United States Tax Court

T.C. Summary Opinion 2024-11

JON K. PALSGAARD AND KIMBERLY A. KELLY,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 14225-22S. Filed July 1, 2024.

—————

Jon K. Palsgaard and Kimberly A. Kelly, pro sese. 

Tamila F. Bishop Frankel, Janice B. Geier, and Kara L. Davidson 

Duyck, for respondent.

SUMMARY OPINION

FRIED, Special Trial Judge: This case was heard pursuant to the 

provisions of section 74631 of the Internal Revenue Code in effect when 

the Petition was filed. Pursuant to section 7463(b), the decision to be 

entered is not reviewable by any other court, and this Opinion shall not 

be treated as precedent for any other case. 

In a notice of deficiency (notice) dated March 14, 2022, respondent 

determined a deficiency in petitioners’ 2019 federal income tax and a

section 6662(a) accuracy-related penalty.

1 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax 

Court Rules of Practice and Procedure.

Served 07/01/24
2

After a concession,2 the issue for decision is whether petitioners

must include Social Security disability (SSD) benefits in gross income 

under section 86.

Background

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

the Petition was filed, petitioners resided in California.

Kimberly A. Kelly (petitioner) worked as a practicing physician in 

California for Southern California Permanente Medical Group (Medical 

Group) until March 2009, when she suffered a physical injury that left 

her disabled within the meaning of section 72(m)(7).

In 2009 petitioner qualified for and began to receive benefits

under a disability insurance policy that Medical Group provided for its 

employees. In accordance with the Medical Group disability policy, 

however, petitioner was obliged to apply for disability benefits with the 

Social Security Administration (SSA). She did so and began receiving 

SSD benefits in 2010. Petitioner received SSD benefits totaling $32,862

in 2019.

Petitioners filed a joint federal income tax return for 2019

reporting that petitioner had received SSD benefits of $3,214 for that

year and took the position that only $2,732 of that amount was subject 

to federal income tax.

In the notice respondent determined that petitioners understated 

the amount of petitioner’s SSD benefits that are subject to federal 

income tax. The income determination in the notice was based on an 

information return the SSA filed, Form SSA–1099, Social Security 

Benefit Statement, showing $32,862 of SSD payments made to 

petitioner in 2019.

Discussion

I. Burden of Proof

The Commissioner’s determinations in a notice of deficiency are 

generally presumed correct, and the taxpayer bears the burden of 

proving error in the determinations. See Rule 142(a); Welch v. Helvering, 

290 U.S. 111, 115 (1933). Petitioners do not contend, and the evidence 

2 Respondent concedes the section 6662(a) accuracy-related penalty.
3

does not establish, that the burden of proof should shift to the 

Commissioner under section 7491(a).

In cases involving unreported income, the Commissioner must 

establish an evidentiary foundation connecting the taxpayer with the 

income-producing activity or demonstrate that the taxpayer actually

received income. Walquist v. Commissioner, 152 T.C. 61, 67 (2019). In 

this case there is no dispute that petitioner received the unreported 

income at issue. Respondent has provided a certified transcript stating 

that the Internal Revenue Service received Form SSA–1099 showing 

$32,862 of Social Security benefits paid to petitioner in 2019. At trial

petitioners did not dispute that petitioner received the unreported SSD

benefits. Respondent accordingly has established the requisite minimal 

evidentiary foundation linking petitioner and her activities with the 

unreported income. See Alonim v. Commissioner, T.C. Memo. 2010-190, 

2010 WL 3397493, at *1.

II. Petitioner’s SSD Benefits

Unless otherwise provided, gross income includes all income from 

whatever source derived. § 61(a). Beginning with the taxable year 1984, 

Social Security benefits, including disability benefits, have been subject 

to federal income tax. See Social Security Amendments of 1983, Pub. L. 

No. 98-21, § 122(b), 97 Stat. 65, 87; Roberts v. Commissioner, T.C. Memo. 

1998-172, aff’d, 182 F.3d 927 (9th Cir. 1999) (unpublished table 

decision).

Gross income specifically “includes social security benefits,” in an 

amount determinable under a specified statutory formula. § 86(a) 

and (b). Section 86(d)(1)(A) defines the term “social security benefit” to 

include “any amount received by the taxpayer by reason of entitlement 

to . . . a monthly benefit under title II of the Social Security Act.” 

Petitioners primarily contend that petitioner’s SSD benefits are

not taxable pursuant to section 104(a)(2), which excludes from gross 

income “the amount of any damages (other than punitive damages) 

received . . . on account of personal physical injuries or physical 

sickness.” Respondent does not dispute that petitioner received her SSD 

benefits on account of personal physical injuries or physical sickness. 

Rather, respondent contends that those benefits do not constitute 

“damages.”

Petitioner did not receive her SSD benefits by prosecution of a 

lawsuit or by settlement of litigation. To the contrary, she received those 
4

benefits under a Government-sponsored insurance program.

Accordingly, those benefits do not constitute “damages” within the 

meaning of section 104(a)(2). See Zardo v. Commissioner, T.C. Memo. 

2011-7, 2011 WL 80389, at *2; see also Palsgaard v. Commissioner, T.C. 

Memo. 2018-82, at *8–9.

Although the record is unclear, petitioners appear to further

argue that petitioner’s SSD benefits are not taxable because there was 

no constructive receipt of the SSD benefits by petitioner and that 

petitioner’s SSD benefits are excluded from income under section 

104(a)(1) and (3).

This case is not the first time petitioners have raised these

arguments before this Court. In prior proceedings for other tax years we

considered these same arguments and ultimately determined that

petitioner’s SSD benefits were taxable. See Palsgaard, T.C. Memo. 

2018-82; Transcript of Bench Opinion, Palsgaard v. Commissioner, No. 

2103-17S (Dec. 13, 2017). But for the years and amounts involved in the 

prior proceedings, the evidence parallels the evidence in this case. We 

could repeat the reasoning of the prior opinions here, but it is unlikely 

that we could improve upon it.

In reaching our decision, we have considered all arguments made, 

and to the extent not addressed herein, we find them to be moot, 

irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered for respondent with respect to the 

deficiency and for petitioners with respect to the section 6662(a) 

accuracy-related penalty.