T.C. M em o . 2 0 1 8 -1 4 5

UNITED STATES TAX COURT

CATHERINE J . CLAY, Pet i ti o ner v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 4 8 3 6-1 4. Fi l edSep t em b er 1 0 , 2 0 1 8
.

Cat h eri n e J . Cl ay , p ro s e. Reb ecca M . Cl ark , fo r res p o n d en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION GALE, Ju d g e: Res p on d en td et erm i n eda d efi ci en cy i n p et i t io n er’ s Fed eral i n co m e t ax fo r 2 0 1 1 o f $ 9 ,7 6 9 an d an accu racy -rel at edp en al t y u n der s ect i o n 6 6 6 2 (a) 1 o f $ 1 ,9 5 4 . Fo l l o wi ng co nces s i on s b y th e p art i es , 2 th e i s s u es fo r d eci s i o n

1 Un l es s o t h erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al (co n ti n u ed ...)- 2
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[* 2 ] are: (1 ) wh et h er an dt o wh at ex t en tth e l o ng -t erm d i s ab i l i t y

(LTD) b en efi t s p et i t i o n er recei v edfro m

St an d ardIn s uran ce Co . (St an d ard ) i n 2 0 1 1 are i n cl u d i b le i n i nco m e fo r t ax ab le y ear 2 0 1 1 , (2 ) wh et h er an dt o wh atex t en tth e So ci al Secu ri t y d i s ab i l it y

(SSD) b en efi t s t h atp et i t i o n er recei v edi n 2 01 1 are i n cl u d i b l e i n i n co m e fo r t h aty ear, an d (3 ) wh et h er an dt o wh atex ten tthe $ 6 ,0 0 0 o f SSD b en efi t s wi t h h el d i n 2 0 1 1 b y the So ci al Secu ri t y

Ad m i n is trat i o n fo r p aym en to f p et i t i o n er’ s at t orn ey ’ s fees i s d edu ct i b l e. FINDINGS OF FACT So m e o f t h e fact s are s t i p u l at edan dare s o fo u nd . Th e s t i p u l at io n o f fact s
an d i t s ex h i b i t s are i n co rp o rat edh erei n b y th i s referen ce. Pet it i o n er res i d edi n M i ch i g an wh en t h e p et i t i o n was fi l ed
.

1 (...co n t in u ed ) Rev en u e Co de o f 1 98 6 , as i n effect fo r t he y ear ati s su e, an d al l Ru l e referen ces are t o t he Tax Co urtRu l es o f Pract i ce an dPro cedure. Al l d ol l ar am o u n t s h av e b een ro u n d edt o t h e n eares td o ll ar. Fi g u res m ay d i ffer b ecau s e o f ro u nd i n g . 2 Res p o n d en th as co n ced edth at p et i t i o n er i s n o tl i ab l e fo r t h e s ec. 6 6 6 2 (a) p en al t y . Pet i ti o n er h as co n ced edth ats he recei v ed a t ax ab l e St at e i n co m e t ax refu ndo f $ 1 7 0. Fi nal l y , p et i ti on er d i dn o t co n t es tres p o n d en t ’ s d i s al l o wan ce o f $ 5 ,3 6 3 o f t h e $ 9 ,3 1 5 o f m ed i cal ex pen s es cl ai m edas a d educt i o n o n p et i t i o n er’ s Sch edu l e A, It em i zedDedu ct i o n s , ei t h er i n th e p et i ti o n , at t ri al , o r o n b ri ef, an dwe t h erefo re d eem

th e i ss ue co nced ed . See Ru l e 3 4 (b ); Leah y v . Co m m i ss i o ner, 8 7 T.C. 5 6 , 7 3 -7 4 (1 98 6 ); M art i n v . Co m m i s si on er, T.C. M em o . 2 01 6 -1 89 , at* 2 n .2
.- 3
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[* 3 ] I. Pet i t i o ner’ s d i s ab i l i t y co v erag e In 2 0 0 9 p et i t i o n er was em p l o y edas a t each er b y

the Sch o ol Di s t ri cto f t h e Ci t y o f Sag i n aw (Di s t ri ct ). Duri n g th att i m e th e Di st ri ctm ai n t ai n ed , an dp ai dth e p rem i u m s o n , a g ro up LTD i ns u ran ce p o l icy wi t h St an d ard(St an d ard p ol i cy ) o n b eh al f o f i t s em

pl o y ees , i n cl u d i n g p et i t i o n er. Pet i t io n er d i dn o trep o rtas i nco m e t h e p rem i u m s p ai do n h er b eh al f b y th e Di s tri ct
. Un d er th e t erm s o f t h e St an dard p o l i cy , a d i sab l ed Di s t ri ctem p l o y ee was
en t i t l edt o recei ve an nu al LTD p aym en t s equ al t o 6 6 -2 / 3 % o f t h e em p l o y ee’ s p red i s ab i l i t y i n co m e, l es s d edu ct i b l e i n co m e. Dedu ct i b l e i n co m e fo r t h i s p u rp o s e i n cl u d ed“ [a] n y

am o un ty ou * * * recei v e o r are el i gi b l e t o recei ve b ecau s e o f y o u r d i s ab i l i t y u n d er * * * Th e Fed eral So ci al Secu ri t y Act .” Th e p o l i cy

req ui redan LTD b en efi treci p i en t t o p u rs u e an y d edu ct ib l e i nco m e fo r wh i ch h e o r s h e was el i g i b l e. Wh ere LTD p aym en t s h adb een m ad e t o a reci p i en twi t h o u t an y redu ct i o n fo r d edu ct i b le i n co m e, an dth e reci p i en t t h ereaft er recei v edd edu ct i b l e i n co m e, th e St an d ardp o li cy treat edth e p o rt i o n o f t h e LTD p aym en tequ al t o th e d educt i b l e i n co m e as an “ o verp aym en t ” an dreq u i redth e reci p i en tt o rep ay th e
o v erp aym en t t o St an dard . Th e St an d ardp o li cy p ro vi d es as fo l l o w s co n cern i n g rep aym en to f an y

o v erp aym en t : “ W e wi l l n o ti fy y ou o f t h e am o u n to f an y
o v erp aym en t o f y o ur cl ai m u n d er an y

g ro up d i s ab i l i ty

i n su ran ce p o l icy

i s s uedb y- 4
-

[* 4 ] u s . Yo um

u s ti m m ed i at el y rep ay u s . Yo uwi l l n o t recei v e an y LTD Ben efi t s
u n t i l we h av e b een rep ai di n fu l l . Inthe m ean t i m e, an y LTD Ben efi t s p ai d * * * wi l l b e ap p l i edt o redu ce t h e am o u n to f t he o v erp aym en t
. ” Th e St an d ardp o l icy

