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If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. Nothing in this language permits an exception merely because a taxpayer is "mistaken" as to the validity of his claim. Nor has the "claim of right" doctrine been impaired.
Respondent filed action seeking a refund of his overpayment of income tax that had been paid on a bonus received from his employer. The bonus was determined in previous litigation to have been overpaid to respondent and improperly computed, and respondent was required to pay back a portion of the bonus. In the subsequent action filed by respondent against petitioner government, he sought the portion of his tax payment attributable to the returned sums. At trial, the court of claims determined that respondent was entitled to a remittance of an overpayment. Certiorari was granted.
Under the circumstances, did the respondent owe a tax on the entire bonus?
The judgment awarding respondent an amount equating to a tax overpayment on an employee bonus was reversed. The court concluded that respondent had an unrestricted claim of right to the sums and had exercised unlimited control over the bonus. Hence, respondent owed a tax on the entire bonus and no exception could be taken on the basis that he was "mistaken" as to the amount of his entitlement and was required to pay back a portion to his employer.