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Clark v. Commissioner | 40 B.T.A. 333 (1939)

If someone receives compensation to make amends for loss or harm suffered, is that compensation included in gross income? In the oldie but goodie case of Clark versus Commissioner, the United States Board of Tax Appeals contemplated this question.

Edward Clark hired a tax adviser to prepare his and his wife’s nineteen thirty-two federal income tax returns. Unfortunately, the adviser made an error in calculating a deduction. As a result, the adviser mistakenly advised Clark and his wife to file a joint tax return. Clark did so and, based on that tax return, owed the Internal Revenue Service, or I R S, over thirty thousand dollars in additional income tax. If Clark and his wife had filed separate tax returns, their total tax liability would have been nineteen thousand nine hundred forty-one dollars and ten cents less. To compensate for the error, the adviser gave Clark nineteen thousand nine hundred forty-one dollars and ten cents.

However, in another stroke of bad luck, the I R S considered the adviser’s payment to be income in the Clarks’ nineteen thirty-four tax return and assessed a deficiency. Clark appealed to the United States Board of Tax Appeals.

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