In Perry v. United States, 160 F. Supp. 270 (Ct. Cl. 1958), the Court of Claims adopted an "exact tax benefit" rule, under which the recovery was taxed at the rate that was applicable to the deduction; it later overruled this decision and accepted the prevailing judicial view that the recovery is to be taxed at whatever rate is in effect for the year of receipt. Alice Phelan Sullivan Corp. v. United States, 381 F.2d 399 Ct. Cl. 1967).
From 1954 to 1976, I.R.C. § 1342 reached a similar result for certain recoveries of amounts paid as a result of a judicial decision in a patent infringement suit. Section 1346 (in force from 1941 to 1976) was also comparable to the "exact tax benefit"principle of the Perry case; it permitted taxpayers receiving a repayment of unconstitutional federal taxes to choose between (a) excluding the receipt currently andamending the earlier year's return to eliminate the deduction (despite the running of the statute of limitations) and (b) reporting the recovery and paying the resulting tax. Sections 1342 and 1346 were repealed by Title XIX (the "deadwood" provisions) of the Tax Reform Act of 1976, Pub. L. No. 94-455, § 1901(a)(147)-(148), 90 Stat. 1788 (1976).
A model income tax statute drafted by an American Law Institute group proposed to require the inclusion of all recoveries of deductible items, whether the deduction was taken or not, and, if a deduction was taken, whether or not it resulted in a reduction of the taxpayer's tax, subject, however, to the taxpayer's option to reopen the earlier year if the statute of limitations had not expired or if the amount exceeded specified dollar or percentage limits.