al so l i m i t edth e p eri o ddu ri n g wh i ch a reci p i en tco u l d recei v e LTD b en efi t s . AnLTD b en efi treci p i en twh o b ecam e d i s ab l ed b efo re ag e 6 1 co u l drecei v e, ata m ax i m u m , LTD b en efi t s u n t i l ag e 6 5 . Ho wev er, i f t he LTD b en efi treci p i en t ’ s d is ab i l it y was “ cau s edo r co n tri b u t edt o ” b y a m en t al d is o rd er, h e o r s h e co u l d recei v e LTD b en efi t s fo r a m ax i m u m o f 2 4 m o n t hs
. II. Pet i t i o ner’ s acci d en tan dth e St an d ardLTD p aym en t s On Oct o b er 8 , 2 0 09 , p et i t i o ner was i n v o l v edi n an au t o m o b i le acci d en t
. Sh e was 4 9 y ears o l dan dearn in g $ 6 5 ,7 9 8 p er y ear fro m th e Di st ri ct . Pet i t i o n er t h ereaft er ap p l i ed fo r an drecei v ed s ickp ay fro m t h e Di s tri ctb et ween No v em b er 1 9 , 2 0 0 9 , an dJ an u ary 5 , 2 0 1 0
. In J an uary2 0 1 0 p et i t i o n er ap p l i edfo r LTD b en efi t s u n d er t h e St an d ard p o l i cy . OnSep t em

b er 1 4, 2 0 1 0 , St an d ardap p ro vedh er req u es teffect i v e ret ro act i v el y

t o J an u ary 6 , 2 0 1 0 . InSep t em b er 2 0 1 0 p et it i o n er recei v eda l u m p s u m p aym en to f $ 2 9 , 2 4 5 fo r ei g h tm o n th s o f b en efi t s (J an u ary 6 th ro u g h Sep tem b er 5 , 2 0 1 0 ) at$ 3 , 6 5 6 p er m o n t h
.- 5
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[* 5 ] On Oct o b er 8 , 2 0 10 , p et i t i o ner s i g n eda d o cu m en ten ti t l ed“ Rep aym en t Ag reem en t ” (rep aym en tag reem en t ) wi t h St an d ard , wh i ch s tat edi n p ert in en tp art :

“ I u n d ers t an dth atm

y recei v in g o r b ei n g el i g i b l e t o recei v e Dedu ct i b l e In co m e
m ay res u l ti n an o v erp aym en to f LTD b en efi t s . I ag ree t o i m m ed i at el y rep ay Th e St an d ardfo r an y

s u ch o verp aym en t .” Aft er recei p t o f t h e l u m

p -s u m p aym en t , p et it i on er recei v edm o n t h l y LTD p aym en t s o f $ 3 ,6 56 th ro u g h Decem ber 2 0 1 1 . Th e p aym en t s ceas edaft er t hat
m o nt h b ecau s e St an d ardt o o k t h e p o s i t i o n thatp et i t i o n er’ s d is ab i l i t y was cau s ed b y a m en t al d i s o rd er, wi t h th e co n s eq u en ce u n d er t he St an d ardp o l i cy t hats h e was
en t i t l edt o recei ve o n ly

2 4 m o n t h s o f LTD b en efi t s . Int o t al , St an d ardm ad e $ 4 3 ,8 6 8 o f LTD p aym en t s t o p et i ti o ner i n 2 0 1 0 an dag ai n i n 2 0 1 1. St an d ardfi l ed wi t h res p o n d en tan di s s u ed t o p et i t i o ner a Fo rm W -2 , W ag e an dTax St at em en t , fo r 2 0 1 1 rep o rt i n g th e $ 4 3 ,8 6 8 i n LTD p aym en t s i tm ad e t o p et i t i o ner d u ri n g th at y ear as wag es . See g en eral l y s ec. 3 2 .1 , Tem

p o rary Em

p l o ym en tTax Reg s . , 4 7 Fed
. Reg . 2 9 2 2 5 (J u l y 6 , 1 9 8 2 ) (as am en d edb y T.D. 7 86 7 , 4 8 Fed . Reg . 7 9 3 (J an . 7 , 1 98 3 ), an dT.D. 9 2 3 3 , 7 0 Fed . Reg . 7 4 1 9 9 (Dec. 1 5, 2 0 15 )). Pet i t i o ner d i s ag reed wi t h St an d ard ’ s p o s i t io n th ath er d i s ab il i ty was du e t o a
m en t al d i s o rd er, i n s t eadco n t en d i n g th ath er d i s ab il i t y was p h y s i cal . Pet i t i o n er
s o u g htan dwas g ran t ed an i n t ern al rev i ew o f St an d ard ’ s d et erm i n at i o n, b u t- 6
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[* 6 ] St an d ardd i dn o tal t er i t s p o s i t i o n . Pet i t i o n er co nt i n u edt o d i s p u t e St an d ard ’ s d et erm i n at i o n an dco n t en dedthats h e was en t i t l edt o fu rt h er LTD b en efi t s b ey o nd 2 0 1 1 . As o f t h e t i m e o f t ri al , St an d ardm ai n t ai nedi t s p o s i t i o n th at p et i t i o n er’ s d i s ab i l i t y was cau s edb y

a m en t al d i s o rd er an dh adrefu s edt o p ay an y LTD b en efi t s b ey o n dthe t wo y ears ’ wo rt h th ath adb een p ai d
. III. Pet i t i o ner’ s SSD b en efi t s an dSt an d ard ’ s d em an dfo r rep aym en t Pet i t i o ner ap p li edfo r SSD b en efi t s i n J an uary2 0 1 0 as req ui redu n d er t h e St an d ardp o li cy . Aft er s h e was i n it i al l y d en i edb en efi t s b y

the So ci al Secu ri t y Ad m i n i s t rat i o n, p et i t i o n er h i redan at t o rn ey t o as si s th er i n t h e ap p l icat i o n p ro ces s
o n a co nt i n g en tfee b as i s . OnNo v em b er 2 2, 2 0 11 , p et i t i o ner recei v eda l et t er fro m t h e So ci al Secu ri t y

Ad m i n i s t rat i o n ap p ro v i n g h er ap p l i cat i o n fo r SSD b en efi t s . Th e l et t er ad v is edth atp et i t i o n er was en ti t ledt o m o n th l y SSD p aym en ts o f $ 1 ,7 3 5
. Th e b en efi t s were p ay ab l e ret ro act i v el y t o Ap ri l 2 01 0 (as a co n seq u en ce o f t h e req u i rem en tth atan i n d i v idual b e fu l l y d i s ab ledfo r fi v e m o n t hs b efo re
co m m en cem en to f SSD b en efi t s ). Th e l et t er ex pl ai nedth at p et it i on er wo u ld recei v e h er m o n t h l y

p aym en tfo r t h e cu rren tm o n th , No v em b er, i n th e fo l l o wi n g
m o nt h , Decem

b er. Th e l et ter fu rt h er ex p l ai n edth atp et i t i o n er was en t i tl ed t o ret ro act i v e b en efi ts o f $ 3 2 ,9 6 5 fo r Ap ri l 2 0 1 0 thro u gh Oct o ber 2 01 1 (at$ 1 ,7 3 5 p er m o n t h ) b u t t h at $ 6 ,0 0 0 o f th i s am o u n two u l db e wi t h hel dt o p ay h er at t o rn ey- 7
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[* 7 ] fo r as s i s t i n g h er i n s ecu ri n g th e SSD b en efi t s . Aft er t h e No v em b er 2 2 , 2 0 1 1 , l et t er b u tb efo re t h e en do f 2 0 1 1 , p et i t i on er recei v eda l u m p s u m o f $ 2 8 ,7 0 0 i n SSD b en efi t s . Th is fi g u re rep res en t ed t h e $ 32 ,9 6 5 i n ret ro act i v e b en efi t s , p l u s th e No v em b er 2 0 11 m o n t hl y

