Where a transaction is planned and implemented or a tax return is filed on the basis of advice from a tax professional that turns out to have been faulty, resulting in the payment of more tax than would otherwise have been paid, the taxpayer may have a claim against the tax professional for the additional tax cost and related expenses such as interest and legal fees. Is a recovery on such a claim itself income subject to tax?
Cosentino v. Commissioner,1 a recent memorandum decision of the Tax Court, concludes that such a recovery is generally nontaxable as a “replacement of capital” except to the extent it represents a recoupment of amounts previously deducted for income tax purposes by the taxpayer. Although no corporate tax issue was implicated, similar issues often arise in corporate contexts, and this decision and authority on which it relies are therefore discussed below.
