T.C. Summary Opinion 2011-44
UNITED STATES TAX COURT
KEVIN L. AND LINDA SHERAR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19548-09S. Filed April 6, 2011.
Kevin L. and Linda Sherar, pro sese.
Jimeel R. Hamud, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
year in issue.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency in petitioners’ 2007
Federal income tax of $4,988.
The issue for decision is whether certain workers’
compensation benefits received by petitioner Linda Sherar (Mrs.
Sherar) are taxable as though they were Social Security benefits
by virtue of section 86(d)(3). We hold that they are.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts and accompanying exhibits. Petitioners resided in the
State of California when the petition was filed.
In 1998, Mrs. Sherar suffered two work-related injuries 2
months apart. As a result of these injuries, Mrs. Sherar has
endured 12 surgeries, and she began receiving workers’
compensation benefits in 1999.
In 2003, on the advice of counsel, Mrs. Sherar applied for
Social Security disability benefits. Mrs. Sherar was initially
denied Social Security benefits but after a series of appeals was
finally granted benefits in 2007.
For 2007, Mrs. Sherar received a Form SSA-1099, Social
Security Benefit Statement, from the Social Security
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Administration. Box 3 of that form reported “Benefits Paid in
2007” of $36,374.40, which amount was described as follows:
Paid by check or direct deposit $3,796.38
Medicare Part B premiums deducted
from * * * benefits 841.50
Workers’ compensation offset 30,663.90
Attorney Fees 1,072.62
Benefits for 2007 $36,374.40
The description of the benefits for 2007 also includes a
statement that the $36,374.40 amount included $10,750.80 paid in
2007 for 2006, $10,330.80 paid in 2007 for 2005, and $4,189.50
paid in 2007 for 2004.2
Petitioners filed a 2007 Federal income tax return
reporting, inter alia, wages of $50,797 on line 7. In contrast,
on line 20a of their return, petitioners did not report any
Social Security benefits, nor did they report any taxable amount
thereof on line 20b.
In the notice of deficiency respondent determined that 85
percent, or $30,918, of the Social Security benefits of
$36,374.40, received by Mrs. Sherar in 2007, was includable in
petitioners’ gross income for that year.
Discussion
Workers’ compensation is generally excludable from a
taxpayer’s gross income. Sec. 104(a)(1). In contrast, Social
Security benefits, including Social Security disability benefits,
2
Necessarily, therefore, the balance of benefits (i.e.,
$11,103.30) was paid for 2007.
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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.
The amount of Social Security benefits may include the
amount of workers’ compensation benefits received. Sec.
86(d)(3). Specifically, 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
workers’ compensation benefits that causes the reduction (the so-
called offset amount) is treated as though it were a Social
Security benefit. Sec. 86(d)(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 the enactment of section 86 by the Social
Security Amendments 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).]
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In other words, the purpose of section 86(d)(3) is to
equalize the Federal tax treatment of Social Security benefits
that are received by taxpayers who may or may not be eligible to
receive workers’ compensation benefits.
We acknowledge that Mrs. Sherar applied for Social Security
benefits on the advice of counsel. We also acknowledge that if
Mrs. Sherar had not applied for Social Security benefits, then
her workers’ compensation benefits would not have been subject to
Federal income tax. See secs. 104(a)(1), 86(d)(3). 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
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). Because Mrs. Sherar’s
Social Security benefits were reduced by the amount of workers’
compensation benefits received, that offset amount is treated as
a Social Security benefit and is, therefore, taxable. See sec.
86(d)(3).
Accordingly, we sustain respondent’s determination that 85
percent of Mrs. Sherar’s Social Security benefits are includable
in petitioners’ income for 2007 under section 86(d)(3).3
3
We note that amounts paid for attorney’s fees are in some
circumstances deductible as a miscellaneous expense. See sec.
(continued...)
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Conclusion
We have considered all of the arguments made by petitioners,
and, to the extent that we have not specifically addressed them,
we conclude that they do not support a result contrary to that
reached herein.
To reflect the foregoing,
Decision will be entered
for respondent.
3
(...continued)
212(1); Andrews v. Commissioner, T.C. Memo. 1992-668; sec. 1.212-
1(a)(1), Income Tax Regs. By definition, miscellaneous itemized
deductions are subject to a 2-percent floor, meaning that
petitioners can deduct these expenses only to the extent that
such expenses exceed 2 percent of petitioners’ adjusted gross
income for 2007, i.e., in this instance, to the extent such
expenses exceed approximately $2,011. See sec. 67(a). Although
petitioners itemized deductions, their Schedule A, Itemized
Deductions, does not list any miscellaneous itemized deductions,
and the amount of attorney’s fees paid with respect to the Social
Security benefits (i.e., $1,072.62) does not exceed the 2-percent
floor limitation. Thus, the attorney’s fees are not deductible.