T.C. M em o . 2 0 1 8 -8 2

UNITED STATES TAX COURT

J O N K. PALSGAARD AND KIM BERLY A. KELLY, Pet i t i o ners v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 5 2 93 -1 6
. Fi l edJ u n e 1 3 , 2 0 1 8
.

M i ch ael T. W el l s , fo r p et i t i o n er. Dav i dJ . W arn er an d W il l i s B. Do u gl as s , fo r res p o n d en t
.

M EM ORANDUM OPINION LAUBER, J u d g e: W i th res p ectt o p et i t i o ners ’ Fed eral i n co m e t ax fo r 2 0 1 3 , th e In t ern al Rev en u e Serv i ce (IRS o r res p o n d en t ) d et erm i n eda d efi ci en cy o f $ 3 6 ,9 9 9 an dan accu racy -rel at edp en al ty o f $ 7 ,1 6 5 . Aft er co n ces s i o n s b y b o th- 2
-

[* 2 ] p art i es , 1 th e p ri n ci p al i s su e fo r d eci si o n i s wh et h er p et i t i o n ers were req u i red t o rep o rtt ax ab l e So ci al Secu ri ty d i s ab i l i ty b en efi ts as g ro s s i n co m e u n d er s ect i o n 8 6
. 2 An s weri n g th i s qu es t i o n i n th e affi rm at i ve, we wi l l s u st ai n t h e IRS’ d et erm i n at i o n . Back gro u n d Th e p art i es h av e s ub m it t ed th i s cas e fo r d eci s i o n wi th o u ttri al u n d er Ru l e 1 2 2 . Al l rel ev an tfact s h av e b een s t i p u l at edo r are o th erwi s e i n cl u d edi n the reco rd . See Ru l e 1 2 2 (a). Pet i t i o n ers res i d edi n Cal i fo rn i a wh en th ey fi l edth ei r p et i

t i on . Al l referen ces t o “p et it i o n er” are t o p et it i o n er wi fe. Pet i t i o ner h ad a s u cces s fu l m ed i cal p ract ice i n Cal ifo rn ia u n t i l M arch 2 0 0 9 , wh en s h e s u ffered a p h y s i cal i n jury th atl eft h er d i sab l edwi th i n t h e m ean i n g o f
s ect i on 7 2 (m )(7 ). Th i s i n jury res u l t edi n a l on g -l as ti n g p h y s i cal i m p ai rm en to f i n 1 OnM ay 1 8 , 2 0 1 7, the p art i es fi l eda s t i p u l at i o n o f s et t ledi s s u es . Pet i t i o n ers co n ced edth atth ey fai l edt o rep ortt ax ab l e d i s tri b u t io n s o f $ 11 1 , 3 2 5 fro ma ret i rem en tp l an an d th at th ey are n o ten t i t l edt o a cl ai m ed d edu ct i o n fo r at to rn ey ’ s fees
. Res p o n d en tco n ced edth atp et i t i o n ers are n o tl i ab l e fo r an y accu racy -rel at ed p en al ty u n d er s ect i o n 6 6 6 2 (a).

2 Un l es s o th erwi s e i nd i cat ed , al l s tatu to ry referen ces are t o th e In t ern al Rev en u e Co d e (Co de) i n effect fo r th e y ear i n i s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. W e ro u n d al l m o n et ary am o u n t s t o th e n eares td o l l ar.- 3
-

[* 3 ] d efi n i t e du rat i on th ats ub s t an t i al l y i n t erfered wi th h er ab il i ty t o en gag e i n g ai n fu l em

p l o ym en t . Sh e ret i redfro m th e p ract i ce o f m ed ici n e s h o rt l y th ereaft er. Aft er ret i ri n g p et i t i o n er b eg an recei v in g d i s ab i l i ty p aym en t s u n d er a l o n g t erm d i s ab i l i ty

p o l i cy wi th L i fe In s u ran ce Co m pan y o f No rt h Am eri ca (LINA). LINA ceas edm ak i ng s u ch p aym en t s i n 2 0 12 . Bel i ev i n g t h atLINA h adv io l at ed th e t erm s o f h er p ol i cy , p et i t i o n er fi l eds u i tag ai n s t LINA i n J u n e 2 0 1 3
. Th atcas e
was s et t l edfo r an u n d i s cl o s edam o u n ti n Oct o b er 2 0 1 3
. Wh i l e h er l i ti g at i o n ag ai n s t LINA was p en di n g, p et i t i o n er ap p l i edt o th e So ci al Secu ri ty

