Income Tax–Recovered Property Previously Deducted Included in Gross Income in Year of Recovery–Alice Phelan Sullivan Corp. v. United States

In 1989 and 1940 the corporate taxpayer claimed as charitable deductions the value of two parcels of realty which it had donated to a charitable organization subject to the condition that they be used solely for religious or educational purposes. Having decided not to use the gifts in the manner specified, the donee reconveyed them to the taxpayer in 1957. The taxpayer failed to reflect this recovery in its gross income for that year. The Commissioner of Internal Revenue, however, determined that under section 111 of the 1954 Internal Revenue Code (Code) the taxpayer’s gross income reported in its 1957 tax return should have included each piece of recovered property valued as of the year of deduction. The taxpayer paid a deficiency assessment and then sued for a partial refund of this assessment in the Court of Claims, relying on that court’s earlier decision in Perry v. United States to establish that an overpayment had been made to the extent that the taxes on the recovered property exceeded the actual tax savings from the charitable deductions in 1939 and 1940. On a motion by the Commissioner for summary judgment, held, Perry v. United States is overruled and the taxpayer’s petition is dismissed. To the extent that a taxpayer is able to utilize a deduction to reduce his taxable income, a subsequent recovery of the property giving rise to the deduction must be included in his gross income for the year of recovery and taxed at the then current rates. By this decision, the Court of Claims conformed its result on this issue to that of other courts which have faced the same question.