On January 11, 2021, the Tax Court issued a Memorandum Opinion in the case of Kelley v. Commissioner (T.C. Memo. 2021-2). The issue presented in Kelley v. Commissioner was whether the provisions of IRC § 86(c) violated his Constitutional due process rights…and “various other constitutional arguments” that the Tax Court did not deign to address.
Preface to Kelley v. Commissioner
Anyone who has read Briefly Taxing for any length of time—you know who you are—knows that I absolutely adore pro se petitioners making frivolous constitutional arguments. It warms the very cockles of my cold cynic’s heart. Not the arguments themselves, mind you, but the joy I get thinking about the clerk who gets to write the opinion tearing the pro se petitioner a new one. One just hopes Poor Mr. Whiskers was not harmed in the drafting of this opinion.
Background to Kelley v. Commissioner
Patrick Kelley, a Louisiana resident, married Gwendolyn—but to protect and secure his bayou fortune,[1] he first executed a separate property agreement. Though he “received” nearly $21k in Social Security benefits, he chose not to report said benefits on Line 20a of his Form 1040 (entitled, as you may have guessed, “Social Security benefits”). As such, his modified AGI was a touch low for the IRS’s liking, and they sent him a notice of deficiency in August 2017.
“The Complexity of the Formula”
Initially, Social Security benefits were not taxable. See Rev. Rul. 70-217. In 1983, Congress ended this large largesse and enacted IRC § 86 to stick it to the old folks. Initially, Congress taxed only 50% of the benefits in excess of a base amount, but in 1993, they dug the knife in a bit deeper and increased the amount includible in gross income to as high as 85% of Social Security benefits received. Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, § 13215(a)-(b), 107 Stat. at 475-476.
Congress made this change in order to more closely conform the income tax treatment of Social Security benefits and private pension benefits by increasing the maximum amount of Social Security benefits included in gross income for certain higher-income beneficiaries. In doing so, Congress introduced the “adjusted base amount” as a way to limit the effect of this provision to taxpayers with a greater ability to pay taxes. As a result, higher earners are subject to a higher rate of tax if their modified adjusted gross income plus one-half of Social Security benefits exceeds the “adjusted base amount.” IRC § 86(b). Nonetheless, generally, IRC § 86 requires the inclusion in gross income of up to 85% of Social Security benefits received. Reimels v. Commissioner, 123 T.C. 245, 247 (2004) (emphasis added). Importantly for the case at hand, IRC § 86(c)(1)-(2) establish a “base amount” and “adjusted base amount” of zero for taxpayers who filed separately but were married and lived together during the taxable year.
A Constitutional “Gimme”
The Tax Court notes that Mr. Kelley did not contest the adjustments, but that he did question the fairness of such adjustments. Mr. Kelley argues that he has been denied due process and equal protection under the Fourteenth Amendment to the Constitution because the application of his filing status as married filing separately is discriminatory. In a footnote, the Tax Court politely points out that the Due Process and Equal Protection Clauses of the Fourteenth Amendment “explicitly apply” to State laws…but hell, the Tax Court was feeling generous, so they threw his arguments into the Fifth Amendment bus and let ‘em ride.
Constitutionality of § 86
Generally, statutory classifications are valid if they bear a rational relation to a legitimate governmental purpose. Statutes are subjected to a higher level of scrutiny if they interfere with the exercise of a fundamental right, such as freedom of speech, or employ a suspect classification, such as race. Regan v. Taxation With Representation of Wash., 461 U.S. 540, 547 (1983).
In Kelley, the different tax exemption amounts based on filing status are not at all like distinctions based on race; here there are no fundamental rights involved.
But, but, money and old people…
Nonetheless, the Supreme Court has noted that Congress has especially broad latitude in creating classifications and distinctions in tax statutes. Id.
Well, hell’s bells.
Generally, a legislative classification does not violate due process or equal protection principles if any state of facts rationally justifying it is demonstrated to or perceived by the courts. United States v. Md. Savings-Share Ins. Corp., 400 U.S. 4, 6 (1970).
Unfortunately for Mr. Kelley, the Tax Court has, and I quote, “consistently upheld the constitutionality of IRC § 86.” McAdams v. Commissioner, 118 T.C. 373, 379 (2002); Thomas v. Commissioner, T.C. Memo. 2001-120.
And dammit if the circuit courts don’t agree. Clark v. Commissioner, T.C. Memo. 1998-280 (1998), aff’d without published opinion, 187 F.3d 641 (8th Cir. 1999); Roberts v. Commissioner, T.C. Memo 1998-172, aff’d without published opinion, 182 F.3d 927 (9th Cir. 1999).
Congressional Reasoning
Congress, it appears, anticipated Mr. Kelley’s bellyaching. Specifically, In H.R. Rept. No. 98-25, at 25 (1983), 1983 U.S.C.C.A.N. 219, 243, and S. Rept. No. 98-23, supra at 27, 1983-2 C.B. at 328, Congress explained that the base amount is zero for married individuals filing separate returns because the committee believes that the family should be treated as an integral unit in determining the amount of social security benefit that is includible in gross income under this provision. Further, if the base amount for these individuals were higher, couples who are otherwise subject to tax on their benefits and whose incomes are relatively equally divided would be able to reduce substantially the amount of benefits subject to tax by filing separate returns.
Accordingly, Congress reasoned that married couples should be treated as a unit to prevent windfalls to couples that might otherwise file separate returns. Thus, the Tax Court observed that such “reasoning” demonstrates that Congress had a “valid and rational basis” for establishing a separate classification for a taxpayer who lived with a spouse for any part of the taxable year and filed a separate return.
Finally, Congress could have changed the married-filing-separately rule when it amended the statute in 1993. It didn’t. On purpose, apparently. As the Tax Court observed in Clark, Congress carried forward this rationale when it amended section 86 for 1994 and succeeding taxable years and established an adjusted base amount of zero for married taxpayers who file separate returns and do not live apart for the entire taxable year.
Alternatively, Disregard the Statute and Cut Him a Deal
Perhaps anticipating that his constitutional argument was, how do we say this nicely, dead on arrival, Mr. Kelley alternatively argued (more like politely requested) that the base amount be reduced by half – for purposes of computing his taxable Social Security benefits. Unfortunately, the Tax Court was not feeling generous (or was not feeling like it wanted to be summarily reversed by a circuit court), and it held that it did not have the “authority” to wholly “disregard the express provisions of a statute” even where the result in a particular case “may seem harsh.”
(T.C. Memo. 2021-2) Kelley v. Commissioner
Footnote re Gigging:
[1] One must assume that Mr. Kelley had some sort of gigging empire. Frogs, flounder, or the like.
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