Court Opinion

ID: 9940585
Source: CourtListenerOpinion
Date Created: 2024-02-14 20:02:11.419364+00
Date Added: 2024-06-11T13:45:04.093238
License: Public Domain

United States Tax Court

                                T.C. Memo. 2024-23

                 DONALD ECRET AND KRISTEN ECRET,
                            Petitioners

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                      —————

Docket No. 5238-22.                                       Filed February 14, 2024.

                                      —————

Donald Ecret and Kristen Ecret, pro sese.

Frank A. DiPietro, Gennady Zilberman, and Francesca Chou, for re-
spondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

       LAUBER, Judge: With respect to petitioners’ Federal income tax
for 2019, the Internal Revenue Service (IRS or respondent) determined
a deficiency of $6,859 and an accuracy-related penalty under section
6662(a). 1 The deficiency stems largely from a determination that peti-
tioners underreported their taxable Social Security benefits. After con-
cessions, the sole question remaining for decision is whether petitioner
wife is properly treated as having received $19,866 of Social Security
benefits in 2019 by virtue of section 86(d)(3), the so-called workers’

        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. We round monetary amounts to the nearest
dollar.

                                  Served 02/14/24
                                          2

[*2] compensation offset provision. 2 We answer this question in the af-
firmative.

                              FINDINGS OF FACT

       The following facts are derived from the pleadings, the trial testi-
mony, and documents stipulated by the parties or otherwise admitted
into evidence. Petitioners resided in New York when they timely peti-
tioned this Court.

       Petitioner wife worked as a registered nurse until 2014. In that
year she suffered an injury and became medically disabled. She began
receiving New York workers’ compensation benefits in 2014. She re-
ceived approximately $42,000 of such benefits annually through 2019,
the tax year at issue. The record does not enable us to determine the
exact amount she received each year.

       In 2015 petitioner wife applied to the Social Security Administra-
tion (SSA) for benefits related to her disability. In December 2017 the
SSA issued her an award letter indicating that she was entitled to ben-
efits beginning in 2015. In January 2018 she was issued a Form SSA–
1099, Social Security Benefit Statement, for 2017, reporting that she
had $14,392 of Social Security benefits for that year. But a Federal stat-
ute, 42 U.S.C. § 424a(a), limits the total combined amount of workers’
compensation and Social Security benefits that an individual may re-
ceive in a given year. See Richardson v. Belcher, 404 U.S. 78, 82–84
(1971) (describing the policy rationale for this statute). The SSA con-
cluded that petitioner wife was over that statutory limit for 2017, and it
thus disbursed no benefits to her. The Form SSA–1099 explained that
the entirety of her 2017 Social Security benefits was subject to “workers’
compensation offset.”

       In January 2018 petitioner wife filed with the SSA a request for
reconsideration, asking that it recalculate her workers’ compensation
offset amount. In January 2019 the SSA issued her a letter granting
relief. The SSA acknowledged that, in its initial award letter, it had
miscalculated her monthly “average current earnings” (ACE). ACE

        2 At trial petitioners conceded that they received during 2019 unreported tax-

able interest and dividend income of $33 and $38, respectively. In his post-trial brief
respondent “concedes, for the purposes of this case,” that the total amount of Social
Security benefits properly treated as having been received by petitioner wife is only
$19,866 for the tax year at issue, rather than $55,248 as determined in the notice of
deficiency. Respondent has also conceded the accuracy-related penalty.
                                         3

[*3] serves as a benchmark to approximate the monthly earnings an in-
dividual would have received if not disabled, and the SSA calculates the
workers’ compensation offset using a figure equal to 80% of ACE. See
42 U.S.C. § 424a(a). The SSA informed petitioner wife that, effective
January 2018, her ACE was adjusted upward to $5,074 to reflect a rise
in the national earnings level. As a result, 80% of her ACE was in-
creased to $4,059. The SSA noted that it had paid her $3,060 on Decem-
ber 4, 2018, to account for this adjustment.

      Petitioner wife received Form SSA–1099 for 2018. It indicated
that she had total Social Security benefits of $71,918, of which $19,322
was attributable to 2018. The balance, or $52,596, reflected retroactive
benefits attributable to 2015–2017. The Form SSA–1099 indicated that
$20,749 had been paid to her “by check or direct deposit.” Another
$5,375 was paid as attorney’s fees and as voluntary Federal income tax
withholding. The balance of the $71,918 in benefits, or $45,794, was not
paid on account of the “workers’ compensation offset.” 3

       Petitioner wife received Form SSA–1099 for 2019, the tax year at
issue. It indicated that she had total Social Security benefits of $55,248,
of which $19,866 was attributable to 2019. The balance, or $35,382, re-
flected retroactive benefits attributable to 2016–2018. The Form
SSA–1099 indicated that $6,120 was paid to her “by check or direct de-
posit.” Another $1,080 was paid as voluntary Federal income tax with-
holding. The balance of the $55,248 in benefits, or $48,048, was not paid
on account of the “workers’ compensation offset.”

