                  T.C. Summary Opinion 2001-103



                     UNITED STATES TAX COURT



         DALE J. AND PHILLIS L. DE BOTH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 438-00S.                       Filed July 9, 2001.



     Dale J. De Both, pro se.

     Eric W. Johnson, for respondent.



     PAJAK, 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

effect for the year in issue.
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     Respondent determined a deficiency in petitioners' 1997

Federal income tax in the amount of $1,316.   This Court must

decide whether petitioners must include a workers’ compensation

offset of $5,540.40 as part of their Social Security benefits.

     Some of the facts in this case have been stipulated and are

so found.   Petitioners resided in Cottage Grove, Minnesota, at

the time they filed their petition.

     In September 1994, Phillis De Both (petitioner) was injured

in a workplace accident.   Both of petitioner's arms were severed,

and she suffered other serious injuries.

     Petitioner received workers' compensation benefits under

Minnesota law for her injuries.   She also received Social

Security benefits under Federal law for her injuries.

     CompCost, Inc. (CompCost), a State Fund Mutual Company,

handles the Minnesota workers’ compensation claims of petitioner.

On February 23, 1999, CompCost advised that the $25,000 threshold

under Minnesota law was met on May 2, 1996, and since that date

CompCost has been taking a Social Security offset against

petitioner’s workers’ compensation benefit.

     The Social Security Administration filed a Form 1099 with

respondent which indicated that in 1997 petitioner received total

benefits of $5,723.90.   Of that amount, $5,540 was not paid to

petitioner, but was a "Worker's compensation offset".   In 1997,

petitioner received payments totaling $175 from Social Security,
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and an $8.50 Medicare premium was paid on her behalf.   During

1997, petitioner also received workers' compensation payments

totaling $15,396.73.

     On their 1997 tax return, petitioners reported $184 ($5,724,

rounded amount, minus the workers’ compensation offset of $5,540)

as the amount of benefits they received from Social Security.

They reported $156 as the amount of Social Security benefits

includable in their gross income.

     Respondent determined that petitioners failed to report

$5,540 of Social Security benefits and that 85 percent of that

amount, or $4,709, is includable in their gross income.

Petitioners claim that because both workers' compensation and

Social Security benefits were reduced using the same offset,

petitioner did not actually receive the $5,540 from anyone.

Accordingly, petitioners contend that the $5,540 should not be

included as part of petitioner’s Social Security benefits.

     Social Security benefits are generally included in income as

provided by section 86.   Workers' compensation benefits are

generally not included in income under section 104(a)(1).    When

an individual receives both Social Security benefits and workers’

compensation benefits in the same year on account of the same

injury, the Social Security benefits paid to the individual are

generally reduced by a portion of the workers’ compensation
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benefits, and this reduction is the workers’ compensation offset.

20 C.F.R. sec. 404.408(a) (2001).     The workers' compensation

offset to Social Security benefits generally is considered as

included in the amount of Social Security benefits received.

Sec. 86(d)(3); Mikalonis v. Commissioner, T.C. Memo. 2000-281.

The relevant House report states in part:

     For example, if an individual were entitled to $10,000 of
     social security disability benefits but received only $6,000
     because of the receipt of $4,000 of workmen’s compensation
     benefits, then, for purposes of the provisions taxing social
     security benefits, the individual will be considered to have
     received $10,000 of social security benefits. [H. Rept. 98-
     25, at 26 (1983)].

However, what is vital in this case is that Social Security

benefits are not to be reduced by workers' compensation benefits

if the workers' compensation plan provides for the reduction of

the workers’ compensation benefits by Social Security benefits.

20 C.F.R. sec. 404.408(b)(2) (2001).    As respondent puts it, this

prevents a double offset.

     Under Minnesota law, after a total of $25,000 of workers'

compensation benefits has been paid, the amount of such benefits

to be received thereafter “shall be reduced” by the amount of

Social Security benefits received on account of the same injury.

Minn. Stat. Ann., sec. 176.101 subdiv. 4 (2001).    Thus, under 20

C.F.R. sec. 404.408(b)(2) (2001), petitioner's Social Security

benefits should not have been reduced by a workers' compensation
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offset because petitioner's workers' compensation benefits were

offset   by Social Security benefits after May 2, 1996.

     The workers' compensation benefits were reduced by the

Social Security benefits throughout 1997.   The Form 1099 from the

Social Security Administration shows that petitioner's Social

Security benefits were reduced for the workers' compensation

offset in 1997.   There was a double offset.   Respondent concedes

that if the Social Security Administration reduced Social

Security benefits to offset workers’ compensation benefits and

CompCost reduced workers’ compensation benefits to offset Social

Security benefits, petitioners would have had a workers’

compensation offset to their Social Security benefits but would

not have received the workers’ compensation benefits on which the

offset was based.

     We find that petitioner did not receive the $5,540 amount

from CompCost or from the Social Security Administration in 1997.

Petitioners are not required to include $5,540 as part of their

Social Security benefits in 1997.   If the Social Security

Administration pays the amount it owed petitioner in 1997 at some

point in the future, the appropriate amount will be includable in
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petitioners’ gross income at that time.    Sec. 86(a).

     Accordingly, we hold for petitioners.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                      Decision will be entered

                              for petitioners.
