Section 86(d)(3) is Congress’ attempt to “equalize the treatment of taxpayers in petitioners’ position with taxpayers residing in ‘reverse offset’ jurisdictions, i.e., States where the receipt of Social Security benefits reduces workers’ compensation benefits. See Charles T. Hall, Social Security Disability Practice § 5:19 (2023).” Section 86(d)(3) makes workers’ comp benefits reduce Social Security benefits in States which don’t cut Comp for Social Security. The bad news is that the cut to Social Security benefit is still taxable.

Juist ask Donald Ecret and Kristen Ecret, T. C. Memo. 2024-23, filed 2/14/24. Kris is a disabled nurse getting NY comp payments when she applied for Social Security. She got both for a couple years (hi, Judge Holmes), and IRS even conceded the year before the year at issue despite Kris’ late filed petition for that year. And IRS concedes the chops.

But IRS does go for the tax for year at issue, and gets it.

Judge Albert G. (“Scholar Al”) Lauber obviously isn’t happy with the result (Kris is obviously disabled, and did pay into Social Security).

“Section 86(d)(3) compels us to agree with respondent. Petitioner wife had $X in Social Security benefits attributable to[year at issue]. Of this amount the SSA disbursed $Y to her as a cash payment after withholding $Z of Federal income tax, which it paid to the IRS on her behalf. The SSA did not disburse the remaining $AA on account of the workers’ compensation offset. But under section 86(d) petitioners are nonetheless required to treat this sum as Social Security benefits for Federal income tax purposes.” T. C. Memo. 2024-22, at p. 7. (Amounts omitted).

The quotation at the head hereof is from T. C. Memo. 2024-22, at p. 6.

Hurts the people in generous States to make up for those in cheapskate States.