Servance v. Comm'r of Internal Revenue, 1587-18S

CourtUnited States Tax Court
Writing for the CourtCOPELAND, Judge.
Docket Number1587-18S
Decision Date21 November 2022

T.C. Summary Opinion 2022-23



No. 1587-18S

United States Tax Court

November 21, 2022


Elijah Servance and Corliss Servance, pro sese.

Brian M. Howell, for respondent.



This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed.[1] Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.

In a notice of deficiency dated January 2, 2018, the Internal Revenue Service (IRS or respondent) determined a deficiency in petitioners' federal income tax of $7,344 and a section 6662(a) accuracy-related penalty of $1,469 for tax year 2015.


After concessions, the issues for decision are:

1. whether the Servances' gross income includes unreported tier 1 railroad retirement benefits of $28,628 paid to Elijah Servance during 2015; and
2. whether the Servances' gross income includes unreported long-term disability payments of $4,406 purportedly made by Hartford Life Insurance Co. (Hartford) to Mr. Servance during 2015


Some facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated by this reference. When the Petition was timely filed, the Servances were residents of Connecticut.

Mr. Servance worked for 33 years for the Metro-North Railroad (Metro-North) until his retirement in 2012. He retired following diagnosis and surgery for colon cancer.

Upon his retirement, Mr. Servance applied for long-term disability benefits from the U.S. Railroad Retirement Board (RRB) on the basis of his cancer diagnosis and treatment. His application was granted on December 19, 2012. During 2015 the RRB paid Mr. Servance $28,628 in tier 1 railroad retirement benefits and reported these benefits (among others) on Form SSA-1099, Social Security Benefit Statement, issued to Mr. Servance. The Servances did not report the tier 1 railroad retirement benefits on their joint 2015 federal income tax return.

Following his retirement, Mr. Servance became eligible for benefits under a long-term disability insurance policy issued by Hartford, whose premiums were paid by Metro-North. The Servances did not report receipt of any Hartford long-term disability payments on their 2015 federal tax return.

The IRS compared the Servances' 2015 federal income tax return to the third-party reports it received and, on the basis of these comparisons, issued a notice of deficiency to the Servances. The notice proposed changes to their 2015 return to reflect $24,334 in taxable tier 1


railroad retirement benefits,[2] an additional $4,406 in taxable wages from Hartford,[3] an additional $61 in unreported taxable dividends, and a $1,469 accuracy-related penalty for an underpayment due to a substantial understatement of income tax under section 6662(a) and (b)(2).

The Servances have conceded their liability for tax on the dividends, and respondent has conceded that they are not subject to the accuracy-related penalty. Therefore, the only issues for our decision are the inclusion in income of the tier 1 railroad retirement benefits and any Hartford long-term disability payments.


Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that the Commissioner's determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). However, in cases of unreported income, the Commissioner must establish an evidentiary foundation connecting the taxpayer to the income-producing activity, or otherwise demonstrate that the taxpayer actually received income. See Edwards v. Commissioner, 680 F.2d 1268, 1270-71 (9th Cir. 1982); Weimerskirch v. Commissioner, 596 F.2d 358, 361-62 (9th Cir. 1979), rev'g 67 T.C. 672 (1977). The presumption of correctness for the Commissioner's determinations does not apply if the notice of deficiency is unsupported by any significant evidence. Schaffer v. Commissioner, 779 F.2d 849, 858 (2d Cir. 1985), aff'g in part and remanding in part Mandina v. Commissioner, T.C. Memo. 1982-34. Once the Commissioner makes the required threshold showing, the burden shifts to the taxpayer to prove by a preponderance of the evidence that the Commissioner's determinations are arbitrary or erroneous. See Williams v. Commissioner, 999 F.2d 760, 763 (4th Cir. 1993), aff'g T.C. Memo. 1992-153.


I. Tier 1 Railroad Retirement Benefits

Petitioners and respondent have stipulated that Mr. Servance received $28,628 in tier 1 railroad retirement benefits in 2015 from the RRB. Section 86(a) generally includes a portion of Social Security benefits in gross income, and section 86(d)(1)(B) explicitly includes tier 1 railroad retirement benefits within the meaning of "social security benefits" for this purpose. On the face of the statute, then, the Servances should not have excluded all of Mr. Servance's tier 1 railroad retirement benefits from their 2015 tax return.

The Servances argue that Mr. Servance's tier 1 railroad retirement benefits are excludable under section 104(a)(1), which excludes "amounts received under workmen's compensation acts as compensation for personal injuries or sickness." Treasury Regulation § 1.104-1(b) extends the exclusion to amounts paid "under a statute in the nature of a workmen's compensation act which provides compensation to employees for personal injuries or sickness incurred in the...

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