§111 — Recovery of tax benefit items
147 citing cases
Statute Text — 26 U.S.C. §111
Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.
If—
a credit was allowable with respect to any amount for any prior taxable year, and
during the taxable year there is a downward price adjustment or similar adjustment,
the tax imposed by this chapter for the taxable year shall be increased by the amount of the credit attributable to the adjustment.
Paragraph (1) shall not apply to the extent that the credit allowable for the recovered amount did not reduce the amount of tax imposed by this chapter.
This subsection shall not apply with respect to the credit determined under section 46 and the foreign tax credit.
For purposes of this section, an increase in a carryover which has not expired before the beginning of the taxable year in which the recovery or adjustment takes place shall be treated as reducing tax imposed by this chapter.
In applying subsection (a) for the purpose of determining the accumulated earnings tax under section 531 or the tax under section 541 (relating to personal holding companies)—
any excluded amount under subsection (a) allowed for the purposes of this subtitle (other than section 531 or section 541) shall be allowed whether or not such amount resulted in a reduction of the tax under section 531 or the tax under section 541 for the prior taxable year; and
where any excluded amount under subsection (a) was not allowable as a deduction for the prior taxable year for purposes of this subtitle other than of section 531 or section 541 but was allowable for the same taxable year under section 531 or section 541, then such excluded amount shall be allowable if it did not result in a reduction of the tax under section 531 or the tax under section 541.
Treasury Regulations
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Treas. Reg. §1.111-1Recovery of certain items previously deducted or credited
(a) General. Section 111 provides that income attributable to the recovery during any taxable year of bad debts, prior taxes, and delinquency amounts shall be excluded from gross income to the extent of the “recovery exclusion” with respect to such items. The rule of exclusion so prescribed by statute applies equally with respect to all other losses, expenditures and accruals made the basis of deductions from gross income for prior taxable years, including war losses referred to in section 127 of the Internal Revenue Code of 1939, but not including deductions with respect to depreciation, depletion, amortization, or amortizable bond premiums. The term “recovery exclusion” as used in this section means an amount equal to the portion of the bad debts, prior taxes, and delinquency amounts (the items specifically referred to in section 111), and of all other items subject to the rule of exclusion which, when deducted or credited for a prior taxable year, did not result in a reduction of any tax of the taxpayer under subtitle A (other than the accumulated earnings tax imposed by section 531 or the personal holding company tax imposed by section 541) of the Internal Revenue Code of 1954 or corresponding provisions of prior income tax laws (other than the World War II excess profits tax imposed under subchapter E, chapter 2 of the Internal Revenue Code of 1939).
(1) Section 111 items. The term “section 111 items” as used in this section means bad debts, prior taxes, delinquency amounts, and all other items subject to the rule of exclusion, for which a deduction or credit was allowed for a prior taxable year. If a bad debt was previously charged against a reserve by a taxpayer on the reserve method of treating bad debts, it was not deducted, and it is therefore not considered a section 111 item. Bad debts, prior taxes, and delinquency amounts are defined in section 111(b) (1), (2), and (3), respectively. An example of a delinquency amount is interest on delinquent taxes. An example of the other items not expressly referred to in section 111 but nevertheless subject to the rule of exclusion is a loss sustained upon the sale of stock and later recovered, in whole or in part, through an action against the party from whom such stock had been purchased.
(2) Definition of “recovery”. Recoveries result from the receipt of amounts in respect of the previously deducted or credited section 111 items, such as from the collection or sale of a bad debt, refund or credit of taxes paid, or cancellation of taxes accrued. Care should be taken in the case of bad debts which were treated as only partially worthless in prior years to distinguish between the item described in section 111, that is, the part of such debt which was deducted, and the part not previously deducted, which is not a section 111 item and is considered the first part collected. The collection of the part not deducted is not considered a “recovery”. Furthermore, the term “recovery” does not include the gain resulting from the receipt of an amount on account of a section 111 item which, together with previous such receipts, exceeds the deduction or credit previously allowed for such item. For instance, a $100 corporate bond purchased for $40 and later deducted as worthless is subsequently collected to the extent of $50. The $10 gain (excess of $50 collection over $40 cost) is not a recovery of a section 111 item. Such gain is in no case excluded from gross income under section 111, regardless of whether the $40 recovery is or is not excluded.
