The Tax Court determined that a taxpayer who elects to exclude a lump sum payment of social security from gross income under IRC §86(e) nevertheless must include that amount in the taxpayer’s modified adjusted gross income (MAGI) for computing repayment of the advance premium tax credit under IRC §36B.  The case of Johnson v. Commissioner, 152 TC No. 6, involved a taxpayer who had received just such a lump sum payment of social security in a year in which he had also received advanced premium tax credits to reduce his health insurance premiums.

IRC §36B provides for advanced payment of premium tax credits that are available to qualified individual purchasing insurance on health insurance exchanges.  The advance credit is to be reconciled at the end of the year to the amount of credit the taxpayer qualifies for based on the taxpayer’s §36B MAGI.  That reconciliation takes place on Form 8962, Premium Tax Credit, which is filed with the taxpayer’s individual income tax return.

IRC §36B(d)(2)(B) defines MAGI for these purposes as:

(B) Modified adjusted gross income

The term “modified adjusted gross income” means adjusted gross income increased by—

(i) any amount excluded from gross income under section 911,

(ii) any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax, and

(iii) an amount equal to the portion of the taxpayer’s social security benefits (as defined in section 86(d)) which is not included in gross income under section 86 for the taxable year.

The provision at §36B(d)(2)(B)(iii) dealing with social security is what the Court sought to interpret in this case. 

A special rule exists at IRC §86(e) that deals with social security recipients who receive a lump sum payment of social security in a single year that relates to prior years.  Most often this occurs in cases where the agency takes significant time to evaluate the claim for benefits, such as in many disability claims. 

That provision provides for the following election:

(e) Limitation on amount included where taxpayer receives lump-sum payment

(1) Limitation

If—

(A) any portion of a lump-sum payment of social security benefits received during the taxable year is attributable to prior taxable years, and

(B) the taxpayer makes an election under this subsection for the taxable year,

then the amount included in gross income under this section for the taxable year by reason of the receipt of such portion shall not exceed the sum of the increases in gross income under this chapter for prior taxable years which would result solely from taking into account such portion in the taxable years to which it is attributable.

In this case the taxpayer was arguing that the provision in IRC §36B(d)(2)(B)(iii) refers to amounts of social security “for the taxable year.”  Such amounts, the taxpayer argues, should only refer to amounts of social security attributable to 2014 (the year before the Court) and not benefits attributable to an earlier year that just happen to have been paid in 2014.  Or, at the very least, IRC §36B is ambiguous on this point and the result (having him repay the credit based on the delay in receiving his social security benefits) is contrary to Congress’ intent in enacting the premium tax credit.

The Tax Court disagreed with that reading.  The Court notes that a basic tenet of tax law is that those who report on the cash basis of accounting (as this taxpayer does) report income when received:

The year of receipt, as opposed to the year to which the Social Security benefits are attributable, is the significant definitive factor. See secs. 441, 451. It is an established legal principle that a cash method individual generally reports income in the year it is received, even if the benefits are attributable to a prior year. See sec. 451(a); sec. 1.451-1(a), Income Tax Regs. In that regard petitioner agrees that the Social Security benefits attributable to 2013 are “technically taxed” in the year received. Accordingly, the phrase “for the taxable year” is not ambiguous.

The taxpayer argues this is not significant, arguing:

Petitioner argues, however, that “[a]lthough the lump-sum payment [relating to 2013] is technically taxed in the year the lump-sum payment is received, a portion of it is includible in income only because it is attributable to tax owed in a prior taxable year under [s]ection 86.” That is, the Social Security benefits received in 2014 but attributable to 2013 are not Social Security benefits received “under section 86 for the [2014] taxable year”.

The Tax Court did not find this argument persuasive:

Although section 36B and its accompanying regulations are silent with regard to the effect, if any, on MAGI if a taxpayer makes a section 86(e) election, section 36B and the underlying regulations provide that Social Security benefits received in a taxable year that were “not included in gross income under section 86 for the taxable year” must be added to a taxpayer’s MAGI. Sec. 36B(d)(2)(B)(iii); see sec. 1.36B-1(e)(2), Income Tax Regs. Petitioner, however, misinterprets the application of section 36B when a section 86(e) election has been made. A section 86(e) election determines the amount included in gross income for the year of receipt. Petitioner’s section 86(e) election simply determined which amount of the lump-sum payment attributable to 2013 should be included in his gross income for 2014. We find that the phrase “under section 86” is not ambiguous and the cross-reference requires the consideration of section 86 in its entirety, including section 86(e).

Thus, the Court concludes:

For the aforementioned reasons, we hold that the text of the statute is not ambiguous and that petitioner must include in his MAGI all of the Social Security benefits received in 2014, irrespective of the section 86(e) election. As a result, petitioner’s adjusted gross income is increased by the amount of Social Security benefits not included in gross income and, as explained below, his MAGI exceeds the established threshold for PTC eligibility by a relatively small amount.