2014.May.25 Too Much Discretion - over the terms for a clawback could trigger liability-based (variable) accounting due to uncertainty about when a grant has occurred, according to two of the big four accounting firms. See this Towers Watson Alert, which quotes from KPMG and PwC memos.
2014.Apr.06 "Uncertainty of Apparent Right Critical In Clawback Deduction, IRS Counsel Says" - This BloombergBNA article reports the IRS view as follows, quoting here from the article:
Sue-Jean Kim, attorney at the Internal Revenue Service's Office of Chief Counsel, said that she prefers Rev. Rul. 68–153, because it summarizes the agency's “thinking on this notion of apparent right.”
“This ruling sets up a spectrum of rights,” Kim said. “At one end is no absolute right, at the other end is the absolute right, and in the middle there is something called ‘apparent right.' ”
Kim said that the common thread in scenarios in which Section 1341 is successfully claimed is an uncertainty in the fact or law surrounding the original income, such as in a performance bonus.
“As long as the taxpayer, at the end of the taxable year, has an understanding that she has a right to the income but later discovers that that understanding was mistaken or erroneous, Section 1341 will apply,” Kim said. The timing of the relief remains a point of contention, Kim said.
Business Loss for Income Clawed-back in Later Year: see Rev. Rul. 67-48, discussed in IRS Field Service Advisory 200036006 regarding the "Claim of Right Doctrine" that allows later year deductions for income that was previously taxed (unless the prior income arose from fraud such as embezzlement).
U.S. Claim of Right Doctrine
Seminal Case: North American Oil Consol. Co v. Burnet (286 US 417, 1932) "The net profits earned by the property in 1916 ... became income of the company in 1917, when it first became entitled to them and when it actually received them. If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. See Board v. Commissioner, 51 F.2d 73, 75, 76. Compare United States v. S.S. White Dental Mang. Co., 274 U. S. 398, 274 U. S. 403. If in 1922 the government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year.
2014.03.17 Nacchio Case Favors Executive despite Criminal Acts - For discussion of a 2014 Court of Claims decision focused on Code Section 1341 and the claim of right doctrine, see Melbinger blog.