(3) Treatment of debt deducted in more than one year by reason of partial worthlessness. In the case of a bad debt deducted in part for two or more prior years, each such deduction of a part of the debt is considered a separate section 111 item. A recovery with respect to such debt is considered first a recovery of those items (or portions thereof), resulting from such debt, for which there are recovery exclusions. If there are recovery exclusions for two or more items resulting from the same bad debt, such items are considered recovered in the order of the taxable years for which they were deducted, beginning with the latest. The recovery exclusion for any such item is determined by considering the recovery exclusion with respect to the prior year for which such item was deducted as being first used to offset all other applicable recoveries in the year in which the bad debt is recovered.
(4) Special provisions as to worthless bonds, etc., which are treated as capital losses. Certain bad debts arising from the worthlessness of securities and certain nonbusiness bad debts are treated as losses from the sale or exchange of capital assets. See sections 165(g) and 166(d). The amounts of the deductions allowed for any year under section 1211 on account of such losses for such year are considered to be section 111 items. Any part of such losses which, under section 1211, is a deduction for a subsequent year through the capital loss carryover (any later receipt of an amount with respect to such deducted loss is a recovery) is considered a section 111 item for the year in which such loss was sustained.
(b) Computation of recovery exclusion—(1) Amount of recovery exclusion allowable for year of recovery. For the year of any recovery, the section 111 items which were deducted or credited for one prior year are considered as a group and the recovery thereon is considered separately from recoveries of any items which were deducted or credited for other years. This recovery is excluded from gross income to the extent of the recovery exclusion with respect to this group of items as (i) determined for the original year for which such items were deducted or credited (see subparagraph (2) of this paragraph) and (ii) reduced by the excludable recoveries in intervening years on account of all section 111 items for such original year. A taxpayer claiming a recovery exclusion shall submit, at the time the exclusion is claimed, the computation of the recovery exclusion claimed for the original year for which the items were deducted or credited, and computations showing the amount recovered in intervening years on account of the section 111 items deducted or credited for the original year.
(2) Determination of recovery exclusion for original year for which items were deducted or credited. (i) The recovery exclusion for the taxable year for which section 111 items were deducted or credited (that is, the “original taxable year”) is the portion of the aggregate amount of such deductions and credits which could be disallowed without causing an increase in any tax of the taxpayer imposed under subtitle A (other than the accumulated earnings tax imposed by section 531 or the personal holding company tax imposed by section 541) of the Internal Revenue Code of 1954 or corresponding provisions of prior income tax laws (other than the World War II excess profits tax imposed under subchapter E, chapter 2 of the Internal Revenue Code of 1939). For the purpose of such recovery exclusion, consideration must be given to the effect of net operating loss carryovers and carrybacks or capital loss carryovers.
(ii) This rule shall be applied by determining the recovery exclusion as the aggregate amount of the section 111 items for the original year for which such items were deducted or credited reduced by whichever of the following amounts is the greater:
(a) The difference between (1) the taxable income for such original year and (2) the taxable income computed without regard to the section 111 items for such original year.
(b) In the case of a taxpayer subject to any income tax in lieu of normal tax or surtax or both (except the alternative tax on capital gains imposed by section 1201, which is disregarded), the difference between (1) the income subject to such tax for such original year and (2) the income subject to such tax computed without regard to the section 111 items for such original year.
(Neither the amount determined under (1) nor the amount under (2) of (a) or (b) of this subdivision shall in any case be considered less than zero.) For this determination of the recovery exclusion, the aggregate of the section 111 items must be further decreased by the portion thereof which caused a reduction in tax in preceding or succeeding taxable years through any net operating loss carryovers or carrybacks or capital loss carryovers affected by such items. This decrease is the aggregate of the largest amount determined for each of such preceding and succeeding years under (a) and (b) of this subdivision, the computation of each carryover or carryback to the preceding or succeeding year being made under (1) of (a) and (b) of this subdivision with regard to the section 111 items for the original year and such computation being made under (2) of (a) and (b) of this subdivision without regard to such items. For the purpose of the preceding sentence, the computations under both (1) and (2) of (a) and (b) of this subdivision shall be made without regard to any section 111 items for such preceding or succeeding year and the carryovers and carrybacks to such year shall be determined without regard to any section 111 items for years subsequent to the original year.
(iii) The determination of the recovery exclusion for original taxable years subject to the provisions of the Internal Revenue Code of 1939 shall be made under 26 CFR (1939) 39.22(b)(12)-1(b)(2) (Regulations 118).
