
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1341]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
 Subchapter Q--Readjustment of Tax Between Years and Special Limitations
 
                         PART V--CLAIM OF RIGHT
 
Sec. 1341. Computation of tax where taxpayer restores 
        substantial amount held under claim of right
        

(a) General rule

    If--
        (1) an item was included in gross income for a prior taxable 
    year (or years) because it appeared that the taxpayer had an 
    unrestricted right to such item;
        (2) a deduction is allowable for the taxable year because it was 
    established after the close of such prior taxable year (or years) 
    that the taxpayer did not have an unrestricted right to such item or 
    to a portion of such item; and
        (3) the amount of such deduction exceeds $3,000,

then the tax imposed by this chapter for the taxable year shall be the 
lesser of the following:
        (4) the tax for the taxable year computed with such deduction; 
    or
        (5) an amount equal to--
            (A) the tax for the taxable year computed without such 
        deduction, minus
            (B) the decrease in tax under this chapter (or the 
        corresponding provisions of prior revenue laws) for the prior 
        taxable year (or years) which would result solely from the 
        exclusion of such item (or portion thereof) from gross income 
        for such prior taxable year (or years).

For purposes of paragraph (5)(B), the corresponding provisions of the 
Internal Revenue Code of 1939 shall be chapter 1 of such code (other 
than subchapter E, relating to self-employment income) and subchapter E 
of chapter 2 of such code.

(b) Special rules

    (1) If the decrease in tax ascertained under subsection (a)(5)(B) 
exceeds the tax imposed by this chapter for the taxable year (computed 
without the deduction) such excess shall be considered to be a payment 
of tax on the last day prescribed by law for the payment of tax for the 
taxable year, and shall be refunded or credited in the same manner as if 
it were an overpayment for such taxable year.
    (2) Subsection (a) does not apply to any deduction allowable with 
respect to an item which was included in gross income by reason of the 
sale or other disposition of stock in trade of the taxpayer (or other 
property of a kind which would properly have been included in the 
inventory of the taxpayer if on hand at the close of the prior taxable 
year) or property held by the taxpayer primarily for sale to customers 
in the ordinary course of his trade or business. This paragraph shall 
not apply if the deduction arises out of refunds or repayments with 
respect to rates made by a regulated public utility (as defined in 
section 7701(a)(33) without regard to the limitation contained in the 
last two sentences thereof) if such refunds or repayments are required 
to be made by the Government, political subdivision, agency, or 
instrumentality referred to in such section, or by an order of a court, 
or are made in settlement of litigation or under threat or imminence of 
litigation.
    (3) If the tax imposed by this chapter for the taxable year is the 
amount determined under subsection (a)(5), then the deduction referred 
to in subsection (a)(2) shall not be taken into account for any purpose 
of this subtitle other than this section.
    (4) For purposes of determining whether paragraph (4) or paragraph 
(5) of subsection (a) applies--
        (A) in any case where the deduction referred to in paragraph (4) 
    of subsection (a) results in a net operating loss, such loss shall, 
    for purposes of computing the tax for the taxable year under such 
    paragraph (4), be carried back to the same extent and in the same 
    manner as is provided under section 172; and
        (B) in any case where the exclusion referred to in paragraph 
    (5)(B) of subsection (a) results in a net operating loss or capital 
    loss for the prior taxable year (or years), such loss shall, for 
    purposes of computing the decrease in tax for the prior taxable year 
    (or years) under such paragraph (5) (B), be carried back and carried 
    over to the same extent and in the same manner as is provided under 
    section 172 or section 1212, except that no carryover beyond the 
    taxable year shall be taken into account.

    (5) For purposes of this chapter, the net operating loss described 
in paragraph (4)(A) of this subsection, or the net operating loss or 
capital loss described in paragraph (4)(B) of this subsection, as the 
case may be, shall (after the application of paragraph (4) or (5)(B) of 
subsection (a) for the taxable year) be taken into account under section 
172 or 1212 for taxable years after the taxable year to the same extent 
and in the same manner as--
        (A) a net operating loss sustained for the taxable year, if 
    paragraph (4) of subsection (a) applied, or
        (B) a net operating loss or capital loss sustained for the prior 
    taxable year (or years), if paragraph (5)(B) of subsection (a) 
    applied.

