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reported none of this refund on his Federal income tax return for
1991.8
In this case, petitioner’s 1990 return indicates taxable
income of a minus $13,489. Included in the amounts deducted for
that year on Schedule C under “Taxes and licenses” was the amount
of $1,099,9 which petitioner labeled “State and local”. It is
obvious that the deduction of State income taxes produced no tax
benefit to petitioner for 1990; he would have had a negative
amount for taxable income in any event. Accordingly, under the
regulations promulgated pursuant to section 111, the $1,743.89 in
State taxes refunded to petitioner in 1991 constitute a “recovery
exclusion” and need not be included in gross income for that
year.10
8 Under sec. 451, the full $1,743.89 would ordinarily be
included in income. The $743.89 would be included because it was
actually received by petitioner, and the $1,000 which he directed
be credited against his 1991 State income tax liabilities would
be included in his gross income as “constructively received”
insofar as it is credited to petitioner’s account, or set apart
for him, or otherwise made available to him. Sec. 1.451-2(a),
Income Tax Regs.
9 Petitioner has not explained the apparent discrepancy
between his 1990 deduction of $1,099 for “State and local” taxes
and the return in 1991 of $1,743.89 of such taxes.
10 The regulations under sec. 111 also provide that “the
aggregate of the section 111 items [e.g., the State income taxes
paid for a prior year] must be further decreased by the portion
thereof which caused a reduction in tax in preceding or
succeeding taxable years through any net operating loss
carryovers or carrybacks * * * affected by such items.” Sec.
(continued...)
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