Adm i n i s trat i o n (SSA) fo r b en efi t s u nd er t h e So ci al Secu ri ty Di s ab i l i ty In s u ran ce (SSDI) p ro g ram . Un l i k e Sup p l em en t al Secu ri ty In co m e b en efi t s , wh i ch are b as edo n n eed , SSDI b en efi t s are g en eral l y b as edo n wo rkh is t ory an d th e am o un to f t h e b en efi ci ary ’ s p ri o r co n tri b u t io n s . See 4 2 U.S.C. s ecs . 4 0 2 , 4 2 3 (c)(1 ) (2 01 2 ); 2 0 C.F.R. s ec. 4 0 4
. 1 30 (2 0 1 7 ). Th e SSA d et erm i n edth atp et i

t i on er was d i s ab l ed an d th ats h e was en t i t l edt o SSDI b en efi t s. Pet i t i o n er recei v ed SSDI b en efi t s o f $ 3 0 ,2 7 4 du ri n g 2 0 1 3
. Pet i t i o ners t i m el y

fi l edFo rm

1 0 4 0 , U.S. In di vi dual In co m e Tax Retu rn , fo r 2 0 1 3 . Onth atretu rnthey rep o rt edSo ci al Secu ri ty

b en efi t s o f $ 1,2 5 9 , o f wh i ch $ 1 ,0 7 0 was t ax ab le as g ro s s i n co m e u n der s ect io n 8 6(a). On Ap ri l 4 , 2 0 1 6 , res p o n den ti s s u eda t i m el y

n o t i ce o f d efi ci en cy , d et erm i n i n g thatp et i ti o n er h adal s o- 4
-

[* 4 ] recei v edu n rep o rt edSSDI b en efi t s o f $ 3 0 ,2 7 4 , o f wh i ch $ 2 5 , 7 3 3 was t ax ab l e
as g ro s s i n co m e. Pet i t i o n ers t im el y p et it io n ed th i s Co u rt fo r red et erm i n at i o n , p ri n ci p al ly co n t en d i n g th atthe SSDI b en efi t s were ex cl ud ab l e fro m g ro s s i n co m e u n d er s ect i on 1 04
. 3 OnM ay 2 2 , 2 0 1 7 , th e p art i es s ub m i t t edth e cas e fo r d eci s i o n wi th o u ttri al u n d er Ru l e 1 22
. Di s cu ss i o n A. Bu rd en o f Pro o f Th e IRS’ d et erm i n at i o ns i n a n o t i ce o f d efi ci en cy are g en eral l y

p res u m ed
co rrect , an dt ax pay ers b ear t h e b u rd eno f p ro vi n g t h em erro n eo u s . Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). Ex cl u s i o n s fro m g ro s s i n co m e are
co n st ru edn arro wl y . See Co m m i s s i on er v . Sch l ei er, 5 1 5 U.S. 3 2 3 , 3 2 8 (1 9 9 5 ). Tax pay ers g en eral l y b ear t h e b u rd en o f p ro v i n g th atth ey are en t it l edt o an ex cl u s i on fro m g ro s s i n co m e. See Si m

p s o n v . Co m

m i s s i o n er, 1 41 T.C. 3 3 1 , 3 3 8-3 3 9 (2 0 1 3), aff’ d , 6 6 8 F. Ap p ’ x 2 4 1 (9 th Ci r. 2 0 1 6 ); Barb at o v . Co m m i s s i o n er, T.C. M em o. 2 0 1 6 -2 3 , 1 1 1 T.C.M . (CCH) 1 0 97 , 1 09 8 n .7 . Pet it i on ers d o n o tco n t en d th atth e b u rd en o f p ro o f s h o u l d s h i ftt o res p o nd en tu n der s ect i o n 7 4 9 1 (a). In an y

