No, this is not a retelling of the old joke about what certain young ladies make for dinner. This is the point for Catherine J. Clay, 2018 T. C. Memo. 145, filed 9/10/18.
Cath’s biggest problem is the $36K of long-term disability insurance payments she got from the policy her school district carried (for which she contributed nothing), but which she was obligated to repay when she qualified for Social Security Disability, and collected thereunder.
Cath agreed she owed the money, but never repaid. Or paid tax on it.
Judge Gale: “The claim-of-right doctrine treats otherwise taxable money proceeds received by a taxpayer under a claim of right, without restriction as to their disposition, as taxable income even though the taxpayer may be under a contingent obligation to return the money at a later time.” 2018 T. C. 145, at p. 11.
Except. What would we ever do in tax law without an “except?”
If someone gets money they shouldn’t have, recognizes the mistake, and makes provision to pay it back, it’s not received in the year in question as claim-of-right, because taxpayer recognized it had no right, and acted accordingly. If a repayment agreement is made, or money put aside or reserved for repayment, no recognition in year received.
It’s called the Merrill rule, and Judge Gale has a lot to say about it. But it doesn’t help Cath; she should have made reservation.
