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
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
The IRS argued that §1341 was not applicable because that was only for involuntary
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
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.