United States v. Lewis
340 U.S. 590 (1951)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A taxpayer must recognize income in the year it is received under a claim of right and without restriction as to its disposition, even if the taxpayer is later required to repay a portion of that income.
Facts:
- In 1944, respondent Lewis received an employee's bonus of approximately $22,000.
- Lewis reported the full $22,000 as income on his 1944 tax return.
- Lewis at all times claimed and used the full bonus unconditionally as his own, under the good faith but mistaken belief that he was entitled to the entire amount.
- Subsequent litigation in a state court determined that Lewis's bonus had been improperly computed.
- As a result of the state court's judgment, Lewis was compelled to return approximately $11,000 to his employer in 1946.
Procedural Posture:
- Lewis brought an action in the U.S. Court of Claims seeking a refund for an alleged overpayment of his 1944 income tax.
- The Court of Claims held in favor of Lewis, ordering a refund based on a recalculation of his 1944 tax.
- The United States (the Government) petitioned the U.S. Supreme Court for a writ of certiorari.
- The Supreme Court granted certiorari.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a taxpayer who receives income under a good faith claim of right, and who is later adjudicated liable to restore a portion of it, have to report the full amount as income in the year of receipt?
Opinions:
Majority - Mr. Justice Black
Yes. If a taxpayer receives earnings under a claim of right and without restriction as to disposition, the earnings must be reported as income in the year received, even if the taxpayer is later adjudged liable to restore its equivalent. The 'claim of right' doctrine is deeply rooted in the federal tax system to give finality to the annual accounting period. A taxpayer's mistaken belief as to the validity of their claim does not create an exception to this doctrine. The proper recourse for the taxpayer is to take a deduction for the loss in the year of repayment (1946), not to reopen and recompute the tax for the year of receipt (1944).
Dissenting - Mr. Justice Douglas
No. While the bonus should have been included in 1944 income when received, the taxpayer should be able to get a refund for the tax paid on the portion that was later judicially determined not to be his income. It is unconscionable for the government to retain tax on money that was not truly income to the taxpayer. Allowing a refund would not violate the integrity of the taxable year and would avoid the inequities created by nice legal distinctions.
Analysis:
This case firmly establishes the 'claim of right' doctrine as a cornerstone of the annual accounting principle in tax law. The decision prioritizes finality and administrative convenience for the tax system over the potential inequities faced by individual taxpayers. It clarifies that the remedy for a later repayment of income is a deduction in the year of repayment, not an amendment of a prior year's return. This precedent prevents the endless reopening of past tax years but can create disparities if a taxpayer's marginal tax rate differs significantly between the year of receipt and the year of repayment.