3 Pet i t i on ers d o n o t d i s p u t e t h at , i f t h e SSDI p aym en t s are i n cl u d i b le i n g ro s s i n co m e, th e IRS co rrect l y ap p l i edth e s t atu to ry fo rm u la t o co m

p u t e th e t ax ab l e am ou n tas $ 2 5 ,7 3 3
.- 5
-

[* 5 ] ev en t , the p art ies h av e ag reed o n al l rel ev an tfact s , s o th e b u rd eno f p ro o f i s i rrel ev an t . See, e.g ., Ni s Fam il y Tr. v . Co m

m i s s i o n er, 1 1 5 T.C. 5 2 3 , 5 3 8 (2 0 0 0 ). B. An al y s i s Un l es s o th erwi s e p ro v id ed , g ro s s i n co m e i n cl u d es al l i n co m e fro m wh at ev er
s o u rce d eri v ed . Sec. 6 1 (a). Gro s s i n co m e s p eci fi cal l y “ i n cl u d es s o ci al s ecu ri t y b en efi t s , ” i n an am o u n td et erm i n ab l e u n d er a s p eci fi eds t atu t o ry fo rm u l a. Sec. 8 6 (a) an d(b ). Sect i o n 8 6 (d )(1 )(A) d efi n es th e t erm “ s o ci al s ecu ri ty

b en efi t ” t o i n cl u d e “ an y am o u nt recei v edb y th e t ax p ay er b y reas o n o f en t i t l em en tt o * * * a
m o nt h l y b en efi tu nd er t i t l e II o f t h e So ci al Secu ri ty Act .” SSDI b en efi t s are p ai d
m o nt h l y an dh av e b een pai du n d er t it l e II o f th e So ci al Secu ri ty Act s in ce 1 9 5 6
. See So ci al Secu ri ty

Am en d m en t s o f 1 9 5 6 , Pub . L. No . 8 4 -8 8 0 , s ec. 1 0 3 (a), 7 0 St at . at 8 15 (co d i fi edas am en d edat4 2 U.S.C. s ec. 4 2 3 ). Pet i t i o ner i n i t i al l y

co n t en d s th ats ect i o n 8 6 i s i n ap p li cab l e b ecau s e s h e recei v edSSDI b en efi t s as o p p o s edt o reg u l ar So ci al Secu ri ty b en efi t s . As n o t ed ab o ve, h o wev er, th e Co d e ex p li ci t l y i n cl u d es SSDI b en efi t s wi th in the d efi n i t i o n
o f a “ s oci al s ecu ri ty

b en efi t ” b ecau s e s u ch p aym en t s co ns t i tu te “ a m o n th l y b en efi t [recei v ed ] u n d er t i t l e II o f t h e So ci al Secu ri ty Act .” Sec. 8 6 (d )(1 )(A); s ee Rei m el s
v . Co m m i s s i o n er, 1 2 3 T.C. 2 45 , 2 4 7 n .4 (2 0 0 4 ), aff’ d , 4 3 6 F.3 d3 4 4 (2 dCi r. 2 0 0 6 ); Ro b b i n s v . Co m

m i s s i o n er, T.C. M em o . 2 0 1 7 -2 4 7 , at* 7 (“ Sect i o n 8 6 p ro -- 6
-

[* 6 ] v i d es th atSo ci al Secu ri ty b en efi t s (i n cl u d i n g d i s ab i l i ty b en efi ts ) are i n cl u d i b l e i n g ro s s i n co m e t o th e ex t en ts etfo rt h i n th ats ect i o n .”). Un l es s
ex p li ci t l y ex cl ud edb y

an o th er Co d e p ro v i si o n , th erefo re, p et i t io n er’ s SSDI b en efi t s are t ax ab l e t o t h e ex t en td et erm i n edu n der s ect i o n 8 6
. 4 Pet i t i o ner arg u es th ath er SSDI b en efi t s are ex cl u d edfro m g ro ss i n co m e b y
s ect i on 1 0 4 (a), wh i ch co v ers cert ai n am o u n t s p ay ab l e o n acco u n to f p h y s ical i n juri es o r s i ckn es s . By en act i n g s ect i o n 8 6 , Co n g res s s t at edi t s cl ear i nt en t th atal l fo rm s o f So ci al Secu ri ty

