T.C. Memo. 2006-39
UNITED STATES TAX COURT
JACQUELINE AND THEODORE MAJOR GREEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
THEODORE MAJOR AND JACQUELINE GREEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 2475-04, 4970-05. Filed March 9, 2006.
Jacqueline and Theodore Major Green, pro sese.
Richard J. Hasserbrock, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: The issues for decision are whether
petitioners are entitled to exclude from income Social Security
benefits and deduct net operating loss (NOL) carryforwards
relating to their 2000 and 2001 returns.
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FINDINGS OF FACT
From 1985 through the years in issue, Theodore Green was
employed as a tax auditor for the Internal Revenue Service (IRS).
His duties included examining Federal income tax returns. On
November 12, 1989, Jacqueline Green sustained injuries when she
was struck in a grocery store parking lot with a shopping cart
operated by Rachel Perez. Mrs. Green, on November 7, 1990,
sought redress for these injuries by filing a complaint against
Ms. Perez in the Superior Court of Ventura County, California.
Mrs. Green’s injuries prevented her from continuing to work on
the assembly line at General Motors (GM) and beginning in 1991,
she began working as a GM decal assembler (i.e., a person who
attaches invoices to automobiles). On August 27, 1991, while
working as a decal assembler, she sustained additional injuries
including severe back injuries requiring several surgeries and
rendering her unable to work.
On August 6, 1992, Mrs. Green filed a claim for Social
Security benefits, and on December 17, 1993, began receiving such
benefits relating to the injuries sustained at GM. Mrs. Green
also filed, with the State of California’s Workers’ Compensation
Appeals Board, a claim against GM for these injuries. At the
time of trial, however, Mrs. Green had not received any workmen’s
compensation benefits.
On November 12, 1996, Mrs. Green obtained a default judgment
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(the judgment) against Ms. Perez for $166,013. On March 14,
1997, Ms. Perez filed a Chapter 7 bankruptcy petition in the U.S.
Bankruptcy Court, Central District of California. Mrs. Green
filed a proof of claim in Ms. Perez’s bankruptcy proceeding but
did not receive any funds relating to the judgment.
Petitioners, on their 1997 return, claimed a $166,013
casualty loss. Petitioners also attached to their 1997 return a
document titled “Election to Forgo The Carryback Period Under
172(b)(3) of Internal Revenue Code NOL Carryforward”. This
document set forth petitioners’ intention to claim an annual
$11,068 (i.e., from 1997 through 2011) NOL carryforward.
Petitioners filed Forms 1040, U.S. Individual Income Tax
Return, relating to 2000 and 2001. On line 20a they reported
Social Security benefits of $12,258 and $12,708, respectively.
Petitioners did not, however, report these benefits as gross
income on line 20b of either return. Petitioners claimed an
$11,068 NOL carryforward on line 21 of each of their 2000 and
2001 returns.
On November 10, 2003, and January 26, 2005, respectively,
respondent issued petitioners a notice of deficiency relating to
2001 and 2000. In the notice, respondent determined that the
Social Security benefits were taxable and petitioners were not
entitled to the NOL carryforwards. On February 11, 2004, and
March 14, 2005, petitioners, while residing in Moorpark,
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California, filed their petitions relating to 2001 and 2000,
respectively. On July 14, 2005, the Court granted respondent’s
motion to consolidate docket Nos. 2475-04 and 4970-05 for
purposes of trial, briefing, and opinion.
OPINION
Section 861 requires the inclusion in gross income of up to
85 percent of Social Security benefits received. See Reimels v.
Commissioner, 123 T.C. 245, 247-248 (2004), affd. 436 F.3d 344
(2d Cir. 2006). In 2000 and 2001, Mrs. Green received Social
Security benefits but, contrary to the mandate of section 86, did
not report these benefits as gross income. Petitioners contend
that the Social Security benefits paid to Mrs. Green in 2000 and
2001 were paid in lieu of workmen’s compensation, and thus,
pursuant to section 104, are excludable from gross income.2
Section 104 states that gross income shall not include those
“amounts received under workmen’s compensation acts as
compensation for personal injuries or sickness”. Sec. 104(a)(1).
Section 1.104-1(b), Income Tax Regs., excludes from income those
payments received “under a statute in the nature of a workmen’s
compensation act which provides compensation to employees for
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
2
Sec. 7491(a) is applicable. Our conclusions, however,
are based on a preponderance of the evidence, and thus the
allocation of the burden of proof is immaterial. See Martin Ice
Cream Co. v. Commissioner, 110 T.C. 189, 210 n.16 (1998).
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personal injuries or sickness incurred in the course of
employment.” Simply put, title II of the Social Security Act
(the Act) is not “in the nature of a workmen’s compensation act.”
The Act allows for disability payments to individuals regardless
of whether the individual was injured “in the course of
employment”. See 42 U.S.C. sec. 423(d)(1)(A) (2000); cf. Norris
v. Commissioner, T.C. Memo. 2001-152, affd. 46 Fed. Appx. 582
(9th Cir. 2002) (holding that a statute is not considered to be
in the nature of a workmen’s compensation act if it allows for
disability payments for any reason other than on-the-job
injuries). Accordingly, we sustain respondent’s determinations
relating to the Social Security benefits. Sec. 86(a).
Petitioners contend that they are entitled, pursuant to
sections 165 and 172, to deduct losses relating to the judgment.
Section 165 allows a deduction for any loss sustained during the
taxable year and not compensated for by insurance or otherwise.
Sec. 165(a). The deduction, however, is limited to those losses
incurred in a trade or business, in any transaction entered into
for profit, or as a result of a fire, storm, theft, or other
casualty. See sec. 165(c)(1), (2), and (3). Petitioners’
claimed loss was not incurred in a trade or business or in a
transaction entered into for profit (i.e., the injuries were
incurred while shopping for groceries). Accordingly, we sustain
respondent’s determinations that petitioners are not entitled to
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section 165 deductions. Id. We also note that petitioners do
not have a basis in the judgment. As a result, petitioners are
not entitled to a section 166 worthless debt deduction. See sec.
166(a) and (b); sec. 1.166-1(e), Income Tax Regs.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Decisions will be entered
for respondent.