T.C. Summary Opinion 2005-158
UNITED STATES TAX COURT
MITCHELL WAYNE ANDREW AND NANCY RAE PATTEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5722-03S. Filed November 2, 2005.
Mitchell Wayne Andrew and Nancy Rae Patten, pro sese.
Kenneth P. Dale, for respondent.
CARLUZZO, 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 2000. Rule references are to the Tax
Court Rules of Practice and Procedure. The decision to be
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entered is not reviewable by any other court, and this opinion
should not be cited as authority.
Respondent determined an $11,599 deficiency in petitioners’
2000 Federal income tax and a $483 section 6651(a)(1) addition to
tax for that year. The issues for decision are: (1) Whether
Social Security benefits received on account of Nancy Rae
Patten’s physical disability are includable in petitioners’
income; and (2) whether petitioners’ failure to file a timely
2000 Federal income tax return is due to reasonable cause.
Background
Some of the facts have been stipulated and are so found.
At the time the petition was filed in this case, petitioners
resided in Lake Stevens, Washington. Petitioners are, and were
during all relevant periods, married to each other. They filed a
joint Federal income tax return for the year in issue. Nancy R.
Patten (petitioner) is afflicted with multiple sclerosis and has
not been employed since 1994.
In 1995, petitioner filed for and was denied Social Security
disability benefits. She reapplied for disability benefits in
1998 and was again denied. She successfully appealed the
denials, and in 2000 she was awarded and received Social Security
disability benefits of $50,405. Although received entirely in
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2000, the Social Security disability benefits are attributable to
1996, 1997, 1998, 1999, and 2000.
Petitioners’ self-prepared 2000 return was filed September
20, 2001. Taking into account an extension to file, that return
was due on or before August 30, 2001.1 The income reported on
petitioners’ 2000 return does not take into account the Social
Security disability benefits petitioner received that year.
In the notice of deficiency, respondent determined that 85
percent of the Social Security disability benefits ($42,844)
petitioner received during 2000 is includable in their income for
that year and imposed a section 6651(a)(1) addition to tax for
their failure to file a timely Federal tax return. Other
adjustments in the notice of deficiency are not in dispute and
need not be addressed.
Discussion
Section 61(a) provides that, except as otherwise provided by
law, gross income includes all income from whatever source
derived. Relevant for our purposes, section 86(a) provides that
if the taxpayer’s modified adjusted gross income2 plus one-half
of the Social Security benefits received by the taxpayer exceeds
1
The parties stipulated the Aug. 30, 2001, date.
2
In this case, ignoring adjustments not relevant here,
petitioners’ modified adjusted gross income equals their adjusted
gross income. See sec. 86(b)(2).
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the adjusted base amount, then gross income includes the lesser
of: (1) The sum of (a) 85 percent of such excess, plus (b) the
lesser of (i) one-half of the Social Security benefits received
during the year or (ii) one-half of the difference between the
adjusted base amount and the base amount of the taxpayer; or (2)
85 percent of the Social Security benefits received during the
taxable year.3 See sec. 86(a)(2). With respect to married
taxpayers who file a joint return for 2000, as petitioners did,
the base amount and the adjusted base amount are $32,000 and
$44,000, respectively. Sec. 86(c)(1)(B) and (2)(B).
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). An election may be made by a taxpayer
who receives a lump-sum payment of Social Security benefits
during the taxable year in which a portion of the benefits is
attributable to previous taxable years. Sec. 86(e). Section
86(e) provides that, if the election is made, the amount included
in gross income for the taxable year of receipt must not exceed
the sum of the increases in gross income for those previous
taxable years that would result from taking into account the
3
Before 1984, certain disability benefits were excludable
from an employee’s gross income under sec. 105. However, this
section was repealed, and “since 1984 Social Security disability
benefits have been treated in the same manner as other Social
Security benefits.” Maki v. Commissioner, T.C. Memo. 1996-209.
