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Staples v. Commissioner (T.C. Memo. 2020-34)

On March 11, 2020, the Tax Court issued a Memorandum Opinion in the case of Staples v. Commissioner (T.C. Memo. 2020-34). The issue presented in Staples was whether petitioner is entitled to a loss deduction on account of his Federal disability annuity benefits, as reduced by the amount he received as Social Security Disability Insurance (SSDI) benefits.

The petitioner worked for the USPTO until disability forced him to retire in 2012. Thereafter, the petitioner received Federal Employees Retirement System (FERS) disability income and Social Security Disability Insurance (SSDI) benefits. The petitioner did not claim a loss deduction on his timely filed return. Because of other income, the IRS sent a Notice CP2000 (proposed adjustments) regarding the petitioner’s 2015 return, and the petitioner responded timely.

In the petitioner’s response, he cited serious illness and incapacitation. The petitioner conceded the additional income, but he contested whether the inclusion raised his taxable income. The petitioner filed an amended return on Form 1040X in which he asserted that the reduction of his FERS annuity constituted a loss for which he should be able to claim a deduction. The 1040X was neither accepted nor processed.

Jurisdiction to Determine Overpayment

The Tax Court has jurisdiction to determine the amount of any overpayment a taxpayer made for a year that is properly before the Tax Court on a petition to redetermine a deficiency. IRC § 6512(b)(1). If the Tax Court finds an overpayment and further determines the amount of the overpayment that is refundable in accordance with IRC § 6512(b)(3), such overpayment will be credited or refunded to the Tax Court when the decision of the Tax Court is final. IRC § 6512(b)(1).

A Federal employee subject to FERS may be eligible to retire and receive a FERS annuity if he or she becomes disabled. See 5 U.S.C. §§ 8451, 8452 (2012). Members of the general public who become disabled may be eligible to receive SSDI benefits. Cleveland v. Policy Mgmt. Sys. Corp., 526 U.S. 795, 797 (1999).

The statute governing petitioner’s FERS annuity benefits requires that his FERS annuity be reduced by the amount of his entitlement to SSDI benefits. See 5 U.S.C. § 8452(a)(2)(A)(i). Unfortunately for the petitioner, this offset has been upheld by the Federal Circuit. Anderson v. Office of Pers. Mgmt., 713 F. App’x 1003 (Fed. Cir. 2017); Johnston v. Office of Pers. Mgmt., 99 F.3d 1160 (Fed. Cir. 1996).

Although the Tax Court has no jurisdiction to decide employee benefit issues, the Tax Court does have jurisdiction under IRC § 6213 and IRC § 6512(b)(1) to redetermine an income tax deficiency or to determine an overpayment by petitioner (by reference to his benefits).

Loss Must be Realized, Not Just Anticipated

No deduction is allowed under the Code for the loss of unrealized income by a cash basis taxpayer. See, e.g., Hort v. Commissioner, 313 U.S. 28, 32-33 (1941); Hendricks v. Commissioner, 406 F.2d 269 (5th Cir. 1969) (stating that a taxpayer is not allowed to reduce ordinary income actually received by the amount of income he failed to receive), aff’g T.C. Memo. 1967-140. The notion of a deductible “loss” simply does not include the failure to realize anticipated income. Marks v. Commissioner, 390 F.2d 598, 599 (9th Cir. 1968), aff’g T.C. Memo. 1966-62.

Original opinion: (T.C. Memo. 2020-34) Staples v. Commissioner

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