T.C. Summary Opinion 2005-158

UNITED STATES TAX COURT

MITCHELL WAYNE ANDREW AND NANCY RAE PATTEN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5722-03S. Filed November 2, 2005.

Mitchell Wayne Andrew and Nancy Rae Patten, pro sese.

Kenneth P. Dale, for respondent.

CARLUZZO, Special Trial Judge: This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for 2000. Rule references are to the Tax

Court Rules of Practice and Procedure. The decision to be
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entered is not reviewable by any other court, and this opinion

should not be cited as authority.

Respondent determined an $11,599 deficiency in petitioners’

2000 Federal income tax and a $483 section 6651(a)(1) addition to

tax for that year. The issues for decision are: (1) Whether

Social Security benefits received on account of Nancy Rae

Patten’s physical disability are includable in petitioners’

income; and (2) whether petitioners’ failure to file a timely

2000 Federal income tax return is due to reasonable cause.

Background

Some of the facts have been stipulated and are so found. 

At the time the petition was filed in this case, petitioners

resided in Lake Stevens, Washington. Petitioners are, and were

during all relevant periods, married to each other. They filed a

joint Federal income tax return for the year in issue. Nancy R.

Patten (petitioner) is afflicted with multiple sclerosis and has

not been employed since 1994.

In 1995, petitioner filed for and was denied Social Security

disability benefits. She reapplied for disability benefits in

1998 and was again denied. She successfully appealed the

denials, and in 2000 she was awarded and received Social Security 

disability benefits of $50,405. Although received entirely in
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1 The parties stipulated the Aug. 30, 2001, date.

2

 In this case, ignoring adjustments not relevant here,

petitioners’ modified adjusted gross income equals their adjusted

gross income. See sec. 86(b)(2). 

2000, the Social Security disability benefits are attributable to

1996, 1997, 1998, 1999, and 2000. 

Petitioners’ self-prepared 2000 return was filed September

20, 2001. Taking into account an extension to file, that return

was due on or before August 30, 2001.1 The income reported on

petitioners’ 2000 return does not take into account the Social

Security disability benefits petitioner received that year. 

In the notice of deficiency, respondent determined that 85

percent of the Social Security disability benefits ($42,844)

petitioner received during 2000 is includable in their income for

that year and imposed a section 6651(a)(1) addition to tax for

their failure to file a timely Federal tax return. Other

adjustments in the notice of deficiency are not in dispute and

need not be addressed.

Discussion

Section 61(a) provides that, except as otherwise provided by

law, gross income includes all income from whatever source

derived. Relevant for our purposes, section 86(a) provides that

if the taxpayer’s modified adjusted gross income2 plus one-half

of the Social Security benefits received by the taxpayer exceeds
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3 Before 1984, certain disability benefits were excludable

from an employee’s gross income under sec. 105. However, this

section was repealed, and “since 1984 Social Security disability

benefits have been treated in the same manner as other Social

Security benefits.” Maki v. Commissioner, T.C. Memo. 1996-209. 

the adjusted base amount, then gross income includes the lesser

of: (1) The sum of (a) 85 percent of such excess, plus (b) the

lesser of (i) one-half of the Social Security benefits received

during the year or (ii) one-half of the difference between the

adjusted base amount and the base amount of the taxpayer; or (2)

85 percent of the Social Security benefits received during the

taxable year.3 See sec. 86(a)(2). With respect to married

taxpayers who file a joint return for 2000, as petitioners did,

the base amount and the adjusted base amount are $32,000 and

$44,000, respectively. Sec. 86(c)(1)(B) and (2)(B).

Social Security benefits are included in the recipient’s

gross income in the taxable year in which the benefits are

received. Sec. 86(a)(1). An election may be made by a taxpayer

who receives a lump-sum payment of Social Security benefits

during the taxable year in which a portion of the benefits is

attributable to previous taxable years. Sec. 86(e). Section

86(e) provides that, if the election 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
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portion of the benefits attributable to the previous taxable

years. Accordingly, if no election is made by the taxpayer under

section 86(e), lump-sum distributions of Social Security benefits

are includable in the taxpayer’s gross income in the taxable year

the benefits are received. Petitioners did not make an election

under section 86(e) with respect to the lump-sum Social Security

disability benefits received in 2000. 

