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
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
Note that the mistaken payment
that Clark made was not deductible,
so he never received any tax benefits to making the erroneous payment.