A taxpayer was unsuccessful in attempting to recover taxes via a claim of right deduction under IRC §1341 in the case of Heiting v. United States, US DC WD Wisconsin, Case No. 3:19-cv-00224.[1]

The claim of right provision under the IRC is a relatively obscure provision, though one that most advisers will eventually run across in their practice.  The provision is meant to provide some relief from the strict annual accounting for income taxes in certain situations where a taxpayer recognizes income that later must be repaid by the taxpayer.

The First Circuit Court of Appeals determined that a District Court went beyond the law in attempting to mitigate an unfair result in the case of Robb Evans & Associates, LLC v. United States, CA1, Case Nos. 15-2540 & 15-2552.

The case involved the always confusing concept of a claim of right under IRC §1341.  This rule provides that if a taxpayer included an item in gross income in a prior year because it appeared the taxpayer had an unrestricted right to the item that is more than $3,000, and the amount is repaid in a later year, the taxpayer can, on the return for the year of repayment, either take a deduction for the amount repaid or claim a credit for the amount of additional tax paid when the item was originally included in income.

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The Court of Appeals for the Federal Circuit overturned a decision of the Federal Court of Claims in the case of Nacchio et ux v. Commissioner, Nos. 2015-5114, 2015-5115 and held that the taxpayer was barred from either claiming a credit under §1341 (the claim of right section) or a deduction under IRC §165 for repayment of gains received due to insider trading.

He had paid tax on a gain of over $44 million on the sale of stock of a public company of which he was the CEO. He was indicated on charges of insider trading with regard to these sales and eventually was convicted of the charges. In addition to paying a $19 million fine he was required to forfeit the net proceeds of his insider trading on which he had earlier paid tax.

The taxpayer in the case of Udeobong v. Commissioner, TC Memo 2016-109 complained that the IRS was assessing tax on income he had previously reported.  But, as the Tax Court noted, while that might be true it wasn’t going to be relevant in his case.

The taxpayer in this case had received payments from Cigna before 2005 for Medicaid reimbursement payments in his Schedule C business and had paid tax on those payments.  Later (but before 2010), a dispute arose with Cigna regarding whether the taxpayer was entitled to certain payments and he returned the payments to Cigna.