       On their joint Federal income tax return for 2019 petitioners re-
ported $5,202 in taxable Social Security benefits. They appear to have
calculated this sum as 85% of the $6,120 cash payment from the SSA.
See § 86(a)(2)(B) (specifying “85 percent of the social security benefits
received during the taxable year” as the maximum amount includible in
gross income).

      The IRS selected petitioners’ 2019 return for examination. It de-
termined that, under section 86(d)(3), the base for calculation of their
taxable Social Security benefits should be increased by $49,128, repre-
senting the sum of $1,080 (the amount paid by the SSA as voluntary
income tax withholding) and $48,048 (the amount of Social Security

       3 Petitioner wife contacted the SSA with questions about the Form SSA–1099

for 2018. By letter dated March 29, 2019, the SSA replied that “Ms. Ecret’s 2018
[Form] 1099 is correct.” It noted that “there were no SSA benefits released prior to
2018” and explained the math underlying the workers’ compensation offset.
                                            4

[*4] benefits not paid on account of workers’ compensation offset). On
November 22, 2021, the IRS issued petitioners a timely notice of defi-
ciency for 2019, upwardly adjusting their gross income by $41,759
($49,128 × .85) to reflect additional taxable Social Security benefits. Pe-
titioners petitioned this Court for redetermination. 4

       Following the trial respondent filed an Opening Brief and peti-
tioners filed an Answering Brief. In his Brief respondent “concedes, for
the purposes of this case,” that petitioners are not liable for income tax
in 2019 on the portion of petitioner wife’s Social Security benefits that
constituted a retroactive payment attributable to 2016–2018. But he
maintains that, under section 86(d)(3), petitioner wife should be treated
as having received in 2019 total Social Security benefits of $19,866, rep-
resenting the sum of $6,120 (the cash payment from the SSA), $1,080
(the amount paid by the SSA as voluntary income tax withholding), and
$12,666 (the amount of 2019 Social Security benefits not paid on account
of workers’ compensation offset). Respondent contends that 85% of this
sum, or $16,886, is properly includible in their gross income for 2019.
Petitioners contend that they should be taxable only on the Social Secu-
rity benefits that were paid to them in cash.

                                      OPINION

I.      Burden of Proof

       The Commissioner’s determinations in a notice of deficiency are
generally presumed correct, and the taxpayer bears the burden of prov-
ing them erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). In certain circumstances section 7491 may shift the burden of
proof to the Commissioner. But that section applies only if the taxpayer
(among other things) “introduces credible evidence with respect to any
factual issue relevant to ascertaining the [taxpayer’s] liability.”
§ 7491(a)(1). The question presented—whether petitioner wife is
treated as having received Social Security benefits that were offset by

         4 The IRS also selected petitioners’ 2018 return for examination, and it timely

issued them, on August 9, 2021, a separate notice of deficiency for that year. Petition-
ers disputed the deficiencies for both years in the Petition they filed on February 22,
2022. But while their Petition was timely with respect to the notice for 2019, it was
filed 108 days late with respect to the notice for 2018. See § 6213(a) (requiring that a
petition be filed within 90 days of the issuance of the notice of deficiency); Sanders v.
Commissioner, No. 15143-22, 161 T.C., slip op. at 2–3 (Nov. 2, 2023). We accordingly
dismissed this case for lack of jurisdiction insofar as it concerned petitioners’ tax lia-
bility for 2018.
                                    5

[*5] workers’ compensation payments—is essentially a legal one, and no
facts relevant to ascertaining petitioners’ liability are in dispute. Thus,
section 7491 does not operate to shift the burden of proof to respondent.

II.    Unreported Income

      Section 61(a) provides that “gross income means all income from
whatever source derived.” Generally, gross income does not include
workers’ compensation. § 104(a)(1). But Social Security benefits are
included in gross income to the extent specified by section 86.

       In cases of unreported income, the Commissioner must establish
an evidentiary foundation connecting the taxpayer to the income-
producing activity or demonstrate that the taxpayer actually received
the income. See Llorente v. Commissioner, 649 F.2d 152, 156 (2d Cir.
1981), aff’g in part, rev’g in part 74 T.C. 260 (1980). “Once the Commis-
sioner makes the required threshold showing, the burden shifts to the
taxpayer to prove by a preponderance of the evidence that the Commis-
sioner’s determinations are arbitrary or erroneous.” Walquist v. Com-
missioner, 152 T.C. 61, 67–68 (2019). But the IRS may not rely solely
on a third-party report of income if the taxpayer raises a reasonable dis-
pute concerning the accuracy of the report. See § 6201(d).

       Respondent met his threshold burden here by supplying a 2019
Form 1099–SSA indicating that petitioner wife was entitled to $55,248
in Social Security benefits, of which $6,120 was paid in cash, $1,080 was
paid as voluntary income tax withholding, and $48,048 was offset by
workers’ compensation. Respondent may rely on this third-party report
of income because petitioners have not raised a reasonable dispute con-
cerning the accuracy of the amounts appearing on it. See Hardy v.
Commissioner, 181 F.3d 1002, 1004–05 (9th Cir. 1999), aff’g T.C. Memo.
1997-97.