b en efi t s are t ax ab l e t o th e ex ten ts et fo rt h i n th atp ro v is i on . See, e.g ., Th o m as v . Co m m i s s i o n er, T.C. M em o. 2 0 01 -1 2 0 , 8 1 T.C.M
. (CCH) 1 6 5 3 , 1 6 5 4
. W e h av e n ev er reco g ni zedan ex cep ti o n t o th atru le, an dwe wi l l n o td o s o h ere. Pet i t i o ner fi rs tco n t en d s th ath er SSDI b en efi t s are co v ered b y s ect i o n 1 0 4 (a)(1 ), wh i ch ex cl u d es fro m g ro s s i n co m e “ am o u n t s recei v ed u n d er wo rkm en ’ s
co m p en s at i o n act s as co m

p en sat i o n fo r p ers o n al i n

juri es o r s i ckn es s .” Pet i t i o n er

4 Befo re 1 9 8 3 al l fo rm s o f So ci al Secu ri ty b en efi t s were ex cl u d edfro m g ro s s i n co m e b y

fo rm er s ect i o n 1 0 5 (d ). See Rev . Ru l . 7 0 -2 1 7 , 1 9 7 0 -1 C.B. 1 3 . Th at y ear Co ng res s p as s edth e So ci al Secu ri ty Am en dm en t s o f 1 98 3 , Pub . L. No . 9 8
- 2 1 , s ecs . 1 2 1 , 1 2 2 (b ), 9 7 St at . at8 0 , 8 7 , wh i ch rep eal eds ect i o n 1 0 5 (d ) an dm ad e al l So ci al Secu ri ty

b en efi t s t ax ab l e t o t h e ex t en t p ro v i d edi n s ect i o n 8 6 . See s ec. 8 6 (d ); S. Rep t . No . 9 8 -2 3 , at 2 6 (1 9 8 3 ), 1 9 8 3-2 C.B. 3 26 , 3 2 8 (“ Th [i s ] b i l l d efi n es a ‘ s o ci al s ecu ri ty

b en efi t ’ as an y

am o u n trecei v edb y

th e t ax p ay er b y

reas o n o f en

t i tl em en tt o * * * a m o n th l y b en efi tu n d er t i t l e II o f t he So ci al Secu ri ty Act (Fed eral Ol d -Ag e, Su rv i v o rs , an dDi s ab il i ty In s u ran ce Ben efi t s * * * )[.] ”).- 7
-

[* 7 ] recei v edh er b en efi t s u n der t h e So ci al Secu ri ty Act , n o tu n d er an y wo rkm en ’ s
co m p en s at i o n l aw. A s t atu t e i n th e n atu re o f wo rkm en ’ s co m p en s at i o n i s o n e t h at

“p ro v i d es co m

p en s at i o n t o em

pl o y ees fo r p ers on al i n

juri es o r s ickn es s i n cu rredi n th e co u rs e o f em

p l o ym en t .” Sec. 1
. 1 0 4 -1 (b ), In co m e Tax Reg s . “ As t atut e p ro v i d i n g fo r p aym en t o f b en efi t s th atare n o t rel at edt o an i n j u ry i n cu rredi n th e
co u rs e o f em

p l o ym en ti s n o tco n s i d eredt o b e a s tatu t e i n t h e n atu re o f wo rkm en ’ s
co m p en s at i o n . ” Green v . Co m m i s s i o n er, T.C. M em o . 2 0 0 7 -2 1 7, 9 4 T.C.M
. (CCH) 1 3 4 , 1 3 5 ; s ee Tak e v . Co m m i s s i on er, 8 2 T.C. 6 3 0 , 6 3 4 (1 9 8 4 ) (“ A s t atu t e i s i n t h e n atu re o f a wo rkm en ’ s co m p en s at i o n acto n l y i f i t al lo ws d i s ab i l it y p ay m en t s s o lel y

