The Tax Court held that a portion of a taxpayer's lump-sum Social Security disability payment was includible in gross income in the tax year received, pursuant to the statutory formula in Sec. 86. The court noted that the taxpayer did not make the election permitted by Sec. 86(e) to limit the includible amount, but even if he had, it would not have reduced his and his wife's tax liability below the amount determined by the IRS.
Facts: On their 2014 income tax return, Charles and Nancy Robbins did not report receipt of any Social Security benefits. However, in 2014 Mr. Robbins received a lump-sum Social Security disability payment of $59,895, which represented $15,994 of benefits accrued during 2012, $18,940 accrued during 2013, and $24,961 accrued during 2014. The past-due benefits accrued while Robbins was awaiting a decision from the Social Security Administration (SSA) on his disability claim.
The SSA sent the IRS a Form SSA-1099, Social Security Benefit Statement, reporting the lump-sum payment. Applying the formula set forth in Secs. 86(a) through (c), the IRS determined that $32,668 of the $59,895 benefit received in 2014 was includible in gross income for that year.
In 2016, the IRS issued a notice of deficiency regarding the Social Security benefit, the underreporting of a Maryland income tax refund, and a deduction for mortgage insurance premiums. The taxpayers challenged only the taxability of the Social Security benefit, asserting that none of the benefit was includible in income. They argued that no tax would have been due if they had received the monthly payments as the benefits accrued during 2012 through 2014.
The taxpayers did not respond to the IRS's request for admissions or motion for summary judgment.
Issue: The issue decided by the court was whether any portion of the lump-sum Social Security disability payment was includible in gross income in 2014.
Sec. 86 provides that Social Security benefits, including disability benefits, are includible in gross income to the extent provided in Secs. 86(a) through (c). If a taxpayer receives a lump-sum Social Security payment during the tax year and any portion of it is attributable to prior tax years, Sec. 86(e) allows the taxpayer to make an election limiting the amount included in gross income. If the taxpayer makes an election, the amount included in gross income in the year of receipt due to the portion of the payment attributable to prior tax years will not exceed the sum of the increases in gross income for the prior tax years that would have resulted if the portions attributable to those years had been received in those years. If an election is not made, a lump-sum payment of Social Security benefits is includible in gross income in the year received.
A taxpayer makes a Sec. 86(e) election on the tax return for the year of receipt as provided in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. It instructs the taxpayer to enter "LSE" to the left of the line on the Form 1040 or Form 1040A where the Social Security benefits are reported.
Holding: The Tax Court sustained the IRS's determination that $32,668 of the $59,895 Social Security benefit received in 2014 was includible in gross income. The court reasoned that the lump-sum payment was includible in gross income in 2014 pursuant to Secs. 86(a) through (c), as the taxpayers did not make a Sec. 86(e) election. It held they could not possibly have made the election, as they failed to report any of the Social Security benefit on the 2014 tax return.
The court also held that even if the taxpayers had made the Sec. 86(e) election, it would not have resulted in a tax liability less than that determined by the IRS. It noted that the worksheets attached to the IRS's motion for summary judgment showed that the taxpayers would have a higher tax liability than the tax shown in the notice of deficiency if an election had been made.
- Robbins, T.C. Memo. 2017-247
— By Mark Aquilio, CPA, J.D., LL.M., professor of accounting and taxation, St. John's University, Queens, N.Y.