(3) Example. The provisions of this paragraph may be illustrated by the following example:
(c) Provisions as to taxes imposed by section 531 (relating to the accumulated earnings tax) and section 541 (relating to the tax on personal holding companies). A recovery exclusion allowed for purposes of subtitle A (other than section 531 or section 541) of the Internal Revenue Code of 1954 shall also be allowed for the purpose of determining the accumulated earnings tax under section 531 or the personal holding company tax under section 541 regardless of whether or not the section 111 items on which such recovery exclusion is based resulted in a reduction of the tax under section 531 or section 541 of the Internal Revenue Code of 1954 (or corresponding provisions of prior income tax laws) for the prior taxable year. Furthermore, if there is recovery of a section 111 item which was not allowable as a deduction or credit for the prior taxable year for purposes of Subtitle A (not including section 531 or section 541) or corresponding provisions of prior income tax laws (other than Subchapter E, Chapter 2 of the Internal Revenue Code of 1939, relating to World War II excess profits tax), but was allowable for such prior taxable year in determining the tax under section 531 or section 541 (or corresponding provisions of prior income tax laws) then for the purpose of determining the tax under section 531 or section 541 a recovery exclusion shall be allowable with respect to such recovery if the section 111 item did not result in a reduction of the tax under section 531 or section 541 (or corresponding provisions of prior income tax laws).
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Treas. Reg. §1.111-1(a)The difference between (1) the taxable income for such original year and (2) the taxable income computed without regard to the section 111 items for such original year.
The difference between (1) the taxable income for such original year and (2) the taxable income computed without regard to the section 111 items for such original year.
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Treas. Reg. §1.111-1(b)In the case of a taxpayer subject to any income tax in lieu of normal tax or surtax or both (except the alternative tax on capital gains imposed by section 1201, which is disregarded), the difference between (1) the income subject to such tax for such original year and (2) the income subject to such tax computed without regard to the section 111 items for such original year.
In the case of a taxpayer subject to any income tax in lieu of normal tax or surtax or both (except the alternative tax on capital gains imposed by section 1201, which is disregarded), the difference between (1) the income subject to such tax for such original year and (2) the income subject to such tax computed without regard to the section 111 items for such original year.
(Neither the amount determined under (1) nor the amount under (2) of (a) or (b) of this subdivision shall in any case be considered less than zero.) For this determination of the recovery exclusion, the aggregate of the section 111 items must be further decreased by the portion thereof which caused a reduction in tax in preceding or succeeding taxable years through any net operating loss carryovers or carrybacks or capital loss carryovers affected by such items. This decrease is the aggregate of the largest amount determined for each of such preceding and succeeding years under (a) and (b) of this subdivision, the computation of each carryover or carryback to the preceding or succeeding year being made under (1) of (a) and (b) of this subdivision with regard to the section 111 items for the original year and such computation being made under (2) of (a) and (b) of this subdivision without regard to such items. For the purpose of the preceding sentence, the computations under both (1) and (2) of (a) and (b) of this subdivision shall be made without regard to any section 111 items for such preceding or succeeding year and the carryovers and carrybacks to such year shall be determined without regard to any section 111 items for years subsequent to the original year.
(iii) The determination of the recovery exclusion for original taxable years subject to the provisions of the Internal Revenue Code of 1939 shall be made under 26 CFR (1939) 39.22(b)(12)-1(b)(2) (Regulations 118).
(3) Example. The provisions of this paragraph may be illustrated by the following example:
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Treas. Reg. §1.111-1(c)Provisions as to taxes imposed by section 531 (relating to the accumulated earnings tax) and section 541 (relating to the tax on personal holding companies).
Provisions as to taxes imposed by section 531 (relating to the accumulated earnings tax) and section 541 (relating to the tax on personal holding companies). A recovery exclusion allowed for purposes of subtitle A (other than section 531 or section 541) of the Internal Revenue Code of 1954 shall also be allowed for the purpose of determining the accumulated earnings tax under section 531 or the personal holding company tax under section 541 regardless of whether or not the section 111 items on which such recovery exclusion is based resulted in a reduction of the tax under section 531 or section 541 of the Internal Revenue Code of 1954 (or corresponding provisions of prior income tax laws) for the prior taxable year. Furthermore, if there is recovery of a section 111 item which was not allowable as a deduction or credit for the prior taxable year for purposes of Subtitle A (not including section 531 or section 541) or corresponding provisions of prior income tax laws (other than Subchapter E, Chapter 2 of the Internal Revenue Code of 1939, relating to World War II excess profits tax), but was allowable for such prior taxable year in determining the tax under section 531 or section 541 (or corresponding provisions of prior income tax laws) then for the purpose of determining the tax under section 531 or section 541 a recovery exclusion shall be allowable with respect to such recovery if the section 111 item did not result in a reduction of the tax under section 531 or section 541 (or corresponding provisions of prior income tax laws).
