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Section 1341 was enacted in 1954 to address the type of
situation that existed in United States v. Lewis, 340 U.S. 590
(1951). In that case, the taxpayer repaid, in a later year, part
of a bonus received erroneously in a prior year that was closed
for tax purposes. Because of those circumstances, the taxpayer
lost the benefits of being able to calculate the reduction of
income in the year of receipt of the bonus. Those benefits
included interest from a refund of the tax paid earlier and
differing tax rates between the years of receipt and repayment.
Although section 1341 does not address the question of interest,
it does address other possible benefits that might have been
available from the deduction or computation of the tax in the
earlier year.
Respondent contends that section 1341 generally does not
apply to circumstances where the income is obtained through
illegal means. The cases that have addressed this issue,
however, generally involve embezzlement or a similar circumstance
where the taxpayer was entrusted with another's cash or assets.7
We could find only one section 1341 illegal income case that did
not involve embezzlement or similar circumstances. On the basis
7 One case involved the misappropriation of a lawyer’s
clients’ trust funds, which in all material respects is the same
as embezzlement, especially with respect to the question of
whether a taxpayer has a claim of right (appearance of an
unrestricted right) with respect to the item in question. See
O'Hagan v. Commissioner, T.C. Memo. 1995-409.
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