# PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.T.C. Sum m ary Opi ni on 20 14 -6 6

UNITED STAT ES TAX COURT

ARTHUR L. ENG LISH, JR . AND CHERYL C. ENGLISH, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 26 40 7- 12 S. Fi le d J ul y 10 , 20 14 .
Arth urL. Engl is h, J r., an d C he ry l C. En gl is h, p ro ses e. Eli zab eth C . Mo ur ge s, fo r res po nd en t.

SUMM ARY OPINION GERBER, Jud ge : Th is cas e was he ardpu rs ua ntto th e p ro vi si on s o f se ct io n 74 63 of t he Int ern al Rev enue Co de ineffec t wh enth e p et it io n was fil ed . 1
Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de ineffe ctforth e y ear i n i ss ue , andall Ru le refe ren ces are t o t he Tax (co nt in ue d...)- 2 -

Purs ua ntto sec ti on 74 63 (b ), th e d eci si on to be en te redis no t re vi ewab le by any ot he r co urt, an d t hi s o pi ni on sh al l n otbe tre at edas p rece de ntforan y ot he r cas e. Res po nd en t d et erm in eda $1 0,5 59 de fic ie nc y in , anda $2 ,11 2 a ccu racyrel at edpe na lty

with re sp ectto , pet it io ne rs ’ Fed eral in co m e ta x fo r 20 10 . After co nc es si on s, the is su es rem ai ni ng for de ci si on are: (1) whet he r pe ti ti on ers m ay ex cl ud e fro m

gro ss in co m e $ 49 ,61 0 o f So ci al Secu rit y di sabi li ty ben efi ts rece iv ed by Mrs. En gl is h a nd(2) whet he r pe ti ti on ers are l iabl e fo r th e acc ur acy-rela te d pe na lty . Bac kg ro un d Pet it io ne rs res id edinMarylan d wh enth ey fil edth e p et it io n. Du rin g 20 07 Mrs . Eng li sh (pe ti ti on er) was di sabl edan d c ou ldno t wo rk . Becau se of h er di sabi li ty, sh e b eg anrece iv in g l on g- te rm di sabi li ty paym en ts un de r anin su ran ce po li cy with t he Hart fo rdin su ran ce co m pa ny (Hartfo rd ). Mrs . Eng li sh ’s in su ran ce po li cy pro vi de d t ha t h er b en efi ts wou ldbe reduc edif s he rece iv edan y So ci al Secu rit y di sabi li ty ben efi ts . Peti ti on er ap pl ie d fo r di sabi li ty ben efi ts fro m So ci al Secu rit y du rin g 2 00 7 a nddi d n otrece iv e an y be ne fit s dur in g 2 00 7, 2 00 8, o r 20 09 .

(...co nt inue d) 1 Co urt Ru le s o f Prac ti ce an d P ro cedur e.- 3 -

In20 10 Mrs . Eng li shwas award edSo ci al Secu rit y di sabi li ty ben efi ts . That sa m e y ear s he rece iv eda $4 9,6 10 lu m p- su m So ci al Secu rit y

paym en t fo r pr io r y ears . She was the refo re re qu ire d t o re pa y ap pr ox im at el y

$4 8,1 44 of t he Hart fo rd be ne fit s s he ha d p rev io us ly recei ve d. Pet it io ne rs co ns ul te d wi th two cert ifi edpubl ic acco un ta nt s co nc ern in g t he ta xabi li ty of he r di sabi li ty ben efi ts fro m So ci al Secu rit y . They ge ne ral ly adv is ed th atdi sabi li ty ben efi ts are n ottax ab le . Peti ti on ers ’ 20 10 in co m e ta x re tu rnwas pr ep aredby Bill Brab bl e, a certi fie d p ub li c acc ou nt an t. The y di d n otrep ort o n th atreturn a ny of th e So ci al Secu rit y di sabi li ty ben efi ts th atMrs . Eng li sh ha d rece iv ed . Res po nd en t i ss ue d p et it io ne rs a de fic ie nc y no ti ce, i nc reas in g t he ir in co m e b y

th e unr ep orte d $ 49 ,61 0 l um p- su m So ci al Secu rit y

pa ym en t. Pet it io ne rs fil eda pe ti ti on with t hi s C ou rt, c ha ll en gi ng res po nd en t’s d et erm in at io n. Dis cu ss io n I. Burd enof P ro of Gen eral ly, th e Co m

m is si on er’s d et erm in at io ns are p res um edco rrec t, an d t he ta xp ay er b ears th e b ur de n o f pr ov in g o th erwi se . Rul e 1 42 (a); see W el chv. Helv eri ng , 29 0 U.S. 1 11 , 11 5 (1 93 3) . The b ur de n o f pr oo f m ay sh iftto th e Co m m is si on er i f th e ta xp ay er p ro ve s tha t h e o r sh e h as sat is fie d c ert ai n requi rem en ts . Sec. 7 49 1( a); see Bak er v . Comm is si on er, 1 22 T.C. 14 3, 1 68- 4 -

