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a claim of right and was not entitled to trust was not the proper taxpayer to file decision regarding the interest income
the refund it received for the 2014 tax a claim for refund. It found that both from the Graegin loan created a claim
year. Consequently, it issued the trust a the capital gain and interest income of right for the interest income paid
notice of deficiency for $1.5 million. that were the basis of the refund claim by RMV to the estate. The Tax Court
The trust declined to repay the re- were partnership items and that, under also rejected this argument, observing
fund and challenged the IRS’s determi- TEFRA, these items must be decided that RMV’s voluntary renegotiation
nation in Tax Court. The trust asserted at the partnership level, not at the part- of the note’s terms to reflect the Tax
in Tax Court that the Form 1045 it filed ner level. Court’s previous decision with respect
in October 2015 satisfied the Sec. 1341 Regarding whether it met the sub- to the rate of interest income did not
claim-of-right requirements. In the al- stantive requirements of Sec. 1341, the retroactively restrict RMV’s right to the
ternative, the trust contended that it was trust argued that it met these require- interest income reported for the prior
entitled to the refund under the mitiga- ments in two ways. First, in 2009 and tax year. The court reasoned that RMV
tion provisions of Secs. 1311 through 2010, RMV sold capital assets that and, by extension, the trust had an un-
1314 or under a theory of equitable generated capital gains that were al- restricted right to the interest income
recoupment. Both parties moved for locable to the trust. According to the at all relevant times; therefore, the deci-
partial summary judgment on the issue trust, RMV understated its basis in the sion regarding the interest income did
of whether the trust was entitled to the capital assets, which effectively caused not give the trust a claim of right.
refund it received. the trust to overstate its capital gain. Mitigation provisions: The trust’s
Thus, the basis adjustment (which first alternative to its claim-of-right
The Tax Court’s decision arose out of the adjustment of the argument was that it was entitled to a
The Tax Court granted the IRS’s motion partnership’s value in the stipulated refund under the mitigation provisions
for summary judgment, holding that decision in the trust’s earlier Tax Court (Secs. 1311 through 1314), which allow
the trust was not entitled to a refund for case) created a claim of right with re- for filing a refund claim within one year
the 2014 tax year under any of the three spect to the overstated capital gain. from the date a proper determination
theories it advanced. The Tax Court found that this was becomes final.
Claim of right: Sec. 1341 applies not the case. It noted that the trust Three requirements must be met
where a taxpayer included an item in through RMV had an unrestricted for the mitigation provisions to apply.
gross income for a prior tax year because right in the capital assets sales proceeds A taxpayer must show that (1) there
it appeared that the taxpayer had an and that no portion of this item had was a determination as defined by Sec.
unrestricted right (a claim of right) to been repaid or restored as a result of 1313(a); (2) the determination falls
the item of income. Under the claim- the disputes surrounding RMV’s right within specified circumstances of ad-
of-right doctrine, a taxpayer is allowed to the item. Consequently, the court justment set forth in Sec. 1312; and (3)
a deduction after the close of the prior found that RMV’s unrestricted right to the party against whom the mitigation
tax year if it is established that the the sales proceeds had never ceased to provisions are being invoked has main-
taxpayer did not have an unrestricted exist, so the trust’s right to the income tained a position inconsistent with the
right to that item of income. In certain was also unrestricted. Because the challenged erroneous inclusion, exclu-
circumstances, a taxpayer with a claim trust’s right to the income items was sion, recognition, or nonrecognition of
of right under Sec. 1341 may be entitled at all times unrestricted, Sec. 1341 did income as described by Sec. 1311(b).
to a refund. For purposes of Sec. 1341, not apply. The Tax Court held that, for proce-
the original “circumstances, terms, and Further, the Tax Court stated that dural reasons, the mitigation provisions
conditions” of the payment of an income an adjustment to basis related to the did not apply. Under Sec. 1314(b), the
item determine whether the taxpayer value of an income item is independent mitigation provisions require that a
has an unrestricted right to it. A tax- from a taxpayer’s right to the income refund claim be filed with respect to
payer’s unrestricted right to an income item. Thus, the adjustment to basis did a specific year. In the trust’s case, it
item that is not subject to contingent not affect the trust’s unrestricted right claimed it overpaid for the 2009 and
repayment cannot be altered by subse- to the income item in question — the 2010 tax years, so its refund claim
quent agreements. capital gain — and, as a result, the should have been filed for those years.
The Tax Court found both proce- court again determined that Sec. 1341 The trust, however, filed its claim for
dural and substantive reasons why Sec. did not apply. the 2014 tax year. The court found that
1341 would not apply to the trust. Pro- The trust also argued in its refund this procedural defect was fatal to the
cedurally, the court concluded that the claim that the Tax Court’s earlier trust’s position.

www.thetaxadviser.com January 2023 49