A recent tax case involved a psychiatrist who had been charged with healthcare fraud. His plea deal required him to make some $2 million in reimbursements to Medicare and other insurers. Seeking to ease the pain, he filed for an income tax refund of over $800,000. He argued that he should be allowed to recover the tax he paid on the $2 million he didn’t get to keep.
He was hoping to recover under a section of the Internal Revenue Code dealing with a concept called claim of right. This rule may apply in a situation where you paid tax on an item of income in an earlier year, believing you had a right to that income, but later had to repay the money. The rule can prevent unfairness in a situation where you pay tax on income you don’t get to keep.
The dishonest doctor had a problem, though. One of the requirements of this rule is that you had an unrestricted right to the income in the year you paid the tax. The court observed that this taxpayer never had a right to this money at all, as he obtained it through fraud. Refund denied.
The poor guy paid tax on the money, didn’t get to keep it, and couldn’t recover the tax. We could almost feel sorry for him if it weren’t for that detail about how he got into this mess.