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tax benefit from the deduction of State income taxes in a prior
year; i.e., the year for which the refund was received. See sec.
111(a). Moreover, a taxpayer is not required to include in
income any portion of a refund that did not result in a reduction
of taxes in the year the State income taxes were deducted. See
sec. 1.111-1(a), Income Tax Regs. Petitioner complied with this
rule of law on her 1992 and 1993 Federal income tax returns. On
her 1992 Federal income tax return, petitioner deducted $2,658 on
Schedule A for State income taxes. During 1993, petitioner
received a $1,227 refund of her 1992 State income taxes. On her
1993 Federal income tax return, petitioner reported $729 as a
taxable refund of State income taxes. Petitioner reported only
$729 of the total refund in her 1993 income because her itemized
deductions for 1992 exceeded her allowable standard deduction for
that year by only $729. Thus, the maximum tax benefit received
by petitioner in 1992 for the deduction of State income taxes was
$729 and that is the amount she was required to and did in fact
report as income on her 1993 return.4
When respondent determined that BRVC was an activity not
engaged in for profit for 1992, respondent computationally
disallowed petitioner's 1992 itemized deductions in their
4 See sec. 1.111-1(b)(2)(ii) and (3), Income Tax Regs.;
Prewitt v. Commissioner, T.C. Memo. 1995-24. Respondent adopted
this rationale in Rev. Rul. 93-75, 1993-2 C.B. 63.
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