Van Cleave v. United States Assignment should be briefed, i.e., include facts, issue(s), rule(s), analysis, and conclusion (FIRAC). Each assigned problem s

Van Cleave v. United States Assignment should be briefed, i.e., include facts, issue(s), rule(s), analysis, and conclusion (FIRAC). Each assigned problem should be analyzed (not just solved). Provide a straightforward brief of a case (or perhaps just the facts and issues).(Source ONLY come in this case, do not use any other source/reference from other articles!) CHAPTER 20
655
How INELUCTABLE IS THE INTEGRITY OF THE TAXABLE YEAR?
Van Cleave v. United States*
United States Court of Appeals, Sixth Circuit, 1983.
718 F.2d 193.
CIRCUIT JUDGE.
Before ENGEL and KRUPANSKY, CIRCUIT JUDGES and BROWN, SENIOR
BAILEY BROWN, SENIOR CIRCUIT JUDGE.
This appeal involves a claim of favorable income tax treatment
under 26 U.S.C. § 1341 by a taxpayer who in a subsequent year paid back
excessive compensation to the corporation which employed him. The
taxpayer included this excessive compensation in his return for the
the compensation was received. The government concedes that taxpayer
is entitled to a deduction in the subsequent year. Taxpayer contends,
however, that he should be allowed, pursuant to Section 1341, more
favorable tax treatment by in effect excluding the
compensation from his income in the year received, thereby reducing his
for the subsequent year. The district court, after a bench trial, entered
judgment for the government in taxpayer’s refund action and taxpayer
appealed. We reverse and hold that taxpayer is entitled to the benefit of
tax
atter
Section 1341.
BACKGROUND
the
118
e
The taxpayer, Eugene Van Cleave, was president and majority
stockholder of VanMark Corporation throughout the time in question. In
1969, the corporation adopted a by-law requiring corporate officers who
received from the corporation income determined by the Internal
Revenue Service (IRS) to be excessive and so not deductible by the
corporation as a business expense—to pay back the amount determined
to be excessive to the corporation. In addition, Mr. Van Cleave entered
into a separate agreement requiring him to reimburse the corporation for
nondeductible compensation.
Mr. Van Cleave received $332,000 in salary and bonuses in 1974.
During 1975, the IRS audited the corporation’s return, determined that
$57,500 of Mr. Van Cleave’s salary was excessive, and disallowed that
portion of his salary as a deduction to the corporation. In December, 1975,
pursuant to the corporation’s by-law and the agreement between Mr. Van
Cleave and the corporation, Mr. Van Cleave repaid the nondeductible
$57,500.
Mr. Van Cleave reported the full compensation on his calendar year
1974 income tax return. On his 1975 return, prepared with the
repayment to the corporation in mind, he calculated his tax liability by
using 26 U.S.C. § 1341. The IRS audited the return, and allowed a
See Bartelstein, “Van Cleave v. United States: Repayment Agreements and Section
1341” 38 Tax Lawyer 239 (1984), which is critical of the Van Cleave result and supportive of the
District Court’s contrary result in the case.
656
PART 5
1
THE YEAR OF INCLUSION OR DEDUCTION
deduction for 1975 but disallowed use of Section 1341, resulting in a tax
deficiency of $5,987.34. Mr. Van Cleave paid this deficiency and brought
this action for a refund.
This case turns on the interpretation of Section 1341 of the Internal
Revenue Code.
C
Section 1341 was enacted by Congress to mitigate the sometimes
harsh result of the application of the “claim of right” doctrine. United
States v. Skelly Oil Co., 394 U.S. 678, 681, 89 S.Ct. 1379, 1381 (1969);
***. Under the claim of right doctrine, a taxpayer must pay tax on an
item in the year in which he receives it under a claim of right even if it is
later determined that his right to the item was not absolute and he is
required to return it. The taxpayer, however, is allowed to deduct the
amount of the item from his income in the year of repayment. This result
was held to be required because income and deductions are determined
on an annual basis. Skelly at 681, 89 S.Ct. at 1381. But, as pointed out
by the Supreme Court in Skelly, it is possible for a taxpayer to benefit
less from the deduction in the year of repayment than he would benefit
if he had been able to deduct the amount repaid from his income in the
year of receipt. Id. This result of the claim of right doctrine could occur
when, as was the case with Mr. Van Cleave, the taxpayer had been in a
higher tax bracket in the year of receipt than he was in the year of
repayment.
