Abstract
A good deal has been written over the past forty-odd years about the tax benefit rule. Over this period the federal courts have decided many cases in which its application has been at issue, 1 and the law journals have published a small but steady stream of commentary on the rule and its manifestations. 2 Last term, in Hillsboro National Bank v. Commissioner, 3 the Supreme Court issued an opinion that focused squarely, and at some length, on the tax benefit rule. Despite this attention, relatively little has been done to examine the conceptual foundations of the tax benefit rule 4 and to try, in the light of that examination, to give a coherent account of the principle behind the rule. This essay attempts to begin to fill that void. The phrase "tax benefit rule" has been widely used to refer to the requirement that a taxpayer who recovers an amount that he deducted in an earlier year include the recovery in his income for the current year unless he received no tax benefit from the deduction. 5 In Hillsboro, the Supreme Court rejected this "recovery" formulation 6 and described the rule instead as "ordinarily apply[ing] to require the inclusion of income when events occur that are fundamentally inconsistent with an earlier deduction." 7 In a lengthy separate opinion and partial dissent, Justice Stevens sharply criticized the Court's "reformulation" as "an extremely significant enlargement of the tax collector's powers." 8 Although Justice Stevens' concern is understandable ...