Tax Court in Brief | Trice v. Comm’r | Reporting Disability Income and Lifetime Learning Credit Reduction

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The Tax Court in Brief – February 13th – February 17th, 2023

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of February 13th, 2022, through February 17th, 2023

Trice v. Comm’r, T.C. Memo. 2023-15| February 13, 2023 | Gustafson, J. | Dkt. No. 20398-19

Summary: The IRS issued a Notice of Deficiency (“NOD”) Tanisha Trice for the taxable year 2017. The IRS took issue with her report of income in the form of disability benefits she received from the Social Security Administration (“SSA”). The SSA reported on Form SSA–1099, “Social Security Benefit Statement”, that Trice was awarded disability benefits totaling a gross and untaxed amount of $17,164. Ultimately, the SSA reported having paid, and Trice indicated receipt of $13,866. Trice also showed repayment of certain amounts to the SSA in the same tax year. But, the records did not clearly indicate the calculation after taking into amounts reduced by the SSA or the repaid by Trice. On her tax return, Trice did not report the Social Security benefits, and she left that response blank. She reported wages of $52,713; adjusted gross income (“AGI”) of $50,450; an education credit of $2,000; and a “total tax” of $3,758. The IRS received the SSA’s report and compared that report to Trice’s 2017 return and noted her non-reporting of the disability benefits. The IRS increased her taxable income by $13,290 (i.e., 85% of Trice’s “net benefits” of $15,635) and, because of the resulting increase in her AGI, reduced the amount of education credit to which she was entitled (i.e., from $2,000 down to $452). The IRS issued an NOD to Trice. She sought review by the Tax Court.

Key Issues:

Whether the IRS showed, as a matter of law, (1) that under I.R.C. § 86(a)(2)(B), 85% of Trice’s “net benefits” of $15,635 (i.e., $13,290) was taxable income and, as a result, and (2) that Trice’s education credit should be reduced because of the increase in her income from the SSA benefit determination?

Primary Holdings: The disability benefits that Trice received must be included in income. But, the reported disability benefits that consisted of SSA “deductions” were not explained, and as to them, the IRS was not entitled to summary judgment. Trice’s Lifetime Learning credit must be reduced to the extent that the disability benefits cause her modified adjusted gross income to trigger reductions under I.R.C. § 25A(d). But, until the dispute about the SSA “deductions” has been resolved, the amount of reduction to this credit cannot be discerned.

Key Points of Law:

Unreported Income. Where the IRS alleges that a taxpayer failed to report income, the IRS must “provide some predicate evidence connecting the taxpayer to the charged activity” before the presumption of correctness attaches to the determination. Gerardo v. Commissioner, 552 F.2d 549, 554 (3d Cir. 1977), aff’g in part, rev’g in part T.C. Memo. 1975-341. Once the IRS connects the taxpayer with the unreported income, then at trial the taxpayer bears the burden of proving that the taxpayer did not receive the income, or, in response to a motion for summary judgment, the taxpayer’s burden would be to raise a genuine dispute as to receipt of the income. See Williams v. Commissioner, 999 F.2d 760, 763 (4th Cir. 1993), aff’g T.C. Memo. 1992-153; Walker v. Commissioner, 757 F.2d 36, 38 (3d Cir. 1985), rev’g and remanding T.C. Memo. 1983- 538; see also Rule 142(a).

Taxation of SSA Benefits. Generally, under section 86(a)(2)(B), 85% of Social Security benefits is taxable.

IRS Reliance on Information Returns and Taxpayer’s Reasonable Dispute. Where the IRS relies on, for example, a Form SSA–1099, to show that the income so reported was in fact income to the taxpayer, such reliance on an information return implicates section 6201(d), which provides:

In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return . . . and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.

See, e.g., Cabirac v. Commissioner, 120 T.C. 163, 166–67 (2003), aff’d per curiam without published opinion, 2004 WL 7318960 (3d Cir. Feb. 10, 2004). If a taxpayer “asserts a reasonable dispute” as to an income item reported on such a return, the IRS must “produc[e] reasonable and probative information . . . in addition to such information return.” 26 U.S.C. § 6201(d).

Lifetime Learning Credit. Section 25A(a)(2) provides for a “Lifetime Learning Credit” equal to 20% of as much as $10,000 of certain education-related expenses, 26 U.S.C. § 25A(c)(1)—i.e., a credit of up to a maximum of $2,000. This credit is claimed on Form 8863, “Education Credits (American Opportunity and Lifetime Learning Credits)”, attached to Form 1040. Section 25A(d), as in effect for 2017, limited and reduced the amount of the otherwise available credit—

by the amount . . . which bears the same ratio to the amount which would be so taken into account as—(A) the excess of—(i) the taxpayer’s modified adjusted gross income for such taxable year, over (ii) $40,000 ($80,000 in the case of a joint return), bears to (B) $10,000 ($20,000 in the case of a joint return).

Form 8863, as prescribed for 2017, implemented this limitation on lines 13–18, which began to phase out the credit for a single taxpayer with AGI of $56,000 or more and phased it out entirely when AGI equals $66,000 or more.

Insights: Taxpayer Trice showed that she had been working with the SSA since 2015 to get the disability benefit issue resolved and to determine the actual amount of the SSA overpayment, “deductions,” and income that may be subject to federal income tax. She also presented reasonable explanation as to her non-receipt of income that the IRS sought to assigned to her for federal income tax purposes. Under section 6201(d), Trice showed that she fully cooperated with the IRS, and, given the confusion and lack of clear documentation from the SSA, the IRS failed to show produce reasonable and probative information concerning the deficiency it sought to assign to Trice.