TAX COURT OPINION

Case: Jon K. Palsgaard & Kimberly A. Kelly
Docket Number: 2103-17S
Judge: Guy
Opinion Type: bench
Filed: 01/05/2018
Pages: 8

SR UNITED STATES TAX COURT WASHINGTON, DC 20217 JON K. PALSGAARD & KIMBERLY A. KELLY, Petitioners, v. ) ) ) ) ) Docket No. 2103-17S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Special Trial Judge Daniel A. Guy, Jr., at Fresno, California, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. entered under Rule 155. In accordance with the oral findings of fact and opinion, decision will be It is further ORDERED that the parties shall submit computations under Rule 155, Tax Court Rules of Practice and Procedure,¹ on or before April 5, 2018. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. January 5, 201 8 ¹Petitioners can access the text of Rule 155 on the Court's website at www.ustaxcourt.gov. Petitioners should consider discussing the preparation of the computations with respondent's counsel. SERVED Jan 05 2018 1 2 3 4 5 6 7 8 9 Bench Opinion by Special Judge Daniel A. Guy, Jr. December 13, 2017 Jon K. Palsgaard & Kimberly A. Kelly v. Commissioner of Internal Revenue Docket No. 2103-17S THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact ard opinion. The oral findings of fact and opinion shall not 10 be relied upon as precedent in any other case. 11 This proceeding for the redetermination of a 12 deficiency is a small tax case conducted pursuant to the 13 provisions of section 7463 of the Internal Revenue Code cf 14 1986, as amended, and Rules 170 through 174 of the Tax 15 Court Rules of Practice and Procedure. 16 This bench opinion is made pursuant to the 17 authority granted by section 7459(b) of the Internal 18 Revenue Code of 1986, as amended, and Rule 152 of the Tax 19 Court Rules of Practice and Procedure. Hereinafter in 20 21 22 23 24 this bench opinion, unless otherwise indicated, section references are to the Internal Revenue Code of 1986, as amended, in effect for 2015, and Rule references are to the Tax Court Rules of Practice and Procedure. Petitioners, husband and wife, resided in 25 California at the time the petition was filed. Petitioner cribers (973)406-2250|operations@escribersnet|www.escribers.net 1 2 3 4 5 6 7 8 9 Jon K. Palsgaard appeared at trial pro se. Petitioner Kimberly A. Kelly was unable to appear at trial and consented to Mr. Palsgaard prosecuting the case on her behalf. Victoria Z. Gu appeared on behalf of respondent. The parties stipulated to some of the underlying facts in this case. Respondent issued a notice of deficiency to petitioners determining an income tax deficiency of $724 for the taxable year 2015. The tax deficiency is 10 attributable to respondent's determination that 11 petitioners understated the amount of Ms. Kelly's social 12 13 14 15 16 17 18 security disability benefits that are subject to Federal income tax. Petitioners timely filed a petition for redetermination with the Court pursuant to section 6213(a). After filing an answer to the petition, and before trial, respondent filed a motion for leave to file amendment to answer out of time and lodged a first 19 amendment to answer. As discussed on the record at the 20 21 22 23 24 25 trial of this case, the Court granted respondent's motion for leave and filed respondent's amendment to answer. Petitioners filed a joint Federal income tax return for 2015 reporting that Ms. Kelly had received social security disability benefits of $31,247 for that year, but took the position that only $1,259 of that cribers (973)406-2250]operations@escribemnet|www.escribers.net 1 2 3 4 5 6 7 8 9 amount was subject to Federal income tax. On June 13, 2016, the IRS sent a letter to petitioners informing then that they committed a math error in reporting the taxable portion of Ms. Kelly's social security disability benefits (i.e., underreported the taxable portion of those benefits by $25,301) and that the IRS had summarily increased the amount of their income tax by $6,395. On June 20, 2016, the IRS sent a second letter to petitioners informing them that it appeared they were subject to but failed to report 10 alternative minimum tax for the taxable year 2015. On 11 12 13 14 July 19, 2016, petitioners sent a letter to the IRS challenging the above-described adjustments to their tax liability for 2015. On October 28, 2016, the IRS issued a notice of 15 deficiency to petitioners for the taxable year 2015, 16 17 18 including an adjustment of $1 to the petitioners' taxable income attributable to social security disability benefii s and determining that they were liable for alternative 19 minimum tax of $724. Respondent's amendment to answer 20 21 includes an allegation that respondent did not err in determining that petitioners were obliged to include an 22 additional $25,301 of Ms. Kelly's social security 23 disability benefits in taxable income for 2015. 24 Ms. Kelly was formerly an employee of Southern 25 California Permanente Medical Group (Permanente). In la e cribers (973)406-2250loperations@escribers.net|www.escribers.net . 