PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE. T.C. Summary Opinion 2014-66
UNITED STATES TAX COURT
ARTHUR L. ENGLISH, JR. AND CHERYL C. ENGLISH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26407-12S. Filed July 10, 2014.
Arthur L. English, Jr., and Cheryl C. English, pro sese.
Elizabeth C. Mourges, for respondent.
SUMMARY OPINION
GERBER, 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
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax (continued...) -2-
Pursuant to section 7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent for any other case.
Respondent determined a $10,559 deficiency in, and a $2,112 accuracy-
related penalty with respect to, petitioners’ Federal income tax for 2010. After
concessions, the issues remaining for decision are: (1) whether petitioners may
exclude from gross income $49,610 of Social Security disability benefits received
by Mrs. English and (2) whether petitioners are liable for the accuracy-related
penalty.
Background
Petitioners resided in Maryland when they filed the petition. During
2007 Mrs. English (petitioner) was disabled and could not work. Because of her
disability, she began receiving long-term disability payments under an insurance
policy with the Hartford insurance company (Hartford). Mrs. English’s insurance
policy provided that her benefits would be reduced if she received any Social
Security disability benefits. Petitioner applied for disability benefits from Social
Security during 2007 and did not receive any benefits during 2007, 2008, or 2009.
1 (...continued) Court Rules of Practice and Procedure. -3-
In 2010 Mrs. English was awarded Social Security disability benefits. That
same year she received a $49,610 lump-sum Social Security payment for prior
years. She was therefore required to repay approximately $48,144 of the Hartford
benefits she had previously received.
Petitioners consulted with two certified public accountants concerning the
taxability of her disability benefits from Social Security. They generally advised
that disability benefits are not taxable. Petitioners’ 2010 income tax return was
prepared by Bill Brabble, a certified public accountant. They did not report on
that return any of the Social Security disability benefits that Mrs. English had
received. Respondent issued petitioners a deficiency notice, increasing their
income by the unreported $49,610 lump-sum Social Security payment. Petitioners
filed a petition with this Court, challenging respondent’s determination.
Discussion
I. Burden of Proof
Generally, the Commissioner’s determinations are presumed correct, and the
taxpayer bears the burden of proving otherwise. Rule 142(a); see Welch v.
Helvering, 290 U.S. 111, 115 (1933). The burden of proof may shift to the
Commissioner if the taxpayer proves that he or she has satisfied certain
requirements. Sec. 7491(a); see Baker v. Commissioner, 122 T.C. 143, 168 -4-
(2004). Petitioners have neither claimed that the burden shifts to respondent nor
shown that they complied with the requirements of section 7491(a). The burden of
proof, therefore, remains on petitioners.
II. Exclusion of Social Security Benefits From Gross Income
Petitioners contend that they are entitled to offset the Social Security
benefits Mrs. English received in 2010 by the amount of the Hartford payment.2
We are sympathetic to petitioners’ position. However, under existing law, we are
required to reach a different result.
Section 86 provides that a taxpayer’s gross income includes up to 85% of
Social Security benefits, including disability benefits, received during the taxable
year. However, for purposes of that section, taxpayers may reduce Social Security
benefits by repayments of other Social Security benefits previously received. Sec.
86(d)(2)(A). A Social Security benefit is defined as “any amount received by the
taxpayer by reason of entitlement to--(A) a monthly benefit under title II of the
Social Security Act, or (B) a tier 1 railroad retirement benefit.” Benefits received
from private insurers, such as Hartford, do not satisfy this definition. See Linzy v.
2 Petitioners did not argue before or during trial that the Social Security benefits not used to repay Hartford are excludable or deductible from income. Nor does the Court find that a legal basis exists for such an exclusion or deduction. Accordingly, respondent’s determination with respect to the Social Security benefits received in 2010 that were not paid to Hartford is sustained. -5-
Commissioner, T.C. Memo. 2013-219; Brady v. Commissioner, T.C. Memo.
2013-1.
In the setting of this case, section 86(d)(2) is the only exception to the
general rule of section 86(a) requiring inclusion of Social Security benefits in
income. Although Congress generally has deemed disability benefits not subject
to Federal tax, it has generally mandated that disability benefits from the
Government are, to some extent, taxable. Although these laws result in differing
treatment for certain disability benefits, we are not at liberty to carve out other
exceptions to section 86 where Congress has not expressly done so. Accordingly,
petitioners are not entitled to exclude from gross income the $49,610 Social
Security payment received in 2010.3
III. Accuracy-Related Penalty
Respondent also determined a 20% accuracy-related penalty under section
6662(a) on the underpayment for 2010. Respondent determined that petitioners
are liable for the penalty because they substantially understated their income tax
within the meaning of section 6662(b)(2) and (d)(1). An “understatement” means
3 We also note that petitioners are not entitled to a deduction for the Hartford payment. This is because there is no statutory provision that allows a deduction for such a payment. See Linzy v. Commissioner, T.C. Memo. 2013-219; Brady v. Commissioner, T.C. Memo. 2013-1. -6-
the excess of the amount of the tax required to be shown on the return over the
amount of the tax imposed which is shown on the return, reduced by any rebate.