147 Citing Cases
Petitioners dispute these arguments, citing respondent’s published guidance and section 111, the Tax Benefit Rule.
Generally, under section 111 and the regulations thereunder, if State income tax was deducted on a prior year’s Federal income tax return and resulted in a 5 reduction of Federal income tax and a tax benefit to the taxpayer, the taxpayer’s subsequent recovery of the State income tax must be included in gross income for the year in which the recovery is received.
Such an amount could, however, be subject to the tax benefit rule under section 111 to the extent a tax benefit was obtained from previously deducting that amount.
172, 190. This change presented novel issues for Australia and the United States in applying the 1982 Treaty, the Pine Gap Agreements, and Australian domestic law. 10 benefits are viewed as “any exclusion, exemption, deduction, rebate, credit or other allowance.” 1982 Treaty, art. 1(2)(b), 35 U.S.T. at 2001–02. To give effect to th
Because we hold that timely ap- proval was not secured for any penalty, we need not address petitioner's concerns.
Generally, under section 111 and the regulations thereunder, ifState income tax was deducted on a prior year's Federal income tax return and resulted in a reduction ofFederal income tax and a tax benefit to the taxpayer, the taxpayer's subsequent recovery ofthe State income tax must be included in gross income for the year in which the recovery is received.
111 (excluding from gross income the reco- very ofamounts deducted in a prior year that gave rise to no tax benefit); Maines v. Commissioner, 144 T.C. 123, 130-131 (2015). On their 2012 Federal income tax return petitioners claimed and were al- lowed a deduction of$7,165 for State and local income taxes paid to Maryland. In 2013 they received
tible when paid. Petitioners further argue that should Mr. Wages' bail bonding business reacquire any sums from the indemnity fund in the future, those amounts should be recaptured in that year's gross receipts under the tax benefit rule codified in section 111. Respondent disagrees with petitioners' theory. First, he points out that petitioners' argument rests on allegations that are not part ofthe evidentiary record in the case and thus petitioners have not sustained their burden ofproof. Seco
The inclusionary component provides that an amount deducted from gross income in one year is included in income in a subsequent year ifan event occurs in the subsequent year that is fundamentally inconsistent with the premise on which the deduction had previously been based.
This means that any refundable portion ofthe QEZE Real Property Tax Credit that remained after first reducing the Maineses' state income-tax liability is taxable as income.¹¹ The exclusionary aspect ofthe tax-benefitrule under section 111(a) does not apply here to the extent that the decreased pass-through income from Huron reduced the Maineses' federal tax liability.
Failure To Report a Portion ofa Taxable State Income Tax Refund The tax benefit rule ofsection 111 provides that ifan amount is deducted from income in one year and a part or all ofthe amount is recovered in a later year, the recovered amount is treated as income for the year it is received to the extent the deduction reduced the amount oftax imposed.
As we’ve already discussed, the tax-benefit rule and section 111 are what we use to answer this question.
H.R. Rept. No. 111-447, at 15 (2010). Unfortunately, no direct legislative history exists to explain the change. What we do have is the rationale behind an almost identical amendment included in a bill that never became law.6 H.R. 4849, 111th Cong., sec. 111 (2010). The House passed H.R. 4849 partly out ofconcern for the potential inequities an inflexible penalty may create. H.R. Rept. No. 111-447, supra at 15. Congress had heard from the National Taxpayer Advocate that the potential magnitude o
Generally, under section 111 and the regulations thereunder, if a tax was deducted on a prior year's return that resulted in a reduction of tax and a tax benefit to the taxpayer, the taxpayer's subsequent recovery of the tax must be included in gross income in the year the recovery is received.