p aym en t o f $ 1 , 7 3 5, l es s th e $ 6 , 0 00 wi t h h el d t o p ay p et i t i o n er’ s at t orn ey ’ s fees . Ou to f t h i s am o u ntrecei v edi n 2 0 1 1 , $ 1 3 ,8 8 0 was fo r SSD b en efi t s at t ri b ut ab l e t o 2 0 1 0 --i
. e., t he p o rt i o n o f t h e $ 3 2 ,9 65 i n ret ro act i v e b en efi t s fo r Ap ri l 2 0 1 0 th ro u g h No v em b er 2 0 1 0 (at $ 1,7 3 5 p er m on t h ). 3 In v i ew o f t h e SSD p aym en t s p et i ti o n er recei v edi n 2 01 1 , St an d ard d et erm i n edth ati t h ad o v erp ai d LTD b en efi t s t o h er b y $ 3 6 ,6 9 4
. 4 St an d ardfi rs t
s en tp et i t i o n er a n ot i ce o f h er o b l i g at i o n t o rep ay thi s am o u nto n Decem

ber 2 3 , 2 0 1 1 , an ds ub seq uen t l y s ou g h tt o co l l ectth e o v erp aym en t . Pet it io n er, h o wev er, d i dn o t u s e an y

o f the SSD l u m

p s u m o f $ 2 8 ,7 0 0 s h e recei v edi n l at e 2 0 1 1 t o rep ay St an d ardfo r t h e o v erp aym en to f h er LTD b en efi ts . In s t ead , wh i l e ackn o wl ed g i n g

3 Th e So ci al Secu ri t y Ad m i n i s t rat i on i s s uedp et i t i o ner a Fo rm 1 09 9 -SSA, So ci al Secu ri t y

Ben efi tSt at em en t , fo r 2 0 1 1 . It rep o rt s t h atp et i t io n er was p ai d $ 3 4 ,7 0 0 i n b en efi t s i n 2 0 1 1 b u tth at$ 1 3 ,8 8 0 o f t hatam ou n twas fo r 2 01 0 . Th e Decem b er 2 0 1 0 SSD b en efi tp aym en t , recei v edb y p et i ti o ner i n 2 0 1 1 , was treat ed o n th e Fo rm

1 0 9 9 -SSA as at t ri b u t ab l e t o 2 0 1 1
. 4 Th i s fi g u re ap p aren t l y

rep res en ts th e 2 0 m o n t h s o f SSD b en efi t s p et i t i o n er recei v edi n 2 0 1 1 , p lu s an ad d i t i o n al m o n t h ’ s wo rt h fo r Decem b er 2 0 1 1 , recei v ed i n J an u ary

2 0 1 2 , an d an ad d i t i o n al fi v e d ay s ’ wo rt h fo r J an uary1 -5 , 2 0 1 1 , recei v edi n Feb ru ary

2 01 2 . Ini t s cal cu l at io n s St an d ardtreat edp et i ti o n er’ s m o nt h l y SSD p aym en tas eq u al t o $ 1 ,7 34 rat h er t h an $ 1 ,7 3 5 , th e co rrect fi gu re.- 8
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[* 8 ] th ats h e was req ui redt o rep ay St an dard , s he t o o kth e p os i t i o n th atrep aym en t
s h o u ldco m e fro m

fu tu re LTD p aym en t s th ats h e b el i ev edwere du e t o h er, ev en t h o u g h St an d ard ’ s p o s i t i o n was th atp et i t i o ner h adb een p ai dal l LTD b en efi t s t o wh i ch s h e was en t i t l edu n d er t he St an d ardp o l i cy . Pet i t i o n er u s edth e $ 2 8 ,7 0 0 l u m p s u m t o p ay o ff an o l d t ax d eb tan dt o trav el o u to f St at e fo r p hy si cal th erap y . In 2 0 1 3 St an dard wro t e p et i t i o n er o n atl eas to ne o ccas i o n o fferi n g v ari o u s rep aym en tt erm s. By

J u l y 2 0 1 3 St an d ard h adreferred th e m at ter t o a co l l ect i o n ag en cy . As o f t h e t i m e o f t ri al (m o re t han th ree y ears aft er St an d ard h adfi rs t s o u g h t rep aym en t ) p et i t i o n er h adn o t rep ai d an y o f t h e $ 3 6 ,6 94 o v erp aym en to f LTD b en efi t s t h atSt an d ards o u g htt o co l l ectfro m h er. IV. Pet i t i o ner’ s 2 0 1 1 ret u rn Pet i t i o ner d i dn o trep o rt an y o f t h e LTD p aym en t s s h e recei v edfro m St an d ardi n 2 0 1 1 o n h er 2 0 1 1 Fed eral i n co m e t ax retu rn . Pet i t i on er rep o rt ed $ 3 4 ,7 0 0 o f So ci al Secu ri t y b en efi t s o n l in e 2 0 a an d zero o f t h atam o u n t as t ax ab le
o n l i n e 2 0 b o f t h e 2 0 1 1 retu rn . Pet i t i o n er cl ai m eda $ 6,0 0 0 m i s cel l an eo u s d educt i o n o n Sch edu l e A fo r t h e am o u n t t he So ci al Secu ri ty Ad m in i s t rat i o n wi t h h el dfro m

h er SSD b en efi t s an dp ai d t o h er at t o rn ey .- 9
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[* 9 ] V. No t i ce o f d efi ci en cy Res p o n d en tth ereaft er i s s u eda n o t i ce o f d efi ci en cy t o p et i t i o n er fo r 2 0 1 1 d et erm i n i n g , i n t er al i a, t h at : (1 ) p et i t io n er h adfai l ed t o rep o rt$ 4 3 ,8 67 o f t ax ab le wag es (i .e., the am o u n t
o f LTD b en efi ts p et i t i on er recei v edfro m St an d ardi n 2 0 1 1 5 ), (2 ) p et i t io n er h adfai l ed t o rep o rt$ 2 7 ,6 34 o f t ax ab le SSD b en efi t s fo r 2 0 1 1 , an d (3 ) t h e $ 6 ,0 0 0 m i scel l an eo u s d edu ct i o n cl ai m edo n Sch edu l e A was d i s al lo wedt o th e ex t en t o f $ 1 ,4 3 0
. Pet i t i o ner fi l eda t i m el y

p et i t i o n fo r red et erm i nat i o n . OPINION I. Un rep o rt edLTD i n co m e A. Res p o nd en t ’ s u n rep o rt edi n co m e d et erm in at i o n Th ere i s n o d i s p u t e t h atp et i t io n er recei v ed$ 4 3 , 8 6 8 o f LTD b en efi t s fro m St an d ardi n 2 0 1 1 ; s h e co n ced es recei v i n g t h i s am o u n tfro m St an d ard
. Co n s eq u en t l y , th ere i s an ev id en t i ary fo u n dat i o n fo r res p o n d en t ’ s d et erm i nat i o n o f
u n rep o rt edi n co m e i n th i s am o un t , an dp et i t i o ner ret ai n s th e b u rd en o f s ho wi n g