Section 1341 allows the taxpayer to choose the more favorable
alternative as follows:
If the taxpayer included an item in gross income in one taxable
year, and in a subsequent taxable year he becomes entitled to a
deduction because the item or a portion thereof is no longer
subject to his unrestricted use, and the amount of the deduction
is in excess of $3,000, the tax for the subsequent year is reduced
by either the tax attributable to the deduction or the decrease
in the tax for the prior year attributable to the removal of the
item, whichever is greater. Under the rule of the Lewis case (340
U.S. 590, 71 S.Ct. 522 (1951)) (see infra], the taxpayer is entitled
to a deduction only in the year of repayment. ***
I.
The district court held that Section 1341 treatment was not available
to Mr. Van Cleave because it determined that his repayment was
voluntary. The district court determined that it was voluntary because
Mr. Van Cleave owned a substantial majority of the stock and in that
sense controlled the corporation. On appeal, however, the government
does not contend that Section 1341 is inapplicable because the repayment
was voluntary and indeed does not contend that the repayment in fact
un voluntary
How INELUCTABLE IS THE INTEGRITY OF THE TAXABLE YEAR?
CHAPTER 20
657
that such possibility of tax avoidance is not a proper
however,
The district court also seemed to be persuaded by the argument that,
if Mr. Van Cleave were allowed Section 1341 treatment under these
circumstances, this would open the door to tax avoidance in that
taxpayers who controlled corporations could “test the waters” in setting
their compensation without risk of an adverse tax result. We believe,
consideration in applying this statute, and that the consideration is a
legislative rather than a judicial consideration. Moreover, as Mr. Van
Cleave suggests, the possibility of tax avoidance could be reduced by
requiring the corporation and recipient of compensation to state in their
reimburse in the event a deduction is disallowed to the corporation.
II.
Buy
Ali
ut
2
The leading case on the claim of right tax doctrine is North American
Oil Consolidated v. Burnet, 286 U.S. 417, 52 S.Ct. 613 (1932). North
American Oil involved a dispute over the year in which income, earned
on property held by a receiver during a title dispute between the taxpayer
and the government, was to be taxed. The possibilities were 1916, the
in which the income was earned; 1917, the year in which the district
year
court ruled in favor of the taxpayer and the money was paid to the
taxpayer; or 1922, the year the litigation was finally terminated in the
taxpayer’s favor. In an opinion by Justice Brandeis, the Court
determined that 1917 was the year that the income must be reported and
set forth the claim of right doctrine as follows:
If a taxpayer receives earnings under a claim of right and
without restriction as to its 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.
Id. at 424, 52 S.Ct. at 615.
In a more recent case, Healy v. Commissioner, 345 U.S. 278, 73 S.Ct.
671 (1953), each of the taxpayers involved received excessive
compensation from a closely-held corporation in which he was both a
shareholder and an officer. The taxpayers reported that compensation as
income in the year of receipt. In a subsequent year, the IRS determined
that part of this compensation was excessive, disallowed the deduction to
the corporation, and taxpayers, as transferees, were required to pay back
the excess. The government conceded that the taxpayers could deduct the
amount paid back from their taxable income, but argued that the
deduction could only be taken in the year of repayment. Taxpayers, on
the other hand, argued that they should be allowed to have their tax
liability determined by taking a deduction in the year the excessive
compensation was received. The Court held that, under the claim of right
doctrine, the deduction could be taken only from the income of the year
Rule of
claim of
right
of repayment.
