Tuesday, August 6, 2019
Douglas A. Kahn (Michigan), Return of an Employee’s Claim of Right Income, 163 Tax Notes 1819 (2019):
This brief article explains how the 2017 repeal of the miscellaneous itemized deduction affects the operation of section 1341 on an employee’s return of claim of right income.
Conclusion There is no good reason to treat the temporary repeal of miscellaneous itemized deductions as effectively repealing the provision excluding from the miscellaneous itemized deduction category a return of claim of right income that otherwise would be a miscellaneous itemized deduction. In adopting section 67(b)(9), Congress indicated that it does not consider a return of claim of right income to be the type of transaction that should be treated differently (and less advantageously) than other itemized deductions. It would be perverse to find that the provision changing a section 1341 miscellaneous itemized deduction to an ordinary itemized deduction can no longer apply because the item would be a miscellaneous itemized deduction if there were no section 1341 provision. If that were so, the employee would have no relief from being taxed on the amount he returned; it would not be deductible and no credit would be allowed. The author believes that the repeal of the miscellaneous itemized deduction does not have that effect and so an employee’s return of claim of right income will continue to qualify for section 1341 treatment as either an itemized deduction or a credit, whichever is more beneficial.