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Federal income taxes. Hillsboro Natl. Bank v. Commissioner, 460
U.S. 370, 377 (1983). The tax benefit rule rectifies the
inequity that results when a deduction is taken during one
taxable year and later events show that the deduction would not
have been allowable if all relevant facts had been known at the
time of the deduction. Id. at 383-384. In operation, the tax
benefit rule requires the taxpayer to recognize the amount so
deducted as income in the year of the later, inconsistent event.
The amount the taxpayer must include in income, however, is
limited to the amount of the deduction that provided a tax
benefit for the prior year. E.g., Rojas v. Commissioner, 90 T.C.
1090, 1097 (1988), affd. 901 F.2d 810 (9th Cir. 1990). In the
case at hand, the excess of the $44,165 deducted over the $27,506
actually paid as interest is $16,659. The inconsistent event
occurred in January 1993, when respondent assessed only $27,506
of interest with respect to the Thompsons’ 1980 and 1981 tax
years on the basis of the decisions entered by the Tax Court in
August 1992. Respondent in effect refunded the excess $16,659 to
the Thompsons by applying it as a credit toward their $15,000
deficiencies for each of 1980 and 1981. The Thompsons thus had a
“tax benefit” of $16,659 in 1993 that they failed to report on
their return for that year.
Although the Thompsons’ failure to include income under the
tax benefit rule was erroneous, it did not result from the
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