                         T.C. Memo. 2009-270



                       UNITED STATES TAX COURT



        KENNETH A. AND CYNTHIA A. SEAVER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2749-08.               Filed November 25, 2009.



     Kenneth A. and Cynthia A. Seaver, pro sese.

     John W. Strate, for respondent.



                         MEMORANDUM OPINION


     HALPERN, Judge:    Respondent has determined a deficiency of

$4,187 in petitioners’ Federal income tax for 2005.   After

concessions, the issues remaining for decision are (1) whether

petitioners may exclude from gross income $12,441 of Social

Security disability benefits received by Cynthia A. Seaver

(petitioner) and (2) whether petitioners may offset $16,614 of
                                 - 2 -

discharge of indebtedness income with “the loss that precipitated

the debt forgiveness.”1

     Some facts have been stipulated and are so found.    The

stipulation of facts, with accompanying exhibits, is incorporated

herein by this reference.    We need find few facts in addition to

those stipulated and shall not, therefore, separately set forth

our findings of fact.     We shall make additional findings of fact

as we proceed.

     Unless otherwise stated, all section references are to the

Internal Revenue Code in effect for 2005, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

     Petitioners bear the burden of proof.    See Rule 142(a).2




     1
      Other adjustments are purely computational and require no
further discussion by us.
     2
      Sec. 7491(a)(1) provides that, if a taxpayer offers
credible evidence with respect to an issue, the burden of proof
with respect to the issue is on the Commissioner. See also Rule
142(a)(2). Sec. 7491(a)(1) applies only if the taxpayer complies
with the relevant substantiation requirements in the Internal
Revenue Code, maintains all required records, and cooperates with
the Commissioner with respect to witnesses, information,
documents, meetings, and interviews. Sec. 7491(a)(2)(A) and (B).
The taxpayer bears the burden of proving compliance with the
conditions of sec. 7491(a)(2)(A) and (B). E.g., Ruckriegel v.
Commissioner, T.C. Memo. 2006-78. Petitioners neither propose
facts to support their compliance with the conditions of sec.
7491(a)(2)(A) and (B) nor persuasively argue that respondent
bears the burden of proof on any issues because of sec.
7491(a)(1). We therefore conclude that sec. 7491(a)(1) does not
apply in this case.
                               - 3 -

                            Background

Introduction

     Petitioners, husband and wife, made a joint return of income

for 2005.   At the time they filed the petition, they resided in

California.

Social Security Disability Benefits

     In 1996, petitioner was injured at work.   The injury was

totally disabling.   In April 1997, because of her disability, she

began receiving monthly benefit payments from Hartford Insurance

Co. under her employer’s long-term disability insurance plan (LTD

benefits and the LTD plan, respectively).   In March 1999, she was

awarded Social Security disability benefits (SSD benefits), which

consisted of a lump sum for the period since her injury and

future monthly payments.   Upon that award of SSD benefits,

Hartford Insurance Co. reduced petitioner’s monthly LTD benefits

by the amount of her monthly SSD benefits and required her to

repay an amount because of the lump-sum benefit she had been

awarded.

     Although petitioners reported $14,637 of taxable SSD

benefits on their 2005 Form 1040, U.S. Individual Income Tax

Return, respondent has conceded that they should have reported

only $12,441 (the disputed SSD benefits).   Petitioners argue that

the disputed SSD benefits should be excluded from their gross

income.
                                     - 4 -

Theft Loss Deduction

      In 1999, petitioners purchased a house in California.           The

seller failed to disclose that the property did not drain

properly.      Because of heavy rain, flooding in the house caused

approximately $30,000 in damages.        Petitioners engaged attorney

Stuart Safine (Mr. Safine) to take action against the seller to

recoup their losses from the flooding.          Mr. Safine promised

petitioners that, if they prevailed, they would be awarded legal

fees.

