Administrative concerns occasionally override other aspects of tax policy. One example is the imposition of an annual reporting cycle which leads taxpayers to make assumptions about future events so that items can be reported on regularly scheduled returns. This can result in reporting items as income that are not actually earned by the taxpayer. For example, under the claim of right doctrine, created because of the annual reporting requirement, taxpayers must report certain receipts as income even though they are later required to return these amounts to the payor. In most cases they are permitted a deduction in the year that the cash is returned. However, this deduction may not fully offset the prior taxation due to rate changes and other items. As a partial remedy Congress enacted Section 1341 which allows taxpayers to calculate the tax reduction from the repayment based on the tax paid on the inclusion. The IRS has attempted to limit the application of Section 1341. In Dominion Resources, the courts reviewed the rules adopted by IRS and prior courts and applied a better reasoned, more equitable approach. The limited scope of the case did not permit the court to review all of the limitations imposed on this Section over the years and apply a consistent approach. This article will discuss the case as well as areas in which the court could, in the future, adopt its reasoning to arrive at a more equitable approach to Section 1341.

Included in

Tax Law Commons