1 Unless otherwise indicated, all subsequent section

references are to the Internal Revenue Code in effect for 2001,

the taxable year in issue. All monetary amounts are rounded to

the nearest dollar.

T.C. Summary Opinion 2005-61

UNITED STATES TAX COURT

JAMES W. DAVIS AND TERI A. DAVIS, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8590-04S. Filed May 19, 2005.

James W. Davis, pro se.

Michael J. Proto, for respondent.

ARMEN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1 The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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Respondent determined a deficiency in petitioners’ Federal

income tax for the taxable year 2001 in the amount of $4,238.

The issue for decision is whether a lump-sum payment of

Social Security disability benefits, received by petitioner Teri

A. Davis in 2001, is includable in petitioners’ gross income for

2001 (pursuant to the formula in section 86(a)), even though a

significant portion of the payment is attributable to benefits

for 1999 and 2000. We hold that it is.

Background

Some of the facts have been stipulated, and they are so

found. 

At the time that the petition was filed, petitioners resided

in Canton, New York.

In 1999, petitioner Teri A. Davis (Mrs. Davis) suffered an

injury and applied for Social Security disability benefits. 

However, the Social Security Administration resisted her claim. 

Mrs. Davis then retained legal counsel. Ultimately, after many

months, Mrs. Davis prevailed in the dispute, and she received a

lump-sum payment of benefits in 2001. 

For 2001, Mrs. Davis received a Form SSA-1099, Social

Security Benefit Statement, from the Social Security

Administration. Box 3 of that form reported “benefits for 2001”

of $21,656, which was described as follows:
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2 Necessarily, therefore, the balance of the benefits

(i.e., $9,178) was paid for 2001.

 Paid by check or direct deposit $17,393

 Medicare premiums deducted from benefits 100

 Worker’s compensation offset 163

 Attorney fees * * * 4,000

 Benefits for 2001 $21,656

The description of the “benefits for 2001” also included a

statement that the $21,656 amount included $8,868 paid in 2001

for 2000 and $3,610 paid in 2001 for 1999.2 

Petitioners timely filed a Federal income tax return for

2001. On line 7 of their return, petitioners reported

compensation received by petitioner James W. Davis (Mr. Davis) in

the amount of $52,013. In contrast, on line 20a of their return,

petitioners did not report any Social Security benefits, nor did

they report any taxable amount thereof on line 20b.

Petitioners did not itemize deductions on their 2001 return,

but claimed the standard deduction.

In the notice of deficiency, respondent determined that 85

percent, or $18,408, of the Social Security benefits of $21,656,

received by Mrs. Davis in 2001, was includable in petitioners’

gross income for that year.

Discussion

Social Security benefits, including Social Security

disability benefits, are includable in gross income pursuant to a

statutory formula. See sec. 86(a); Thomas v. Commissioner, T.C.
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Memo. 2001-120; Maki v. Commissioner, T.C. Memo. 1996-209. In

the present case, the application of that formula results in the

inclusion of benefits of $18,408 (i.e., 85 percent of $21,656) in

petitioners’ gross income for 2001. 

Petitioners point out that a significant portion of the

Social Security benefits received by Mrs. Davis in 2001 was

attributable to 1999 and 2000. Petitioners contend that it would

be unfair to determine the taxable portion of the lump-sum

payment without regard to the prior years to which the payment is

attributable. Therefore, petitioners argue, they should be

entitled to amend their returns for 1999, 2000, and 2001 and

include in gross income for each of those years the amount of

benefits attributable to each of those years, and recompute their

tax liabilities for each of those years accordingly. We disagree

with petitioners’ approach because it is contrary to law.

Under income tax accounting principles, an item of gross

income must be included in income for the taxable year that it is

received by the taxpayer unless, under the taxpayer's method of

accounting, the amount is to be properly accounted for in a

different period. Sec. 451(a). For taxpayers such as

petitioners who use the cash receipts and disbursements method of

accounting, an item is includable in gross income when it is

actually or constructively received. Sec. 1.451-1(a), Income Tax

Regs. 
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However, the law recognizes that a taxpayer who receives a

lump-sum payment of Social Security benefits attributable in part

to prior taxable years may be adversely affected by the

“bunching” of income. Section 86(e)(1) is designed to provide a

measure of relief to such taxpayers. 

