The taxpayer in the case of Udeobong v. Commissioner, TC Memo 2016-109 complained that the IRS was assessing tax on income he had previously reported. But, as the Tax Court noted, while that might be true it wasn’t going to be relevant in his case.
The taxpayer in this case had received payments from Cigna before 2005 for Medicaid reimbursement payments in his Schedule C business and had paid tax on those payments. Later (but before 2010), a dispute arose with Cigna regarding whether the taxpayer was entitled to certain payments and he returned the payments to Cigna.
However, the taxpayer did not claim a deduction for the years he repaid the funds, nor did he file a claim for refund. However, he did enter into litigation with Cigna over the payments and in 2010 Cigna was required to repay the amounts he had paid back to Cigna.
The taxpayer, who reported on the cash basis of accounting, did not report the receipt of income in 2010 for these payments. His position was that he had already paid tax on the payments when they were originally received from Cigna and, thus, he would be paying a second tax on the same income if he reported them on his 2010 return.
But the Tax Court pointed out that his problem was that the repayments of the amounts, prior to 2010, gave rise under IRC §1341(a) to either a current deduction or a credit under the claim of right provisions.
He did receive cash income in 2010, but could not claim a deduction (arguably for basis in the receivable) since the claim of right provisions required that deduction or credit to be claimed in the year of repayment.