                                  T.C. Memo. 2020-34



                            UNITED STATES TAX COURT



                    MARK ALAN STAPLES, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 6560-18.                              Filed March 11, 2020.



      Mark Alan Staples, pro se.

      Michael Thomas Garrett, Lindsey J. Nicolette, and Matthew A. Houtsma,

for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      COPELAND, Judge: In a notice of deficiency dated January 8, 2018, and

pursuant to section 6212(a),1 respondent determined a deficiency of $1,635 in


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                         -2-

[*2] Federal income tax for petitioner’s 2015 taxable year. After concessions,2 the

issue for decision is whether petitioner is entitled to a loss deduction on account of

his Federal Employees Retirement System disability annuity (FERS annuity)

benefits being reduced by the amount he received as Social Security Disability

Insurance (SSDI) benefits. We hold that he is not entitled to a loss deduction.

                                FINDINGS OF FACT

      Some facts have been stipulated and are so found. Petitioner resided in

Albuquerque, New Mexico, when he timely filed his petition. Petitioner was

employed as a primary patent examiner for the U.S. Patent and Trademark Office,

an agency of the Department of Commerce, until a disability forced him into

retirement. His retirement began November 13, 2012.

      Petitioner’s FERS disability application was finalized on January 14, 2013,

with payments due from an effective date of November 14, 2012, onward. In

connection with granting the FERS annuity, the Office of Personnel Management

(OPM) instructed petitioner to apply for SSDI benefits, and petitioner complied.


      1
       (...continued)
Revenue Code (Code) in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
      2
        As noted infra, the notice of deficiency giving rise to this action related to
two items of unreported taxable income. Petitioner conceded both in the
stipulation of facts and at trial.
                                         -3-

[*3] At some point thereafter, the Social Security Administration (SSA) awarded

petitioner a monthly SSDI benefit of $1,654, which, according to a letter from

OPM, was effective March 1, 2012.

      In response to petitioner’s receipt of SSDI benefits, OPM initially reduced

his monthly FERS annuity by 100% of his monthly SSDI benefits for the months

in which he received both. Beginning December 1, 2013, OPM recomputed

petitioner’s FERS annuity, resulting in a monthly reduction equal to 60% of his

monthly SSDI benefits. On or about the time when petitioner turned 62, and in

accordance with 5 U.S.C. sec. 8452(b)(1) (2012), OPM again recomputed

(effective August 14, 2015) his FERS annuity using an amount that essentially

represented the annuity he would have received if he had continued working until

the day before his 62d birthday and had retired under the FERS nondisability

provisions. After OPM’s August 14, 2015, recomputation, no further reduction

occurred to petitioner’s FERS annuity.

      Petitioner requested that OPM reconsider its initial computation of his

FERS annuity. By letter dated November 19, 2015, OPM affirmed its initial

decision and stated that the affirmation represented its “final decision” but that

petitioner had the right to appeal to the Merit Systems Protection Board (MSPB).

It is unclear whether petitioner did appeal to the MSPB.
                                         -4-

[*4] On his 2015 Federal income tax return filed March 26, 2016, petitioner

reported (1) taxable interest income of $1, (2) SSDI benefits of $29,723, (3) FERS

annuity benefits of $23,650, and (4) retirement benefits of $3,325 from an

retirement account maintained at State Street Retiree Services. Petitioner is a cash

basis taxpayer. He did not claim any loss deduction on his return.

      Respondent received third-party reporting that during 2015 petitioner

additionally received (1) $10 in interest income from Nusenda FCU (Nusenda) and

(2) $4,648 in distributions from a retirement account maintained with PNC Bank

National Association (PNC), from which PNC withheld and remitted $929 to the

Internal Revenue Service (IRS). The third-party information prompted respondent

to send petitioner a Notice CP2000, dated June 19, 2017, proposing changes to his

2015 return, reflecting an outstanding balance due of $742 and allowing him 30

days to respond (i.e., by July 19, 2017).

      Before the expiration of the 30-day deadline, petitioner responded in writing

to respondent (1) conceding that he had indeed received the referenced interest

income from Nusenda and retirement distribution from PNC, less the remitted

withholding, but (2) contesting whether the additional income raised his overall

tax liability, and (3) attaching a check for $742 dated July 17, 2017. Petitioner

also apologized, citing his serious illness and incapacitation as the reasons for his
                                          -5-

[*5] oversights and omissions. Respondent treated petitioner’s check as a deposit

and did not take it into account when determining petitioner’s deficiency. Despite

petitioner’s concession, he continued to challenge whether the inclusion of the

additional income should raise his overall tax liability, asserting that the reduction

of his FERS annuity constituted a loss for which he should be able to claim a

deduction. Petitioner filed Form 1040X, Amended U.S. Individual Income Tax

Return, dated September 19, 2017, through which he advanced his loss theory.

