Vernon J. Nicholas, III, and Micki Nicholas - Page 3




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          1998 Federal income taxes in the amounts of $3,625 and $1,526,              
          respectively.  Petitioners conceded that they had unreported                
          income in the amounts of $748 in 1997 and $54 in 1998.  The sole            
          issue the Court must decide is whether Social Security disability           
          payments are includable in gross income.                                    
               Some of the facts in this case have been stipulated and are            
          so found.  Petitioners resided in Las Vegas, Nevada, at the time            
          they filed their petition.                                                  
               Petitioners timely filed their joint 1997 Federal tax return           
          (1997 return).  Petitioners reported adjusted gross income of               
          $51,316 on their 1997 return.                                               
               Petitioners timely filed their joint 1998 Federal tax return           
          (1998 return).  Petitioners reported adjusted gross income of               
          $66,049 on their 1998 return.                                               
               Petitioner Micki Nicholas (petitioner) received Social                 
          Security disability benefits in 1997 of $17,587.  Portions of the           
          amount received in 1997 included unpaid disability claims for the           
          taxable years 1994, 1995, and 1996.  Petitioner also received               
          $6,249 in Social Security disability benefits during 1998.                  
          Petitioners did not report any portion of the disability benefits           
          received in 1997 and 1998 on their respective Federal income tax            
          returns.                                                                    
               Petitioners contend that the Social Security disability                
          benefits are not taxable and, additionally, that a portion of the           






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