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The Tax Benefit Rule
Bittker, Boris Kanner, Stephen
Bittker, Boris
Kanner, Stephen
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Abstract
When a taxpayer recovers or collects an item that was deducted in an earlier year, he is ordinarily taxed on the amount received unless the prior deduction was of no "tax benefit" because it did not reduce his tax liability.' Because each year's income tax return must be based on the facts as known during that year, the deduction in complete good faith of amounts that are recovered in later years is a familiar phenomenon. Creditors, for example, often deduct claims against debtors when they appear to be worthless but subsequently collect part or all of the debt when the debtor's financial circumstances unexpectedly improve. Another example is a claim against the taxpayer, such as a local property tax or an employee's salary, which is deducted when paid but recovered in part when subsequent events establish that the taxpayer paid more than he actually owed.