Sec. 6662(d)(2)(A). In the case of an individual, an understatement is substantial
if it exceeds the greater of 10% of the tax required to be shown on the income tax
return or $5,000. Sec. 6662(d)(1)(A).
Respondent bears the burden of production with respect to petitioners’
liability for the accuracy-related penalty determined in the notice of deficiency and
must therefore produce evidence that it is appropriate to impose that penalty. See
sec. 7491(c); see also Higbee v. Commissioner, 116 T.C. 438, 446 (2001). As a
result of our determination regarding the unreported Social Security payment,
petitioners’ understatement of income tax for 2010 is greater than 10% of the tax
required to be shown on the return, which is greater than $5,000. Accordingly,
respondent has met his burden of production.
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PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE. T.C. Summary Opinion 2014-66
UNITED STATES TAX COURT
ARTHUR L. ENGLISH, JR. AND CHERYL C. ENGLISH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26407-12S. Filed July 10, 2014.
Arthur L. English, Jr., and Cheryl C. English, pro sese.
Elizabeth C. Mourges, for respondent.
SUMMARY OPINION
GERBER, 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
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax (continued...) -2-
Pursuant to section 7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent for any other case.
Respondent determined a $10,559 deficiency in, and a $2,112 accuracy-
related penalty with respect to, petitioners’ Federal income tax for 2010. After
concessions, the issues remaining for decision are: (1) whether petitioners may
exclude from gross income $49,610 of Social Security disability benefits received
by Mrs. English and (2) whether petitioners are liable for the accuracy-related
penalty.
Background
Petitioners resided in Maryland when they filed the petition. During
2007 Mrs. English (petitioner) was disabled and could not work. Because of her
disability, she began receiving long-term disability payments under an insurance
policy with the Hartford insurance company (Hartford). Mrs. English’s insurance
policy provided that her benefits would be reduced if she received any Social
Security disability benefits. Petitioner applied for disability benefits from Social
Security during 2007 and did not receive any benefits during 2007, 2008, or 2009.
1 (...continued) Court Rules of Practice and Procedure. -3-
In 2010 Mrs. English was awarded Social Security disability benefits. That
same year she received a $49,610 lump-sum Social Security payment for prior
years. She was therefore required to repay approximately $48,144 of the Hartford
benefits she had previously received.
Petitioners consulted with two certified public accountants concerning the
taxability of her disability benefits from Social Security. They generally advised
that disability benefits are not taxable. Petitioners’ 2010 income tax return was
prepared by Bill Brabble, a certified public accountant. They did not report on
that return any of the Social Security disability benefits that Mrs. English had
received. Respondent issued petitioners a deficiency notice, increasing their
income by the unreported $49,610 lump-sum Social Security payment. Petitioners
filed a petition with this Court, challenging respondent’s determination.
Discussion
I. Burden of Proof
Generally, the Commissioner’s determinations are presumed correct, and the
taxpayer bears the burden of proving otherwise. Rule 142(a); see Welch v.
Helvering, 290 U.S. 111, 115 (1933). The burden of proof may shift to the
Commissioner if the taxpayer proves that he or she has satisfied certain
requirements. Sec. 7491(a); see Baker v. Commissioner, 122 T.C. 143, 168 -4-
(2004). Petitioners have neither claimed that the burden shifts to respondent nor
shown that they complied with the requirements of section 7491(a). The burden of
proof, therefore, remains on petitioners.
II. Exclusion of Social Security Benefits From Gross Income
Petitioners contend that they are entitled to offset the Social Security
benefits Mrs. English received in 2010 by the amount of the Hartford payment.2
We are sympathetic to petitioners’ position. However, under existing law, we are
required to reach a different result.
Section 86 provides that a taxpayer’s gross income includes up to 85% of
Social Security benefits, including disability benefits, received during the taxable
year. However, for purposes of that section, taxpayers may reduce Social Security
benefits by repayments of other Social Security benefits previously received. Sec.
