1997-290. The
rationale for this provision appears in the legislative history
accompanying that enactment of section 86 by the Social Security
Amendments Act of 1983, Pub. L. 98-21, sec. 121, 97 Stat. 80:
Your Committee’s bill provides that social
security benefits potentially subject to tax will
include any workmen’s compensation whose receipt caused
a reduction in social security disability benefits.
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).]
In other words, the purpose of section 86(d)(3) is to equalize
3
Sec. 86(d)(3) provides as follows:
SEC. 86(d). Social Security Benefit.--
* * * * * * *
(3) Workmen’s compensation benefits
substituted for social security benefits.–-For purposes
of this section, if, by reason of section 224 of the
Social Security Act * * *, any social security benefit
is reduced by reason of the receipt of a benefit under
a workmen’s compensation act, the term “social security
benefit” includes that portion of such benefit received
under the workmen’s compensation act which equals such
reduction.
At trial, Mrs. Flores testified that she received workmen’s
compensation in an amount greater than the $11,855 “offset” that
was identified in her 2002 Form 1099-SSA, described supra p.3.
In this regard, we emphasize that sec. 86(d)(3) serves to treat
workers’ compensation benefits as though they were Social
Security benefits only to the extent of the offset amount.
- 6 -
the Federal tax treatment of Social Security benefits that are
received by various taxpayers who may or may not be eligible to
receive workers’ compensation benefits.
We acknowledge that Mrs. Flores applied for Social Security
benefits only because she was obliged to do so under the terms of
her long-term disability policy. We also acknowledge that if
Mrs. Flores had not been so obliged, and if she had not actually
applied for Social Security benefits, then her workers’
compensation benefits would not have been subject to Federal
income tax. See sec. 104(a)(1). Under the circumstances, we can
appreciate petitioners’ dismay. Nevertheless, as the Supreme
Court of the United States has instructed, we are dutybound to
apply the law as written by the Congress to the facts as they
occurred and not as they might have occurred. See Commissioner
v. Natl. Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 148-149
(1974).
In view of the foregoing, we hold for respondent on the
legal issue presented.4
Reviewed and adopted as the report of the Small Tax Case
Division.
4
We also note that respondent’s application of sec. 86 is
mathematically correct.
- 7 -
To reflect our disposition of the disputed issue,
Decision will be entered
for respondent.