Tax Court in Brief | Caldwell v. Commissioner | Employer Disability Compensation is Taxable Income to Employee

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The Tax Court in Brief – May 16th – May 20th, 2022

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Tax Litigation:  The Week of May 16th, 2022, through May 20th, 2022

Caldwell v. Comm’r, T.C. Memo 2022-51 | May 20, 2022 | Lauber, J. | Dkt. No. 3333-19

Short Summary: Paul Caldwell worked for Sprint Nextel as an account executive. His monthly income was $10,275. Through his employer he enrolled in two disability programs: the “Core Plan” and the “Buy-Up Plan”. These plans provided payment in the event Caldwell was unable to perform the material duties of his employment due to injury or sickness. The Core Plan provided 50% of his monthly income. Sprint paid all premiums under the Core Plan without any contribution from Caldwell. Caldwell paid for the Buy-Up Plan with pre-tax payroll deductions from his Sprint wages. The benefit paid 15% of his monthly salary. After suffering a knee injury, Caldwell applied for his benefits. In 2011 Caldwell received $61,187.62 and $27,204.07 under the Core Plan and Buy-Up Plan, respectively. Caldwell did not file a return for 2011. Through a substitute for return (SFR), the IRS determined that these payments were includible in Caldwell’s gross income. After taking the standard deduction and allowing one personal exemption, the IRS claimed his taxable income was $101,286 with a tax liability of $21,977.

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Insights: This case is a great review of specific types of income-producing activities which result in gross income to the taxpayer under § 61. The case also highlights some of the penalties taxpayers face if he or she has failed to file an income tax return. Additionally, the case sheds light on Tax Court procedural issues. If a taxpayer has received disability for benefits for personal injury or sickness from pre-tax dollars, then the benefits are, more likely than not, properly included in gross income. Therefore, failure to report such income may result in the IRS declaring a deficiency on the return where reporting was required. The taxpayer should keep detailed records of benefits received so that, if a third-party files an erroneous W-2, the taxpayer may then raise a reasonable dispute. If the IRS lodges an addition to tax against the taxpayer, then the taxpayer must do more than saying he did in fact file a return. If the taxpayer supplies no evidence of reasonable cause aside from testimony that he did file a return, then the taxpayer fails to establish a reasonable cause exception. The taxpayer may face an addition to tax for failure to file. Furthermore, the taxpayer will face an addition to tax for failure to pay when the IRS supplies an SFR and subsequently declares a deficiency based on that return.

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