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Tuesday, December 30, 2008

Tax Court: IRS's Unclear Instructions No Excuse for Taxpayer's Mistake

Jellen v. Commissioner, T.C. Summ. Op. 2008-164 (Dec. 29, 2008):

Petitioner's only argument is that respondent's instructions and guidance to taxpayers as to the taxability of Social Security benefits are confusing and unclear and therefore that the Social Security disability benefits he received in 2004 and 2005 should not be subject to taxation under section 86(a).

We are sympathetic with petitioner's complaint about unclear guidance to taxpayers that occasionally appears in respondent's instructional publications, but petitioner is not thereby excused from paying required Federal income taxes on the Social Security benefits he received. We sustain respondent's adjustments to petitioner's Federal income taxes for 2004 and 2005.

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Comments

Is this a great country or what? Time to break out the tar and feathers folks.

Posted by: Robert | Dec 31, 2008 8:06:27 AM

After twenty five years the question still remains as to whether the inclusion of state income tax refunds is allowed in the determination of taxable Social Security benefits. The instructions issued by IRS includes the refunds in the calculation even though section 111(a) states, "[gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter".

Inclusion of a state income tax refund in the determination of taxable Social Security benefits can result in the gross income attributable to a refund being up to 1.85 times the amount of the refund even though a state income tax overpayment can at most only reduce taxable income dollar for dollar.

IRS has had the opportunity to prove there position but has declined to go to court. IRS would be hard pressed to defend its position due to one very simple question.

Precisely, what is it about the language in section 111(a) of the Internal Revenue Code that allows IRS to issue instructions that can result in the gross income attributable to an itemized deduction recovery exceeding the amount of the recovery?

Posted by: WD Kebschull | Jan 2, 2009 5:27:12 PM

I have noticed that journalists in reporting what most would consider malfeasance do not specifically identify the miscreant so that he, whether it be a person or a business, can be vilified. I have often wondered how these people's actions would change if journalists published the "judge"'s home address, telephone number, e-mail address, club memberships, church membership, children's names and addresses, etc.? People in official positions will continue to do this kind of thing unless they are made to pay some penalty for their actions. When they go unidentified, they are home free.

Posted by: John Kozy | Jan 2, 2009 5:28:11 PM

If the court included any itemized deduction recoveries such as a state income tax refund in the determination of the petitioners taxable Social Security benefit, the respondent should immediately (before April 15, 2009) file amended Federal and state (Minnesota) tax returns for 2005 unless the exclusion of any itemized deduction recoveries did not impact the calculation of taxable Social Security benefits on the Federal or Minnesota return. In other words, the taxable Social Security benefits are limited by the applicable percentage of Social Secuity benefit even after the exclusion.

Section 111(a) of the Internal Revenue Code limits the gross income attributable to an itemized deduction recovery to being no more than the recovery. Inclusion of an itemized deduction recovery in the calculation of taxable Social Security benefits can result in the gross income attributable to a recovery being up to 1.85 times the amount of the recovery.

Here is the question that IRS refuses to answer:

"Precisely, what is it about the language in section 111(a) of the Internal Revenue Code that allows IRS to issue instructions that can result in the gross income attributable to an itemized deduction recovery exceeding the amount of the recovery?"

And I haven't even touched on the impact of the inclusion of recoveries in AGI when determining allowable deductions (see Schedule A), credits, exemptions, etc. There are more than 25 examples where the taxpayer is adversely affected by the inclusion of itemized deduction recoveries in AGI when calculating these items.

Of course, IRS in its infinite wisdom excludes from AMTI refunds of itemized tax overpayments that provided a tax benefit in the prior year when the regular tax was paid. See line 8 on form 6251 for 2008.

The problem here is that neither the income used for the tax overpayment nor the refund of the overpayment is tax directly. Another problem is that contrary to IRS's claim, section 56(b)(1)(D) only applies to refunds that provided a limited long-term capital gains rate base tax benefit as a result of the two-tier capital gains rate scheme in a prior year when the AMT was PAID. From 1997 through 2007 the long-term capital gains rates were 10 and 20 percent or 5 and 15 percent. For 2008 the rates are zero and 15 percent. The threshold for the 25 percent tax rate for regular taxable income determines whether the capital gains are taxed at the higher or lower rate. Thus a deductible tax overpayment can reduce the portion of capital gains taxed at the higher rate and increase the portion taxed at the lower rate, thus the potential for a tax benefit from an itemized deductible tax overpayment in a year the AMT is paid. See page 2 of From 6251.


WDK

Posted by: WD Kebschull | Jan 2, 2009 5:28:11 PM

We have the responsibility of having to do our own taxes. Virtually impossible when you consider how convoluted the tax code is. Now the IRS can say tough luck even though they didn't explain it correctly you still have to pay?
The solution is to scrap the whole stinking mess. Get rid of it. Get rid of the parasitic accountants and tax lawyers and hundreds of thousands of IRS employees. If anyone still believes we need income taxes just take a look at the 8 trillion that was handed over to wall street. Printed from nothing with pleasure from the FED. Oh and by the way, get rid of the FED. Have Treasury subsume them and issue actual DOLLARS not FRN's with it's associated interest.

Posted by: jimmy | Jan 2, 2009 5:28:11 PM

Tar and feathers was last year....

Posted by: Reality | Jan 2, 2009 5:28:11 PM