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portion of the benefits attributable to the previous taxable
years. Accordingly, if no election is made by the taxpayer under
section 86(e), lump-sum distributions of Social Security benefits
are includable in the taxpayer’s gross income in the taxable year
the benefits are received. Petitioners did not make an election
under section 86(e) with respect to the lump-sum Social Security
disability benefits received in 2000.
Allegations petitioners made in the petition and their
presentation at trial suggest that petitioners do not dispute the
manner in which Social Security benefits are generally treated
for Federal income tax purposes. Instead they argue that the
Social Security disability benefits here under consideration are
excludable from their income by virtue of section 104(a)(2).
Petitioners admit that they did not know how to treat the
disability benefits for Federal income tax purposes. According
to petitioners, in an informal contact made with one of
respondent’s employees they were advised that the benefits were
excludable from income under section 104(a)(2). They further
contend that their uncertainty as to how to treat the disability
benefits resulted in the late filing of their 2000 return.
Section 104(a)(2) excludes from gross income amounts
received in damages, by suit or settlement, “on account of
personal physical injuries or physical sickness”. In determining
whether damages received are excludable under section 104(a)(2),
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the focus is the nature of the claim underlying the damage award.
United States v. Burke, 504 U.S. 229, 237 (1992). The underlying
claim giving rise to the recovery must be “based upon tort or
tort type rights”, and the damages must have been received “on
account of personal injuries or sickness”. Commissioner v.
Schleier, 515 U.S. 323, 336-337 (1995).
Section 1.104-1(c), Income Tax Regs., provides that “The
term ‘damages received (whether by suit or agreement)’ [in
section 104(a)(2)] means an amount received (other than worker’s
compensation) through prosecution of a legal suit or action based
upon tort or tort type rights, or through a settlement agreement
entered into in lieu of such prosecution.”
Despite the fact that petitioner sued to obtain Social
Security disability benefits, these benefits do not constitute
“damages” from a tortious injury. Rather, these benefits are
amounts received through disability insurance.4 See Andrews v.
Commissioner, T.C. Memo. 1992-668.
Taking into account petitioners’ 2000 filing status, their
modified adjusted gross income, and the Social Security
disability benefits petitioner received that year, 85 percent of
4
To the extent that petitioners did receive erroneous
advice on this point from one of respondent’s employees, the
event is of no significance here. See Zimmerman v. Commissioner,
71 T.C. 367, 371 (1978), affd. without published opinion 614 F.2d
1294 (2d Cir. 1979); Green v. Commissioner, 59 T.C. 456, 458
(1972).
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those benefits are includable in their 2000 income. See sec.
86(a), (c). Respondent’s determination in this regard is,
therefore, sustained.
Section 6651(a)(1) imposes an addition to tax for failure to
file a Federal income tax return by its due date, determined with
regard to any extension of time for filing previously granted.
The addition equals 5 percent for each month that the return is
late, not to exceed 25 percent. Sec. 6651(a)(1).
The addition to tax is applicable unless the taxpayer
establishes that the failure was due to reasonable cause and not
willful neglect. Id. The taxpayer must prove both reasonable
cause and a lack of willful neglect. United States v. Boyle, 469
U.S. 241, 246 (1985). “Reasonable cause” requires the taxpayer
to demonstrate that he exercised ordinary business care and
prudence. Id. “Willful neglect” is defined as a “conscious,
intentional failure or reckless indifference.” Id. at 245.
Respondent bears the burden of production with respect to
any additions to tax. See sec. 7491(c). In order to meet this
burden, respondent must produce sufficient evidence establishing
that it is appropriate to impose the additions to tax. See
Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once
respondent has done so, the burden of proof is upon petitioners
to persuade the Court that respondent’s determination is
incorrect. See id.
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Respondent established that petitioners’ 2000 return was not
filed by its extended due date. Petitioners’ only explanation
for the untimely filing is their uncertainty as to how to treat
the Social Security disability payments. We are not persuaded
that their explanation rises to the level of “reasonable cause”.
Accordingly, we hold that petitioners are liable for the addition
to tax under section 6651(a)(1) for the year 2000.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.