86(d)(2)(A). A Social Security benefit is defined as “any amount received by the
taxpayer by reason of entitlement to--(A) a monthly benefit under title II of the
Social Security Act, or (B) a tier 1 railroad retirement benefit.” Benefits received
from private insurers, such as Hartford, do not satisfy this definition. See Linzy v.
2 Petitioners did not argue before or during trial that the Social Security benefits not used to repay Hartford are excludable or deductible from income. Nor does the Court find that a legal basis exists for such an exclusion or deduction. Accordingly, respondent’s determination with respect to the Social Security benefits received in 2010 that were not paid to Hartford is sustained. -5-
Commissioner, T.C. Memo. 2013-219; Brady v. Commissioner, T.C. Memo.
2013-1.
In the setting of this case, section 86(d)(2) is the only exception to the
general rule of section 86(a) requiring inclusion of Social Security benefits in
income. Although Congress generally has deemed disability benefits not subject
to Federal tax, it has generally mandated that disability benefits from the
Government are, to some extent, taxable. Although these laws result in differing
treatment for certain disability benefits, we are not at liberty to carve out other
exceptions to section 86 where Congress has not expressly done so. Accordingly,
petitioners are not entitled to exclude from gross income the $49,610 Social
Security payment received in 2010.3
III. Accuracy-Related Penalty
Respondent also determined a 20% accuracy-related penalty under section
6662(a) on the underpayment for 2010. Respondent determined that petitioners
are liable for the penalty because they substantially understated their income tax
within the meaning of section 6662(b)(2) and (d)(1). An “understatement” means
3 We also note that petitioners are not entitled to a deduction for the Hartford payment. This is because there is no statutory provision that allows a deduction for such a payment. See Linzy v. Commissioner, T.C. Memo. 2013-219; Brady v. Commissioner, T.C. Memo. 2013-1. -6-
the excess of the amount of the tax required to be shown on the return over the
amount of the tax imposed which is shown on the return, reduced by any rebate.
Sec. 6662(d)(2)(A). In the case of an individual, an understatement is substantial
if it exceeds the greater of 10% of the tax required to be shown on the income tax
return or $5,000. Sec. 6662(d)(1)(A).
Respondent bears the burden of production with respect to petitioners’
liability for the accuracy-related penalty determined in the notice of deficiency and
must therefore produce evidence that it is appropriate to impose that penalty. See
sec. 7491(c); see also Higbee v. Commissioner, 116 T.C. 438, 446 (2001). As a
result of our determination regarding the unreported Social Security payment,
petitioners’ understatement of income tax for 2010 is greater than 10% of the tax
required to be shown on the return, which is greater than $5,000. Accordingly,
respondent has met his burden of production.
The accuracy-related penalty is not imposed with respect to any portion of
the underpayment of tax if the taxpayer can establish that he acted with reasonable
cause and in good faith with respect to that portion. Sec. 6664(c)(1). The burden
is upon the taxpayer to prove reasonable cause. See Higbee v. Commissioner, 116
T.C. at 447-449. We determine whether a taxpayer acted with reasonable cause
and in good faith by considering the pertinent facts and circumstances. -7-
This case involves a technical confluence of the taxability of Social Security
disability benefits and the general nontaxability of private insurance disability
benefits. There is no question that petitioner was disabled and entitled to
disability benefits. She first received them from Hartford and, in accord with the
tax law, did not include them in her income. When she became entitled to Social
Security benefits with regard to the same disability, under her contract with
Hartford, she was required to repay the Hartford benefits she had previously
received.
Congress saw fit to make a certain percentage of Social Security benefits
taxable, even if the payments are for a disability. Congress also provided that in
circumstances where Social Security benefits had to be repaid, the initial receipt of
the benefits would not be taxable. The disparate treatment of private and public
disability benefits for tax purposes is curious and somewhat confusing. Under
these circumstances, petitioners, who do not have tax expertise, sought the advice
of two certified public accountants who counseled them that their benefits were
not taxable.
Petitioners contend that their reliance on their tax professional for the 2010
tax status of their disability benefits was reasonable. Reliance on the advice of a
tax professional may constitute reasonable cause and good faith if under all the -8-
facts and circumstances the reliance is reasonable and in good faith. Neonatology
Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff’d, 299 F.3d 221 (3d
Cir. 2002); sec. 1.6664-4(c)(1), Income Tax Regs.
Considering all of the circumstances before us, we find that petitioners
acted reasonably and that it was reasonable for them to rely on the advice of tax
professionals to exclude the relevant Social Security benefits from income.
Accordingly, we hold that petitioners are not liable for an accuracy-related penalty
for 2010.
To reflect the foregoing,
Decision will be entered for respondent as
to the deficiency and for petitioners as to the
accuracy-related penalty.