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We hold that petitioners received discharge of indebtedness
income in 1996 when FmHA wrote off $177,772 of petitioners’
outstanding loan obligation.
II. Social Security Benefits
The second question raised by this litigation is whether a
portion of the Social Security benefits received by petitioners
is includable in their gross income. Although this issue is
largely computational, we address it briefly to ensure lucidity.
The parties stipulated that petitioners received such benefits in
the amount of $3,420. Of this total, respondent contends that 85
percent, or $2,907, must be reported as gross income.
Petitioners have offered no argument related to their Social
Security benefits.
Income tax treatment of Social Security benefits is governed
by section 86. Section 86 applies to require inclusion of
payments if the taxpayer’s adjusted gross income, with certain
modifications not relevant here, plus one-half of the Social
Security benefits received, exceeds a specified base amount. See
sec. 86(b). This base amount, in the case of taxpayers filing a
joint return, is $32,000. See sec. 86(c)(1)(B). Since
petitioners reported adjusted gross income of $8,466 and we have
just held that they must include an additional $177,772 from
discharge of indebtedness, the base amount threshold is clearly
exceeded.
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