Respondent has not processed or accepted petitioner’s amended return and does

not agree or stipulate that petitioner’s amended tax return accurately reflects his

income tax liability for the 2015 taxable year.

      Overall, petitioner remained dissatisfied with respondent’s rationale for

raising his overall tax liability. Petitioner sent respondent a letter, dated

November 30, 2017, expressing his confusion regarding conversations with and

letters received from respondent: “I did not know what further information or

action the IRS was seeking from me.” The letter furthered his argument that he

suffered a loss that his tax return should have reflected. “OPM took -$7,939 of my

SSA income away from my federal pension/annuity * * * even though 93% of

SSA income had been earned in my private sector employment withholdings * * *.

[M]y income loss in 2015 should not have been taxed * * *. I decided to amend
                                        -6-

[*6] my 2015 tax return as I overpaid my taxes by not accounting for my income

loss.” Petitioner indicated that the IRS allows deductions for gambling losses,

casualty losses, disaster losses, theft losses, and business losses and should allow

his FERS annuity loss.

      Respondent sent petitioner a notice of deficiency dated January 8, 2018,

indicating additional income of $4,658 and a resulting deficiency of $1,635, the

same amounts as reflected in the Notice CP2000. Without taking into account

petitioner’s deposit, the amount due was $742 after applying the additional

withholding of $929 and an interest charge of $36.

                                     OPINION

A.    Jurisdiction

      We are a court of limited jurisdiction. See sec. 7442; Burns, Stix Friedman

& Co. v. Commissioner, 57 T.C. 392, 396 (1971). We have only the jurisdiction

which is conferred on us by statute. Burns, Stix Friedman & Co. v.

Commissioner, 57 T.C. at 396; see also sec. 7442. As a result, we lack general

equitable powers. Commissioner v. McCoy, 484 U.S. 3, 7 (1987). To the extent

petitioner disputes OPM’s calculations of his FERS annuity, this Court does not

have jurisdiction to decide employee benefit entitlement issues that fall within the

purview of various departments and agencies of the U.S. Government. See Norris
                                        -7-

[*7] v. Commissioner, T.C. Memo. 2001-152, 2001 WL 715854, at *2, aff’d, 46 F.

App’x 582 (9th Cir. 2002).

      Our jurisdiction to consider tax matters generally depends on the existence

of a validly issued notice of deficiency and a timely filed petition. Secs. 6212 and

6213; Rule 13(a); Monge v. Commissioner, 93 T.C. 22, 27 (1989); Normac, Inc. v.

Commissioner, 90 T.C. 142, 147 (1988). We may then redetermine the amount of

the deficiency for the taxable period at issue in the notice. See secs. 6212, 6213,

and 6214; see also Hyde v. Commissioner, T.C. Memo. 2011-131, 2011 WL

2436914, at *3. Ordinarily, we will not look behind the notice of deficiency to

examine the circumstances surrounding the determination. See Petzoldt v.

Commissioner, 92 T.C. 661, 687-688 (1989). Instead, we conduct a proceeding de

novo and redetermine a taxpayer’s liability on the basis of the evidence presented

during the deficiency proceeding, not on whatever record was developed at the

administrative level before the notice of deficiency was issued. See Greenberg’s

Express, Inc. v. Commissioner, 62 T.C. 324, 327-328 (1974).

      We also have jurisdiction to determine the amount of any overpayment a

taxpayer made for a year that is properly before the Court on a petition to

redetermine a deficiency. Sec. 6512(b)(1). If we determine that there is an

overpayment and further determine the amount of the overpayment that is
                                          -8-

[*8] refundable in accordance with section 6512(b)(3), the overpayment amount

thus determined “shall, when the decision of the Tax Court has become final, be

credited or refunded to the taxpayer.” Sec. 6512(b)(1). Petitioner claims he is

entitled to such a refund. Because this matter involves a validly issued notice of

deficiency and a timely filed petition, we have jurisdiction to determine the merits

of both respondent’s proposed deficiency and petitioner’s refund claim.

