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gains taxes than he would have if he had provided evidence of
basis. But if so, he has only himself to blame.
II. State Tax Refund Income
Respondent has also determined that petitioner’s 1991
taxable income includes the $1,743.89 that the State of New York
refunded or credited to petitioner in that year as overpaid State
taxes from the previous year.
Section 111(a) provides that income recovered during the
taxable year is excluded from gross income for that year but only
to the extent that the amount of the recovery did not reduce
prior Federal income taxes. The amount excluded is called the
“recovery exclusion”. Accordingly, if a taxpayer would not have
positive taxable income in a given year regardless of whether he
or she deducted State income taxes for that year, then the
taxpayer’s recovery of those taxes in a subsequent year will be
excluded from gross income in that subsequent year. See sec.
1.111-1(b)(2), Income Tax Regs.
The evidence shows that, in 1991, the State sent $743.89 of
previously overpaid income taxes directly to petitioner, and it
credited the $1,000 balance of these overpaid taxes to
petitioner’s 1991 State income tax liabilities. Petitioner
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