1. Annual Accounting: Burnet v. Sanford & Brooks A dispute with the government over a contract to dredge river. Did company make or lose money on the contract overall? Did timing of expenses and revenue match? What did the company have to report in 1920?

2. Lesson: Ours is an annual, not transactional, method of accounting.

3. The net operating loss carryover provisions of section 172 give some limited relief to this annual regime.

4. Section 172 applies to BUSINESS losses.

5. Thus, we must have special rules when applying section 172 to individuals.

6. Claim of Right: North American Oil Consolidated A dispute with the government regarding ownership of land that produces oil income. Income earned in 1916. Income to company in 1917 In 1920 app ct affirmed. Suit dismissed in 1922. In what year does the company have income?

7. Under claim of right doctrine, a taxpayer has income when The taxpayer receives the funds; Treats the funds as its own; Concedes no offsetting obligation. It does not matter if the claim is disputed and later settled or abandoned.

8. In limited situations, section 1341 gives the taxpayer a choice as to tax rate to use when paying back funds received under claim of right. Rate in year of repayment Rate in year monies were received

9. Tax Benefit Rule – Section 111 A taxpayer includes a recovery of funds in income to the extent and only to the extent that the funds generated a tax benefit for the taxpayer in a prior taxable year.

10. The tax benefit rule has an inclusionary and exclusionary aspect. Full benefit in earlier year, full inclusion in later year. No benefit in earlier year, not inclusion in the later year. Some benefit in earlier year, some inclusion in the later year.

11. Common examples where tax benefit rule applies: Recovery of bad debts Recovery of taxes paid Recovery of theft loss Recovery of worthless asset

12. Tax benefit rule is part annual and part transactional It is annual in that the tax rates in year of recovery apply. It is transactional in that the amount of income included depends on the extent to which income in earlier year generated a benefit.