      As a result of arbitration, petitioners incurred legal fees

to Mr. Safine of approximately $80,000, and they charged $16,614

of those fees to their bank credit cards.          Although petitioners

did ultimately prevail in arbitration, the arbitrator did not

award them legal fees.      Petitioners disputed their $16,614 credit

card liability on the ground that Mr. Safine’s conduct towards

them had been “false and fraudulent”.          In 2005, the banks forgave

the entire $16,614 liability.

                               Discussion

I.   Social Security Disability Benefits

      A.     Petitioners’ Argument

      Petitioners assert that they should be allowed to exclude

the disputed SSD benefits, or, in the alternative, to deduct

them.      They argue that, because of the award of SSD benefits,

they forwent tax-free LTD benefits.          Under the LTD plan,
                                  - 5 -

petitioner received nontaxable benefits, but she was not entitled

to receive benefits in excess of those the LTD plan provided.

Also under the LTD plan, other benefits petitioner received

(e.g., SSD benefits) reduced her LTD benefits.     Petitioners thus

argue that, if petitioner received LTD benefits tax free, and she

received SSD benefits in lieu of LTD benefits, then she should

receive the SSD benefits tax free as well.

     In the alternative, petitioners assert that Internal Revenue

Service Publication 915 (2005), Social Security and Equivalent

Railroad Retirement Benefits (Pub. 915), grants them the right to

deduct an amount equal to any SSD benefit they had to repay to a

third party.   Pub. 915 states at 14:     “If you received a lump-sum

payment from * * * [the Social Security Administration] and you

had to repay the * * * insurance company for the disability

payments, you can take an itemized deduction for the part of the

payments you included in gross income in the earlier year.”

     B.   Respondent’s Argument

     Respondent’s argument is straightforward:     “Social Security

disability benefits are taxable. * * * Therefore, in this case,

petitioners are required to report Social Security disability

payments as taxable income.”   Respondent relies on section

86(a)(1), which provides that “gross income for the taxable year

of any taxpayer * * * includes social security benefits”.
                                 - 6 -

     C.   Analysis

     Section 86 requires the inclusion of Social Security

benefits in gross income.     In Reimels v. Commissioner, 123 T.C.

245, 247 (2004), affd. 436 F.3d 344 (2d Cir. 2006), we set forth

the following history and description of section 86:

          Before 1983, Social Security benefits were
     excluded from the recipient’s gross income. See, e.g.,
     Rev. Rul. 70-217, 1970-1 C.B. 13. This longstanding
     practice ended with the enactment of section 86 as part
     of the Social Security Amendments of 1983, Pub. L.
     98-21, sec. 121(a), 97 Stat. 80. The legislative
     history indicates that Congress made this change to
     shore up the solvency of the Social Security trust
     funds and to treat “more nearly equally all forms of
     retirement and other income that are designed to
     replace lost wages”. S. Rept. 98-23, at 25 (1983),
     1983-2 C.B. 326, 328.

          Section 86 requires the inclusion in gross income
     of up to 85 percent of Social Security benefits
     received, including Social Security disability
     insurance benefits. * * *

Thus, absent some exception, petitioners must include the

disputed SSD benefits in their gross income for 2005.

     Petitioners acknowledge that, under the LTD plan, “LTD

benefits * * * are compared to ‘other benefits’ * * * [including

SSD benefits] with LTD paying the remainder up to 60% of salary

at the time of the injury.”    Thus, under the LTD plan, petitioner

was entitled to disability payments only on top of other benefits

(including SSD benefits).   In other words, if she had not

received an award of SSD benefits, her LTD plan payments for 2005

would have been greater (up to 60 percent of her salary), and
                                - 7 -

(she claims) none of those payments would have been taxable

because of section 104(a)(3).   While that may well be, the LTD

plan entitled her to payments only to the extent she did not

receive (among other benefits) SSD benefits.   She was thus

insured under the LTD plan against the risk of not receiving SSD

benefits and other benefits up to the amount of 60 percent of her

salary.   That Congress has chosen to allow the tax-free receipt

of benefits such as those paid under the LTD plan and to tax SSD

benefits under section 86 is not a choice we are free to

question.   Petitioners’ arguments to the contrary are of no

avail.3

     D.   Conclusion

     Petitioners may not exclude the disputed SSD benefits from

gross income and are not entitled to any deduction with respect

to those benefits.