B.    Burden of proof

      A taxpayer bears the burden of proving that he is entitled to the deductions

claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992). The burden of proof shifts to the Commissioner under certain

circumstances when a taxpayer presents credible evidence with respect to any

factual issue relevant to ascertaining the taxpayer’s liability. Sec. 7491(a).

Petitioner does not contend, nor does the evidence establish, that the burden shifts

to respondent under section 7491(a) as to any issue in this case.

C.    Whether petitioner is entitled to a deduction because his FERS annuity
      benefits were reduced by his receipt of SSDI

      Petitioner contends that the reduction of his FERS annuity was a loss which

he should be able to account for by deducting it from his income. He claims the

loss is akin to a gambling loss, casualty loss, disaster loss, theft loss, or business
                                        -9-

[*9] loss. However, petitioner did not experience a gambling, casualty, disaster,

theft, or business loss in 2015. Instead, he did not receive additional anticipated

income which, if received, would have been subject to tax. There was no receipt

of that income and thus no tax and likewise no applicable deduction. We disagree

with petitioner’s contention because he cannot deduct a loss for unrealized

income.

       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. secs. 8451 and 8452

(2012). It is a benefit not enjoyed by non-Federal employees who become

disabled. In a similar situation, 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 * * * [SSDI] program provides benefits to

a person with a disability so severe that she is ‘unable to do [her] previous work’

and ‘cannot . . . engage in any other kind of substantial gainful work which exists

in the national economy.’” (quoting 42 U.S.C. sec. 423(d)(2)(A) (1994) (second

alteration in original))).

       The statute governing petitioner’s FERS annuity benefits requires that his

FERS annuity be reduced by his entitlement to SSDI benefits. See 5 U.S.C. sec.

8452(a)(2)(A)(i) (“For any month in which an annuitant is entitled both to an
                                        - 10 -

[*10] annuity under this subchapter * * * and to a disability insurance benefit

under section 223 of the Social Security Act, the annuitant’s annuity for such

month (as so computed) shall * * * be reduced by 100 percent of the annuitant’s

assumed disability insurance benefit for such month[.]”).

      Petitioner is not the first person unhappily affected by the FERS-SSDI

offset rule; it is an issue that has been addressed and decided in many previous

cases. See Anderson v. Office of Pers. Mgmt., 713 F. App’x 1003 (Fed. Cir.

2017) (holding that a FERS disability retirement annuity under 5 U.S.C. sec. 8452

is subject to offset by SSDI benefits); Johnston v. Office of Pers. Mgmt., 70

M.S.P.R. 109, 113-114 (M.S.P.B. 1996) (holding that the plain text of 5 U.S.C.

sec. 8452(a)(2)--and the legislative history surrounding it--support a reduction in

the FERS disability annuity based on the SSDI benefit as determined under section

223 of the Social Security Act), aff’d without published opinion, 99 F.3d 1160

(Fed. Cir. 1996).

      In addition, the congressional record reflects that the FERS-SSDI offset rule

is no accident. While the criteria for a FERS disability annuity and SSDI benefits

are different, the creation of a FERS disability annuity created the potential for

overlap; in that regard, the Senate explained: “[T]he * * * [FERS] benefit payable

to the Social Security disabled must take into account the amount of the Social
                                       - 11 -

[*11] Security benefit to avoid being overly compensated.” S. Conf. Rept. No. 99-

302, at 142 (1986).

      But as we noted supra, we lack jurisdiction to decide employee benefit

entitlement issues that fall within the purview of the various Federal agencies.

However, we have jurisdiction under sections 6213 and 6512(b)(1) to redetermine

an income tax deficiency or to determine an overpayment by petitioner. The sole

issue before us is whether the reduction to petitioner’s FERS annuity was a loss

for which he is entitled to a deduction in the amount of the reduction. In other

words, petitioner seeks a deduction for an amount of income which he expected to

realize but did not.

      Petitioner is a cash basis taxpayer. It is well established that no deduction is

allowed under any Code section for the loss of unrealized income by a cash basis

taxpayer. See, e.g., Hort v. Commissioner, 313 U.S. 28, 32-33 (1941) (holding

that since unrealized rent is not includable in cash method taxpayer’s gross

income, taxpayer has no grounds for deduction of the rental payments he failed to

realize); 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.
                                      - 12 -

[*12] Marks v. Commissioner, 390 F.2d 598, 599 (9th Cir. 1968), aff’g T.C.

Memo. 1966-62. We therefore find petitioner’s contention without merit.

      To reflect the foregoing and petitioner’s concessions,


                                               Decision will be entered under

                                      Rule 155.
