This case involved the technical confluence of the taxability of social security benefits and general non-taxability of private insurance disability benefits.  Petitioner applied for and began to receive long term disability benefits from a private insurer in 2007.  Petitioner’s insurance policy provided that petitioner’s benefits would be reduced if she received social security disability benefits.  Petitioner applied for Social Security disability benefits but did not receive any benefits during 2007, 2008 and 2009.  In 2010, petitioner was awarded Social Security benefits and received a lump sum of $49, 610 to cover prior years.  Petitioner was now required to repay her private insurer $48, 144 of the private disability benefits she had previously received.

The first question before the tax court was whether petitioner could exclude the lump sum of $49, 610 received from Social Security from gross income on petitioner’s 2010 income tax return.  The court held that petitioner could not exclude from gross income the $49, 610 payments received from Social Security during 2010 pursuant to Sec. 86 of the Internal Revenue Code (“IRC”).

The second question before the tax court was whether petitioner was liable for a 20% accuracy related penalty pursuant to Sec. 6662(a) of the IRC due to a substantial underpayment of income tax for 2010.  Under Sec. 6664 (c)(1) of the IRC, the accuracy related penalty is generally not imposed if the taxpayer acted with reasonable cause and in good faith.  The court found that the petitioner acted with reasonable cause and in good faith because two tax professionals were consulted by petitioner and they each separately advised petitioner to exclude social security benefits from income.

See English v. Comm’r, T.C. Summary Opinion 2014-66. [This opinion may not be treated as precedent for any other case].

Posted by Chuba Abaelu,

Associate Editor, Wealth Strategies Journal