Section 86(e) provides as follows:

SEC. 86(e). Limitation On Amount Included Where

Taxpayer Receives Lump-Sum Payment.--

(1) Limitation.–-If–-

(A) any portion of a lump-sum payment of

social security benefits received during the

taxable year is attributable to prior taxable

years, and

(B) the taxpayer makes an election under this

subsection for the taxable year,

then the amount included in gross income under

this section for the taxable year by reason of the

receipt of such portion shall not exceed the sum

of the increases in gross income under this

chapter for prior taxable years which would result

solely from taking into account such portion in

the taxable years to which it is attributable.

Section 86(e)(1) implicitly recognizes the principle that a

lump-sum payment of Social Security benefits is to be included in

gross income (pursuant to the formula of section 86(a)) in the

year in which the lump-sum payment is received and not in the

years to which the payment is attributable. However, upon a

taxpayer’s election, section 86(e)(1) does limit the amount

properly includable in gross income for the taxable year of
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receipt to the sum of the increases in gross income for the years

to which the lump-sum payment is attributable. 

In the present case, the parties agree that an election

under section 86(e)(1) would not serve to reduce the amount of

the lump-sum payment that is includable in petitioners’ gross

income in 2001. That being the case, it is apparent that 85

percent of the lump-sum payment is includable in petitioners’

gross income for 2001 pursuant to the formula of section 86(a).

Petitioners further contend that the portion of the lump-sum

payment of Social Security benefits that was paid to Mrs. Davis’s

attorney for legal fees (i.e., $4,000) should be disregarded for

purposes of section 86(a). We disagree.

Under the so-called anticipatory assignment of income

doctrine, “A taxpayer cannot exclude an economic gain from gross

income by assigning the gain in advance to another party.” 

Commissioner v. Banks, 543 U.S. , 125 S. Ct. 826, 831 (2005), 

see Lucas v. Earl, 281 U.S. 111 (1930); S. Rept. 98-23, 26

(1983), 1983-2 C.B. 326, 328 (stating that for tax purposes, the

total amount of Social Security benefits received by a taxpayer

is not reduced by attorney’s fees). Therefore, the portion of

the lump-sum payment of Social Security benefits that
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3 The same analysis applies to the Medicare premiums ($100)

that were deducted from Mrs. Davis’s lump-sum payment. Indeed,

S. Rept. 98-23, 26 (1983), 1983-2 C.B. 326, expressly mentions

Medicare premiums and states that for tax purposes, they do not

serve to reduce the total amount of Social Security benefits

received by a taxpayer.

Finally, we note that the so-called workers’ compensation

offset ($163) is treated as though it were a Social Security

benefit. Sec. 86(d)(3); see Mikalonis v. Commissioner, T.C.

Memo. 2000-281; Willis v. Commissioner, T.C. Memo. 1997-290. 

4 In particular, we reject, as contrary to law,

petitioners’ argument that the tax on the lump-sum payment of

Social Security benefits should be reduced pro tanto by the

amount of the attorney’s fees incurred by Mrs. Davis to obtain

that payment. We also reject, as outside our jurisdiction in an

action to redetermine a deficiency, petitioners’ arguments

regarding the designation of payments made pursuant to an

installment payment agreement involving the taxable years 1995,

1998, and 2001. In this regard, we note that the record in this

(continued...)

was paid to Mrs. Davis’s attorney for legal fees on her behalf is

taken into account in applying the formula of section 86(a).3

A portion of the amount that was paid on behalf of Mrs.

Davis to her attorney for legal fees is potentially deductible as

an itemized deduction. See secs. 212(1), 265(a)(1); sec. 1.212-

1(a)(1), Income Tax Regs.; Andrews v. Commissioner, T.C. Memo.

1992-668. The matter is academic, however, because petitioners

did not itemize their deductions in 2001 and made no effort at

trial to demonstrate that their deductible expenses exceeded the

$7,600 standard deduction that they claimed on their return. 

Finally, we have considered all of petitioners’ other

arguments, and, to the extent that we have not specifically

addressed them, we conclude that they are without merit.4
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4(...continued)

case does not show any overpayment of tax for 2001; therefore,

the Court’s ancillary jurisdiction under sec. 6512 is not

implicated in this deficiency proceeding. See sec. 6213; cf.

secs. 6320, 6330 involving lien and levy actions (collection

actions).

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect our disposition of the disputed issue,

Decision will be entered

for respondent.