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In the notice of deficiency, respondent determined that
$4,679 of the Social Security benefits received by petitioners
during 2000 represented gross income and determined a deficiency
in tax based upon the inclusion of that amount with the wage and
salary income petitioners reported. No other adjustments were
proposed in the notice of deficiency. At trial, the testimony of
petitioners indicated that they might be entitled to a dependency
exemption deduction for their son, who was disabled due to an
accident. Rule 41(b)(1). After the trial, respondent agreed
that petitioners would be allowed to produce evidence of the
support they provided for their son. Thereafter, respondent
filed a report with the Court, conceding that petitioners were
entitled to a dependency exemption deduction for their son.
With respect to the Social Security income at issue,
petitioners contend that they have never reported their
retirement benefits as income in prior years, nor have their
income tax returns ever been audited so as to require inclusion
of their benefits in income. However, section 61(a) provides
that gross income includes all income from whatever source
derived, unless excludable by a specific provision of the Code.
Moreover, section 86(a), for the year at issue, provides that, if
the modified adjusted gross income of the taxpayer, plus one-half
of the Social Security benefits received, exceeds the adjusted
base amount, gross income includes the lesser of (1) the sum of
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