fo r s erv i ce-rel at edp ers o n al i n jury o r s i ckn es s .”), aff’ d , 8 0 4 F.2 d5 5 3 (9 th Ci r. 1 9 8 6 ). Th ere i s n o ev i d en ce t h atp et i t i o n er s u ffered h er i nju ry i n th e co u rs e o f h er
em pl o y m en t . Ev en i f s h e h ad , th e s ect i on 1 0 4 (a)(1 ) ex cl u s i o n d o es n o tco ver b en efi t s d et erm i n edb y

referen ce t o th e em

pl o y ee’ s ag e, l en g th o f s erv i ce, o r p ri o r
co n tri b u t i o n s. Seward s v . Co m m is s io n er, 1 3 8 T.C. 3 2 0 , 3 22 (2 0 1 2 ), aff’ d , 7 8 5 F.3 d1 3 3 1 (9 th Ci r. 2 0 15 ). SSDI p aym en t s d o n o td ep en do n wh eth er a d i s ab i l i t y
o ccu rredo n th e jo b , b ut i n st eadare d et erm i n edb y th e d i s ab l edp ers o n ’ s co n tri b u t i on s an dl en g th o f s erv i ce. See s up ra p . 3 . SSDI p aym en t s th erefo re are n o tex -- 8
-

[* 8 ] cl u d ab l e fro m

g ro ss i n co m e as “ wo rkm en ’ s co m p en s at io n ” wi th i n th e
m ean i n g o f s ect i o n 1 0 4 (a)(1 ). See Green , 9 4 T.C.M
. (CCH) at 1 3 5
. Pet i t i o ner al t ern at iv el y

rel i es o n s ect io n 1 04 (a)(2 ), wh ich ex cl u d es fro m g ro s s i n co m e “ the am ou nto f an y d am ag es (o th er t h an p un i t i v e d am ag es ) recei v ed

* * * o n acco u n t o f p ers o n al p h y s i cal i n juri es o r p h y s i cal s i ckn es s .” Res po n d en t d o es no td is p u t e t hatp et i t i o n er recei v ed h er SSDI b en efi ts o n acco u nto f p ers o n al p h y s i cal i n

juri es o r p h y s i cal s i ckn es s . Rat h er, h e co n t en ds th atth o s e b en efi t s d o
n o tco ns t i tu t e “ d am ag es .” Fo r p u rp o s es o f s ect i on 1 0 4 , “ th e t erm d am ag es m ean s an am o u n t recei v ed (o th er t h an wo rk ers ’ co m p en s at i o n) t h ro u gh p ro s ecu t i o n o f a l eg al s u i to r act i o n , o r t h ro u g h a s et t l em en t ag reem en ten tered i n t o i n l i euo f p ro s ecu ti on .” Sec. 1 .1 04 -1 (c)(1 ), In co m e Tax Reg s . Pet i t io n er d i d n o trecei v e h er SSDI b en efi t s b y p ro s ecu ti o n o f a l aws u i to r b y s et t lem en t o f l i t i g at i o n . To th e co n trary , s h e recei v edth o s e b en efi ts u n d er a Go v ern m en t -s po n s o redi n su ran ce p ro g ram . As far
as th e reco rds h ows , th ere was n o d i s p u t e wh at ev er ab o u th er en t i t l em en tt o s u ch b en efi t s . See Perez v . Co m m i s s i o n er, 1 44 T.C. 5 1 (2 01 5 ) (fi n d i n g s ect i o n 1 0 4 (a)(2 ) i n ap pl i cab le t o p aym en trecei v ed fo r co n sen s u al p erfo rm an ce o f a s erv i ce co n tract ); Green v . Co m m i ss i o n er, T.C. M em o . 2 0 0 8-1 3 9 , 9 5 T.C.M . (CCH)- 9
-