(2 00 4) . Peti ti on ers ha ve ne ithe r cl ai m edth atth e b ur de n s hi fts to res po nd en t n or sh own th atth ey

co m pl ie d wi th th e requi rem en ts of s ect io n 7 49 1( a). The burd enof pr oo f, th eref

or e, rem ai ns onpe ti ti on ers . II. Exc lu si on of S oc ia l Se cu rit y Ben efi ts Fro m

Gros s In co m e Pet it io ne rs co nt en d t ha t the y are en ti tl edto off

se t the So ci al Secu rit y be ne fit s M rs . Eng li sh rece iv edin20 10 by the am ou ntof t he Hart fo rdpa ym en t. 2 W e are sym

pa th et ic to pe ti ti on ers ’ po si ti on . Howev er, und er ex is ti ng law, we ar e requi redto reac h adi ffer en t re su lt . Sect io n 8 6 p ro vi de s tha t a t ax pa y er’s g ro ss in co m e in cl ud es up to 85 % of So ci al Secu rit y

be ne fit s, i nc lu di ng di sabi li ty ben efi ts , recei ve d dur in g t he tax ab le y ear. Ho wev er, fo r pu rp os es of t ha t s ect io n, t ax pa y ers m ay reduc e So ci al Secu rit y be ne fit s b y

rep aym en ts of o th er So ci al Securit y be ne fit s p rev io us ly recei ve d. Se c. 86 (d )(2 )(A). A So ci al Secu rit y be ne fitis de fin edas “ an y am ou ntrece iv edby the ta xp ay er b y

reas on of e nt it le m en t t o- -(A) a m on th ly ben efi t u nd er t it le II o f th e So ci al Secu rit y

Act, o r (B) ati er 1 rai lro adret ire m en t b en efi t.” Be ne fit s re cei ve d fro m pri va te in su rers , su chas Hartf or d, d o n otsat is fy

th is de fin it io n. Se e Lin zy v. Pet it io ne rs di d n otarg ue be fo re o r du rin g t ria l tha t the So ci al Securit y 2 be ne fit s n otus edto rep ay Hart fo rdare ex cl ud ab le or d educ ti bl e fro m in co m e. Nor do es th e Co urt fi ndth ata le ga l b as is ex is ts for su chanex cl us io n o r de du ct io n. Acco rd in gl y , res po nd en t’s d et erm in at io n wi th res pe ctto th e So ci al Secu rit y be ne fit s re cei ve d i n 2 01 0 t ha t wer e n otpa idto Hart fo rdis su st ai ne d.- 5 -

Co m m is si on er, T.C. Mem o. 2 01 3- 21 9; Brady v. Co m m is si on er, T.C. Mem o. 20 13 -1 . Inth e se tt in g o f th is cas e, se ct io n 8 6( d) (2 ) is th e o nl y ex cep ti on to th e ge ne ral rul e o f se ct io n 8 6( a) re qu iri ng in cl us io n o f So ci al Secu rity be ne fit s i n in co m e. Altho ug h C on gr es s g en eral ly has de em eddi sabi li ty ben efi ts no t s ub ject to Fed eral tax , itha s g en eral ly m an da te d t ha t d is ab il ity be ne fit s fr om

th e Gov ern m en t ar e, to so m e ex te nt , tax ab le . Alth ou gh th es e la ws re su ltindi ffer in g tre atm en t fo r certa indi sabi li ty ben efi ts , we are n otat l ib erty to carv e o utothe r ex cep ti on s t o s ect io n 8 6 wh ere C on gr es s h as no t ex pr es sl y do ne so . Accor di ng ly, pe ti ti on ers are n oten ti tl edto ex cl ud e fro m gro ss in co m e th e $ 49 ,61 0 S oc ia l Secu rit y pa ym en t re cei ve d i n 2 01 0. 3 III. Accu racy-Rel at edPen al ty Res po nd en t al so de te rm in eda 20 % accu racy-rela te d p en al ty und er s ect io n 66 62 (a) o n t he un de rp aym en t fo r 20 10 . Res po nd en t d et erm in edth atpe ti ti on ers are l iabl e fo r th e p en al ty becau se th ey subs tant ia ll y

un de rs ta te d t he ir i nc om e ta x withi n t he m ean in g o f se ct io n 6 66 2( b) (2 ) an d (d )(1 ). An “ un de rs ta te m en t” m ean s
W e al so no te th atpe ti ti on ers are n oten ti tl edto a de du ct io n fo r th e Hart fo rd 3 pa ym en t. Thi s i s b ecau se th ere i s n o s ta tu to ry pro vi si on th atall ows a de du ct io n fo r su cha pa y

m en t. See Lin zy

v. Co m m is si on er, T.C. Mem o. 2 01 3- 21 9; Brady v. Co m m is si on er, T.C. Mem o. 2 01 3- 1.- 6 -

th e ex ces s o f th e am ou ntof t he tax requi redto be sh own on th e return o ve r th e am ou ntof t he tax im