5 Th e u n ro u nd edam o u n to f t h e LTD b en efi t s p et i ti o n er recei v edi n 2 0 1 1 i s $ 4 3 ,8 6 7 .5 6 . Pres um ab l y

th i s fi g u re was ro u n d edd own t o $ 4 3 ,8 6 7 i n t h e n o t i ce o f d efi ci en cy , wh ereas o u r fi n di n g s ro u ndth e fi g u re t o $ 43 ,8 6 8
.- 1 0 -

[* 1 0 ] erro r i n th atd et erm i n at i on . Cf. Un i t ed St at es v . W al t o n , 9 0 9 F.2 d9 1 5 , 9 1 8- 9 1 9 (6 th Ci r. 1 9 90 ) (req ui ri ng th e Co m m i s s i o n er t o p ro v i d e ev i d en t i ary fo u n d at i o n fo r h i s d et erm in at i o n o f u n rep ort edi n co m e). B. Sect io n 1 0 5 an d t h e cl ai m -o f-ri g h t d o ct ri n e Sect io n 1 0 5 (a) an d(c) p ro v id es th atam o u n t s recei v edb y an em p l o y ee t h ro u g h acci d en to r h eal th i n su ran ce fo r p ers o n al i nju ri es o r s i ckn es s are g en eral ly i n cl u d i b l e i n i n co m e t o th e ex t en ts u ch am o u n t s are at t ri b u t ab l e t o co n tri b u t i o n s b y an em p l o y er wh i ch were n o ti n cl u di b l e i n th e g ro s s i n co m e o f t h e em p lo y ee,
u n l es s th e am o u n t s are co m p u t edwi t h referen ce t o the n atu re o f t h e i n ju ry wi t h o u t reg ardt o th e p eri o d t h e em p l o y ee i s ab s en t fro m

wo rk
. Here, t h e Di s t ri ctp ai dth e p rem i u m s fo r p et i t i o n er’ s co v erag e u n d er t h e St an d ardp ol i cy , n on e o f wh i ch were i n cl u d edi n h er t ax ab le i n co m e. Fu rt h erm o re, t h e LTD b en efi t s p et it i o n er recei v ed fro m St an d ardwere co m

p u teds o l el y

o n a p ercen t ag e o f h er s al ary an dn o t o n th e
n atu re o f h er i n

ju ry . Th erefo re p et i t i o n er m u s ti ncl u d e th e LTD b en efi t s s h e recei v edfro m

St an d ardi n i nco m e fo r 2 0 1 1, ab s en ts o m e b as i s fo r ex cl u s i o n . Pet i t i o ner arg u es th at$ 3 6 ,6 9 4 o f t h e LTD b en efi t s s h e recei v edi n 2 0 1 1 are
ex cl u d i b l e fro m i n co m e b ecau s e: (1 ) p u rs uan tt o th e rep aym en tag reem en t , s h e
was o bl i gat edb y

th e en do f 2 0 1 1 t o rep ay St an d ardthe $ 3 6 ,6 9 4 i tcl ai m edi t- 1 1 -

[* 1 1 ] o v erp ai dh er i n LTD b en efi t s fro m Ap ri l 2 0 1 0 th ro u g h Decem b er 2 01 1 6 an d (2 ) t h e St an d ardp o l i cy

res t ri ct edh er u s e o f an y

o v erp aym en tb y

req u i ri n g s u ch
am ou n tt o b e rep ai dwi t hi n 3 0 d ay s . 7 Res p o n den tco u n t ers th atreg ard l es s o f St an d ard ’ s cl ai m fo r rep aym en t , u n d er t h e cl ai m -o f-ri g h t d o ct ri n e p et i t i o n er m u st i n cl u d e i n h er i n co m e fo r 2 0 1 1 th e $ 4 3 , 8 67 i n LTD b en efi t s s he recei v eddu ri n g t h aty ear. Th e cl ai m -o f-ri g h td oct ri n e t reat s o th erwi se t ax ab l e m o n ey p ro ceed s recei v edb y

a t ax p ay er u n der a cl ai m o f ri g h t, wi t h ou tres t ri ct i o n as t o th ei r d i s p o s i t i on , as t ax ab le i n co m e ev en tho u g h t h e t ax p ay er m ay b e u n d er a
co n ti n g en to b l ig at i o n t o retu rnth e m o n ey ata l at er t i m e. See No rdb erg v . Co m m i s s i o n er, 7 9 T.C. 6 55 , 6 6 4 (1 9 8 2 ), aff’ d wi t h o u t p ub l is h edo pi n i o n , 7 2 0 F.2 d6 5 8 (1 s tCi r. 1 9 8 3 ). In N. Am . Oi l Co n s o l . v . Bu rn et , 2 8 6 U.S. 4 1 7 , 4 2 4

6 See s up ra n o t e 4
. 7 In 2 0 1 1 , p et i t i o ner recei v edSSD b en efi t s o f $ 1 9 , 0 8 5 at t ri b u tab l e t o 2 0 1 1 (J an u ary -No v em

b er 2 0 1 0 b en efi t s ) an d$ 15 ,6 1 5 at t ri b u tab l e t o 2 0 1 0 (Ap ri l

Decem b er 2 0 1 0 b en efi t s ). Th us , i two u l dap p ear t h at , u n der t h e t erm s o f th e St an d ardp o li cy , St an d ardo v erp ai d$ 1 9 , 0 8 5 o f LTD b en efi t s t o p et i ti o ner i n 2 0 1 1 , n o t$ 3 6,6 9 4 . (Th e rem ai nd er o f t h e o v erp aym en t was m ad e i n 2 0 1 0 , b efo re p et i t i o n er’ s el i gi b i l i t y

fo r SSD b en efi t s , an d t h u s o b l i g at i on t o rep ay St an d arda p o rt i on o f t h e LTD b en efi t s recei v ed , was kn o wn .) Nev ert h el es s , s i n ce we co n cl u d e h erei n aft er t h atp et i t i o n er d o es n o tqual i fy fo r an y ex cep t i o n t o th e cl ai m -o f-ri g h td oct ri n e, we n eedn otres o l ve wh i ch p o rt i o n o f t h e LTD o v erp aym en t i s at t ri b u t ab l e t o 2 0 1 0 v ers u s 2 01 1
.- 1 2 -

