Clark v. Commissioner
40 B.T.A. 333 (B.T.A. 1939)

  • Clark hired a lawyer and received tax advice from him. The lawyer gave him some bad advice and Clark paid more in taxes than he needed to.
  • In order to make amends (an avoid a malpractice lawsuit), the lawyer reimbursed Clark for the erroneous taxes that he paid.
    • By the time the mistake was realized, it was too late to file an amended return and get the money back from the IRS.
  • The IRS claimed that the reimbursement was taxable as gross income. Clark disagreed.
    • Clark argued that this wasn't gross income, but just replacement of capital.
  • The Tax Court found for Clark.
    • The Tax Court compared Clark's position at the beginning of the series of events to the position at the end of those events.
    • Clark had exactly the same amount of money at the end as he had at the beginning. Therefore he never had any income, he was just put in the place where he would have been had the lawyer not made a mistake.
  • Note that the mistaken payment that Clark made was not deductible, so he never received any tax benefits to making the erroneous payment.