How did a Louisiana individual obtain relief when using IRC § 1341's federal tax-credit method for repaying more than $3,000 of previously reported income?

Plain-English summary

A Louisiana individual using IRC § 1341's federal credit method for repaying more than $3,000 of previously taxed income could deduct the repayment on Louisiana Schedule E.

The taxpayer made the deduction for the same period in which the federal credit was claimed and identified it as “IRC 1341 Income,” “Claim of Right Doctrine,” or similar wording.

The two federal methods

Federal law allowed the taxpayer to choose the smaller tax result from deducting the repayment in the year paid or reducing current federal tax by the prior-year tax attributable to the repaid income.

The deduction method already reduced income carried into Louisiana, so no special adjustment was needed. The credit method did not change federal adjusted gross income, so the Schedule E deduction prevented Louisiana from continuing to tax repaid income.

Common questions

Q: Who did the ruling cover?

A: Individuals repaying more than $3,000 of income previously reported under a claim of right.

Q: Was a Louisiana adjustment needed with the federal deduction method?

A: No.

Q: Was an adjustment needed with the federal credit method?

A: Yes, through the Schedule E deduction described.

Q: How was the deduction labeled?

A: “IRC 1341 Income,” “Claim of Right Doctrine,” or similar language.

Citations and references

• IRC § 1341 — claim-of-right relief
• La. R.S. 47:295 — equitable adjustment authority cited in the ruling
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 04-002

Original ruling text

evenue RevenueRRRRevenue Information Bulletin No 01-xxxx

Revenue Ruling
No. 04- 002
March 18, 2004
Individual Income Tax
Taxpayer Claim of Rights for Repayments of Income in Excess of $3,000
Purpose: This Revenue Ruling explains an additional deduction allowed certain taxpayers who
have reduced their federal income tax using the provisions of I.R.C. § 1341.
Analysis/Discussion: Federal tax law allows an individual taxpayer who has to pay back over
$3,000 of previously reported income two options to recover the tax paid on the income. The
option to be chosen is the lesser of: 1) deducting the repaid amount in the year of repayment, or
2) reducing the tax for the year of repayment by the amount of tax for the previous year which
was attributed to inclusion of the income amount.
The first option allows for a deduction of the income for the year in which the repayment occurs
and by virtue of the “piggy back” of the federal tax return, benefit is derived on the Louisiana
return. No special adjustment is necessary on the Louisiana return in this case.
Under the second option, the credit is taken by noting “I.R.C. Section 1341” on the appropriate
line in the “Payment” section of the federal Form 1040. This option does not change the
adjusted gross income amount on the federal tax return, therefore the taxpayer will have paid
Louisiana income tax on income no longer subject to taxation. An adjustment is necessary in
order to prevent Louisiana taxation of income not taxed for federal income tax purposes.
Conclusion: To ensure that Louisiana taxpayers are treated in a fair and equitable manner, in
accordance with La. Rev. Stat. Ann. § 47:295 and with approval of the Board of Tax Appeals,
the Department has devised a manner in which affected taxpayers may obtain relief. Individual
taxpayers, who for federal income tax purposes use the second option noted above, may file their
tax returns for the same period that the credit is taken on the federal return and use Schedule E to
deduct the amount of repayment. The amount should be identified as “IRC 1341 Income”,
“Claim of Right Doctrine” or similar wording.
Cynthia Bridges
Secretary
By:

William (Mac) E. Little
Attorney
Policy Services Division

A Revenue Ruling is issued under the authority of LAC 61III.101 (C ). A Revenue Ruling is written to provide
guidance to the public and to Department of Revenue employees. It is a written statement issued to apply principles
of law to a specific set of facts. A Revenue Ruling does not have the force and effect of law and is not binding on
the public. It is a statement of the department's position and is binding on the department until superseded or
modified by a subsequent change in statute, regulation, declaratory ruling, or court decision.