Respondent does not assert, and there.is no evidence, that petitioners sold credits that they could have claimed against a State income tax liability. Therefore, whether a taxpayer who sells credits at a discount that he could have used, pays his State tax liability, and deducts that liability for Federal tax purposes may receive capital
111.1 (2011) ("the U.S. Postal Service hereby incorporates by reference in this part, the Domestic Mail (continued...) - 31 - effect for the years at issue, required that a periodical include a "statement of frequency" of publication, and section E211. 5 . 3 provided: All issues must be published regularly as called for by the statement of fr
Respondent does not assert, and there is no evidence, that petitioners sold credits that they could have claimed against a State income tax liability. Therefore, whether a taxpayer who sells credits at a discount that he could have used, pays his State tax liability, and deducts that liability for Federal tax purposes may receive capital
cussion of the CUT method. See sec. 1.482-6, Income Tax Regs., for a discussion of the profit split method. These regulations, promulgated in December 2008, are effective for transactions entered into on or after Jan. 5, 2009. See infra, Discussion, sec. 111(A), Comparability of OEM Agreements, for a more in-depth discussion. During the May 2 hearing, respondent referred to “access to R&D team” and “access to marketing team” as “assembled workforce”. The term “pre-existing intangibles” is not us
Respondent conceded the balance of the State income tax refund determined in the 2001 deficiency notice. 3All section references are to the Internal evenue Code in effect for the year in issue, and all Rule refereIces are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. 4Petitioner has lived in Las Vegas, Nev.
Commissioner, T.C. Memo. 1997-92; sec. 1.111-1(a), Income Tax Regs. The amount of the refund is taxable to petitioner absent his proving to the contrary. Petitioner has failed to present any evidence or testimony to the effect that the amount of this tax refund was not taxable to him for the subject year. -8- We sustain respond
Commissioner, T.C. Memo. 1997-92. Petitioner claimed an $8,708 income tax deduction relating to payment of State taxes in 1994, and he received a $1,150 State tax refund in 1995. Petitioner contends that he received no tax benefit in 1995 relating to the refund because his 1995 adjusted gross income was negative. We disagree; 19
We therefore sustain respondent’s tax deficiency determinations for 1997, 1998, and 1999. We now turn our attention to the additions to tax for failure to file a tax return and pay tax. Sec. 6651(a)(1) and (2). Section 6651(a)(1) imposes an addition to tax for failure to timely file a return. Petitioner can avoid the section 6651(a)(1) ad
Commissioner, T.C. Memo. 1997-92. Petitioner claimed an $8,708 income tax deduction relating to payment of State taxes in 1994, and he received a $1,150 State tax refund in 1995. Petitioner contends that he received no tax benefit in 1995 relating to the refund because his 1995 adjusted gross income was negative. We disagree; 19
State Income Tax Refund Pursuant to section 111, if State income tax was deducted on a Federal income tax return for a prior taxable year and if such deduction resulted in a tax benefit to the taxpayer, such as a reduction of Federal income tax for the prior taxable year, a subsequent recovery by the taxpayer of the State income tax must be included in the taxpayer’s gross income for
(3) Recovery of tax benefits items.--Any amount to which section 111 (relating to recovery of tax benefit items) applies.
Accordingly, under the regulations promulgated pursuant to section 111, the $1,743.89 in State taxes refunded to petitioner in 1991 constitute a “recovery exclusion” and need not be included in gross income for that year.10 8 Under sec.
Generally, pursuant to section 111 and the regulations thereunder, if State income tax was deducted on a Federal income tax return for a prior taxable year and if such deduction resulted in a tax benefit to the taxpayer (i.e., a reduction of Federal income tax) for such prior taxable year, then a subsequent recovery by the taxpayer (i.e., a refund) of such State income t
Generally, under section 111 and the regulations thereunder, if a tax was deducted on a prior year's return that resulted in a reduction of tax and a tax benefit to the taxpayer, a subsequent recovery by the taxpayer of such tax must be included in gross income in the year the recovery is received.
634; Simplification of Imputed Interest Rules (continued...) - 34 - Accordingly, we must decide whether the tests developed under prior law for purposes of the investment tax credit must be used in deciding the appropriate recovery classes (for tax years ended 1985 and 1986) or appropriate recovery periods (for tax years ended 1
634; Simplification of Imputed Interest Rules (continued...) - 34 - Accordingly, we must decide whether the tests developed under prior law for purposes of the investment tax credit must be used in deciding the appropriate recovery classes (for tax years ended 1985 and 1986) or appropriate recovery periods (for tax years ended 1