                               T.C. Memo. 2013-246



                         UNITED STATES TAX COURT



                  ALVIN D. CRAIGHEAD, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12415-12.                        Filed October 29, 2013.



      Alvin D. Craighead, pro se.

      Britton G. Wilson, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      PARIS, Judge: Respondent issued to petitioner a notice of deficiency for

the 2009 tax year. In response, petitioner filed a petition on May 16, 2012, raising

the defense that he was not required to file a tax return for the 2009 tax year.

After preparing his own self-assessment, petitioner maintains that he was not

required to file a Federal tax return because his gross income was below the filing
                                         -2-

[*2] threshold. Further, petitioner contends that respondent’s determination was

incorrect because he did not remember receiving the income reflected on

respondent’s 2009 substitute for return, prepared under section 6020.1

      After concessions, the issues for decision are: (1) whether petitioner was

required to file a Federal tax return for the 2009 tax year; (2) the amount of

petitioner’s taxable income for the 2009 tax year; and (3) whether petitioner was

entitled to a making work pay credit for the 2009 tax year.2

                                FINDINGS OF FACT

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

facts, the exhibit attached to the stipulation of facts, and the exhibits admitted at

trial and by order are incorporated herein by this reference. Petitioner resided in

Oklahoma when the petition was filed.

      On October 24, 2011, respondent prepared for petitioner a substitute for

return for 2009 under section 6020(b). On February 22, 2012, respondent issued

petitioner a notice of deficiency for the 2009 tax year, determining that petitioner



      1
       Unless otherwise indicated, all section references are to the Internal
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
      Respondent conceded petitioner is not liable for additions to tax under sec.
6651(a)(1) and (2) for the 2009 tax year.
                                          -3-

[*3] received wages of $7,571, Social Security benefits of $15,308, unemployment

compensation of $9,450, royalties of $354, and an annuity distribution of $360 in

the 2009 tax year.3 Respondent supported all of the income determinations

through third-party documentation except for the royalties. Respondent supported

the royalties with information provided on a Form 1099-MISC, Miscellaneous

Income, reflecting the name of the payer, but this Form was not directly entered

into evidence.4

      At trial petitioner did not remember most of the income received in the 2009

tax year. He remembered working for Terra Soil Farming, LLC, but could not

remember whether he received wages from the company in 2009. He recognized

that he owned a small amount of mineral rights but did not remember whether he

received royalties in tax year 2009. Petitioner remembered receiving

unemployment benefits but did not remember how much he received in the 2009

tax year. Petitioner did not remember receiving any retirement or annuity

distribution but did remember working for the company for whom the annuity was




      3
          All amounts are rounded to the nearest dollar.
      4
       As discussed below, petitioner admitted to owning the property for which
the royalties were paid.
                                        -4-

[*4] paid.5 Petitioner remembered receiving Social Security benefits, but disputed

the amount he received in 2009.6

      Respondent’s original 2009 substitute for return included $15,308 of Social

Security benefits. Respondent later determined that petitioner repaid $4,446 of the

Social Security benefits, thereby reducing his net Social Security benefits to

$10,862 for the 2009 tax year. Similarly, in addition to the $5,700 standard

deduction allowed on the original substitute for return, respondent later

determined at trial that petitioner was entitled to an additional $1,400 standard

deduction for the 2009 tax year because he was over the age of 65. As a result of

these subsequent determinations, respondent decreased petitioner’s 2009

deficiency from $2,734 to $58.

                                     OPINION

      The Commissioner’s determinations in a notice of deficiency are generally

presumed correct and the taxpayer bears the burden of proving that the

determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111,



      5
       The retirement income was paid in the form of an annuity distribution by
Principal Life Insurance for the benefit of Terra Renewal Services, Inc.
      6
       As discussed below, respondent conceded that petitioner received net
Social Security benefits lower than originally determined in the notice of
deficiency--aligning with petitioner’s testimony at trial.
                                        -5-

[*5] 115 (1933); United States v. McMullin, 948 F.2d 1188, 1192 (10th Cir.

1991). In unreported income cases the presumption of correctness does not attach

until the Commissioner has produced some substantive evidence demonstrating

the taxpayer received the unreported income. McMullin, 948 F.2d at 1192; see

also Erickson v. Commissioner, 937 F.2d 1548 (10th Cir. 1991), aff’g T.C. Memo.

1989-552. Respondent produced third-party evidence to establish that petitioner

received unreported income, and the presumption has attached. Further, petitioner

has not asserted that the burden has shifted, and in fact he has openly accepted the

burden.

      Section 6012 requires every individual who has gross income over a certain

amount to file an income tax return. An unmarried individual taxpayer must make

a return if he or she has gross income in excess of the sum of the exemption

amount plus the basic standard deduction applicable to that individual. See sec.

