T.C. Summary Opinion 2020-5
UNITED STATES TAX COURT
TRACEY RENE MERRELL AND CHRISTOPHER L. MERRELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14862-18S. Filed January 16, 2020.
Tracey Rene Merrell and Christopher L. Merrell, pro sese.
Albert B. Brewster II and Willis B. Douglass, for respondent.
SUMMARY OPINION
GUY, 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
1 Unless otherwise indicated, all section references are to the Internal (continued...) -2-
any other court, and this opinion shall not be treated as precedent for any other
case.
In a notice of deficiency dated May 7, 2018, respondent determined that
petitioners are liable for a Federal income tax deficiency of $7,396 and an
accuracy-related penalty of $1,479 for the taxable year 2015 (year in issue).
Petitioners, husband and wife, filed a timely petition for redetermination with the
Court pursuant to section 6213(a). When the petition was filed, petitioners resided
in California.
After concessions2 the issues remaining for decision are whether petitioners
(1) failed to include in taxable income certain Social Security benefits paid to Mrs.
Merrell and (2) are liable for the additional tax prescribed in section 72(t) in
respect of a premature distribution to Mr. Merrell from an IRA.
1 (...continued) Revenue Code (Code) of 1986, as amended and in effect for the taxable year 2015, and all Rule references are to the Tax Court Rules of Practice and Procedure. 2 Petitioners concede that they (1) failed to report interest income of $43, (2) are not entitled to deduct $5,000 for a contribution to an individual retirement account (IRA), and (3) are not entitled to deduct legal fees related to a bankruptcy proceeding. Respondent concedes that petitioners (1) did not have unreported wage income of $1,109 and (2) are not liable for an accuracy-related penalty under sec. 6662(a). -3-
Background3
During the year in issue Mrs. Merrell received Social Security benefits
totaling $26,812, including benefits of $9,772 that were otherwise payable to her
in 2014, and Mr. Merrell received a distribution of $17,410 from an IRA. Mr.
Merrell had not attained the age of 59½, nor was he disabled during the year in
issue.
Petitioners filed a timely joint Federal income tax return for the taxable year
2015 reporting total income of $67,658, comprising wages of $50,248 and the
aforementioned IRA distribution of $17,410. Petitioners did not report any Social
Security benefits on their tax return, nor did they indicate that they intended to
make an election to include any amount of Social Security benefits in taxable
income for 2014. As indicated above, respondent determined that petitioners were
obliged to include in taxable income for 2015 Social Security benefits of $22,790
(representing 85% of the Social Security benefits of $26,812 paid to Mrs. Merrell).
On June 15, 2018, after receiving the notice of deficiency in dispute,
petitioners submitted to the Internal Revenue Service (IRS) a handwritten letter
titled “1040X 2015” identifying a number of proposed changes to their original
3 Some of the facts have been stipulated. -4-
tax return, including the addition of “$14,484 for taxable social security income.”
The IRS did not process petitioners’ amended return for 2015.
Petitioners also submitted to the IRS an amended income tax return for 2014
reporting taxable Social Security benefits of $8,306 (representing 85% of the
Social Security benefits of $9,772 paid to Mrs. Merrell in 2015 that were
otherwise payable to her in 2014) and related income tax of $1,284. The IRS did
not process petitioners’ amended return for 2014.
Discussion
The Commissioner’s determination of a taxpayer’s liability in a notice of
deficiency normally is presumed correct, and the taxpayer bears the burden of
proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933).4 Petitioners do not contend and the record does not suggest
that respondent bears the burden of proof under section 7491(a) with respect to the
issues discussed below.
I. Social Security Benefits
Section 61(a) provides that “gross income means all income from whatever
source derived”. Section 86 provides that Social Security benefits may be subject
4 Petitioners acknowledge that Mrs. Merrell received Social Security benefits of $26,812 in 2015. -5-
to income tax pursuant to a statutory formula. If a taxpayer’s “modified adjusted
gross income” plus one-half of the Social Security benefits received during the
taxable year exceeds the “base amount”, then a portion of the taxpayer’s Social
Security benefits is includable in gross income. Sec. 86(a)-(d).
Taxpayers may make an election with respect to the amount of a lump-sum
payment of Social Security benefits received during a taxable year in which a
portion of the payment is attributable to previous years. Section 86(e) provides
that if the election under that section 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 portion of the benefits attributable to the previous taxable years. Although
section 86(e)(2)(B) provides that an election under that subsection shall be made
in such manner as the Secretary shall prescribe in regulations, no such regulations
have been promulgated to date.
