In 2015,Godfrey received a $50,000 sales commission on a long-term contract.But in 2016,the customer filed bankruptcy and Godfrey's employer was not able to collect from the customer.Under the bonus agreement,Godfrey was required to repay the employer $20,000 of the bonus.Godfrey was in the 35% marginal tax bracket in 2015 but he is in the 25% marginal tax bracket in 2016.
A)Godfrey can amend his 2015 tax return and reduce his taxable income by $20,000.
B)Godfrey should deduct the $20,000 paid in 2016 and thus his tax savings will be $5,000.
C)Godfrey can reduce his 2016 tax liability by 35% × $20,000 = $7,000.
D)Godfrey should not have reported the income in 2015 because of the contingencies.
E)None of the above.

Question

Quizplus · Accepted Answer

Godfrey can use the "claim of right" doctrine to reduce his 2016 tax liability by the amount of tax he paid on the $20,000 in 2015, which is 35% of $20,000, equaling $7,000.

In 2015,Godfrey Received a $50,000 Sales Commission on a Long-Term