Erroneous Deductions and the Tax Benefit Rule

Abstract

Professor Willis argues that the Tax Court's "erroneous deduction exception" to the tax benefit rule is theoretically sound. He maintains that application of the exception sets up a circumstance of adjustment pursuant to the mitigation rules of sections 1311 through 1314. As a result, whenever the government loses a case because of the "erroneous deduction exception," it can likely use the mitigation rules to re-open the year in which the erroneous deduction was taken.

Professor Willis also maintains that the "estoppel exception" to the "erroneous deduction exception," as applied in many cases, frustrates the application of the mitigation rules and thus should be used sparingly. He thus argues that the Fifth Circuit should reverse the Tax Court in Hughes and Luce v. Commissioner, a case currently on appeal. This reversal, he explains, would not be true victory for the taxpayer because it would prompt mitigation of the closed years.

In a further example, Professor Willis discusses the 1994 decision in Davoli v. Commissioner, another "erroneous deduction exception" case. He explains that, because the government lost that decision, it actually has one year from finality (mid-October, 1995) in which to seek mitigation of the closed years. He speculates that the government will fail to take advantage of this remedy.

Keywords: Tax Benefit Rule