6012(a)(1)(A)(i). Further, the threshold amount is increased by an additional

standard deduction--as defined by section 63(c)(3)--if a single taxpayer is over the

age of 65 at the end of the tax year. See sec. 6012(a)(1)(B).

      Under section 151(a), an individual is allowed an income exemption as a

deduction when computing his or her taxable income. The exemption amount is

adjusted each year for inflation and was $3,650 for each 2009 tax year exemption.
                                        -6-

[*6] See sec. 151(d)(4); Rev. Proc. 2008-66, 2008-45 I.R.B. 1107. The exemption

amount is phased out when a taxpayer’s adjusted gross income exceeds a threshold

amount, which was $166,800 for the 2009 tax year. See sec. 151(d)(3); Rev. Proc.

2008-66, supra. As discussed below, petitioner’s adjusted gross income is below

$166,800 and his $3,650 personal exemption is not reduced for the 2009 tax year.

      Under section 63 an individual taxpayer who does not elect to itemize

deductions is allowed to deduct a standard amount--known as a standard

deduction--from his or her income. See sec. 63(b) and (c). An individual’s

standard deduction may be made up of several smaller components. See sec.

63(c)(1). Single taxpayers who do not itemize are generally allowed a basic

standard deduction, which was $5,700 for the 2009 tax year. Sec. 63(c)(1)(A);

Rev. Proc. 2008-66, supra. An additional standard deduction, which was $1,400

for the 2009 tax year, is allowed for single taxpayers who are not surviving

spouses and over the age of 65 before the end of the taxable year. See sec.

63(f)(1)(A). Petitioner testified that in 2009 he was over 65 and did not itemize

his deductions. Petitioner does not contend that he was entitled to any other

deductions provided in section 63(c)(1). Accordingly, he was entitled to a basic

standard deduction of $5,700 and an additional standard deduction of $1,400

because he was older than 65 at the end of the 2009 tax year.
                                        -7-

[*7] To summarize, for the 2009 tax year petitioner is entitled to a personal

exemption of $3,650 under section 151(a), a basic standard deduction of $5,700

under section 63(c)(1)(A), and an additional standard deduction of $1,400 under

section 63(f)(1)(A). The sum of these three amounts helps determine whether

petitioner was exempt from filing a Federal income tax return for the 2009 tax

year. See sec. 6012(a)(1)(A)(i) and (B). In other words, petitioner would not be

required to file a return if he received less than $10,750 of gross income in the

2009 tax year.

      Gross income means all income from whatever source derived, including

wages, royalties, pensions, annuities, and several other types of income. Sec. 61.

Respondent reconstructed petitioner’s gross income using information from third-

party returns and records. Respondent adequately supported the determination

that petitioner received $7,571 of wages from Terra Soil Farming, LLC, in the

2009 tax year by introducing third-party documentation. Respondent also showed

that petitioner received $354 of mineral royalties from Edward Oil Co. and a $360

annuity distribution from Principal Life Insurance on behalf of Terra Renewal

Services, Inc., in the 2009 tax year. Petitioner did not assert any reasonable

dispute of the third-party returns under section 6201(d) or otherwise meet his

burden of proving he did not receive the unreported income. Accordingly,
                                       -8-

[*8] petitioner’s gross income includes his wages, royalties, and an annuity

distribution for the 2009 tax year.

      Gross income for individual taxpayers also generally includes

unemployment compensation. Sec. 85(a). This includes any amount received

under a law of the United States or any State that is in the nature of unemployment

compensation. Sec. 85(b). For the 2009 tax year, however, a taxpayer is entitled

to exempt $2,400 of his or her unemployment compensation from gross income.

Sec. 85(c). In other words, a taxpayer is required to include only unemployment

compensation over $2,400 in his or her gross income. Respondent introduced

evidence to support the determination that petitioner received $9,450 of

unemployment compensation from the Oklahoma Employment Security

Commission in the 2009 tax year. After applying the exemption, petitioner’s gross

income includes $7,050 of unemployment compensation for the 2009 tax year.

      Generally gross income includes at least some portion of any Social

Security benefits received by a taxpayer. See sec. 86(a). However a taxpayer’s

gross income will not include any Social Security benefits if the sum of the

taxpayer’s modified adjusted gross income plus one half of his or her Social

Security benefits does not exceed a base amount. Sec. 86(b)(1). The base amount
                                         -9-

[*9] provided in section 86(b)(1)(B) for a single taxpayer was $25,000 for the

2009 tax year. Sec. 86(c)(1)(A).

