1 Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue. All

Rule references are to the Tax Court Rules of Practice and

Procedure.

T.C. Memo. 1998-172

UNITED STATES TAX COURT

RICHARD S. AND BERNICE F. ROBERTS, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 467-97. Filed May 11, 1998.

Richard S. Roberts, pro se. 

Bradley T. Stanek, for respondent.

MEMORANDUM OPINION

NAMEROFF, Special Trial Judge: This case was heard pursuant

to the provisions of section 7443A(b)(3)1 and Rules 180, 181, and

182.
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Respondent determined a deficiency in petitioners’ 1994

Federal income tax in the amount of $3,451. This case was

submitted fully stipulated, and the sole issue to be decided is

whether petitioners are taxable on any amount of Social Security

benefits received in 1994. Petitioners resided in West Covina,

California, at the time they filed their petition.

Petitioners’ 1994 Federal income tax return reflects

adjusted gross income of $136,094.44. Included in that amount is

$4,898.72, which is 85 percent of $5,763.20, the amount of Social

Security benefits received by petitioner Bernice F. Roberts. In

addition, petitioner Richard S. Roberts (petitioner) received

Social Security benefits in 1994 in the amount of $13,151. 

Petitioners contend that no portion of this latter amount is

taxable because petitioner will never recoup his basis under the

85-percent taxability system. Several of the stipulated

exhibits, which respondent objected to as irrelevant and

consisting of hearsay, attempt to demonstrate this fact with

historical calculations of petitioner’s contributions to the

Social Security system and his benefits received. However, as

explained below, the calculation in petitioner’s exhibits of the

amounts of Social Security contributions made and recovered is

irrelevant under the statutory scheme for taxation of such

benefits.

Section 86 was enacted in 1983. Social Security Amendments

of 1983, Pub. L. 98-21, sec. 121(a), 97 Stat. 80. This provision
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reversed a longstanding practice of excluding Social Security

benefits from income. See S. Rept. 98-23, at 25 (1983), 1983-2

C.B. 326, 327. Congress concluded that “social security benefits

are in the nature of benefits received under other retirement

systems,” and like other retirement benefits, should be taxed to

the extent “they exceed a worker’s after-tax contributions”. 

Id. at 25-26, 1983-2 C.B. at 328. The maximum portion of taxable

benefits was set at one-half in recognition of the fact the

Social Security benefits are partially financed by the after-tax

contributions of employees and self-employed individuals. Id.

In short, by taxing only a portion of the benefits, Congress

intended to allow taxpayers some cost recovery for their

contributions (i.e., for the taxes they pay into the Social

Security system). Section 86 was amended for 1994 and succeeding

years to require that if the sum of a taxpayer’s modified

adjusted gross income plus one-half of Social Security benefits

exceeds $44,000, the taxpayer must include in income up to 85

percent of the Social Security benefits. Omnibus Budget

Reconciliation Act of 1993 (OBRA), Pub. L. 103-66, sec. 13215(b),

107 Stat. 476.

The method chosen by Congress to tax Social Security 

benefits differs from the manner in which other retirement

benefits are taxed; viz, allowing taxpayers to exclude from

retirement benefits an amount representing an aliquot share of

their investment in the retirement plan. See, e.g., sec. 72. 
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2 Sec. 86(f) provides the Social Security benefits may be

treated for Federal tax purposes as a pension or annuity only for

purposes of sec. 22(c)(3)(A), relating to the credit for the

elderly and the permanently and totally disabled; sec. 32(c)(2),

relating to the earned income credit; sec. 219(f)(1), relating to

the deduction for retirement savings; and sec. 911(b)(1),

relating to the foreign earned income exclusion.

The latter method requires taxpayers to maintain adequate records

substantiating their investment in the retirement plan and the

amounts previously excluded from income. Apparently, because

Social Security covers a substantially larger population,

Congress eliminated this record-keeping requirement, simplifying

the task of reporting for the vast majority of taxpayers. Thus,

except as provided in section 86(f), there is no provision in

section 86 for treating Social Security benefits as an annuity or

pension subject to section 72.2

In essence, petitioners question the fairness of section 86. 

However, this is not the proper forum to question the policy

considerations that impelled the enactment of this legislation. 

“Normally, a legislative classification will not be set aside if

any state of facts rationally justifying it is demonstrated to or

perceived by the courts.” United States v. Maryland SavingsShare Ins. Corp., 400 U.S. 4, 6 (1970). The legislative history

of section 86, as enacted in 1983, demonstrates that Congress had

a valid and rational basis for the distinctions made in the

statute:

By taxing only a portion of social security and

railroad retirement benefits (that is, up to one-half
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of benefits in excess of a certain base amount), the

Committee’s bill assures that lower-income individuals,

many of whom rely upon their benefits to afford basic

necessities, will not be taxed on their benefits. The

maximum proportion of benefits taxed is one-half in

recognition of the fact that social security benefits

are partially financed by after-tax employee

contributions. The bill’s method for taxing benefits

assures that only those taxpayers who have substantial

taxable income from other sources will be taxed on a

portion of the benefits they receive. [S. Rept. 98-23,

supra at 26, 1983-2 C.B. at 328.]

Subsequently the relevant committee report in connection

with the amendment to section 86 in OBRA section 13215(b)

further explains the congressional purpose: 

The committee desires to more closely conform the

income tax treatment of Social Security benefits and private

pension benefits by increasing the maximum amount of Social

Security benefits included in gross income for certain

higher-income beneficiaries. Reducing the exclusion for

Social Security benefits for these beneficiaries will

enhance both the horizontal and vertical equity of the

individual income tax system by treating all income in a

more similar manner. To limit the effect of this provision

to taxpayers with a greater ability to pay taxes, the

present-law income thresholds are maintained. * * * [H.

Rept. 103-111, at 654 (1993), 1993-3 C.B. 167, 230.]

 

We recognize that “‘No scheme of taxation, whether the tax

is imposed on property, income, or purchases of goods and

services, has yet been devised which is free of all

discriminatory impact.’” Druker v. Commissioner, 77 T.C. 867,

872 (1981) (quoting San Antonio Indep. Sch. Dist. v. Rodriguez,

411 U.S. 1, 41 (1973)), affd. in part on this issue and revd. in

part on another issue 697 F.2d 46 (2d Cir. 1982).

Petitioner’s argument stems from the fact that he continued

to work after qualifying for Social Security benefits, earned a
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substantial amount of income in 1994 (and other years), and

continues to pay into the system. He attempts to demonstrate

that under the current statutory scheme, he will never be able to

recoup all his contributions to the system. The only fair way,

he contends, is to permit him to report Social Security payments

in a manner similar to that of pensioners under section 72; i.e.,

to recover * * * on the basis of upon life expectancy. Of

course, there is no way to know whether petitioner’s calculations

and predictions will be accurate. It is also theoretically

possible that petitioner will stop working and live long enough

to recover all his contributions to the Social Security system. 

Regardless, we hold that section 86 does not suffer any

constitutional infirmity and sustain respondent’s determination

in this case.

 Decision will be entered

for respondent.