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.
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