po se d wh ic h i s s ho wn o n t he return, re du cedby any reb at e. Sec. 6 66 2( d) (2 )(A). Inth e cas e o f anin di vi du al , an u nd ers ta te m en t i s s ub st an ti al if i t ex ceed s the gre at er o f 10 % of t he tax requi redto be sh own on th e in co m e ta x return o r $5 ,00 0. Se c. 66 62 (d )(1 )(A). Res po nd en t b ears th e b ur de n o f pr oduc ti on with re sp ectto pe ti ti on ers ’ li ab il ity for th e acc ur acy-rela te d p en al ty det erm in edinth e n ot ic e o f de fic ie nc y an d
m us t the refo re p ro du ce ev id en ce tha t i t i s ap pr op ria te to im po se th atpe na lty . See se c. 74 91 (c); see als o Hi gb ee v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). As a res ul t o f ou r de te rm in at io n re ga rd in g t he un rep orte d S oc ia l Se curit y pa y m en t, pe ti ti on ers ’ un de rs ta te m en t o f in co m e ta x fo r 20 10 is gre at er tha n 1 0% o f th e ta x requi redto be sh own on th e return, wh ic h i s g reat er tha n $ 5,0 00 . Accor di ng ly, res po nd en t h as m ethi s b ur de n o f pr oduc ti on . The accu racy-rela te d p en al ty is n otim po se d wi th res pe ctto an y po rti on of th e und erp aym en t o f ta x i f th e ta xp ay er ca n e st ab li sh th athe act edwith re as on ab le cau se an d i n g oo d fa ith wi th res pe ctto th atpo rti on . Sec. 6 66 4( c)(1 ). The b ur de n is up on th e ta xp ay er t o p ro ve reas on ab le cau se . See Hig be e v . Comm is si on er, 1 16 T.C. at 4 47 -4 49 . W e d et erm in e whe th er a t ax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fa ith b y

co ns id eri ng th e p ert in en t fa ct s an d c irc um st an ces .- 7 -

Thi s ca se in vo lv es a te ch ni cal co nf lu en ce o f th e ta xabi li ty of So ci al Secu rit y di sabi li ty ben efi ts an d t he ge ne ral no nt ax ab il ity of p riv at e in su ran ce d is ab il ity be ne fit s. Th ere i s n o que st io n tha t p et it io ne r was di sabl edan d e nt it le d t o di sabi li ty ben efi ts . She fir strece iv edth em fro m Hart fo rdan d, i n a cco rdwith t he ta x l aw, di d n otin cl ud e th em inhe r in co m e. Whe n s he be cam e en ti tl edto So ci al Secu rit y be ne fit s wi th reg ardto th e sa m e d is ab il ity , un de r he r co nt ractwith Hart fo rd , sh e was requi redto rep ay th e Hart fo rdbe ne fit s s he ha d p rev io us ly rece iv ed . Co ng res s s aw fi t t o m ak e a ce rta in pe rcen ta ge of S oc ia l Se cu rit y be ne fit s ta xabl e, ev enif the pay

m en ts are fo r a d is ab il ity . Con gr es s al so pro vi de d t ha t i n ci rcu m st an ces wher e So ci al Secu rit y be ne fit s h adto be rep ai d, the in it ia l re cei ptof th e b en efi ts wou ldno t b e ta xabl e. The d is pa rat e tr eat m en t o f pr iv at e an d p ub li c di sabi li ty ben efi ts for

tax pu rp os es is curio us an d s om ewh atco nf us in g. Un de r th es e ci rcu m st an ces , pet it io ne rs , who do no t h av e ta x e xp ert is e, so ug htth e advi ce of two cert ifi edpubl ic acco un ta nt s wh o c ou ns el edth em th atth ei r be ne fit s wer e no t t ax ab le . Pet it io ne rs co nt en d t ha t the ir r el ia nc e o n t he ir t ax pro fes si on al forth e 2 01 0 ta x s ta tu s o f th ei r di sabi li ty ben efi ts was re as on ab le . Reli an ce o n t he advi ce o f a ta x p ro fes si on al m ay

co ns ti tu te reas on ab le cau se an d g oo d fa ith i f un de r al l the- 8 -

fact s an d c irc um st an ces th e rel ianc e is reas on ab le an d i n g oo d fa ith. Neo na to lo gy Ass oc s., P.A. v. C omm is si on er, 1 15 T.C. 43 , 98 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d Ci r. 20 02 ); s ec. 1 .66 64 -4 (c)( 1) , Inc om e Tax Reg s. Co ns id eri ng all of t he cir cu m st an ces be fo re u s, we fi ndth atpe ti ti on ers act edreas on ab ly andth atitwas re as on ab le forth em to rel y on th e advi ce o f ta x pr of es si on al s t o e xc lu de th e rel ev an t So ci al Secu rit y be ne fit s fr om

in co m e. Acco rd in gl y , we ho ldth atpe ti ti on ers are n otli ab le foranaccu racy-rela te d p en al ty fo r 20 10 . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redforres po nd en t as to th e d efi ci en cy

an d fo r pe ti ti on ers as t o the accu racy-rela te d p en al ty.