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Van Cleave v. United States

United States Court of Appeals for the Sixth Circuit
718 F.2d 193 (1983)


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.

Rule of Law


Holding and Reasoning (Brown, J.)

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