United States v. Lewis

Background

A taxpayer (Mr. Lewis) reported about $22,000 as an employee bonus on his 1944 federal income tax return. Later, a state court decided the bonus had been incorrectly calculated and, in 1946, he was compelled to return roughly $11,000 to his employer. Until that judgment, he had used the full $22,000 as his own, believing in good faith that he was entitled to it. The Court of Claims relied on an earlier decision and ordered a refund, treating the mistakenly received portion as not income in 1944.

Reasoning

The central question was whether money an employee received and used as his own is taxable in the year of receipt even if a later court forces repayment. The Court explained that under the longstanding “claim of right” rule, money received under a claim of right and without restriction is income when received. The Court said earlier cases relied on by the Court of Claims did not overturn that rule. Because Lewis had claimed and used the money unconditionally, the Court held it was taxable in 1944 and reversed the refund order.

Real world impact

Workers who receive pay, bonuses, or similar sums and later must return some of the money will generally be treated as having had taxable income when they first received the funds. That makes recovering taxes paid after repayment harder. The Court noted that reopening earlier tax years would not be a workable general solution in many cases because the three-year statute of limitations often prevents recovery.

Dissents or concurrances

Justice Douglas dissented, arguing that it is unfair for the Government to keep taxes paid on money later shown not to be the taxpayer’s, and he would have allowed the refund.