                  T.C. Summary Opinion 2001-62



                      UNITED STATES TAX COURT



                 FRANK J. ZAVATTO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12576-99S.                   Filed April 24, 2001.



     Frank J. Zavatto, pro se.

     Caroline Tso Chen, for respondent.


     CARLUZZO, 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.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for 1997.   The decision to be entered is

not reviewable by any other court, and this opinion should not be

cited as authority.
                                - 2 -

     Respondent determined a deficiency of $3,348 in petitioner’s

1997 Federal income tax.    The issue for decision is whether any

portion of the Social Security benefits paid to petitioner in

1997 are includable in his income for that year.

Background

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

the time the petition was filed, petitioner resided in Mountain

View, California.

     After he retired in 1992 at the age of 62, petitioner

applied for and began to receive Social Security benefits.     In

1995, petitioner became reemployed and continued working

throughout 1997, during which period he also continued to receive

Social Security benefits.   During the year in issue, he was paid

Social Security benefits totaling $13,865.

     As a result of the other income earned by petitioner each

year during the years 1995 through 1997, petitioner was overpaid

Social Security benefits of $20,395.30 (the overpayment), which

included the amount of benefits petitioner received in 1997.

Consequently, the Social Security Administration (SSA) began to

withhold Social Security benefits to which petitioner was

otherwise entitled in order to recover the overpayment.    The SSA

recovered $1,702 of the overpayment in 1997 and continued to

withhold all or part of petitioner’s Social Security benefits in

1998 and 1999.   As of the date of trial, petitioner had not
                               - 3 -

repaid the entire amount of the overpayment.

     On his 1997 Federal income tax return, petitioner reported

adjusted gross income of $102,279, which does not include any of

the Social Security benefits paid to petitioner during that year.

     In the notice of deficiency, respondent determined that a

portion of the Social Security benefits received by petitioner in

1997 are includable in his income for that year.    Other

adjustments made in the notice of deficiency are not in dispute.

Discussion

     The extent to which Social Security benefits are includable

in a taxpayer’s income is determined pursuant to a formula that

takes into account the amount of the taxpayer’s Social Security

benefits, the amount of the taxpayer’s other income, and the

taxpayer’s filing status.   See sec. 86.   For purposes of the

computation contemplated by the formula, the amount of Social

Security benefits received by a taxpayer during any taxable year

is “reduced by any repayment made by the taxpayer during the
taxable year of a social security benefit previously received by

the taxpayer (whether or not such benefit was received during the

taxable year).”   Sec. 86(d)(2).

     The deficiency here in dispute was properly computed in

accordance with section 86, and petitioner does not contend

otherwise.   Instead, petitioner disputes the deficiency because

it is based upon Social Security benefits that he is required to

repay.   According to petitioner, because of his obligation to
                                - 4 -

repay it, the overpayment is, in effect, a loan to him that

should not be included in his income.

       Generally, loan proceeds are not income to the borrower.

Although we understand why petitioner might view the overpayment

as a loan, for Federal income tax purposes, an overpayment of

Social Security benefits is not treated as a loan to the

recipient.

       An individual’s Social Security benefits are subject to

reduction if the individual’s other income exceeds a certain

level during a particular year.    See 42 U.S.C. sec. 403.    The

extent of the reduction often cannot be determined until year’s

end when the individual’s other income for the entire year is

known.    Similarly, the extent of an overpayment of Social

Security benefits resulting from such a reduction often cannot be

determined until year’s end.    Under those circumstances, an

overpayment of Social Security benefits made in one year would

have to be recovered in subsequent years.    See 42 U.S.C. sec.

404.    The legislative history accompanying section 86(d)

indicates that the Congress was mindful of the potential negative

Federal income tax consequences facing a taxpayer in such a

situation and in the enactment of section 86(d)(2) intended to

provide a mechanism “to prevent a taxpayer from being subject to

taxation on his benefits in those situations in which a taxpayer

must repay a portion of those benefits because he has been

overpaid previously.”    S. Rept. 98-23 at 27 (1983), 1983-2 C.B.

326, 329.
                                  - 5 -

      We understand that under the circumstances of this case, the

relief mechanism provided by section 86(d)(2) might not seem

meaningful to petitioner.   Nevertheless, the deficiency here in

dispute properly takes into account the provisions of section

86(d)(2), as well as the other applicable provisions of section

86.   Therefore, the deficiency must be sustained, and we so hold.

      To reflect the foregoing,

                                               Decision will be

                                          entered for respondent.