[* 1 2 ] (1 9 3 2 ), th e Sup rem e Co u rtart i cu l at edthe d o ct ri n e as fo l l o ws : “ If a t ax p ay er recei v es earn i n g s u nd er a cl ai m o f ri g h tan dwi t h o utres t ri ct i o n as t o i t s d i s p o s i t i on , h e h as recei v edi n co m e wh i ch h e i s req u i redt o ret u rn , ev en th o u g h i t
m ay s t i ll b e cl ai m edth ath e i s n o ten ti t l edt o ret ai n th e m o ney , an dev en tho u g h h e
m ay s t i ll b e ad

ju d g edl i ab l e t o res t o re i t s equ iv al en t .” In s ho rt , u n der t h e cl ai m -o fri gh t d o ct ri n e, wh en a t ax p ay er recei v es o t h erwi s e t ax ab l e fu n d s wi t h o u t
res t ri ct i o n as t o th ei r d i s p o s i t i o n an d h as o n l y a co n t i n g en t o b l i g at i o n t o rep ay t h em , h e i s t ax ab l e i n th e y ear o f recei p tn ot wi t h s tan d i n g the co n ti ng en cy . No rdb erg v . Co m

m i s si o ner, 7 9 T.C. at6 6 4 ; Pro f’ l In s . Ag en t s o f M i ch . v . Co m m i s s i o n er, 7 8 T.C. 2 46 , 2 7 0 (1 9 8 2 ), aff’ d , 7 26 F.2 d 1 0 9 7 (6 t h Ci r. 1 9 8 4 ); Ho p e v . Co m

m is s io n er, 5 5 T.C. 1 0 2 0 (1 9 7 1 ), aff’ d , 4 71 F.2 d 7 3 8 (3 d Ci r. 1 9 7 3 ). Ho wev er, t h ere i s a l i m i tedex cep t i o n t o t he cl ai m -o f-ri gh td oct ri n e, fi rs t
en u nci at edb y

th e Co u rto f Ap p eal s fo r th e Ni n t h Ci rcu i ti n Un i t ed St at es v . M erri l l , 2 1 1 F.2 d 2 9 7 (9 t h Ci r. 1 9 5 4 ). In M erri l l , th e t ax pay er, wh o s erv edas
ex ecu t o r o f h i s d eceas edwi fe’ s es t at e, h adp ai dh i m s el f t h e en t i re $ 2 0,0 0 0
ex ecu t o r’ s fee o u to f h i s wi fe’ s es t at e’ s s h are o f t he co upl e’ s co m m u n i t y p ro p ert y . He recei v ed$ 1 2 ,5 0 0 o f t h e fee i n 1 9 3 9 an dth e rem ai n i n g $ 7 , 5 0 0 i n 1 9 40 . Wh en h e l earn edfro m

th e In t ern al Rev en u e Serv ice ag en tex am i n i n g h i s wi fe’ s es t at e t ax ret u rn th ato n l y

h al f o f t h e ex ecu t o r’ s fee was d edu ct ib l e b y th e es t at e, h e- 1 3 -

[* 1 3 ] co ncl u d ed , aft er co n su l t at i o n wi th an acco u n t an t , thath al f o f t h e fee h ad b een m i st ak en l y

p ai dt o h i m b y

th e es t at e. (Paym en to f t he fee s h ou l dh av e b een
s p l i tequ al l y b et w een each s p o u s e’ s h al f s h are o f t he co m m u ni t y p ro p ert y .) As a
res u l t, o n Decem

b er 3 1, 1 9 40 , h e m ad e ad ju st m en t s t o th e es t at e’ s an d h i s o wn p ers o n al b o o k s o f acco u ntt o refl ecth i s p ers o n al i n d eb t ed n es s t o th e es t at e fo r h al f
o f t h e ex ecu t o r’ s fee, o r $ 1 0,0 0 0 . He rep ai d$ 10 ,0 0 0 t o th e es t at e i n 1 9 4 3 b efo re h i s refu n ds u itwas co n s i d ered
. Th e Co m m is s i o n er arg u edthatth e en t i re $ 2 0 ,0 0 0 ex ecu t o r’ s fee was t ax ab l e i n co m e t o th e t ax p ay er u n d er th e cl ai m -o f-ri g h td o ct ri n e. Th e Co urto f Ap p eal s ag reed wi t h res p ectt o t h e p o rt io n o f t h e fee p ai dt o t h e t ax p ay er i n 1 9 3 9 , as h i s
m i s t ak e was n o td i s co v ered u n t i l 1 9 4 0 , an datth e cl o s e o f 1 9 3 9 h e h el dth e fu n d s recei v edi n th aty ear u n d er a m i s t ak en , b u t g o o d -fai t h , cl ai m o f ri g h t . Th e Co u rt
o f Ap peal s d i s ag reed , h owev er, wi t h res p ectt o t he p o rt i o n o f t h e fee recei v edi n 1 9 4 0 , reas o n in g as fo l lo ws : “ W e are n o taware t h at t he * * * [cl ai m -o f-ri g h t d o ct ri n e] h as ev er b een ap p l i edwh ere, as h ere, i n th e s am e y ear t h atth e fu n d s are
m i s t ak en l y

recei v ed , t h e t ax pay er d i s co v ers an dad m i t s t h e m is t ak e, ren o u nces h i s cl ai m t o th e fu n ds , an dreco g n izes h i s o b li g at i o n t o rep ay t h em .” M erri l l , 2 1 1 F.2 d at3 0 4
. Th e Co u rto f Ap p eal s h el dth atth e t ax p ay er was n o treq u i redt o rep o rtas i n co m e th e p o rt i o n o f t h e fee recei v edi n 1 9 40 , th e y ear t h e t ax p ay er reco g n i zed- 1 4 -

[* 1 4 ] h i s o b l i g at i o n t o rep ay , ci t i n g h is g o odfai t h i n m ak i n g th e 1 94 0 b o o kk eep i n g en t ri es an dh i s actu al rep aym en t i n 1 9 4 3
. Th e Tax Co u rt h as reco gn i zedth e M erri l l ex cep t i o n t o t h e cl ai m -o f-ri g h t d o ct ri n e. See No rd

b erg v . Co m

m i s s i o n er, 7 9 T.C. at6 6 5 ; Ho p e v . Co m m i s s i o n er, 5 5 T.C. at1 0 30 ; M ai s v . Co m m i s s i o n er, 5 1 T.C. 4 9 4 , 4 99 (1 96 8 ); Gad d y v . Co m m i s s i o n er, 3 8 T.C. 9 43 , 9 4 8 -9 4 9 (1 9 6 2 ), aff’ di n p art , rem an d ed i n p art , 3 4 4 F.2 d4 6 0 (5 t h Ci r. 1 9 6 5); Bi s h o p v . Co m m i s s i o n er, 2 5 T.C. 9 6 9 , 9 7 4 (1 95 6 ). W e h av e em p h as izedth atth e ap p l i cat i on o f t h e ex cep t i on req ui res t h atth e t ax p ay er, i n t h e y ear a m i s t ak en p aym en ti s recei v ed , b o t h reco g ni ze an o b l i gat i on t o rep ay an d
m ak e p ro v i s i o n fo r rep aym en t
. “ St at edb ri efl y , th e M erri l l cas e h o ld s th atwh ere a fi xedan dd efi n i t e o b l i g at i o n t o rep ay i s reco g n izedi n th e y ear o f o verp aym en tan d p ro v is i o n i s m ad e fo r i t s rep aym en t , the am o u nt s recei v edare n otwi t h i n th e s co p e
o f t h e cl ai m -o f-ri gh td oct ri n e.” Gad d y v . Co m m i ss i o n er, 3 8 T.C. at9 4 9 ; s ee al so Ho p e v . Co m

m is s io n er, 5 5 T.C. at1 0 3 0
. In Gad d y , th e t ax p ay er-h u s b an dh ad en tered i n t o a co n t ract o n J ul y 1 , 1 9 5 6 , t o l eas e h i s t an k er t ru ck s t o a p et ro l eu m p ro du cer t o h au l p et ro l eu m ata rat e p er
m i l e t h at was i n t en dedn o tt o ex ceed th e p ri ce t he p et ro l eu m p ro du cer wo u l dh av e t o p ay i f t h e h au l i ng were d on e b y a co n t racth au ler. Th e p art i es t o t h e co n t ract ag reed th atth e rat e o f 2 3 cen t s p er m i l e s h o u l dco ns t i tu t e t h e p ro p er rat e b u t- 1 5 -

