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with his sales of insider information, an NOL would not result
from the payment of the legal expenses incurred in 1988 or 1989.
We hold that petitioner is not entitled to carry back an NOL
deduction from 1988 or 1989 to the year in controversy in this
case (1987).
Does Section 1341 Apply to Petitioner’s Disgorgement Payment?
Having decided that petitioner is not entitled to an NOL
carryback to 1987, we consider his alternative argument that
section 1341 applies to the 1988 disgorgement payment. In
particular, petitioner argues that he is entitled to a tax credit
under section 1341(a)(5) equal to the 1987 tax attributable to
the inclusion of the $125,000 disgorgement in his 1987 income.
Section 1341 permits a special computation method for the tax
liability of a taxpayer who has: (1) Received income (in excess
of $3,000) in 1 year under a claim of right; (2) included the
amount in income; and (3) in a subsequent taxable year, was
required to make restoration of the income to another because it
was established that the taxpayer did not have an unrestricted
right to the income. Sec. 1341; sec. 1.1341-1(a)(1), Income Tax
Regs.
Section 1.1341-1(a)(2), Income Tax Regs., continues with the
definition:
“income included under a claim of right” means an item
included in gross income because it appeared from all
the facts available in the year of inclusion that the
taxpayer had an unrestricted right to such item, and
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