Death Is Not a Tax Dodge: A Look at the Tax Benefit Rule

tax-benefit-ruleBecause tax accounting is done annually, taxes are assessed on a basis that may prove inaccurate if a particular transaction is altered after the tax year has closed. For example, if a corporation deducts a state tax that it paid in one year, it would receive a windfall if the tax is invalidated and refunded in a later year. To rectify these situations, the tax benefit rule may apply to trigger income recognition if subsequent events are “fundamentally inconsistent” with a prior deduction. Hillsboro Nat’l Bank v. Comm’r, 460 U.S. 370, 383 (1983).

Last week, the Tax Court addressed the tax benefit rule, holding that death is not fundamentally inconsistent with a prior deduction for purchases of seed and other agricultural inputs associated with a farm; as a consequence, the farmer and his wife were able to deduct the same expenses twice in two consecutive years.… Read More