Van Cleave v. United States

Eugene Van Cleave (plaintiff) was the president and majority stockholder of VanMark Corporation (VanMark). In 1969, VanMark adopted a by-law that required officers of the corporation to return any portion of their salaries deemed excessive by the Internal Revenue Service (IRS) and thereby non-deductible by VanMark. Van Cleave entered into a direct agreement with VanMark under which he agreed to return to the corporation any nondeductible portion of his future salary. In 1974, Van Cleave earned $332,000 and reported the entire salary as income for that year. In 1975, the IRS deemed $57,500 of Van Cleave’s 1974 salary to be excessive, thereby disallowing a deduction in that amount to VanMark. Pursuant to the corporation’s by-law and his own separate agreement with VanMark, Van Cleave returned $57,500 to VanMark in December 1975. On his 1975 tax return, Van Cleave relied on 26 U.S.C. § 1341 to compute his tax liability for that year. Van Cleave essentially sought to exclude the $57,500 from his 1974 income, which reduced his tax liability for that year. He then applied the reduction in his tax liability for 1974 as a credit to his 1975 tax liability. The government (defendant) disallowed Van Cleave’s reliance upon § 1341 and determined that Van Cleave was only entitled to deduct the $57,500 in 1975, the year he returned it to VanMark. The district court found in favor of the government.