Allegations petitioners made in the petition and their

presentation at trial suggest that petitioners do not dispute the

manner in which Social Security benefits are generally treated

for Federal income tax purposes. Instead they argue that the

Social Security disability benefits here under consideration are

excludable from their income by virtue of section 104(a)(2). 

Petitioners admit that they did not know how to treat the

disability benefits for Federal income tax purposes. According

to petitioners, in an informal contact made with one of

respondent’s employees they were advised that the benefits were

excludable from income under section 104(a)(2). They further

contend that their uncertainty as to how to treat the disability

benefits resulted in the late filing of their 2000 return. 

Section 104(a)(2) excludes from gross income amounts

received in damages, by suit or settlement, “on account of

personal physical injuries or physical sickness”. In determining

whether damages received are excludable under section 104(a)(2),
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4 To the extent that petitioners did receive erroneous

advice on this point from one of respondent’s employees, the

event is of no significance here. See Zimmerman v. Commissioner,

71 T.C. 367, 371 (1978), affd. without published opinion 614 F.2d

1294 (2d Cir. 1979); Green v. Commissioner, 59 T.C. 456, 458

(1972).

the focus is the nature of the claim underlying the damage award. 

United States v. Burke, 504 U.S. 229, 237 (1992). The underlying

claim giving rise to the recovery must be “based upon tort or

tort type rights”, and the damages must have been received “on

account of personal injuries or sickness”. Commissioner v.

Schleier, 515 U.S. 323, 336-337 (1995).

Section 1.104-1(c), Income Tax Regs., provides that “The

term ‘damages received (whether by suit or agreement)’ [in

section 104(a)(2)] means an amount received (other than worker’s

compensation) through prosecution of a legal suit or action based

upon tort or tort type rights, or through a settlement agreement

entered into in lieu of such prosecution.”

Despite the fact that petitioner sued to obtain Social

Security disability benefits, these benefits do not constitute

“damages” from a tortious injury. Rather, these benefits are

amounts received through disability insurance.4 See Andrews v.

Commissioner, T.C. Memo. 1992-668. 

Taking into account petitioners’ 2000 filing status, their

modified adjusted gross income, and the Social Security

disability benefits petitioner received that year, 85 percent of
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those benefits are includable in their 2000 income. See sec.

86(a), (c). Respondent’s determination in this regard is,

therefore, sustained.

Section 6651(a)(1) imposes an addition to tax for failure to

file a Federal income tax return by its due date, determined with

regard to any extension of time for filing previously granted.

The addition equals 5 percent for each month that the return is

late, not to exceed 25 percent. Sec. 6651(a)(1).

The addition to tax is applicable unless the taxpayer

establishes that the failure was due to reasonable cause and not

willful neglect. Id. The taxpayer must prove both reasonable

cause and a lack of willful neglect. United States v. Boyle, 469

U.S. 241, 246 (1985). “Reasonable cause” requires the taxpayer

to demonstrate that he exercised ordinary business care and

prudence. Id. “Willful neglect” is defined as a “conscious,

intentional failure or reckless indifference.” Id. at 245.

Respondent bears the burden of production with respect to

any additions to tax. See sec. 7491(c). In order to meet this

burden, respondent must produce sufficient evidence establishing

that it is appropriate to impose the additions to tax. See 

Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once

respondent has done so, the burden of proof is upon petitioners

to persuade the Court that respondent’s determination is

incorrect. See id.
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Respondent established that petitioners’ 2000 return was not

filed by its extended due date. Petitioners’ only explanation

for the untimely filing is their uncertainty as to how to treat

the Social Security disability payments. We are not persuaded

that their explanation rises to the level of “reasonable cause”. 

Accordingly, we hold that petitioners are liable for the addition

to tax under section 6651(a)(1) for the year 2000.

Reviewed and adopted as the report of the Small Tax Case

Division. 

To reflect the foregoing, 

Decision will be entered

under Rule 155.