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Section 61(a) provides that, except as otherwise provided by
law, gross income includes all income from whatever source
derived. Section 86(a)(1) generally requires the inclusion of
Social Security benefits in gross income. Section 86
specifically provides the taxpayer with a formula to determine
what percentage of her Social Security benefits are includable in
gross income. Because petitioner had modified adjusted-gross
income plus one-half of the Social Security benefits received in
excess of $34,000, section 86(a)(2) controls the determination of
the amount of her Social Security benefits that are includable in
gross income. Section 86(a)(2)(B) applies to this case. Section
86(a)(2)(B) provides that the amount of Social Security benefits
included in gross income here is "85 percent of the social
security benefits received during the taxable year."
Social Security benefits are included in the recipient's
gross income in the taxable year in which the benefits are
received. Sec. 86(a)(1). Petitioner admits receiving Social
Security benefits in 1999. If petitioner is required to repay
the Social Security benefits, she may be entitled to a deduction
in the year of repayment. N. Am. Oil Consol. Co. v. Burnett, 286
U.S. 417, 424 (1932). If the deduction fails to make petitioner
whole because the applicable tax rate was higher in the year of
recognition than it was in the year of return, section 1341 may
apply. See United States v. Skelly Oil Co., 394 U.S. 678, 681
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Last modified: May 25, 2011