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If you are a cash method taxpayer who pays an expense
and then recovers any part of the amount paid in the
same tax year, reduce your expense deduction by the
amount of the recovery. If you have recovery in a
later year, include the recovered amount in income.
* * *
Petitioner’s reliance on that publication is unwarranted
because the excerpt relied upon assumes that the expenditure is
deductible in the first instance. The material relied on by
petitioner does not address the critical preliminary question of
whether the costs advanced were loans or expenses. Reliance on
the Commissioner’s publication, in this instance, is misplaced
because it does not contain guidance on the question of which
costs, payments, or disbursements constitute a deductible
expense.4
Respondent, in the notice of deficiency, disallowed
petitioner’s claimed deduction of litigation costs for 1993.
Respondent also reversed petitioner’s 1993 income inclusion
attributable to reimbursement of litigation costs deducted in
prior years (including 1992). Finally, respondent determined
that section 481 applied, and so the reimbursement income
4 Assuming arguendo that the publication was applicable to
the question of whether or not advanced costs are deductible, the
statement relied on by petitioner is the statement of a legal
principle (i.e., Tax Benefit Rule). Because a necessary element
for estoppel is that there be reliance on a factual statement,
the circumstances here would not satisfy that necessary
prerequisite. See Estate of Emerson v. Commissioner, 67 T.C.
612, 617-618 (1977).
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Last modified: May 25, 2011