James W. Davis and Teri A. Davis - Page 5

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          Memo. 2001-120; Maki v. Commissioner, T.C. Memo. 1996-209.  In              
          the present case, the application of that formula results in the            
          inclusion of benefits of $18,408 (i.e., 85 percent of $21,656) in           
          petitioners’ gross income for 2001.                                         
               Petitioners point out that a significant portion of the                
          Social Security benefits received by Mrs. Davis in 2001 was                 
          attributable to 1999 and 2000.  Petitioners contend that it would           
          be unfair to determine the taxable portion of the lump-sum                  
          payment without regard to the prior years to which the payment is           
          attributable.  Therefore, petitioners argue, they should be                 
          entitled to amend their returns for 1999, 2000, and 2001 and                
          include in gross income for each of those years the amount of               
          benefits attributable to each of those years, and recompute their           
          tax liabilities for each of those years accordingly.  We disagree           
          with petitioners’ approach because it is contrary to law.                   
               Under income tax accounting principles, an item of gross               
          income must be included in income for the taxable year that it is           
          received by the taxpayer unless, under the taxpayer's method of             
          accounting, the amount is to be properly accounted for in a                 
          different period.  Sec. 451(a).  For taxpayers such as                      
          petitioners who use the cash receipts and disbursements method of           
          accounting, an item is includable in gross income when it is                
          actually or constructively received.  Sec. 1.451-1(a), Income Tax           
          Regs.                                                                       






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