In December 2014, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2015 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2014 tax return. He had $150,000 of taxable income that year. On June 30, 2015, 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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Under the tax benefit rule, when a taxpayer receives a refund of an expense previously deducted on a tax return, the refund must be included in gross income in the year received to the extent that the deduction provided a tax benefit in a prior year. In this case, Todd deducted the $1,200 fire insurance premiums on his 2014 tax return, which reduced his taxable income in that year. Since he received a $500 refund of the premiums in 2015, he must include that amount in his 2015 gross income in accordance with the tax benefit rule. Todd does not need to amend his 2014 return or add the $500 to his sales proceeds from the building. The claim of right doctrine would only apply if Todd had received the refund in a different tax year than the one in which he deducted the premiums.

In December 2014, Todd, a Cash Basis Taxpayer, Paid $1,200