Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 57-47

1957-1 C.B. 23

Sec. 61

IRS Headnote

A taxpayer received a sum of money from her tax consultant as recompense for an error made by the latter in the preparation and filing of the taxpayer's individual income tax return. The error had caused the taxpayer to pay more tax than she would have owed had the correct method been employed. Held , no taxable income is derived from that part of the recovery received by the taxpayer which does not exceed the amount of tax which she was required to pay because of the error, but the remainder of the recovery, representing interest on the amount deemed overpaid and the fee paid to the consultant for preparing the return, must be included in her gross income in computing her taxable income.

Full Text

Rev. Rul. 57-47

Advice has been requested in regard to the taxability of an amount received by a taxpayer as recompense for an error made by her tax consultant, under the circumstances described below.

A certain taxpayer received a sum of money from her tax consultant as recompense for an error made by the latter in the preparation and filing of the taxpayer's individual income tax return. The error caused the taxpayer to pay more tax than she would have owed had the correct method been employed. When the error was discovered, the statutory period of limitation for recovery of the overpayment of the tax had expired, so the tax consultant paid her, by way of recompense, an amount equal to the difference between the tax which the taxpayer would have paid except for the error and the amount which she was actually required to pay, plus an amount equal to the sum of (1) six per cent interest on such difference from the date the taxpayer paid her tax and (2) the fee which she paid the tax consultant for the preparation of her return. Such fee had been deducted by the taxpayer for income tax purposes and the full amount of the deduction served to reduce her tax for the year of such deduction.

Under the provisions of section 164(b)(1) of the Internal Revenue Code of 1954, no deduction is allowed for Federal income taxes in computing taxable income. The amount received by the taxpayer by way of recompense for the tax paid by her on account of the error made by her tax consultant therefore is not includible in gross income. Edward H. Clark v. Commissioner , 40 B.T.A. 333.

However, section 212(3) of the Code allows as a deduction expenses for the production of income `in connection with the determination, collection, or refund of any tax,' and this includes expense in preparation of tax returns. David L. Low , 7 T.C. 363, acquiescence, C.B. 1946-2, 3. Section 111 of the Internal Revenue Code of 1954 provides that gross income shall not include income `attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the recovery exclusion' with respect thereto, which did not result in a reduction of the taxpayer's income tax. Since the taxpayer deducted the fees paid to the tax consultant and received full tax benefit for such deduction, section 111 does not provide for excluding from her gross income that part of the recovery which represented a return to her of such fee. Further, there is no provision for excluding from gross income the amount received by her as interest to compensate her for the loss of use of funds which she could have retained except for the error made by the tax consultant.

In view of the foregoing, it is held that no taxable income is derived from that part of the recovery received by the taxpayer which does not exceed the amount of tax which she was required to pay because of the error made by her tax consultant, but that the remainder of the recovery must be included in gross income in computing her taxable income.

Nonacquiescence in the case of Edward H. Clark v. Commissioner , 40 B.T.A. 333, C.B. 1939-2, 45, has been withdrawn. See page 4 of this Bulletin.