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Court in North Am. Oil Consol. Co. v. Burnett, 286 U.S. 417
(1932). In determining the proper taxable year in which to
include income generated from land the legal title to which was
subject to litigation, the Court stated as follows:
If a taxpayer receives earnings under a claim of right
and without restriction as to its disposition, he has
received income which he is required to return, even
though it may still be claimed that he is not entitled
to retain the money, and even though he may still be
adjudged liable to restore its equivalent. [Id. at
424.]
The Supreme Court elaborated on the claim of right doctrine in
James v. United States, 366 U.S. 213, 219 (1961), as follows:
When a taxpayer acquires earnings, lawfully or
unlawfully, without the consensual recognition, express
or implied, of an obligation to repay and without
restriction as to their disposition, “he has received
income which he is required to return, even though it
may still be claimed that he is not entitled to retain
the money, and even though he may still be adjudged
liable to restore its equivalent.” North American Oil
Consolidated Co. v. Burnet, supra, at p. 424. In such
case, the taxpayer has “actual command over the
property taxed–-the actual benefit for which the tax is
paid,” Corliss v. Bowers, supra [281 U.S. 376, 378
(1930)]. This standard brings wrongful appropriations
within the broad sweep of “gross income”; it excludes
loans. * * *
Accordingly, in order for the customer overpayments to be
excluded from income, petitioner must establish either of the
following: (1) The existence of a consensual recognition of
petitioner’s obligation to repay the overpayments to the
remitting customers, or (2) the presence of a restriction on
petitioner’s disposition of the customer overpayments.
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