And Socially Insecure

That’s Jim Brady’s plight in James Brady and Mary Brady, as Jim bats lead-off in 2013 T.C. Memo. 1, filed 1/3/13, Judge Goeke pitching the bad news.

Jim forgot to report about $1.5K in dividends, so he gets an underreporting penalty, but that’s the least of Jim’s problems.

Jim is a retired Wall Street floor broker with a varied background–“Before his employment as a broker, Mr. Brady worked in sanitation, construction, as a sergeant in the U.S. Marines, and as a New York Stock Exchange clerk.” 2013 T. C. Memo. 1, at p. 12, footnote 3.

Jim was disabled and getting paid by Unum under a disability policy–payments concededly non-taxable, but the policy provided that if Jim could get Social Security, he would have to take it and pay Unum back out of whatever he got from SSA. And Social Security is taxable, up to 85% of benefits.

Jim strikes out with SSA the first time around, loses appeal number one, but wins an administrative hearing and gets $87K, of which $73K is retroactive benefit money he owes Unum for past benefits.

Jim goes to Ronny, a CPA and lawyer, to do his return. Ronny reports Jim’s $14K current benefits, but nets out the retro Jim paid Unum. Jim admits on the trial he forgot to give Ronny the 1099s he got for the dividends.

No good, says Judge Goeke, Jim owes tax on the whole enchilada, at least up to 85% thereof. If it was a payback to SSA for past benefits, that can be netted, but not paybacks to private insurers. See Section 86(d)(2)(A).

Judge Goeke: “We addressed a similar issue involving reimbursement of funds to a private insurer in Seaver v. Commissioner, T.C. Memo. 2009-270. In that case we held that when a recipient of Social Security benefits is required by contract to reimburse a third party for tax-free benefits previously received, the recipient is not entitled to a deduction for the reimbursement. Id., slip op. at 7. We stated that we were not ‘free to question’ the choices that Congress had made regarding Social Security benefits and benefits paid by a private insurer.” 2013 T. C. Memo. 1, at pp. 5-6.

Tax Court may not be free to question Congress’ choices, but I am. This is another way that a disabled person, who has no other sources of income but relies on insurance (whether private or governmental), gets mistreated. And that’s regardless of partisan issues; this is a non-political blog, friends.

So Jim is on the hook for the tax. But he relied on Ronny, the attorney and CPA, so penalties only for the dividends.

Now for yet another example why one should hire a lawyer with Tax Court experience, or a Tax Court admittee, that rare specimen who passed through the needle’s eye, for a Tax Court trial. Jim might have made a Section 86(e) election, and adjusted the taxable amount of the benefits he received. Maybe it would have helped him, although IRS said it wouldn’t, even if he could so elect four years after the fact, which IRS did not concede.

“At trial the Court inquired whether petitioners would like to make the section 86(e) election if the election would aid them and if making the election so long after filing their 2008 return was possible. Petitioners stated that they would. However, not only have we found no authority for making the section 86(e) election so long after the filing of the relevant tax return, but respondent has stated in his brief that ‘based on the petitioners’ income in the previous years’, even if a section 86(e) election was made it ‘would do nothing to limit petitioners’ tax liability.’  Petitioners’ tax returns (or other statements of income) for 2005 through 2007 were not introduced into evidence for our review, and petitioners did not dispute respondent’s statement. Given that the burden of proof is on petitioners, we find they have not proven that the section 86(e) election is of any consequence in this case. We will not proceed to address whether it is possible for petitioners to make such an election with respect to 2008 at this late date.” 2013 T. C. Memo. 1, at p. 7. (Footnote omitted).

The omitted footnote says Jim had a chance to file a post-trial brief after IRS had filed theirs, but Jim didn’t. There may be no authority to allow a late-filed Section 86(e) election, but it might have been worth asking. There doesn’t seem to be any authority denying it.

Pity the pro se in Tax Court.