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Unemployment Income Returned in a Later Year Was Taxable in Year Received

(Parker Tax Publishing August 2017)

The Tax Court held that unemployment compensation received in one year but returned in a later year was taxable in the year received. The taxpayer's argument that the rescission exception to the claim of right rule applied was rejected because the taxpayer did not recognize the need to repay the compensation and make provisions for repayment in the year the income was received. Yoklic v. Comm'r, T.C. Memo. 2017-143.

Michael Yoklic filed for unemployment benefits in April 2012 with the Arizona Department of Economic Security (DES). DES found him eligible to receive $240 per week from May to August 2012. Yoklic received a total of $3,360 in unemployment benefits during this period. In August 2012, DES issued a determination letter, followed by decision letters in September and October 2012. The letters stated that Yoklic was not entitled to the unemployment benefits he received and that he had received an overpayment of $3,360. Yoklic did not file a request for review. He repaid the benefits to DES the following year, in September 2013.

DES issued a Form 1099-G, Certain Government Payments, reporting Yoklic's unemployment compensation of $3,360 paid in 2012. When Yoklic prepared his 2012 tax return, he did not report the unemployment compensation. The IRS sent Yoklic a notice of deficiency in 2014, determining that the reported unemployment compensation was fully taxable because it was considered a substitute for wages. Yoklic petitioned the Tax Court for redetermination of the deficiency.

Unemployment compensation is included in gross income under Code Sec. 85. For a cash basis taxpayer, Code Sec. 451(a) provides that the amount of any item of income is included in gross income for the year in which it was received. The doctrine of claim of right provides that if a taxpayer receives income without an obligation to repay it or any restriction on its disposition, the income is included in the year of receipt, even if the income must be repaid in a later year. However, there is a rescission exception which provides that income received under a claim of right need not be included in income if, in the year of receipt, the taxpayer (1) recognizes an existing and fixed obligation to repay the amount received and (2) makes provisions for repayment.

Yoklic argued that the unemployment compensation should not be included in his 2012 income because he repaid it in 2013. The Tax Court inferred that Yoklic was arguing that the unemployment pay was not includible in income under the rescission exception. The Tax Court rejected that argument and sustained the IRS's determination that Yoklic had $3,360 of taxable unemployment compensation in 2012. The doctrine of rescission did not apply, according to the Tax Court, because there was no evidence that Yoklic made provisions for repayment in 2012. Instead, the court found that the income was not repaid to DES until September 2013 and was thus includible in income in 2012.

For a discussion of the claim of right doctrine, see Parker Tax ¶70,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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