     3
      Petitioners rely on Pub. 915 to support the proposition
that, when the recipient of SSD benefits is required to repay
them to a third party as a result of a contractual agreement, she
is (or should be) entitled to a deduction. Yet petitioners
overlook that Pub. 915 allows a deduction only “for the part of
the payments you included in gross income in the earlier year.”
Because petitioners argue that LTD benefits were not (and would
not be) taxable because of sec. 104(a)(3), Pub. 915, by its
terms, does not help them. Pub. 915 addresses a situation in
which the recipient would be taxed twice on what is, in effect,
one payment. That is not petitioners’ situation.
                                   - 8 -

II.   Theft Loss Deduction

      A.   Petitioners’ Argument

      Petitioners concede that they have discharge of indebtedness

income under section 61(a)(12).      Petitioners do not contend that

any of the exceptions in section 108(a) applies but argue instead

that they “should be able to offset that income with the loss

that precipitated the debt forgiveness.”     Petitioners assert that

the attorney’s fees they paid to Mr. Safine are a deductible

theft loss because he misrepresented the likelihood of obtaining

an attorney’s fee award in arbitration.

      B.   Respondent’s Argument

      Respondent asserts that petitioners are not entitled to a

theft loss deduction to offset their $16,614 of cancellation of

indebtedness income.    Respondent argues that petitioners have not

established that a theft loss has occurred.     Respondent also

asserts that even if Mr. Safine’s alleged misrepresentation

caused petitioners to sustain a theft loss, any such loss would

not be a loss in 2005, the year at issue.

      C.   Analysis

      Petitioners unconvincingly argue that they are entitled to a

theft loss deduction under section 165.     Section 165(a) and (e)

allows a loss deduction for theft losses, which are treated as

sustained in the year discovered by the taxpayer.     Respondent

argues that petitioners have failed to show either that they
                                - 9 -

sustained a theft loss or that they discovered it in 2005.    We

agree.

     Petitioners presented insufficient evidence to prove that a

theft loss occurred.    Petitioners provided only uncorroborated

testimony as to the reason the banks discharged their

indebtedness.    Petitioners argue on brief:

     Debt was discharged voluntarily by the banks after we
     made that [sic] claim that we paid for services that
     were fraudulent or misrepresented. * * * The credit
     agreements with the banks included a provision for
     reversal of charges for damaged goods, fraud or failure
     to perform.

Petitioners have failed to provide us with their credit card

agreements with the banks or with anything beyond their own

testimony as to why the banks discharged the indebtedness.

     Moreover, petitioners have provided us with letters from an

attorney apparently representing them in an attempt to recoup

their fees from Mr. Safine’s estate.    Those letters indicate that

that litigation was not ended adversely to petitioners until

2006.    Section 1.165-1(d)(3), Income Tax Regs., provides with

respect to the year in which a theft loss is sustained:

     [I]f in the year of discovery there exists a claim for
     reimbursement with respect to which there is a
     reasonable prospect of recovery, no portion of the loss
     with respect to which reimbursement may be received is
     sustained, for purposes of section 165, until the
     taxable year in which it can be ascertained with
     reasonable certainty whether or not such reimbursement
     will be received.
                             - 10 -

If there was a theft under local law, of which we are not

convinced, petitioners have failed to prove 2005 is the proper

year for a corresponding deduction.    That is a sufficient reason

to deny any deduction.

     D.   Conclusion

     Petitioners are not entitled to any theft loss deduction in

2005.


                                      Decision will be entered

                               under Rule 155.
