Opinion ID: 371173
Heading Depth: 3
Heading Rank: 1

Heading: Included in Gross Income

Text: 16 Section 1341, as the Government notes, applies only when income received under claim of right in a prior year was included in gross income. Because the taxpayers did not report the money received from Capron on their 1967 return, the Government argues, they are not entitled to relief under § 1341. We cannot agree. 17 The statute does not specify whether the taxpayer himself must include the income in question on his return or whether the statute also applies where the income is included in gross income by action of the Commissioner. The only circuit court decision to discuss this issue expressly declined to decide it. See Maxwell v. United States, 334 F.2d 181, 183-84 (5th Cir. 1964). One district court, however, has held that an action may be brought under § 1341 where the income was included, and the taxes thereon were paid, pursuant to a deficiency assessed by the Commissioner. Kappel v. United States, 281 F.Supp. 426, 431-32 (W.D.Pa.1968), Aff'd, 437 F.2d 1222 (3d Cir.), Cert. denied, 404 U.S. 830, 92 S.Ct. 71, 30 L.Ed.2d 59 (1971). 18 We believe Kappel was correctly decided and that an action for refund under § 1341 should be permitted where the funds were included in gross income for the year of receipt by action of the Commissioner. Section 1341 was enacted to permit taxpayers forced to pay taxes on income that must be repaid in a later year to recapture the full amount of the taxes paid on that income. See United States v. Skelly Oil Co., 394 U.S. 678, 680-82, 89 S.Ct. 1379, 22 L.Ed.2d 642 (1969). The purpose of the statute applies with equal force where the taxpayer is required to pay tax on such funds pursuant to a deficiency assessed by the Commissioner. The Government suggests no sound reason why relief under the provisions of this remedial statute should be denied in such circumstances. We also note that the regulations for § 1341 provide that receipts shall be included in gross income whenever it appear(s) from all the facts available in the year of inclusion that the taxpayer has an unrestricted right to such item . . . . 26 C.F.R. 1.341(a)(2). We believe this language suggests that the Commissioner may consider all the facts available pursuant to his power to review returns and may include receipts in gross income pursuant to his power to assess deficiencies. 4