The Tax Court in Brief
Freeman Law’s “The Tax Court in Brief” covers substantive Tax Court opinion, providing a brief of its decisions in clear, concise prose.
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Short Summary: Taxpayer timely filed her 2022 federal income tax return reporting approximately $65,085 in wages but reported none of the $26,268 in Social Security benefits she received during the tax year. The benefits were reported to her on Form SSA-1099, and she did not dispute receiving them. After examining the return, the IRS determined that $22,328—representing 85% of the benefits—was includible in gross income under I.R.C. § 86 and issued a notice of deficiency determining an additional income tax liability of $4,917. Rejecting Taxpayer’s arguments that Social Security benefits are categorically exempt from income taxation and that taxation of those benefits constitutes unconstitutional “double taxation,” the Tax Court reaffirmed that Congress expressly subjected Social Security benefits to federal income tax under specified income thresholds and that longstanding precedent forecloses constitutional challenges to I.R.C. § 86.
Key Issue: Whether Taxpayer was required under I.R.C. § 86 to include a portion of her Social Security benefits in gross income for tax year 2022 where her modified adjusted gross income exceeded the applicable statutory base and adjusted base amounts.
Primary Holdings: The Tax Court held that Taxpayer was required to include 85% of her Social Security benefits in gross income under I.R.C. § 86 because her modified adjusted gross income exceeded the statutory thresholds.
Key Points of Law:
Unreported Income
- The IRS’s determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving them erroneous. Rule 142(a);Welch v. Helvering, 290 U.S. 111, 115 (1933).
- When the case involves unreported income, the Commissioner must first come forward with minimal evidence connecting the taxpayer with income-producing activity or showing actual receipt of unreported income. Walquist v. Commissioner, 152 T.C. 61, 67 (2019).
- Once the Commissioner meets this burden of production, the burden is on the taxpayer to prove by a preponderance of the evidence that the Commissioner’s determinations are arbitrary or erroneous. See Walquist, 152 T.C. at 67–68.
- Where the taxpayer has stipulated receiving the unreported income, the Commissioner has necessarily met his burden. See El v. Commissioner, 144 T.C. 140, 143 (2015).
- Under Tax Court Rule 122(b), submission of a case under Rule 122 does not alter the burden of proof.
Social Security Benefits
- Gross income includes all income from whatever source derived. SeeR.C. § 61(a).
- Gross income specifically includes Social Security benefits. SeeR.C. § 86(a)(1).
- For purposes of I.R.C. § 86, Social Security benefits include any amount received by the taxpayer by reason of entitlement to a monthly benefit under title II of the Social Security Act. I.R.C. § 86(d)(1).
- The amount of Social Security benefits considered for inclusion as taxable income is reduced by any repayments made by the taxpayer during the taxable year, regardless of when the Social Security benefits were originally received. I.R.C. § 86(d)(2).
- Section 86 provides that a taxpayer must include in gross income part of the Social Security benefits received during the taxable year if the sum of the taxpayer’s modified adjusted gross income, as defined in I.R.C. § 86(b)(2), and one-half of the Social Security benefits exceeds the statutory base amount applicable to the taxpayer’s filing status for the year (i.e., $32,000 for married taxpayers filing jointly, and $25,000 for all other individuals, except married taxpayers filing separately). SeeR.C. § 86(a), (b)(1), (c)(1).
- The taxable amount is limited to 85% of the Social Security benefits, with the exact amount determined using the taxpayer’s modified adjusted gross income and the corresponding base amount and adjusted base amount applicable to the taxpayer’s filing status (i.e., $44,000 for joint returns and $34,000 for all others, except married taxpayers filing separately). SeeR.C. § 86(a)–(c).
Insights: The $25,000 and $34,000 thresholds in I.R.C. § 86 are income thresholds, not exclusions based solely on the amount of Social Security benefits received. Once modified adjusted gross income exceeds the statutory thresholds, up to 85 percent of Social Security benefits may become taxable. Arguments that Social Security benefits are exempt from tax because they constitute double taxation are likely unsuccessful. And, on another note, this case illustrates that where the underlying facts are undisputed and the dispute concerns only the legal consequences of those facts, Rule 122 submissions remain an efficient procedural vehicle for resolving the case without trial.
