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Are Recoveries for Losses Taxable? The Commissioner’s Nonacquiescence in Cosentino Muddies the Waters  

Author:  Erik M. Jensen.

Source: Volume 34, Number 02, Winter 2017 , pp.47-62(16)

Journal of Taxation of Investments

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The tax treatment of the recovery of losses is a common issue, as is the question of what constitutes a loss. The governing principles, not always clear to begin with, have been further muddied by the Commissioner’s nonacquiescence in the 2014 Tax Court decision in Cosentino v. Commissioner, a case involving an accounting firm’s compensation of the Cosentinos for, among other things, additional federal income tax they had paid because of the firm’s suspect advice. The Internal Revenue Service distinguishes Cosentino from the classic Board of Tax Appeals case Clark v. Commissioner, on which the Tax Court had relied in holding that the recovery of federal income tax paid wasn’t taxable. This article discusses the tax treatment of losses and loss recoveries generally and examines both Clark and Cosentino in detail. The conclusion: The distinctions that the Service sees between those two cases are plausible in some respects, but not satisfying.

Keywords: Cosentino v. Commissioner; AOD 2016-01; Clark v. Commissioner; losses; recovery of losses; recovery of basis or capital

Affiliations:  1: Case Western Reserve University School of Law.

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