      For this equation, Social Security benefits means any amount received by a

taxpayer by reason of entitlement to a monthly benefit under title II of the Social

Security Act. Sec. 86(d)(1)(A). The amount of Social Security benefits received

during any taxable year shall be reduced by any repayment made by a taxpayer

during the taxable year of a Social Security benefit previously received by the

taxpayer regardless of whether the benefit was received during the taxable year.

See sec. 86(d)(2). Third-party reporting originally reflected that petitioner

received a total of $15,308 in Social Security benefits, and certified transcripts

from the Social Security Administration later showed that petitioner repaid $4,446

of the benefits during the 2009 tax year.7 This means that petitioner received

Social Security benefits of $10,862 for purposes of section 86(b)(1)(A)(ii). One-

half of this amount is $5,431.

      Under section 86(b)(2), modified adjusted gross income means a taxpayer’s

adjusted gross income without regard to Social Security benefits but includes any

tax-exempt interest the taxpayer received. Petitioner did not have any adjustments


      7
       The “repayments” were actually withheld from Social Security benefits
before payment to petitioner.
                                       - 10 -

[*10] to his gross income, and therefore his adjusted gross income is equal to his

gross income. Further, petitioner did not receive any tax-exempt interest.

Accordingly, his modified adjusted gross income equals his gross income without

including any Social Security benefits. As discussed above, petitioner’s 2009

gross income includes $7,571 of wages, $354 of mineral royalties, $360 of annuity

income, and $7,050 of unemployment compensation--for a total modified adjusted

gross income of $15,335.

      The sum of one-half of petitioner’s Social Security benefits, $5,431, plus his

modified adjusted gross income, $15,335, equals $20,766.8 The base amount for a

single taxpayer is $25,000. Sec. 86(c)(1)(A). Accordingly, petitioner’s 2009

gross income does not include his Social Security benefits because under section

86(b), the sum of his modified adjusted gross income plus his received Social

Security benefits was less than the base amount.

      As a result, respondent has adequately supported the determination that

petitioner’s taxable income for the 2009 tax year was $15,335.9 This amount

exceeds his filing threshold of $10,750 computed under section 6012(a)(1)(A)(i)


      8
       Respondent’s opening brief reports two different sums for this equation:
an erroneous sum of $20,731 and the correct sum of $20,766.
      9
      As discussed above, petitioner’s gross income equaled his adjusted gross
income because he did not have any adjustments to his gross income. See sec. 62.
                                       - 11 -

[*11] and (B). Accordingly, petitioner was required to file a Federal tax return for

the 2009 tax year.

      Under section 36A(a), an eligible individual taxpayer is allowed a credit

against tax equal to the lesser of: (1) 6.2% of the taxpayer’s earned income, or (2)

$400. The credit--called the making work pay credit--starts to phase out when a

taxpayer’s modified adjusted gross income is more than $75,000.10 Sec. 36A(b).

Under sections 36A(d)(2) and 32(c)(2), earned income means wages, salaries, tips,

and other employee compensation. Earned income does not include pension or

annuity income. Sec. 32(c)(2)(B)(ii). Only petitioner’s $7,571 of wages received

from Terra Soil Farming, LLC, satisfies the definition of earned income.

Accordingly, because 6.2% of petitioner’s $7,571 of wages is $469, which is more

than $400, petitioner is entitled to a $400 making work pay credit.

      In conclusion, petitioner did not carry his burden of proving that

respondent’s determinations were erroneous. Respondent’s determination that

petitioner’s gross income included $7,571 of wages, $354 of royalties, a $360

annuity distribution, and $7,050 of unemployment compensation for the 2009 tax


      10
        The term “modified adjusted gross income” under sec. 36A is different
from “modified adjusted gross income” in sec. 86, as discussed above. The
difference is moot because the phaseout of the sec. 36A credit does not apply to
petitioner.
                                        - 12 -

[*12] year is sustained. As a result, petitioner was required to file a 2009 tax

return because his gross income was more than the sum of his standard deduction

and personal exemption. Respondent’s determination as modified to reflect the

increased standard deduction for single taxpayers over the age of 65 and the

removal of petitioner’s Social Security benefits is sustained.11 Respondent’s

determination that petitioner was entitled to a $400 making work pay credit is also

sustained for the 2009 tax year.12

      To reflect the foregoing,


                                                       An appropriate decision

                                                 will be entered.




      11
         As noted above, respondent miscalculated the sum of one-half petitioner’s
Social Security benefits and his modified adjusted gross income. This error,
however, does not change petitioner’s taxable income because the correct sum is
still below the $25,000 base provided in sec. 86(c)(1)(A).
      12
          Respondent conformed the determinations to reflect the exhibits presented
at trial--described above--and subsequently decreased petitioner’s deficiency to
$58. Respondent also conceded the additions to tax under sec. 6651(a)(1) and (2)
for tax years 2009.