(Aug. 16, 1954, ch. 736, 68A Stat. 348; Pub. L. 85-866, title I, 
Sec. 60(a)-(d), Sept. 2, 1958, 72 Stat. 1647; Pub. L. 87-863, Sec. 5(a), 
Oct. 23, 1962, 76 Stat. 1142; Pub. L. 88-272, title II, Sec. 234(b)(7), 
Feb. 26, 1964, 78 Stat. 116; Pub. L. 94-455, title XIX, 
Sec. 1901(a)(146), Oct. 4, 1976, 90 Stat. 1788.)

                       References in Text

    Chapter 1 of the Internal Revenue Code of 1939, referred to in 
subsec. (a), was comprised of sections 1 to 482 of former Title 26, 
Internal Revenue Code. Chapter 1 was repealed by section 7851(a)(1)(A) 
of this title. For table of comparisons of the 1939 Code to the 1986 
Code, see Table I preceding section 1 of this title. See also section 
7851(e) of this title for provision that references in the 1986 Code to 
a provision of the 1939 Code, not then applicable, shall be deemed a 
reference to the corresponding provision of the 1986 Code, which is then 
applicable.
    Subchapter E of chapter 2 of the Internal Revenue Code of 1939, 
referred to in subsec. (a), was comprised of sections 710 to 784 of 
former Title 26, Internal Revenue Code. Sections 710 to 736, 740, 742 to 
744, 750, 751, 760, 761, and 780 to 784 were repealed by act Nov. 8, 
1945, ch. 453, title I, Sec. 122(a), 59 Stat. 568. Section 741 was 
repealed by act Oct. 21, 1942, ch. 619, title II, Secs. 224(b), 228(b), 
56 Stat. 920, 925. Section 752 was repealed by act Oct. 21, 1942, ch. 
619, title II, Sec. 229(a)(1), 56 Stat. 931, eff. as of Oct. 8, 1940.


                               Amendments

    1976--Subsec. (b)(2). Pub. L. 94-455 struck out provision relating 
to the applicability of this paragraph where deduction arises out of 
payments or repayments made pursuant to a price redetermination 
provision in a subcontract entered into before Jan. 1, 1958.
    1964--Subsec. (b)(2). Pub. L. 88-272 substituted ``7701(a)(33) 
without regard to the limitation continued in the last two sentences 
thereof)'' for ``1503(c) without regard to paragraph (2) thereof)''.
    1962--Subsec. (b)(4), (5). Pub. L. 87-863 added pars. (4) and (5).
    1958--Subsec. (a). Pub. L. 85-866, Sec. 60(a), inserted ``and 
subchapter E of chapter 2 of such code'' in last sentence.
    Subsec. (b)(2). Pub. L. 85-866, Sec. 60(b), (c), in second sentence 
inserted ``with respect to rates'' and inserted ``, or by an order of a 
court, or are made in settlement of litigation or under threat or 
imminence of litigation'' and inserted last sentence.
    Subsec. (b)(3). Pub. L. 85-866, Sec. 60(d), added par. (3).


                    Effective Date of 1976 Amendment

    Amendment by Pub. L. 94-455 effective for taxable years beginning 
after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as a 
note under section 2 of this title.


                    Effective Date of 1964 Amendment

    Amendment by Pub. L. 88-272 applicable to taxable years beginning 
after Dec. 31, 1963, see section 234(c) of Pub. L. 88-272, set out as a 
note under section 1503 of this title.


                    Effective Date of 1962 Amendment

    Section 5(b) of Pub. L. 87-863 provided that: ``The amendment made 
by subsection (a) [amending this section] shall be effective with 
respect to taxable years beginning on or after January 1, 1962.''


                    Effective Date of 1958 Amendment

    Amendment by section 60(a), (c), (d) of Pub. L. 85-866 applicable to 
taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 
1954, see section 1(c)(1) of Pub. L. 85-866, set out as a note under 
section 165 of this title.
    Section 60(e) of Pub. L. 85-866 provided that: ``The amendment made 
by subsection (b) [amending this section] shall apply with respect to 
taxable years beginning after December 31, 1957. No interest shall be 
allowed or paid on any overpayment resulting from the application of the 
amendment made by subsection (c) [amending this section].''

                  Section Referred to in Other Sections

    This section is referred to in sections 5, 67, 6213, 6411 of this 
title.