658
THE YEAR OF INCLUSION OR DEDUCTION
In a similar case, United States v Lewis. 340 U.S. 590,71 S.Ct. 522
c.
a
(1951), taxpayer received a bonus from his employer in 1944 and
PART 3
reported
paid back one half of the bonus pursuant to a state court judgment. As in
it on his income tax return for that year. In a subsequent year, taxpayer
Healy, taxpayer claimed that he should be able, in the year of repayment
,
to have his tax liability determined by taking a deduction in the year the
excessive bonus was paid to him. The Court held, however, that, under
the claim of right doctrine, the taxpayer could take a deduction only in
the year of repayment. Justice Douglas dissented, noting that the effect
of the Court’s decision was to allow the government to exact tax on money
that was not income to the taxpayer.
As previously noted, Section 1341 was enacted to alleviate the effect
of the claim of right doctrine in cases such as Lewis. The government
argues, however, that Section 1341 is not available to the taxpayer in the
instant case. The government points out that Section 1341 provides for
taxpayer relief only if “it appeared that the taxpayer had an unrestricted
right” (emphasis added) to the excess salary and “it was established after
the close of such prior taxable year *** that the taxpayer did not have
an unrestricted right to such item.” Section 1341(a)(1) and (2). The
government argues that Mr. Van Cleave had more than an appearance
of an unrestricted right to the excess compensation in the year in which
it was received, and that the right to the compensation became restricted
only upon the occurrence of the IRS audit and determinations in a
subsequent year. The government maintains that, since Mr. Van Cleave
had an unrestricted right to the compensation in the year of receipt,
contingent only upon the happening of an event in a subsequent year,
Section 1341 is not available to him.1
We reject this argument and hold that Section 1341 is available to
Mr. Van Cleave. The fact that his ultimate right to the compensation was
not determined until the occurrence of a subsequent event does not mean
that Mr. Van Cleave had, in the statutory sense, an unrestricted right to
the compensation when he received it. In Prince v. United States, 610
F.2d 350 (1980), the Fifth Circuit reversed a district court decision that
the estate of a taxpayer was not entitled to Section 1341 tax adjustment.
A state court had ruled that the decedent, a trust beneficiary, had
received trust funds-and paid federal income tax on them that should
have gone to the trustee as part of its fee. The state court required the
decedent’s estate to return these funds to the trustee. The government’s
position in that case was identical to its stance in this case: Section 1341
was not available to the taxpayer’s estate because the taxpayer had an
unrestricted right to the income in the year of receipt, not just the
appearance of a right. Id. at 352. In rejecting the government’s argument,
the court said:
1
The government also maintains this position in Rev.Rul. 67-437, 1967–2 C.B. 296. See
also Rev.Rul. 69–115, 1969-1 C.B. 50, which holds that the taxpayers would be allowed to
deduct the payment as an I.R.C. $ 162 deduction in the year of repayment. Ed.
How INELUCTABLE IS THE INTEGRITY OF THE TAXABLE YEAR?
CHAPTER 20
659
The Alabama judgment established, whether expressly or by
implication, that the deductions from the trust income for the
ten year fee had been miscalculated. As a result, (decedent] had
received more income from the trust than she was entitled to
receive. This income had to be returned. The requirements of
Section 1341 were thus clearly satisfied. [Decedent] appeared to
have an unrestricted right to the income when she received it; it
was established in a taxable year after she received it that she
did not have such a right. Id.
We agree with the Fifth Circuit’s reading of Section 1341 and hold
that the fact that a restriction on a taxpayer’s right to income does not
arise until a year subsequent to the time of receipt does not affect the
availability of Section 1341 tax adjustment. Therefore, Section 1341 tax
adjustment is available to a taxpayer in this situation if the other
requirements of the section are met. We are aided in this conclusion by
our examination of cases involving the application of the claim of right
doctrine, the effect of which the section was designed to alleviate. United
States v. Lewis, 340 U.S. 590, 71 S.Ct. 522 (1951); Healy v.
Commissioner, 345 U.S. 278, 73 S.Ct. 671 (1953). Acceptance of the
government’s reading of the statute would thwart the ameliorative
purpose intended by Congress in enacting the section. ***. Accordingly,
Mr. Van Cleave is entitled to a tax adjustment under Section 1341.
The judgment of the district court is reversed and the case is
remanded for proceedings consistent with this opinion.

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