United States v. Lewis
340 U.S. 590 (1951)

  • In 1944, Lewis received a $22k bonus from his employer. When he filed his 1944 tax returns, he counted the $22k as part of his gross income.
  • Later, it was determined that the bonus had been improperly calculated and a court made him return $11k in 1946.
  • Lewis attempted to amend his 1944 tax returns to recalculate his gross income so as to not include the $11k he eventually gave back. The IRS disagreed.
    • The IRS argued that the $11k he gave back should be counted as a loss on Lewis' 1946 returns, not as an amendment to his 1944 tax returns.
  • The Trial Court found for Lewis. The IRS appealed.
    • The Trial Court found that the excess bonus was a mistake of fact and was therefore not income in 1944.
  • The US Supreme Court reversed.
    • The US Supreme Court found under the claim of right doctrine, the entire $22k was income in 1944, and should be taxed as such.
      • Under the claim of right doctrine if a taxpayer receives income and there are no restrictions on its dispositions (aka they can do whatever they want with it), then they are considered to have earned that income, even if it is later decided that they have to give the money back.
      • See North American Oil v. Burnet (286 U. S. 417 (1932)).
    • In this case, Lewis received the money in 1944 and had full enjoyment of it until he had to give it back in 1946, so he had to pay tax on the income in 1944.
  • The problem for people like Lewis is that they may be in a high tax bracket in the year they get the money and in a lower tax bracket in the year when they get the claim the loss. So the taxpayer is not in the same position as they would have been if there had not been a mistake.
    • After this case was decided, Congress passed 26 U.S.C. 1341, which allows taxpayers in Lewis' situation to either take a deduction in the year the money gets repaid, or take a tax credit equal to the amount of taxes the taxpayer originally paid.