In Pollard v. Commissioner, T.C. Memo. 2011-132, slip op. at 5, the Court
described the section 86(e) election as follows:
Section 86(e) is consistent with the general rule that taxpayers * * * who use the cash receipts and disbursements method of accounting must include an item in gross income when it is actually or constructively received. Sec. 451(a); sec. 1.451-1(a), Income Tax Regs. Thus, a lump-sum payment of Social Security benefits is to be -6-
included in gross income in the year in which the payment is received rather than in the years to which the payment is attributable, to the extent that application of the formula results in a taxable amount. The election merely provides an alternative method of applying the formula to determine the taxable portion of the Social Security benefits.
Petitioners did not make an election under section 86(e) on their original
income tax return for the year in issue. In any event respondent maintains that an
election under section 86(e) would not affect petitioners’ tax liability. Although
petitioners disagree with respondent on that point, they did not offer their original
tax return for 2014, worksheets, or similar records that would show otherwise.
From the limited information that petitioners offered into evidence, it does not
appear that an election under section 86(e) would alter their tax liability.
Consequently, respondent’s determination is sustained.
II. Section 72(t)
Section 72(t)(1) imposes an additional tax of 10% on the portion of a
distribution from a qualified retirement plan as defined in section 4974(c) (e.g., an
IRA) that is includable in gross income, unless the distribution falls under one of
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T.C. Summary Opinion 2020-5
UNITED STATES TAX COURT
TRACEY RENE MERRELL AND CHRISTOPHER L. MERRELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14862-18S. Filed January 16, 2020.
Tracey Rene Merrell and Christopher L. Merrell, pro sese.
Albert B. Brewster II and Willis B. Douglass, for respondent.
SUMMARY OPINION
GUY, 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
1 Unless otherwise indicated, all section references are to the Internal (continued...) -2-
any other court, and this opinion shall not be treated as precedent for any other
case.
In a notice of deficiency dated May 7, 2018, respondent determined that
petitioners are liable for a Federal income tax deficiency of $7,396 and an
accuracy-related penalty of $1,479 for the taxable year 2015 (year in issue).
Petitioners, husband and wife, filed a timely petition for redetermination with the
Court pursuant to section 6213(a). When the petition was filed, petitioners resided
in California.
After concessions2 the issues remaining for decision are whether petitioners
(1) failed to include in taxable income certain Social Security benefits paid to Mrs.
Merrell and (2) are liable for the additional tax prescribed in section 72(t) in
respect of a premature distribution to Mr. Merrell from an IRA.
1 (...continued) Revenue Code (Code) of 1986, as amended and in effect for the taxable year 2015, and all Rule references are to the Tax Court Rules of Practice and Procedure. 2 Petitioners concede that they (1) failed to report interest income of $43, (2) are not entitled to deduct $5,000 for a contribution to an individual retirement account (IRA), and (3) are not entitled to deduct legal fees related to a bankruptcy proceeding. Respondent concedes that petitioners (1) did not have unreported wage income of $1,109 and (2) are not liable for an accuracy-related penalty under sec. 6662(a). -3-
Background3
During the year in issue Mrs. Merrell received Social Security benefits
totaling $26,812, including benefits of $9,772 that were otherwise payable to her
in 2014, and Mr. Merrell received a distribution of $17,410 from an IRA. Mr.
Merrell had not attained the age of 59½, nor was he disabled during the year in
issue.
Petitioners filed a timely joint Federal income tax return for the taxable year
2015 reporting total income of $67,658, comprising wages of $50,248 and the
aforementioned IRA distribution of $17,410. Petitioners did not report any Social
Security benefits on their tax return, nor did they indicate that they intended to
make an election to include any amount of Social Security benefits in taxable
income for 2014. As indicated above, respondent determined that petitioners were
obliged to include in taxable income for 2015 Social Security benefits of $22,790
(representing 85% of the Social Security benefits of $26,812 paid to Mrs. Merrell).
On June 15, 2018, after receiving the notice of deficiency in dispute,
petitioners submitted to the Internal Revenue Service (IRS) a handwritten letter
titled “1040X 2015” identifying a number of proposed changes to their original
3 Some of the facts have been stipulated. -4-
tax return, including the addition of “$14,484 for taxable social security income.”
The IRS did not process petitioners’ amended return for 2015.
Petitioners also submitted to the IRS an amended income tax return for 2014
reporting taxable Social Security benefits of $8,306 (representing 85% of the
Social Security benefits of $9,772 paid to Mrs. Merrell in 2015 that were
otherwise payable to her in 2014) and related income tax of $1,284. The IRS did
not process petitioners’ amended return for 2014.
