In December 2018, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2019 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2018 tax return. He had $150,000 of taxable income that year. On June 30, 2019, 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, if a taxpayer receives a refund for a deductible expense in a later year, the amount received must be included in gross income in the year of refund to the extent the deduction provided a tax benefit in a prior year. In this case, Todd deducted the entire $1,200 insurance premium on his 2018 tax return, providing him with a tax benefit. Therefore, he must include the $500 refund in his 2019 gross income. Option A is incorrect because Todd cannot simply amend his 2018 return to reduce his insurance expense as the refund was received in 2019. Option C is incorrect because the refund is not related to the sales proceeds from the building. Option D is incorrect because the claim of right doctrine applies if the taxpayer had an unrestricted right to the income in the year received, which is not the case here.

In December 2018, Todd, a Cash Basis Taxpayer, Paid $1,200