                        T.C. Memo. 2006-39



                      UNITED STATES TAX COURT



       JACQUELINE AND THEODORE MAJOR GREEN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

       THEODORE MAJOR AND JACQUELINE GREEN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 2475-04, 4970-05.      Filed March 9, 2006.


     Jacqueline and Theodore Major Green, pro sese.

     Richard J. Hasserbrock, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   The issues for decision are whether

petitioners are entitled to exclude from income Social Security

benefits and deduct net operating loss (NOL) carryforwards

relating to their 2000 and 2001 returns.
                                - 2 -

                         FINDINGS OF FACT

     From 1985 through the years in issue, Theodore Green was

employed as a tax auditor for the Internal Revenue Service (IRS).

His duties included examining Federal income tax returns.      On

November 12, 1989, Jacqueline Green sustained injuries when she

was struck in a grocery store parking lot with a shopping cart

operated by Rachel Perez.   Mrs. Green, on November 7, 1990,

sought redress for these injuries by filing a complaint against

Ms. Perez in the Superior Court of Ventura County, California.

Mrs. Green’s injuries prevented her from continuing to work on

the assembly line at General Motors (GM) and beginning in 1991,

she began working as a GM decal assembler (i.e., a person who

attaches invoices to automobiles).      On August 27, 1991, while

working as a decal assembler, she sustained additional injuries

including severe back injuries requiring several surgeries and

rendering her unable to work.

     On August 6, 1992, Mrs. Green filed a claim for Social

Security benefits, and on December 17, 1993, began receiving such

benefits relating to the injuries sustained at GM.      Mrs. Green

also filed, with the State of California’s Workers’ Compensation

Appeals Board, a claim against GM for these injuries.      At the

time of trial, however, Mrs. Green had not received any workmen’s

compensation benefits.

     On November 12, 1996, Mrs. Green obtained a default judgment
                               - 3 -

(the judgment) against Ms. Perez for $166,013.     On March 14,

1997, Ms. Perez filed a Chapter 7 bankruptcy petition in the U.S.

Bankruptcy Court, Central District of California.     Mrs. Green

filed a proof of claim in Ms. Perez’s bankruptcy proceeding but

did not receive any funds relating to the judgment.

     Petitioners, on their 1997 return, claimed a $166,013

casualty loss.   Petitioners also attached to their 1997 return a

document titled “Election to Forgo The Carryback Period Under

172(b)(3) of Internal Revenue Code NOL Carryforward”.     This

document set forth petitioners’ intention to claim an annual

$11,068 (i.e., from 1997 through 2011) NOL carryforward.

     Petitioners filed Forms 1040, U.S. Individual Income Tax

Return, relating to 2000 and 2001.     On line 20a they reported

Social Security benefits of $12,258 and $12,708, respectively.

Petitioners did not, however, report these benefits as gross

income on line 20b of either return.     Petitioners claimed an

$11,068 NOL carryforward on line 21 of each of their 2000 and

2001 returns.

     On November 10, 2003, and January 26, 2005, respectively,

respondent issued petitioners a notice of deficiency relating to

2001 and 2000.   In the notice, respondent determined that the

Social Security benefits were taxable and petitioners were not

entitled to the NOL carryforwards.     On February 11, 2004, and

March 14, 2005, petitioners, while residing in Moorpark,
                               - 4 -

California, filed their petitions relating to 2001 and 2000,

respectively.   On July 14, 2005, the Court granted respondent’s

motion to consolidate docket Nos. 2475-04 and 4970-05 for

purposes of trial, briefing, and opinion.

                              OPINION

     Section 861 requires the inclusion in gross income of up to

85 percent of Social Security benefits received.   See Reimels v.

Commissioner, 123 T.C. 245, 247-248 (2004), affd. 436 F.3d 344

(2d Cir. 2006).   In 2000 and 2001, Mrs. Green received Social

Security benefits but, contrary to the mandate of section 86, did

not report these benefits as gross income.   Petitioners contend

that the Social Security benefits paid to Mrs. Green in 2000 and

2001 were paid in lieu of workmen’s compensation, and thus,

pursuant to section 104, are excludable from gross income.2

Section 104 states that gross income shall not include those

“amounts received under workmen’s compensation acts as

compensation for personal injuries or sickness”.   Sec. 104(a)(1).

Section 1.104-1(b), Income Tax Regs., excludes from income those

payments received “under a statute in the nature of a workmen’s

compensation act which provides compensation to employees for


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
     2
        Sec. 7491(a) is applicable. Our conclusions, however,
are based on a preponderance of the evidence, and thus the
allocation of the burden of proof is immaterial. See Martin Ice
Cream Co. v. Commissioner, 110 T.C. 189, 210 n.16 (1998).
                                - 5 -

personal injuries or sickness incurred in the course of

employment.”    Simply put, title II of the Social Security Act

(the Act) is not “in the nature of a workmen’s compensation act.”

The Act allows for disability payments to individuals regardless

of whether the individual was injured “in the course of

employment”.    See 42 U.S.C. sec. 423(d)(1)(A) (2000); cf. Norris

v. Commissioner, T.C. Memo. 2001-152, affd. 46 Fed. Appx. 582

(9th Cir. 2002) (holding that a statute is not considered to be

in the nature of a workmen’s compensation act if it allows for

disability payments for any reason other than on-the-job

injuries).    Accordingly, we sustain respondent’s determinations

relating to the Social Security benefits.    Sec. 86(a).

     Petitioners contend that they are entitled, pursuant to

sections 165 and 172, to deduct losses relating to the judgment.

Section 165 allows a deduction for any loss sustained during the

taxable year and not compensated for by insurance or otherwise.

Sec. 165(a).    The deduction, however, is limited to those losses

incurred in a trade or business, in any transaction entered into

for profit, or as a result of a fire, storm, theft, or other

casualty.    See sec. 165(c)(1), (2), and (3).   Petitioners’

claimed loss was not incurred in a trade or business or in a

transaction entered into for profit (i.e., the injuries were

incurred while shopping for groceries).    Accordingly, we sustain

respondent’s determinations that petitioners are not entitled to
                                 - 6 -

section 165 deductions.   Id.    We also note that petitioners do

not have a basis in the judgment.    As a result, petitioners are

not entitled to a section 166 worthless debt deduction.       See sec.

166(a) and (b); sec. 1.166-1(e), Income Tax Regs.

     Contentions we have not addressed are irrelevant, moot, or

meritless.

     To reflect the foregoing,



                                              Decisions will be entered

                                         for respondent.
