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Clark v. Commissioner, 40 B.T.A. 333, 335 (B.T.A. 1939) was an important early United States income tax case.
Contents
Facts
The taxpayers, husband and wife, made an irrevocable election to file a joint federal income tax return rather than separate returns on the advice of their return preparer. Subsequently, the Service examined the return and assessed a deficiency against the taxpayers. The deficiency existed because the return preparer took a larger deduction from income for capital losses than was allowed by law. If the taxpayers had filed separate returns employing the proper deduction for long-term capital losses, their combined tax liability would have been $19,941.10 less than the amount they paid on their joint return. As recompense for his error, the return preparer indemnified the taxpayers in that amount.
Deficiency assessed
The Service included the indemnification payment in taxpayers’ income as an amount attributable to the return preparer’s payment of the taxpayer’s income tax liability.
Opinion of the court
The Board rejected the Service’s argument that this payment was income and stated that “[p]etitioner’s taxes were not paid for him by any person . . . [h]e paid his own taxes. . . .The [money] was paid to petitioner, not qua taxes, . . . but as compensation for his loss.” 40 B.T.A. at 335. The fact that the underlying obligation was for taxes “is of no moment here.” Id.