United States v Lewis Case Brief and Analysis Please brief and analyze to this case, DO NOT use any source/reference from other articles. United States v.

United States v Lewis Case Brief and Analysis Please brief and analyze to this case, DO NOT use any source/reference from other articles. United States v. Lewis
Supreme Court of the United States, 1951.
340 U.S. 590, 71 S.Ct. 522.
MR. JUSTICE BLACK delivered the opinion of the Court.
Respondent Lewis brought this action in the Court of Claims seeking
a refund of an alleged overpayment of his 1944 income tax. The facts
found by the Court of Claims are: In his 1944 income tax return
respondent reported about $22,000 which he had received that year as
an employee’s bonus. As a result of subsequent litigation in a state court,
however, it was decided that respondent’s bonus had been improperly
computed; under compulsion of the state court’s judgment he returned
approximately $11,000 to his employer. Until payment of the judgment
in 1946, respondent had at all times claimed and used the full $22,000
unconditionally as his own, in the good faith though “mistaken” belief
that he was entitled to the whole bonus.
On the foregoing facts the Government’s position is that
respondent’s 1944 tax should not be recomputed, but that respondent
should have deducted the $11,000 as a loss in his 1946 tax return. See
G.C.M. 16730, XV-1, Cum.Bull. 179 (1936). The Court of Claims,
however, relying on its own case, Greenwald v. United States, 102 Ct.Cl.
272, 57 F.Supp. 569, held that the excess bonus received “under a
mistake of fact” was not income in 1944 and ordered a refund based on a
recalculation of that year’s tax. 117 Ct.Cl. 336, 91 F.Supp. 1017. We
granted certiorari, 340 U.S. 903, 71 S.Ct. 279, because this holding
conflicted with many decisions of the courts of appeals, see, e.g.,
Haberkorn v. United States, 173 F.2d 587, and with principles
announced in North American Oil v. Burnet, 286 U.S. 417, 52 S.Ct. 613.
652
THE YEAR OF INCLUSION OR DEDUCTION
PART 3
***
no
earnings under a claim of right and without restriction as to its
In the North American Oil case, we said: “If a taxpayer receives
disposition, he has received income which he is required to return, even
though it may still be claimed that he is not entitled to retain the money,
and even though he may still be adjudged liable to restore its equivalent.”
an exception merely because a taxpayer is “mistaken” as to the validity
286 U.S. at 424, 52 S.Ct. at page 615. Nothing in this language permits
Court of Claims stated, by Freuler v. Helvering, 291 U.S. 35, 54 S.Ct.
308, or Commissioner v. Wilcox, 327 U.S. 404, 66 S.Ct. 546. The Freuler
case involved an entirely different section of the Internal Revenue Code,
and its holding is inapplicable here. 291 U.S. at 43, 54 S.Ct. at page 311
Income taxes must be paid on income received (or accrued) during
an annual accounting period. Cf. I.R.C., &$ 41, 42; and see Burnet v.
Sanford & Brooks Co., 282 U.S. 359, 363, 51 S.Ct. 150, 151. The “claim of
right” interpretation of the tax laws has long been used to give finality to
that period, and is now deeply rooted in the federal tax system. See cases
collected in 2 Mertens, Law of Federal Income Taxation, $ 12.103. We see
reason why the Court should depart from this well-settled
interpretation merely because it results in an advantage or disadvantage
to a taxpayer. 1
Reversed.
MR. JUSTICE DOUGLAS, dissenting.
The question in this case is not whether the bonus had to be included
in 1944 income for purposes of the tax. Plainly it should have been
because the taxpayer claimed it as of right. Some years later, however, it
was judicially determined that he had no claim to the bonus. The
question is whether he may then get back the tax which he paid on the
money.
Many inequities are inherent in the income tax. We multiply them
needlessly by nice distinctions which have no place in the practical
administration of the law. If the refund were allowed, the integrity of the
taxable year would not be violated. The tax would be paid when due; but
the Government would not be permitted to maintain the unconscionable
position that it can keep the tax after it is shown that payment was made
on money which was not income to the taxpayer.
NOTE
The Requirements of Section 1341. Section 1341 may be a good place to
take note of the rule of the seven barrel staves. Apparently, it took seven
1
It has been suggested that it would be more “equitable” to reopen respondent’s 1944. the
return. While the suggestion might work to the advantage of this taxpayer, it could not be
adopted as a general solution because
, in many cases, the three-year statute of limitations would
preclude recovery. I.R.C. § 322(b). [See I.R.C. (1986) $ 6511(a). Ed.]
How INELUCTABLE IS THE INTEGRITY OF THE TAXABLE YEAR?
CHAPTER 20
652
barrel staves to make a vessel that would hold water; if one was missing, it
was just a case of nothing done. A statutory provision that requires the
coincidence of several requirements presents the same problem; if one is not
met the provision is inapplicable. Note the three prerequisites expressed in
Section 1341(a)(1) through (3).1
Under Section 1341(a)(1), an item must be included in gross income
because it appeared that the taxpayer had an unrestricted right to it. Such
inclusion is required under the North American Oil doctrine.2 Application of
returned misappropriated funds would obviously fail it.
this first test may not be difficult. However, an embezzler who later
1341(a)(2). Note, first, that the amount repaid must constitute an allowable
Most of the controversy under Section 1341 has arisen under Section
deduction within the Lewis principle, if the Section 1341 alternatives are to
be available. A repayment may fit within the requirements of Section 162 or
Section 212.5
To satisfy Section 1341(a)(2), it must also be “established after the close
of such prior year… that the taxpayer did not have an unrestricted right to
such item… Thus, a voluntary act of a repayment does not satisfy the
requirement. In Pike v. Commissioner,6 the Tax Court concluded that the
Section 1341(a)(2) “established” requirement was not met where there was
an investigation by a special counsel of a state who was of the opinion that a
gain on the sale of stock of the corporation belonged to the corporation and,
as a result, the taxpayer returned the gain to the corporation. The court
stated that “a judicial determination of liability is not required,”? but to avoid
abuse of Section 1341, “a taxpayer must prove by a preponderance of the
evidence that he was not entitled to the unrestricted use of the amount
received in the prior year.”