6 1 2 3 4 5 6 7 8 9 2009 she qualified for and began to receive benefits under a disability insurance policy that Permanente provided fcr its employees. These disability benefits were not subject to Federal income tax. In accordance with the Permanent(cid:16)254 disability policy, however, Ms. Kelly was obliged to app]y for disability benefits with the Social Security Administration. She did so and began receiving social security disability benefits in 2010. Since that time, Ms. Kelly's disability benefits under the Permanente 10 policy have been completely offset (or in petitioners' 11 words subrogated) by her social security benefits. 12 13 14 15 16 There is no dispute that in 2015 Ms. Kelly received social security disability benefits totaling $31,247. There likewise is no dispute that Ms. Kelly wa: permanently disabled throughout the taxable year 2015. Respondent determined that $26,560 of Ms. 17 Kelly's social security disability benefits are includab e 18 19 20 21 22 23 24 25 in taxable income in accordance with section 86, representing an increase of $25,301 over the $1,259 amount that petitioners included in taxable income on their tax return. Petitioners contend that Ms. Kelly's social security disability benefits are excluded from taxable income (1) under section 104(a)(2) (damages received on account of personal physical injuries or physical sickness) and (2) because of a lack of "constructive cribers (973)406-2250|operations@escribers;net|www.escribersmet 1 2 3 4 5 6 7 8 9 10 11 receipt". Section 61(a) provides that, except as otherwi:e provided by law, gross income includes all income from whatever source derived. As the Court explained in Reimels v. Commissioner, 123 T.C. 245, 247-248 (2004), aff'd, 436 F.3d 344 (2d Cir. 2006), before 1984 social security benefits were excludable from the recipient's gross income. However, this treatment was repealed in tle Social Security Act Amendments of 1983, Pub. L. No. 98-2 , sec. 122(b), 97 Stat. at 87, and beginning with the taxable year 1984, social security benefits, including 12 disability benefits, have been subject to Federal income 13 tax. See Roberts v. Commissioner, T.C. Memo. 1998-172, 14 aff'd without published opinion 182 F.3d 927 (9th Cir. 1999). 15 16 As is relevant here, section 86(a) provides a 17 detailed formula for determining the taxable portion of 18 19 social security benefits. Section 86(d) (1) (A) defines the term "social security benefit" to mean any amount received 20 by a taxpayer by reason of entitlement to a monthly 21 benefit under Title II of the Social Security Act. The 22 Court notes that Title II of the Social Security Act 23 provides for old-age, survivors, and disability benefits. 24 25 See 42 U.S.C. secs. 401-434 (2012), (including section 423, providing for disability insurance benefit payments . (973)406-2250|operations@escribersnet|www.escribers.net 8 1 2 3 4 5 6 7 8 9 In this regard, petitioners' argument in their pretrial memorandum that "Section 86 of the Code * * * makes no mention whatsoever, of including in taxable income, disability payments paid by the Social Security Administration" is wholly inaccurate. In sum, social security disability benefits aro social security benefits for purposes of section 86 and are includable in Ms. Kelly's taxable income. See Reime s v. Commissioner, 123 T.C. at 247-248; Watts v. 10 Commissioner, T.C. Memo. 2009-103; Joseph v. Commissioner, 11 12 13 14 15 16 17 18 T.C. Memo. 2003-19; Thomas v. Commissioner, T.C. Memo. 2001-120. Petitioners' argument that Ms. Kelly's social security disability benefits are excludable from taxable income under section 104(a) (2) is incorrect. In short, as the Court explained in Thomas v. Commissioner, supra, tho specific provisions of section 86, and particularly subsection (d) (1) of that section (summarized above), 19 which set forth the statutory scheme for the taxation of 20 .social security benefits, override the general provisiona 21 of section 104(a) which exclude certain types of 22 23 24 25 compensation (other than social security benefits) from gross income. Petitioners' constructive receipt argument likewise is misplaced. The Court understands petitionera cribers (973)406-2250|operations@escribers.net|www.escribers.net .. .. 9 1 2 3 4 5 6 7 8 9 to argue that, because the disability benefits that Ms. Kelly received under her employer's disability policy were tax free, and those benefits have now been reduced and otherwise offset by the amount of her social security benefits, her social security benefits should qualify as nontaxable benefits. The Court has considered and rejected similar arguments in Brady v. Commissioner, T.C Memo. 2013-1, and Seaver v. Commissioner, T.C. Memo. 2009- 270. As the Court explained in the Seaver case, the 10 decision by Congress to allow the tax-free receipt of 11 benefits such as those paid under a long-term employer- 12 provided disability plan, while taxing social security 13 disability benefits under section 86, is not a choice the 14 Court is free to question. Inasmuch as Ms. Kelly received 15 social security disability benefits in 2015, those 16 benefits are subject to taxation under the scheme Congrens 17 prescribed in section 86. 18 19 Consistent with the foregoing, a decision will be entered under Rule 155. This concludes the Court's 20 oral findings of fact and opinion. (Whereupon, at 12:55 p.m., the above-entitled matter was concluded.) 21 22 23 24 25 t cribers (973)406-2250|operations®escribersnet|www.escribers.net