In December 2012, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2013 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2012 tax return.He had $150,000 of taxable income that year. On June 30, 2013, 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 receives a refund related to a prior-year deductible expense, the amount of the refund should be included in gross income in the year of receipt to the extent that the deduction had a tax benefit. In this case, Todd received a $500 refund on his fire insurance premiums in 2013, which relates to the premiums he paid in 2012 and deducted on his 2012 tax return. Therefore, Todd should include the $500 in his 2013 gross income in accordance with the tax benefit rule. Amending his 2012 return or adding the $500 to his sales proceeds from the building would not be appropriate in this case.

In December 2012, Todd, a Cash Basis Taxpayer, Paid $1,200