Brief Fact Summary. Taxpayer sues claiming refund of amount of deficiency paid after her charitable conveyance was reconveyed to her years later. Taxpayer alleges taxes due on reconveyance can not exceed tax deduction benefit she originally received by making conveyances.
Synopsis of Rule of Law. A transaction which returns to the taxpayer his own property gives rise to income when the recovered item was initially used as a deduction and provided a tax benefit to the taxpayer.
Issue. Should the taxpayer be required to pay tax on a recovered item that exceeded the amount of the tax benefit received when the item was initially used as a deduction?
Held. Yes. The Government’s motion for summary judgment is granted and Plaintiff’s claim is dismissed.
A transaction which returns to a taxpayer his own property does not give rise to ‘income’ where that term is confined to its traditional interpretation. An exception to this general rule is the “tax benefit rule,” under which, a recovered item is excluded from income so long as its initial use as a deduction did not provide a tax saving. But, where full tax use of the deduction was made resulting in a tax savings, the amount of the saving is immaterial. The recovery is considered income to the full extent of the deduction. The tax benefit rule makes no mention of the tax rate which should be applied to the recovery and the court determines, in light of the single-year model of our tax system, that the applicable tax rate is that of the year of recovery.
Here, the taxpayer received the full tax benefit of the deduction in 1939 and 1940. The amount to be included as income in 1957 is therefore the total amount of the deduction, $8,706.93. It is immaterial that the tax savings in 1939 and 1940 was only $1,877.49 because in the year in which the recovery occurred, 1957, the applicable tax rate of 52% applied to the entire deduction amount of $8,706.93. Therefore, the taxpayer owed the full deficient amount of $4,527.60 and is not entitled to a refund.
Discussion. Income includes recovery of a taxpayer’s own property, the original disposal of which resulted in a tax savings for the taxpayer. When a taxpayer receives income, it is taxable at the rate applicable in the year in which the income was received. It is immaterial that the tax due in the year of recovery exceeds the tax savings in the year that the property was used as a deduction.