III.   Workers’ Compensation Offset

       Federal law limits the amount of combined workers’ compensa-
tion and Social Security benefits that an individual may receive in a
given year. As a general rule, an individual may not receive combined
benefits that exceed 80% of his or her ACE benchmark. See 42 U.S.C.
§ 424a(a). When payment of Social Security benefits would cause the
individual’s combined benefits to exceed 80% of ACE, the SSA must stop
disbursing benefits. The undisbursed benefits are thus said to be offset
by the workers’ compensation payments.
                                     6

[*6] Section 86(a)(1) provides that, to the extent of the specified inclu-
sion ratio, “gross income . . . includes social security benefits,” a term
defined in section 86(d). In general, “social security benefit” is defined
to include “any amount received by the taxpayer by reason of entitle-
ment to . . . a monthly benefit under title II of the Social Security Act.”
§ 86(d)(1)(A). That general definition is modified by section 86(d)(3),
captioned: “Workmen’s compensation benefits substituted for social se-
curity benefits.” It provides in relevant part:

      For purposes of this section, if, by reason of section 224 of
      the Social Security Act [i.e., 42 U.S.C. § 424a] . . . any social
      security benefit is reduced by reason of the receipt of a ben-
      efit under a workmen’s compensation act, the term ‘social
      security benefit’ includes that portion of such benefit re-
      ceived under the workmen’s compensation act which
      equals such reduction.

       Thus, the amount of an individual’s Social Security benefits for
section 86(d) purposes includes workers’ compensation payments to the
extent those payments offset Social Security benefits to which the indi-
vidual is entitled. See Moore v. Commissioner, T.C. Memo. 2012-249,
104 T.C.M. (CCH) 245, 246; Mikalonis v. Commissioner, T.C. Memo.
2000-281, 80 T.C.M. (CCH) 330, 332; see also H.R. Rep. No. 98-25, at 26
(1983), reprinted in 1983 U.S.C.C.A.N. 219, 244 (indicating that Con-
gress specifically anticipated this result). In enacting section 86(d)(3),
Congress apparently sought to equalize the treatment of taxpayers in
petitioners’ position with taxpayers residing in “reverse offset” jurisdic-
tions, i.e., States where the receipt of Social Security benefits reduces
workers’ compensation benefits. See Charles T. Hall, Social Security
Disability Practice § 5:19 (2023).

       In 2019 petitioner wife received roughly $42,000 in workers’ com-
pensation benefits from New York and had $55,248 of Social Security
benefits. As the SSA indicated in its January 2019 letter, 80% of her
monthly ACE was $4,059. On an annual basis, therefore, her combined
workers’ compensation and Social Security benefits were not permitted
to exceed $48,708 ($4,059 × 12). See 42 U.S.C. § 424a(a). But the sum
of the two streams of benefits substantially exceeded this threshold.

       In consequence, the bulk of the Social Security benefits to which
petitioner wife was entitled for 2019 were subject to workers’ compensa-
tion offset. Respondent “concedes, for the purposes of this case,” that
petitioners are not liable for income tax for 2019 on any portion of the
                                    7

[*7] Social Security benefits attributable to tax years 2016–2018. But
he contends that, under section 86(d)(3), petitioner wife must be treated
as having received $19,866 in Social Security benefits for 2019. This
amount includes that portion of petitioner wife’s workers’ compensation
payments, or $12,666, that offset Social Security benefits to which she
was entitled for 2019. Petitioners disagree, contending that they should
be taxed only on the cash payment from the SSA.

      Section 86(d)(3) compels us to agree with respondent. Petitioner
wife had $19,866 in Social Security benefits attributable to 2019. Of this
amount the SSA disbursed $6,120 to her as a cash payment after with-
holding $1,080 of Federal income tax, which it paid to the IRS on her
behalf. The SSA did not disburse the remaining $12,666 on account of
the workers’ compensation offset. But under section 86(d) petitioners
are nonetheless required to treat this sum as Social Security benefits for
Federal income tax purposes.

       Section 86 provides that up to 85% of Social Security benefits are
included in gross income, with the exact percentage depending on vari-
ous income thresholds. See § 86(a)–(c). Respondent contends that the
85% inclusion ratio applies here, and petitioners do not appear to disa-
gree. Indeed, on their 2019 return, they reported $6,120 in Social Secu-
rity benefits and included 85% of those benefits (or $5,202) in their gross
income.

       Applying the 85% inclusion ratio, we conclude that petitioners for
2019 have taxable Social Security benefits of $16,886, viz, 85% of the
$19,866 in benefits that were attributable to 2019. Because petitioners
on their 2019 return reported only $5,202 in taxable Social Security ben-
efits, they must include an additional $11,684 of such benefits
($16,886 − $5,202) in their gross income.

      To reflect the foregoing,

      Decision will be entered under Rule 155.