Discussion
The Commissioner’s determination of a taxpayer’s liability in a notice of
deficiency normally is presumed correct, and the taxpayer bears the burden of
proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933).4 Petitioners do not contend and the record does not suggest
that respondent bears the burden of proof under section 7491(a) with respect to the
issues discussed below.
I. Social Security Benefits
Section 61(a) provides that “gross income means all income from whatever
source derived”. Section 86 provides that Social Security benefits may be subject
4 Petitioners acknowledge that Mrs. Merrell received Social Security benefits of $26,812 in 2015. -5-
to income tax pursuant to a statutory formula. If a taxpayer’s “modified adjusted
gross income” plus one-half of the Social Security benefits received during the
taxable year exceeds the “base amount”, then a portion of the taxpayer’s Social
Security benefits is includable in gross income. Sec. 86(a)-(d).
Taxpayers may make an election with respect to the amount of a lump-sum
payment of Social Security benefits received during a taxable year in which a
portion of the payment is attributable to previous years. Section 86(e) provides
that if the election under that section 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 portion of the benefits attributable to the previous taxable years. Although
section 86(e)(2)(B) provides that an election under that subsection shall be made
in such manner as the Secretary shall prescribe in regulations, no such regulations
have been promulgated to date.
In Pollard v. Commissioner, T.C. Memo. 2011-132, slip op. at 5, the Court
described the section 86(e) election as follows:
Section 86(e) is consistent with the general rule that taxpayers * * * who use the cash receipts and disbursements method of accounting must include an item in gross income when it is actually or constructively received. Sec. 451(a); sec. 1.451-1(a), Income Tax Regs. Thus, a lump-sum payment of Social Security benefits is to be -6-
included in gross income in the year in which the payment is received rather than in the years to which the payment is attributable, to the extent that application of the formula results in a taxable amount. The election merely provides an alternative method of applying the formula to determine the taxable portion of the Social Security benefits.
Petitioners did not make an election under section 86(e) on their original
income tax return for the year in issue. In any event respondent maintains that an
election under section 86(e) would not affect petitioners’ tax liability. Although
petitioners disagree with respondent on that point, they did not offer their original
tax return for 2014, worksheets, or similar records that would show otherwise.
From the limited information that petitioners offered into evidence, it does not
appear that an election under section 86(e) would alter their tax liability.
Consequently, respondent’s determination is sustained.
II. Section 72(t)
Section 72(t)(1) imposes an additional tax of 10% on the portion of a
distribution from a qualified retirement plan as defined in section 4974(c) (e.g., an
IRA) that is includable in gross income, unless the distribution falls under one of
the exceptions prescribed in section 72(t)(2). Petitioners assert that the additional
tax under section 72(t) is not applicable in this case because Mr. Merrell received -7-
what was otherwise a premature IRA distribution at a time when Mrs. Merrell was
disabled.
Section 72(t)(2)(A)(iii) provides that the additional 10% tax does not apply
to a distribution that is attributable to the employee’s being disabled within the
meaning of section 72(m)(7). In the case of an IRA the term “employee” is
defined in section 72(t)(5) as “the individual for whose benefit such plan was
established.”
There is no dispute that Mr. Merrell was the individual for whose benefit
the IRA in question was established, and the parties agree that he was not disabled
during the year in issue. Because section 72(t)(2)(A)(iii) requires that a
distribution be attributable to the employee’s disability for the exception to the
10% additional tax to apply, the section 72(t)(2)(A)(iii) exception is not available
to petitioners. See, e.g., Barkley v. Commissioner, T.C. Memo. 2004-287.
Consequently, respondent’s determination that petitioners are liable for the
additional tax prescribed in section 72(t) in respect of Mr. Merrell’s IRA
distribution is sustained.
As a final matter, petitioners maintain that they will suffer economic
hardship if the additional tax prescribed in section 72(t) is imposed in this case.
We have considered similar claims in the past and have observed that there is no -8-
authority in the Code or caselaw for an equitable or hardship exception to the
imposition of income tax and the additional tax prescribed in section 72(t) on early
distributions from a retirement account. See Arnold v. Commissioner, 111 T.C.
250, 255 (1998); Adams v. Commissioner, T.C. Memo. 2015-162, at *8;
Dollander v. Commissioner, T.C. Memo. 2009-187. The Court may not add an
exception to the Code by judicial fiat, and we are obliged to apply the law as
written. See Iselin v. United States, 270 U.S. 245, 250-251 (1926).
To reflect the foregoing,
Decision will be entered
under Rule 155.