Sunday, May 12, 2013

Van Cleave v. United States case brief

Van Cleave v. United States case brief
718 F.2d 193, 1983 U.S. App. 83-2 U.S. Tax Cas. (CCH) P9620; 52 A.F.T.R.2d (RIA) 6071

CASE SYNOPSIS: Appellant taxpayer challenged the decision of the United States District Court for the Eastern District of Michigan, which denied appellant favorable income tax treatment under 26 U.S.C.S. § 1341 after appellant paid back in a subsequent year excessive compensation to the corporation that employed him.

FACTS: Appellant taxpayer was president and majority stockholder of a corporation. He received compensation in one year that in the following year the Internal Revenue Service (IRS) determined was excessive. Appellant repaid the excessive compensation in the year after he had received it. Appellant claimed that he was entitled under 26 U.S.C.S. § 1341 to more favorable tax treatment by, in effect, excluding the excessive compensation from his income in the year received, thereby reducing his tax liability for that year and receiving a credit against his tax liability for the subsequent year. The IRS contended that appellant was only entitled to a deduction in the year he repaid the compensation, because he had more than a mere appearance of an unrestricted right to the income in the year it was received. The district court entered judgment for the government. On appeal, the court reversed and remanded. The court held that appellant was entitled to the benefit of § 1341, even though he had an unrestricted right to the income in the year received and it was only in the following year that his right to the money became restricted.

CONCLUSION: The court reversed and remanded, holding that appellant taxpayer was permitted to exclude excessive compensation from his income in the year received after having repaid the compensation in a subsequent year. The court held that it did not matter that appellant had an unrestricted right to the compensation when it was received.

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