Deduction for restoring item held under claim of right.
Author | Dudzinsky, Robert J. |
Position | Brief Article |
If, during a tax year (year 2), a taxpayer is entitled to deduction exceeding $3,000 because the taxpayer restores to another person an item that was included in the taxpayer's gross income for a prior tax year (year 1), year 2's tax is the lesser of
--the tax for year 2, computed with this deduction (Sec. 1341(a)(4)); or
--the tax for year 2, computed without this deduction, but reduced by the decrease in year 1's tax that would result from excluding the item from year 1's gross income (Sec. 1341(a)(5)).
Regs. Sec. 1.1341-1(d)(2)(i) limits its the Sec. 1341(a)(5) exclusion to the amount previously included in gross income. However, there is no comparable regulatory (or statutory) limitation on the Sec. 1341(a)(4) deduction.
Nevertheless, in Skelly Oil Co., 394 US 678 (1969), the Supreme Court held that
the Code should not be interpreted to allow respondent "the practical equivalent of double deduction," ... absent a clear declaration of intent by Congress.... Accordingly, to avoid that result in this case, the deduction allowable in the year of repayment must be reduced by the percentage depletion allowance which respondent claimed and the Commissioner allowed in the years of receipt as a result of the...
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