In December 2011,Todd,a cash basis taxpayer,paid $1,200 fire insurance for the calendar year 2012 on a building he held for rental income.Todd deducted the $1,200 insurance premiums on his 2011 tax return.He had $150,000 of taxable income that year.On June 30,2012,he sold the building and,as a result,received a $500 refund on his fire insurance premiums.As a result of the above:

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According to the tax benefit rule, if a taxpayer has received a tax benefit from an expense in one year and recovers the expense in a subsequent year, the recovery must be included in gross income in the year of recovery. In this case, Todd received a tax benefit by deducting the full $1,200 insurance premium on his 2011 tax return, but he only paid $700 of the premium in that year. When he received the $500 refund in 2012, he recovered the portion of the premiums he did not pay in 2011. Therefore, he must include the $500 refund as income on his 2012 tax return in accordance with the tax benefit rule. Amend his 2011 return is not necessary because he timely paid the entire amount of the fire insurance premiums in that year. Adding the $500 to the sales proceeds is not correct because the refund is not related to the sale of the building. The claim of right doctrine is not applicable here because Todd did not receive the insurance premiums by mistake or under an erroneous legal principle.

In December 2011,Todd,a Cash Basis Taxpayer,paid $1,200 Fire Insurance for the Calendar