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A transaction that returns to a taxpayer his own property cannot be considered as giving rise to "income," at least where that term is confined to its traditional sense of gain derived from capital, from labor, or from both combined. Yet the principle is well engrained in tax law that the return or recovery of property that was once the subject of an income tax deduction must be treated as income in the year of its recovery. The only limitation upon that principle is the so-called "tax-benefit rule." This rule permits exclusion of the recovered item from income so long as its initial use as a deduction did not provide a tax saving. But where full tax use of a deduction was made and a tax saving thereby obtained, then the extent of saving is considered immaterial. The recovery is viewed as income to the full extent of the deduction previously allowed.
Plaintiff corporation brought action to recover an alleged overpayment n its income tax during a year that two parcels of realty were returned to the corporation, each of which it had previously donated and claimed as a charitable contribution deduction. The Commissioner of Internal Revenue disagreed with the corporation's characterization of the recovery as a non-taxable return of capital, viewing the transaction instead as giving rise to taxable income, and therefore adjusting the corporation's income by the total of the charitable contribution deductions previously claimed and allowed. The government filed a motion for summary judgment.
Did the return of the two charitable contributions of land made by plaintiff in prior years and deducted in its tax returns for those years give rise to taxable income?
The court granted the government's motion for summary judgment. The court found that because the corporation obtained a full tax benefit from its earlier deductions, those deductions were properly classified as income upon recoupment and must have been taxed as such. Therefore, the court dismissed the corporation's petition.