Van Cleave v. United States
718 F.2d 193 (6th Cir. 1983)

  • Van Cleave was CEO and majority stockholder in a corporation. The Board of his corporation adopted a new by-law saying that if the salaries of any executive was determined by the IRS to be "excessive" (and not deductible by the corporation as a business expense) it needed to be paid back to the corporation.
    • In 1974, Van Cleave earned $332k. In 1975, the IRS determined that $57k of that was "excessive" and so Van Cleave paid it back to the corporation.
    • Under 26 U.S.C. 162(a)(1) a company can only deduct "a reasonable allowance for salaries or other compensation for personal services actually rendered."
  • Since Van Cleave had reported the entire $332k as gross income on his 1974 taxes, when he filed his 1975 taxes, he took a deduction for the $57k he paid back based on 26 U.S.C. 1341. The IRS disagreed and assessed a deficiency.
    • Van Cleave argued that under 1341 he was entitled to take a deduction for money he had previously reported as income but later had to pay back.
    • The IRS argued that 1341 was not applicable because that was only for involuntary repayments.
      • The IRS argued that since Van Cleave was the majority shareholder, he controlled the corporation and could have stopped the Board from implementing the repayment plan.
        • The company couldn't deduct the $57k as a business expense, but they probably were not going to sue him to get it back.
  • The Trial Court found for the IRS. Van Cleave appealed.
    • The Trial Court found that Van Cleave couldn't use 1341 because his repayment was voluntary.
      • Van Cleave had an unrestricted right to the money, meaning he owned it free and clear and no one could take it from him. 1341 is only for cases where the taxpayer thought they had an unrestricted right, but they later learned that they didn't.
  • The Appellate Court reversed.
    • The Appellate Court found that 1341 is still available, even if the payment wasn't absolutely required to be paid back.