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State income tax refund of $355, which he did not report as
income on his 1999 Federal income tax return. In controversy is
whether petitioner’s refund of $355 is includable in his 1999
gross income. The “tax benefit rule” dictates that refunds of
State and local taxes are includable in gross income in the year
received to the extent they reduced the taxpayer’s income tax
liability for the prior year. See Francisco v. Commissioner, 119
T.C. 317, 334 (2002); Kadunc v. Commissioner, T.C. Memo. 1997-92.
Petitioner received an itemized deduction of $789 with respect to
his State income tax, which reduced his 1998 Federal income tax
liability. Therefore, pursuant to the “tax benefit rule”
petitioner must include his $355 refund of 1998 State income tax
in his 1999 gross income, and we so hold.
In summary, we hold that the payments received by petitioner
constitute income in respect of a decedent. Further, because
petitioner did not receive a step-up in basis with respect to the
payments, the full amounts of the payments are includable in
petitioner’s 1999 gross income and are ordinary in character.
Lastly, we hold that petitioner’s 1999 State income tax refund is
includable in his 1999 gross income. To the extent not herein
discussed, we have considered all other arguments made by the
parties and conclude that they are moot or without merit.
Decision will be entered
for respondent.
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