[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1346-1]

[Page 668-669]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1346-1  Recovery of unconstitutional taxes.

    (a) In general. (1) A taxpayer who recovers unconstitutional Federal 
taxes which were paid or accrued and for which a deduction was allowed 
in a prior taxable year may elect, as provided in paragraph (b) of this 
section, to exclude the income (exclusive of interest) attributable to 
such recovery from his gross income in the taxable year of recovery. Any 
such exclusion of income is subject to the requirements of section 1346 
and this section.
    (2) If a taxpayer elects to receive the benefits of section 1346, 
the income (exclusive of interest) attributable to the recovery of the 
unconstitutional Federal tax will be treated as an offset to the 
deduction allowed therefor in a prior taxable year (or years). The 
taxpayer's return for the prior taxable year (or years) with respect to 
which the statutory period for the assessment of a deficiency has 
expired will be opened only for the purpose of reducing the deduction 
allowed for the unconstitutional Federal tax and assessing the resulting 
deficiency or deficiencies, if any. (An election under section 1346 may 
be made only if the taxpayer consents in writing to such assessment. See 
paragraph (b) of this section.) No other adjustment will be allowed.
    (3) If the disallowance of the deduction allowed in respect of a 
prior taxable year results in a deficiency for that year, the deficiency 
will be assessed against the taxpayer within the period agreed upon 
between the taxpayer and the district director with respect to the 
taxable year of the prior deduction, even though the statutory period 
for the assessment may have expired prior to the filing of the consent.
    (4) If a taxpayer does not elect under the provisions of section 
1346 and this section to exclude the tax recovered from gross income in 
the taxable year of recovery, the tax recovered shall, from the 
standpoint of its inclusion in or exclusion from gross income, be 
governed by the provisions of section 111.
    (b) Manner of making election. (1) The election provided for in 
paragraph (a) of this section shall be made by the taxpayer filing a 
statement in writing that he elects to treat the deduction allowed in a 
prior taxable year for the unconstitutional tax as not having been 
allowable for such taxable year. Such a statement must be filed with the 
taxpayer's return for the taxable year in which the recovery of the 
unconstitutional tax or taxes occurs. No other method of making the 
election is permitted. The statement of election must contain a 
description of the tax recovered, the date of recovery, the taxable year 
in which paid or accrued, and the taxable year for which the deduction 
was allowed. The statement of election must also contain a statement 
signifying the taxpayer's consent (i) to treat the deduction or portion 
thereof allowed in a prior year with respect to the unconstitutional tax 
as not allowable for that year and (ii) to the assessment, in respect of 
the taxable year for which the deduction was allowed, of any deficiency, 
together with interest thereon as provided by law, resulting from 
disallowance of the deduction or

[[Page 669]]

portion thereof, even though the statutory period for the assessment of 
any such deficiency may have expired before the filing of such consent.
    (2) The term recovery, as used in this section, includes not only 
refund or credit of taxes previously paid, but also the cancellation of 
a purported tax liability which was accrued and deducted for a prior 
taxable year but never actually paid.

[T.D. 6500, 25 FR 12052, Nov. 26, 1960]