Section 1341 "Claim of Right" Refunds: Calculating Tax Benefits, Avoiding Double Taxation on Repayments and Claw-Backs

Description

The June 2016 tax court case of Udeobong v. Comm'r illustrated the importance of tracking payments and claw-backs of previously taxed income. In Udeobong, a taxpayer who received insurance payments in one year, repaid the amount in the following year and then collected the money in a subsequent year, ended up paying tax on the amount twice due to his failure to pursue his claim of right to credit or deduction in the year he repaid the income.

Taxpayers facing income claw-backs or other repayments or forfeitures of previously reported income may request a refund under the claim of right doctrine of Section 1341, but must do so in the year of the repayment. However, identifying circumstances in which a claim of right deduction can be challenging, and failure to establish that the taxpayer has met the requirements to document a Section 1341 claim can result in costly tax consequences.

While the mechanics of reporting a Section 1341 claim are relatively straightforward, taxpayers have options as to how to claim the optimal tax benefit from the claim. Advisers should be able to determine whether claiming a Schedule A deduction or calculating and claiming a credit provides the best tax benefit. Advisers should also be aware of the impact of claim of right tax benefits on state income tax returns.

Listen as our experienced panel provides a thorough and practical guide to properly reporting claim of right tax benefits under Section 1341.