[* 1 5 ] fu rt h er ag reedth at , i n th e ev en tth e fo reg o i n g rat e p ro v edt o b e t o o h i g h o r t o o l o w i n rel at io n t o th e co n t ract -h au l er p ri ce, an ad ju s t m en tt o th e rat e wo u l db e
m ad e b y am en dm en tt o t h e co n t ract o r a n ew co n tract . Th e t ax pay er recei v edth e 2 3 -cen t rat e i n 1 9 56 an dth ro u gh m u ch o f 1 9 5 7 , b u ti n Sep t em b er 1 95 7 t he p et ro l eu m

p ro du cer d i s co v eredth at t h e rat e was t o o h i g h an dad v i s edth e t ax p ay er. Th e p ro du cer cal cu l at edth ati th ado v erp ai d t h e t ax p ay er $ 1 5,4 3 4 o v er t h e p eri o d
o f J u l y 1 , 1 9 5 6 , th ro ug h J u l y 3 1 , 1 9 5 7 --$ 4 4 4 o f wh i ch h adb een p ai ddu ri ng 1 9 5 7 , t h e y ear b efo re t h e Co u rt . Th e p art i es th ereaft er ag reed th atth e t ax p ay er wo u l d rep ay th e o v erp aym en tt o t h e p ro du cer. Th ey ex ecu t eda n ew co nt ract o n Oct o b er 1 , 1 9 5 7 , at a rat e t h atwas d es i g n ed t o effect th e t ax p ay er’ s rep aym en to f t h e o v erp aym en tt o th e p ro du cer. W e h el dth atth e $ 4 4 4 recei v edb y th e t ax pay er i n 1 9 5 7 was n o ti ncl u d i b l e i n h i s i n co m e fo r 1 9 5 7 u n d er th e cl ai m -o f-ri g h td o ct ri n e p u rs u an tt o th e M erri l l
ex cep t i o n , reas o n i n g t h ath e h adreco g n i zed h i s l iab i l i t y t o rep ay th e o v erp aym en t
an d h adm ad e p ro v i s i o n fo r i ts rep aym en ti n th e y ear t he o v erp aym en t h adb een recei v ed . 3 8 T.C. at9 4 9 . Th e n ew co n t ract th e t ax pay er en tered i n t o o n Oct o b er 1 , 1 9 5 7 , at a rat e d es i g n edt o rei m b u rs e t he p ro du cer fo r th e o verp aym en t , ev i d en cedth e req u i redp ro vi s i on fo r rep aym en t . Id
.- 1 6 -

[* 1 6 ] W e reach eda d i fferen tco n cl u s i o n reg ard i n g p ro v i si o n fo r rep aym en ti n No rdb erg . Th ere, t he t ax p ay er-h u s b an dh adrecei v eda cas h d i s tri b ut i o n du ri n g t h e y ear at i s s u e fro m

a co rp o rat i o n o b l i g at edu n d er h i s n o te. Th e d i s t ri b u t i o n h ad b een m ad e u n d er an ag reem en tp ro v i d in g th atal l o r s o m e p o rt i o n o f t h e d i s t ri b u t i o n m i g h t h av e t o b e rep ai d , o n 2 0 d ay s ’ n o t i ce, i n t h e ev en tcl ai m s were b ro u gh t ag ai n s tth e co rp o rat i o n o r i t s o ffi cers an d d i rect ors . Atth e t i m e o f t h e d i s t ri b u t i o n , cert ai n cred i t o rs s en i o r t o t h e n o t e h el d b y th e t ax pay er h adn o tb een fu l l y p ai d . Th e co rp o rat i o n h adm ad e n o cl ai m fo r rep aym en tu n der t he ag reem en t du ri n g th e y ear at i s s ue. W e h el dth e d i s t ri b u t i o n i n No rdb erg was t ax ab l e i n th e y ear t h e t ax pay er recei v edi tu n der t h e cl ai m -o f-ri g h td o ct ri n e. W e reas o n edth atn o ex cep t i o n t o th e cl ai m -o f-ri g h td oct ri n e was ap p ro p ri at e b ecau s e t h e t ax p ay er h adn ei th er
reco g n izedan y

fi xedo b l i g at i o n t o rep ay th e am o un trecei v edn o r m ad e an y p ro v is i o n fo r rep aym en t i n th e y ear t he d i s t ri b u t io n was m ad e. No rdb erg v . Co m m i s s i o n er, 7 9 T.C. at 6 6 5
. W e reject edas an y p ro v is i on fo r rep aym en tth e t ax p ay er’ s cl ai m

th ath e i n t en d edt o b o rro w o n th e equi t y i n h i s res i d en ce t o m eet h i s o b l i g at i o n , es peci al l y g i v enth e l acko f an y

s p eci fi cs reg ard i n g a fi n an ci al i n s t i tu t i o n p rep ared t o m ak e s u ch a l o an . Id . at6 6 5-6 6 6
. W e n o t edfu rt h er t h ath e h ad n o ts eg reg at ed t h e p ro ceed s o f t h e d i s t ri b u t i o n as a s o u rce o f p o s s i b l e- 1 7 -

[* 1 7 ] rep aym en t ; i n s tead , h e h ads p en tthe p ro ceed s i n th e y ear d i s tri b ut edt o rep ay s tud en tl o an s , t o m ak e i m p ro v em en t s t o h i s res i d en ce, t o p ay l eg al fees , an d t o p ay fo r a v acat i o n . Id . at6 6 2
. Ap p ly i n g th e fo reg o in g p ri n ci p l es t o th e fact s o f t hi s cas e, we co n cl u d e t h at t h e $ 4 3,8 6 8 i n LTD b en efi t s p et i t i on er recei v ed i n 2 0 1 1 , wh i ch are t ax ab l e i n co m e t o h er p u rs uan tt o s ect io n 1 05 (a) an d(c), m us tb e reco g n i zedb y

h er fo r th aty ear
u n d er t h e cl ai m -o f-ri g h t d o ct ri n e. Pet i t i o ner’ s el i g ib i l i t y fo r t h e SSD b en efi t s was
es t ab l i s h ed , an dh er fi rs trecei pto f t h em o ccu rred , i n l at e 2 0 1 1 . Thu s 2 0 1 1 i s th e y ear i n wh i ch p et i t i o n er an dSt an d ardb ecam e aware t h ath er LTD b en efi t s h ad b een ov erp ai du nd er t h e t erm s o f t h e St an d ardp ol i cy . Ev en i f o n e as s u m es arg u en do th atp et i t i o n er reco g n i zedth ata p o rt i o n o f h er LTD b en efi t s h ad b een
o v erp ai dan dack n o wl ed g edan o b li g at io n t o rep ay th em , s h e n ev ert h el es s d o es n o t
co m e wi t h in th e M erri ll ex cep t i o n b ecau s e s h e d idn o t m ak e p ro v is io n fo r rep aym en ti n 2 0 1 1. Th e t ax p ay er i n Gad dy , b y th e cl o s e o f t h e t ax ab l e y ear i n wh i ch th e
m i s t ak en o v erp aym en t s t o h i m h adb een as cert ai n ed , h aden t ered i n t o a co n t ract wi t h th e p et ro l eu m

p ro du cer wh o h ado v erp ai d h i m th atwo u l deffect h i s rep aym en tt o th e p ro du cer o v er t i m e. Paym en t s u n d er th atco n t ract h ad
co m m en cedb efo re y earen d . W e co ncl u d edi n th o s e ci rcu m st an ces th atp ro v i s i o n- 1 8 -