It is also clear that the taxpayer’s lack of an unrestricted right to the
item must be established after the close of the year for which the item was
included in gross income but on the basis of circumstances that existed
8
1 An additional limitation of I.R.C. § 1341 is found in § 1341(b)(2) which provides that the
section “does not apply to any deduction allowable with respect to an item which was included
in gross income by reason of the sale or other disposition of stock in trade of the taxpayer (or
other property of a kind which would properly have been included in the inventory of the
taxpayer if on hand at the close of the prior taxable year) or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business.”
The case is set out at page 623, supra. See also Reg. $ 1.1341-1(a)(2), treating income
included under a claim of right as “an item included in gross income because it appeared from
all the facts available in the year of inclusion that the taxpayer had an unrestricted right to
such item.” See Dubroff, “The Claim of Right Doctrine, ” 40 Tax L. Rev. 729 (1985). An early,
basic analysis of $ 1341 appears in Webster, “The Claim of Right Doctrine: 1954 Version,” 10
Tax L. Rev. 381 (1955) and see Emanuel, “The Scope of Section 1341,” 53 Taxes 644 (1975).
3 See Rev. Rul. 68-153, 1968-1 C.B. 371.
Yerkie v. Commissioner, 67 T.C. 388 (1976); Snavely v. Commissioner, 67 T.C.M. 3056
(1994); Rev. Rul. 65-254, 1965-2 C.B. 50.
But see Hope v. Commissioner, 55 T.C. 1020 (1971), affd 471 F.2d 738 (3d Cir.1973),
cert
. denied 414 U.S. 824, 94 S.Ct. 126 (1973); and cf. United States v. Simon, 281 F.2d 520 (6th
Cir.1960).
6
44 T.C. 787 (1965).
Id. at 799. See Rev. Rul. 58-456, 1958-2 C.B. 415, 418.
8
Id. at 800.
PARTS
654
THE YEAR OF INCLUSION OR DEDUCTION
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during such prior year. The statutory test is whether the taxpayer “did not
agreement to return an amount to which the taxpayer was entitled, no
have” the right that was apparent in the year of receipt. Thus, a subsequent
matter how binding on the taxpayer, will not invoke Section 1341. In Blanton
years, the
Revenue Service (and so not deductible by the corporation) would be
entered into an agreement that any fees held to be excessive by the Internal
returned by him to the corporation. When the first three years’ fees were
found to be excessive, taxpayer returned the excess to the corporation and
asserted a right to the benefits of Section 1341. The Tax Court held that the
section did not apply because:10
Under $ 1341(a)(2), the requisite lack of an unrestricted right to an
must arise out of the
income item permitting deduction
circumstances, terms, and conditions of the original payment of
such item to the taxpayer and not out of circumstances, terms, and
conditions imposed upon such payment by reason of some
subsequent agreement between payor and payee.
The Blanton result raises the question whether Section 1341 would
apply if prior to receipt an employee has entered into a valid contract with
the employer under which the employee is obligated to repay amounts
subsequently held not to be deductible by the employer. Is the answer
indicated by the Van Cleave case, which follows this note, sound as a matter
of statutory interpretation? As a matter of tax policy?
The third requirement, which appears at Section 1341(a)(3), is that the
amount returned must exceed $3,000. One may wonder about this
congressional insertion of a de minimis principle. But it probably does have
the administrative advantage of relieving the Commissioner from the task
of analyzing and cross-check numerous Section 1341 assertions that can
have little impact on the revenue and are something less than cataclysmic to
the taxpayer involved.
The Mechanics of Section 1341. If the requirements of Section 1341
described above are satisfied, a taxpayer is allowed the best of two possible
tax results. The first is the Lewis result-simply a deduction in the current
year under Section 1341(a)(4). The second, found in Section 1341(a)(5),
allows the taxpayer to reduce the current year’s tax for the prior year’s tax
increase caused by the prior year’s over-inclusion in gross income. The
current year’s tax liability is the lesser of the Section 1341(a)(4) or Section
1341(a)(5) results. The alternative which is most beneficial depends upon the
relative rate of tax on the item in the two different years. If the taxpayer is
in a higher rate bracket in the current year, then the Section 1341(a)(4)
deduction is the most beneficial. Alternately, if the item was taxed athe
higher rate in the prior year, the Section 1341(a)(5) alternative becomes the
more beneficial result.
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9
46 T.C. 527 (1966), affirmed per curiam 379 F.2d 558 (5th Cir.1967).
10 Id. at 530. See Soled, “Reimbursement Agreements for Excessive Payments:
Compensation and Other,” 26 N.Y.U. Inst. on Fed. Tax. 1143 (1968).

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