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portion of the benefits attributable to the previous taxable
years. Accordingly, if no election is made by the taxpayer under
section 86(e), lump-sum distributions of Social Security benefits
are includable in the taxpayer’s gross income in the taxable year
the benefits are received. Petitioners did not make an election
under section 86(e) with respect to the lump-sum Social Security
disability benefits received in 2000.
Allegations petitioners made in the petition and their
presentation at trial suggest that petitioners do not dispute the
manner in which Social Security benefits are generally treated
for Federal income tax purposes. Instead they argue that the
Social Security disability benefits here under consideration are
excludable from their income by virtue of section 104(a)(2).
Petitioners admit that they did not know how to treat the
disability benefits for Federal income tax purposes. According
to petitioners, in an informal contact made with one of
respondent’s employees they were advised that the benefits were
excludable from income under section 104(a)(2). They further
contend that their uncertainty as to how to treat the disability
benefits resulted in the late filing of their 2000 return.
Section 104(a)(2) excludes from gross income amounts
received in damages, by suit or settlement, “on account of
personal physical injuries or physical sickness”. In determining
whether damages received are excludable under section 104(a)(2),
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Last modified: May 25, 2011