[* 1 8 ] fo r rep aym en th adb een m ad e. By co n t ras t , p et i t i o n er was atco m p l et e l o g g erh ead s wi th St an d ardo v er arran g em en t s fo r rep aym en to f th e o verp ai dLTD b en efi t s atth e cl o se o f 2 0 1 1. Pet i t i o ner i n si st edth atan y rep aym en tb e m ad e o u t
o f ad d it i o n al LTD b en efi ts s h e co n t en d ed St an d ard o wedh er. St an d ard
m ai n t ai n edth at p et i t i o ner was n o ten t i tl edt o an y fu rt h er LTD b en efi ts , as s h e h ad recei v edth e fu l l 2 4 m o n t h s o f LTD b en efi t s fo r a d i s ab i li t y at t ri bu t ab le t o a m en t al d i s o rd er. Th us , p et i t io n er h adm ad e n o p ro vi s i o n fo r rep aym en tb y t h e cl o s e o f 2 0 1 1 . (In d eed , th i s s t an d off h adp ers i s tedfo r m o re t h anth ree y ears as o f t h e t i m e
o f t ri al .) M o reo v er, p et i t i o n er’ s l acko f a g o o d fai t h i nt en tt o rep ay i s al s o
ev i d en cedb y

th e fact th ats h e s p en tth e $ 2 8 ,7 0 0 l um p s u m o f SSD b en efi t s s h e recei v edi n l at e 2 0 11 t o s at is fy a t ax d eb tan dt o trav el rat h er t h an t o m eeth er rep aym en to b l i g at i on t o St an d ard
. Pet it i on er’ s ci rcu m s t an ces are m ore ak i n t o t h o s e o f t h e t ax p ay er i n No rdb erg , wh o h adm ad e n o t an gi b l e arran g em en t s t o
m eetan y rep aym en to bl i g at i on h e m i g hti ncu r an d as a co n s eq u en ce was fo u n d i n el i g i b l e fo r t h e M erri l l ex cep t i o n . W e co n cl u d e t h at p et i t io n er d o es n o tfal l wi t h i n th e M erri l l ex cep t i o n t o th e cl ai m -o f-ri gh td oct ri n e an dm u s ti n cl ud e i n t ax ab l e i n co m e t h e LTD b en efi t s s he recei v edi n 2 0 1 1 u nd er t h e cl ai m -o f-ri g h t d o ct ri n e. W e t h erefo re s u s t ai n res p o n d en t ’ s d et erm i n at i o n th atp et i t i o ner fai l edt o rep o rt$ 4 3 ,8 6 7 o f t ax ab l e i n co m e fo r 2 01 1
.- 1 9 -

[* 1 9 ] II. Pet i t i o ner’ s SSD i n co m e Pet i t i o ner rep o rt edth e $ 34 ,7 0 0 o f SSD b en efi t s s h e recei v edi n 2 0 1 1 o n h er 2 0 1 1 retu rn b u ttreat edth e en t ire am o u n tas n o n t ax ab l e. Sh e m ai n t ai ns th at p o s i t i on o n b ri ef. 8 Th e n o t i ce o f d efi ci en cy d et erm i nedth at$ 2 7 ,6 3 4 o f th e SSD b en efi t s p et i t i o n er recei v edi n 2 0 1 1 i s t ax ab l e. Res p o n d en tm ai n t ai n s th atp o s i t io n
o n b ri ef, ex cep t h e h as co n ced edth atp et i t i o n er s h ou l d recei v e wh at ev er b en efi t
m ay b e av ai l ab l e t o h er as a res u l to f anel ect i o n u n d er s ect i o n 8 6 (e) wi th res p ect t o the $ 1 3 ,8 80 p ort io n o f t h e SSD b en efi t s s h e recei v edi n 2 01 1 thati s at t ri b u t ab l e t o 2 0 1 0. 9

8 Atth e o u t s eto f t ri al p et i t i o n er acq ui es cedi n res p on d en t ’ s co u n s el ’ s as s ert i o n th atth e p art i es h adag reed th atth e n o t i ce o f d efi ci en cy h adco rrect l y d et erm i n edth e am o u n to f p et i t i o n er’ s SSD b en efi t s th ati s t ax ab l e fo r 2 0 1 1 (wi t ho u t reg ardt o an y el ect i o n u n d er s ec. 8 6(e)). Ho wev er, b o t h p art i es were wel l aware t h atp et i t i o n er was d i s pu t i n g wh et h er t h e fu l l am ou n to f t he LTD b en efi t s s h e recei ved i n 2 0 1 1 i s i ncl u d ib l e i n h er i n co m e fo r t haty ear. An d t h e n o t i ce o f d efi ci en cy ’ s d et erm i n at io n o f t h e am o u n to f SSD b en efi t s i ncl u d ib l e i n p et i t i o n er’ s 2 0 1 1 i nco m e i s p red i cat edo n th e n o t i ce’ s p o s i t i o n thatth e fu l l am o u nto f t h e LTD b en efi t s p et i t i o n er recei v edi n 2 0 1 1 i s i n cl u d i b le i n h er i n co m e fo r t h aty ear. W e co n cl u d e i n thes e ci rcu m s t an ces th atth ere i s s ig ni fi can tam b i g u i t y i n p et i t i o n er’ s s eem i n g co n ces si o n t h atth e n o t i ce o f d efi ci en cy co rrect ly d et erm i n edthe am o u n t o f h er SSD b en efi t s th at i s i n cl u d i b l e i n i n co m e, an dwe t h erefo re d i s reg ardi t
.

