Facts:
In 2014 ABC Corporation, a calendar year taxpayer, properly deducted a $100,000 payment as an expense deduction. In late 2014, ABC elected S corporation status as of January 1, 2015. In March 2015, ABC received a recovery of $40,000 of the payment. The accountant for ABC asks “Must the repayment be reported as income by ABC (the S Corp) under that tax benefit doctrine?” If ABC reports income as a result of the refund, this income will be allocated to the shareholders of ABC for year 2015. Thus, the income will be taxed to taxpayers who did not received the benefit of the deduction in year 2014. How do you advise your client?
Issue:
Should ABC Corporation (The S Corp) report the repayment as income under the tax benefit doctrine?
Analysis:
The ABC (The S Corp) does not have to report the $40,000 repayment or recovery as income on their taxes. According to the Internal Revenue Code §111(a), it states: “Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.”( Internal Revenue Code §111(a))
Findings:
In the case of Theodore A. Frederick v. Commissioner, it is very similar to ABC situation. The issue in the case was to decide whether to include an interest expense recovery as income by an S corporation. Frederick state that a recovery does not include taxable income if it was taxed to someone else other than the original person. Over all that the corporation did not have to claim the recovery as income. In the case it also states that when a C corporation chooses to be treated as as a S Corporation, then the S Corporation would recover an expense that was already deducted by the C