Allen P. Unvert and Catherine R. Unvert v. Commissioner of Internal Revenue

Taxpayers appeal from a decision of the Tax Court holding that money paid toward the purchase of condominiums in 1969 and deducted as an interest expense in that year must be treated as income under the tax benefit rule when recovered in 1972. The taxpayers contend that the erroneous deduction exception to the tax benefit rule applies. We affirm.

FACTS

On December 31, 1969, Allen Unvert paid $54,500 to U. S. Financial Corp. towards the purchase of condominiums. He was told that the payment represented deductible prepaid interest and that the paperwork regarding the purchase would be completed in March 1970. Unvert deducted the $54,-500 for calendar year 1969 as an interest expense.

Unvert claimed additional operating expense deductions in 1970 and 1971, although he was never given any documents reflecting the terms of the purchase. In June 1971, he requested the documents from U. S. Financial. In May 1972, it agreed to return without interest the $54,500 paid in December 1969.

Unvert obtained an extension of time until October 15, 1973, to file his 1972 return but did not then include as income the funds returned by U. S. Financial. The statute of limitations on the 1969…