9 Sec. 8 6 (e) affo rd s an el ect i o n t o t ax p ay ers wh o recei v e a l u m p-s u m p aym en t o f So ci al Secu ri t y b en efi t s du ri ng th e t ax ab l e y ear i n wh i ch a p o rt i o n o f t h e b en efi t s i s at t ri b u t ab l e t o p ri o r t ax ab l e y ears . If t h e el ect i o n i s m ad e, t h e am ou n ti ncl u d edi n g ro s s i n co m e fo r t h e t ax ab le y ear o f recei ptm u s t n o tex ceed t h e s u m o f t h e i n creas es i n g ro s s i n co m e fo r t h o s e p rev i o u s t ax y ears thatwo u l d (co n ti n u ed ...)- 2 0 -

[* 2 0 ] Gro 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 ou rce d eri v edu n l es s
ex cl u d edfro m

g ro s s i n co m e b y

a p ro v is io n o f t h e In t ern al Rev en u e Co d e. See
s ec. 6 1 (a). In th e cas e o f So ci al Secu ri t y b en efi t s , th e am ou n ti n cl ud edi n g ro s s i n co m e, i f an y , i s d et erm i nedi n acco rd an ce wi t h t h e fo rm u la s etfo rt h i n s ect i o n 8 6 . Un d er th atfo rm

ul a, a p o rt i o n o f t h e b en efi t s i s i n cl u d i b l e i n g ro s s i n co m e i f t h e s u m o f t h e t ax pay er’ s m o d ifi edad ju s t edg ro ss i n co m e, as d efi n edb y s ect i o n 8 6 (b )(2 ), p lu s o n e-h al f o f t he am o u n to f So ci al Secu ri t y b en efi t s recei v ed , ex ceed s cert ai n t h res ho l dam o u n t s , th e b as e am o u ntan dth e ad ju s t edb as e am o u nt . See
s ec. 8 6 (a). Th e co m p u t at i o n i n th e n o t i ce o f d efi ci en cy , p res u m ab ly m ad e u n d er
s ect i on 8 6 , o f t h e t ax ab l e p o rt i o n o f p et i t i o n er’ s SSD b en efi t s fo r 2 0 1 1 d oes n o t i n cl u d e t h e ad d i t i o nal $ 17 0 o f i n co m e fro m a t ax ab le St at e t ax refu n d t o wh i ch p et i t i o n er s t i p ul at ed fo r p urp os es o f t h e tri al . Th e co m p ut at i o n al s o d o es n o tt ak e i n t o acco u n tth e i m

pact o f t h e s ect i o n 8 6 (e) el ect i o n th atres p o nd en t co n ced es p et i t i o n er m ay

m ak e. 1 0 W e t h erefo re ex p ectthe p art i es t o ad d res s th e t ax ab l e

9 (...co n t in u ed ) res u l t fro m

t ak in g i nt o acco u n tth e p o rt i o n o f t he b en efi t s at t ri bu t ab l e t o t h e p rev i o u s t ax ab le y ears . See Po l l ardv . Co m m i s s i o n er, T.C. M em o . 2 0 1 1 -1 32
. 1 0 Th e reco rdi s i ns u ffi ci en tfo r u s t o d et erm i n e t h e i m p acto f an y

s ec. 8 6 (e) el ect io n , as i td o es n oti n cl u d e i n fo rm at i o n co n cern i n g p et i t i o n er’ s i n co m e fo r (co n ti n u ed ...)- 2 1 -

[* 2 1 ] p o rt i o n o f p et i t i o n er’ s SSD b en efi t s i n th ei r Ru l e 1 5 5 co m p u t at i o n s . Th o s e
co m p u t at i o n s m

us t t ak e i n t o acco u n to u r h o ld i ng h erei n th atp et i t i o n er’ s 2 01 1 i n co m e i n cl u d es $ 4 3 ,8 6 8 i n LTD b en efi ts an dp et i t i o n er’ s co n ces s i o n th ats h e h ad t ax ab l e i n co m e o f $ 1 7 0 fro m a St at e t ax refu n d t h atwas n o trep o rt edo n th e 2 0 1 1 ret u rn n o r d et erm i n edt o b e i nco m e i n th e n o t i ce o f d efi ci en cy . III. Dedu ct i b i l i t y

o f at t orn ey ’ s fees Th e n o t i ce o f d efi ci en cy

d et erm i nedth at t h e SSD b en efi t s p et i t i o n er recei v edi n 2 0 1 1 i n cl ud e t h e $ 6,0 00 i n at t o rn ey ’ s fees th atth e So ci al Secu ri t y Ad m i n i s t rat i o n wi t h h el dfro m h er $ 3 4 ,7 00 i n b en efi t s an dp ai d d i rect l y t o h er at t o rn ey , an dth atp et i t i on er i s en t it l edt o d edu ctth atam ou n tas a Sch edu l e A
m i s cel l an eo u s i tem izedd edu ct io n t o th e ex t en ti tex ceed ed 2 % o f p et i t i o n er’ s ad ju s t edg ro ss i nco m e--n am el y , $ 4,5 7 0 . Pet i t i on er co n ced edattri al th atth e $ 6 ,0 0 0 p ai dt o h er at t o rn ey i s i n cl u d i b le i n th e SSD b en efi t s s h e recei v edb u t
n ev ert h el es s o n b ri ef co n t en d s t h atth e $ 6 ,0 0 0 s h o u l d n o tb e s o i n cl u d ed
. Reg ard les s o f p et i t io n er’ s p o s i t i o n , i t i s n ow wel l s et t ledth at fees p ai d t o
co m p en s at e fo r an at t o rn ey ’ s s erv i ces i n s ecu ri n g t h e reco v ery o f i n co m e fo r t h e t ax p ay er are g en eral l y

i ncl u d i b l e i n th e t ax p ay er’ s i n co m e ev en i f p ai dd i rect l y t o

1 0 (...co n t i nu ed ) 2 0 1 0
.- 2 2 -

[* 2 2 ] th e at t o rn ey

fro m th e reco v ered am o u n t s . See Co m m i s si o n er v . Ban ks , 5 4 3 U.S. 4 2 6 , 4 2 9 (2 0 0 5 ). Res p o n d en ti s l i k ewi s e co rrect t hatth es e at t orn ey ’ s fees
m ay b e d edu ct edas a m i s cel lan eo u s i tem i zedd edu ct i o n b u t, p urs u an t t o s ect i o n 6 7 (a), o n l y

t o th e ex t en tth atth ey

ex ceed 2 % o f p et i t io n er’ s ad ju s t edg ro s s i n co m e. See s ecs . 6 3 (d ), 6 7 (a) an d(b ); Gl as sm an v . Co m m i s s i o ner, T.C. M em o. 1 9 9 7 -4 9 7 , aff’ d , 1 9 8 F.3 d2 5 3 (9 t h Ci r. 1 9 9 9 ); s ec. 1 .6 7 -1 T (a)(1 )(i i ), Tem p o raryIn co m e Tax Reg s., 5 3 Fed . Reg . 9 8 7 5 (M ar. 2 8 , 1 98 8 ). W e t h erefo re s u s t ai n h is d et erm i n at i o n i n that reg ard
. 1 1 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
.

1 1 Th e n ot ice o f d efi ci en cy d i d n o td et erm i n e, an dres p o n den th as n otarg u ed , t h atp et i t i o n er’ s d edu ct i o n fo r at t o rn ey ’ s fees i s l i m i t edt o an am o u n t al l o cab l e t o t h e reco v ery

o f t h at p o rt i o n o f h er SSD b en efi t s th ati s i n cl u d i b l e i n g ro s s i n co m e. See s ec. 1 .2 1 2 -1 (a)(1 ), (e), In co m e Tax Reg s .; Rev . Ru l . 8 7 -1 02 , 1 9 8 7 -2 C.B. 7 8
. Res po n d en th as acco rd i n g l y wai v ed t h atarg um en t
.