                  T.C. Summary Opinion 2001-154



                     UNITED STATES TAX COURT



     VIRGILIO DELA CRUZ & MILAGROS DELA CRUZ, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1414-00S.                Filed September 25, 2001.



     Milagros Dela Cruz, pro se.

     H. Clifton Bonney, Jr., for respondent.



     DINAN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in
                               - 2 -

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

     Respondent determined a deficiency in petitioners’ Federal

income tax of $2,968 for the taxable year 1997.

     The issues for decision are:   (1) Whether certain Social

Security disability benefits are includable in petitioners’ gross

income; and (2) whether petitioners are entitled to a deduction

for attorney’s fees incurred in obtaining the Social Security

benefits.1

     Some of the facts have been stipulated and are so found.

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.    Petitioners resided in

Daly City, California, on the date the petition was filed in this

case.

     During 1997, petitioner wife (Ms. Dela Cruz) received a

lump-sum payment of $11,316 for Social Security disability

benefits attributable to 1995 and 1996.    Ms. Dela Cruz personally

received $8,487 of this amount, and the remaining $2,829 was

given to her lawyer.   In addition, Ms. Dela Cruz’s daughter,



     1
      Respondent has made two concessions. First, respondent has
accepted an amended return filed by petitioners but not reflected
in the notice of deficiency. The amended return reflects taxable
income of $42,503, while the notice’s adjustments were made to
taxable income of $43,289. Respondent concedes the difference.
Second, respondent concedes a mathematical error in the notice:
The “total increase” in income in the notice should read $9,850
rather than $9,856.
                                - 3 -

Nerilyn A. Dela Cruz, received Social Security benefits of

$3,931.    Petitioners filed a joint Federal income tax return in

1997 and reported $70,601 in adjusted gross income in that year,

excluding the Social Security benefits.     Respondent issued

petitioners a statutory notice of deficiency with the

determination that they had unreported income of $9,619 from

these Social Security benefits.2

     The inclusion of Social Security benefits in gross income is

governed by section 86.    Social Security disability benefits are

treated in the same manner as other Social Security benefits.

Sec. 86(d)(1); Thomas v. Commissioner, T.C. Memo. 2001-120.

Taxpayers who file a joint return and whose modified adjusted

gross income plus half of the Social Security benefits received

is greater than $32,000 must include a portion of the benefits in

their income.    Sec. 86(a) through (c).   Benefits generally are

included in income in the year in which they are received, even

if the benefits are attributable to prior years.     Secs. 86(e),

451(a).    The portion included in income, never exceeding 85

percent, varies according to a formula set forth in section

86(a).    Petitioners had modified adjusted gross income of at

least $70,601, see sec. 86(b)(2), and received benefits of

$11,316.    Because their modified adjusted gross income plus half



     2
      Respondent also determined that petitioners had unreported
income of $38 in dividends. Petitioners concede this amount.
                                - 4 -

their benefits exceeds $44,000 by at least $32,259, they must

include in income 85 percent of the benefits.     See sec. 86(a),

(c).    Thus, respondent is correct in his determination that

petitioners must include in income 85 percent of the Social

Security disability benefits, or $9,619.

       Petitioners’ primary argument is that the payments should

not be included in income because they are disability payments.

As noted above, however, Social Security disability benefits are

treated in the same manner as other Social Security benefits and

must be included in income to the extent required under section

86.    See Thomas v. Commissioner, supra.

       A portion of the benefits was paid directly to Ms. Dela

Cruz’s lawyer.    As a general rule, income is taxed to the person

earning it even if the right to receive the income is

contractually assigned to another person prior to its being

earned.    Lucas v. Earl, 281 U.S. 111 (1930); Kenseth v.

Commissioner, 114 T.C. 399 (2000), affd. 259 F.3d 881 (7th Cir.

2001); Banks v. Commissioner, T.C. Memo. 2001-48; see also S.

Rept. 98-23, 26 (1983), 1983-2 C.B. 328 (stating that the total

amount of Social Security benefits received by a taxpayer is not

to be reduced by attorney’s fees).      Under this principle, the

Social Security benefits paid to Ms. Dela Cruz are includable in

income despite the fact that her lawyer was paid directly by the

Social Security Administration.
                                - 5 -

     Under section 212(1), taxpayers are “allowed as a deduction

all the ordinary and necessary expenses paid or incurred during

the taxable year * * * for the production or collection of

income”.    The amount of the deduction is limited to expenses

related to the collection of income which is required to be

included in gross income for Federal income tax purposes.       Sec.

265(a)(1); sec. 1.212-1(a)(1), Income Tax Regs.     Thus,

petitioners are entitled to deduct 85 percent of the legal

expenses incurred in securing the Social Security disability

benefits (the percentage of the benefits which are included in

income).    See Andrews v. Commissioner, T.C. Memo. 1992-668.3

     We briefly note that the Social Security benefits paid to or

for Ms. Dela Cruz’s daughter Nerilyn are not at issue.      This

amount was not determined to be includable in petitioners’ gross

income by respondent in the notice of deficiency:    Only the

$11,316 in benefits paid with respect to Ms. Dela Cruz were

included.


     3
      This deduction is a miscellaneous itemized deduction
subject to the 2-percent floor of sec. 67(a). According to the
amended return, petitioners have other itemized deductions in the
total amount of $20,148. There are few details in the notice of
deficiency concerning each of the individual deductions
comprising this total amount, and neither party introduced into
evidence a copy of petitioners’ Federal income tax return for
1997. However, the notice does state that petitioners claimed
miscellaneous itemized deductions of $1,100. This shows that a
deduction for legal fees was not taken on the original return.
No such deduction was taken on the amended return either, which
increased petitioners’ total itemized deductions by $786 “to
report additional home mortgage interest.”
                                - 6 -

    Reviewed and adopted as the report of the Small Tax Case

Division.

    To reflect the foregoing,

                                        Decision will be entered

                                under Rule 155.