[* 9 ] 1 5 1 2 , 1 51 7 -1 5 1 8 (fi n d i n g s ect i o n 1 0 4 (a)(2 ) i n ap p li cab l e t o d i s ab i l i ty ret i rem en tp aym en t s recei v edas a b en efi to f Fed eral em p l o y m en t ). Th i s cas e res em

b l es Zard o v . Co m

m i s s i o n er, T.C. M em o. 2 0 1 1 -7 , 1 0 1 T.C.M . (CCH) 1 0 2 0
. Th e t ax p ay er t h ere recei v edd i s ab i li ty ret irem en t p aym en t s
u n d er h i s em

p lo y er’ s p en s i o n p l an an d co nt en d edth atth es e p aym en t s were ex cl u d ab l e u n d er s ect io n 1 0 4 (a)(2 ). W e reject ed thatco n t en ti o n , n ot i ng th at th e t ax p ay er h adn o ts u edo r th reat en edt o s u e h i s em p l o y er fo r h i s wo rk

p l ace i n jury , s o th atth e p aym en t s were n o trecei v ed“ th ro u gh a l eg al s u i t o r a s et t l em en t .” Id . at 1 0 2 2 . Th e s am e co n cl u s i o n fo ll o ws h ere. Pet it i o n er d i dn otfi l e s u i t o r en t er i n t o a l it i g at i o n s et t l em en tb utap pl i edfo r an d recei v edb en efi t s v i a t h e n orm al SSA ad m i n is trat i v e p ro ces s . Th e o n l y l aws u its h e fi l ed --ag ai n s t LINA, h er i n s u ran ce
co m p an y --h adn o th i n g t o d o wi th h er en t i tl em en tt o SSDI b en efi t s . Th os e b en efi t s d i dn o t co n s t i tu te “ d am ag es ” wi t h i n th e m ean in g o f s ect i o n 1 0 4(a)(2 ). Las t ly , p et i t i o ner co n t en d s th at h er SSDI b en efi t s are co vered b y s ect i o n 1 0 4 (a)(3 ), wh i ch ex cl u d es fro m g ro s s i n co m e “ am o u n t s recei v ed th ro u g h acci d en t
o r h eal th i n s u ran ce (o r t h ro u gh an arran gem en th av i ng th e effect o f acci d en to r h eal th i n s u ran ce).” So m e p ri v at el y fu n ded p ro g ram s th atp ay d i s ab i l it y

ret i rem en t b en efi t s m ay

co n s t i tu t e “ h eal th i n s u ran ce” wi th i n th e m ean i ng o f s ect i o n 1 0 4 (a)(3 ). See Tu k a v . Co m m i s s i o n er, 1 2 0 T.C. 1 , 3 , aff’ d , 8 5 F. Ap p’ x 8 7 5 (3 d- 1 0 -

[* 1 0 ] Ci r. 2 0 0 3); Trap p ey v . Co m m is s i o n er, 3 4 T.C. 4 0 7 , 4 08 (1 9 6 0 ). Bu t th e SSDI p ro g ram i s a Go vern m en t -s p o n s o redi n s u ran ce p lan th ati s a p ro du cto f l eg i s lat i v e en act m en t . “ Co ng res s d i dn o ti n t en dth atd i s ab i l it y So ci al Secu ri ty b en efi t s co u l d b e co n s tru edas an acci d en t o r h eal th p l an * * * u n d er s ect io n 1 0 4 (a)(3 ).” Th o m as , 8 1 T.C.M . (CCH) at 1 6 5 4 ; s ee S. Rep t . No . 9 8 -2 3 , at 2 6 (1 9 8 3), 1 9 83 -2 C.B. 3 2 6 , 3 2 8 (ex p l ai n in g th ata “ s oci al s ecu ri ty b en efi t ” s ub

jectt o t ax at io n u n d er s ect io n 8 6 i n cl u d es an y am o u n t recei ved b y th e t ax pay er “ by

reas o n
o f en t i tl em en tt o * * * a m o n thl y b en efi tu n d er t i t l e II o f t h e So ci al Secu ri ty Act (Fed eral Ol d -Ag e, Su rv i v o rs , an dDi s ab il i ty In s u ran ce Ben efi t s * * * )”). Acco rd in g ly , m o n thl y

p aym en t s recei v edu n d er t h e SSDI p ro g ram are n o t
ex cl u d ab l e fro m g ro s s i n co m e u n d er s ect i o n 1 0 4 (a)(3 ). To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.