If an individual repays income they earlier reported under a 'claim of right' and uses the federal section 1341 special tax computation, does Nebraska use that same section 1341 result for its income tax?

Plain-English summary

The "claim of right" rule deals with money you received and paid tax on in one year, believing it was yours, but later have to pay back. Federal law lets you deduct the repayment in the year you repay it -- but if you were taxed at a high rate in the earlier year and are in a lower bracket now, that deduction may not make you whole. So Internal Revenue Code section 1341 gives a taxpayer who repays more than $3,000 a choice: either deduct the repayment now, or reduce this year's tax by the amount of tax the income cost you back in the earlier year, whichever is better. This ruling answers whether Nebraska follows that federal section 1341 result.

The core holding: "The federal income tax computed under section 1341 of the Internal Revenue Code for individual income tax will be employed for Nebraska purposes if used for federal purposes."

Why it comes out that way, and how to apply it:

• Nebraska piggybacks on federal tax. Under Neb. Rev. Stat. section 77-2715(1), Nebraska individual income tax is a flat percentage of the taxpayer's adjusted federal income tax liability -- the federal income tax the taxpayer would owe (before federal credits) on federal taxable income as modified by Nebraska under section 77-2716. IRC section 5(b) routes claim-of-right restorations into the section 1341 computation, so that computation is part of the federal liability Nebraska starts from.
• Whichever federal method you used carries over. If you deducted the repayment under section 1341(a)(4) (the "with the deduction" method), you enter that federal tax on the Nebraska line for federal tax before credits, note "section 1341 Claim of Right -- see attached schedules," add any Nebraska-recomputed alternative minimum tax, and multiply by the Nebraska rate for the year of repayment. If you used section 1341(a)(5) (tax figured without the deduction, minus the decrease in the prior year's federal tax from excluding the payment), you generally do the same.
• When the benefit is bigger than this year's tax. Under section 1341(a)(5), if the decrease in federal tax exceeds the federal tax for the year of repayment (computed without the deduction), the excess is treated as an overpayment as of the last day for paying that year's tax. Multiply that excess by the current Nebraska rate and enter the result on the total credits line of the Nebraska return -- so the federal claim-of-right benefit becomes a Nebraska credit.
• Nebraska adjustments still apply. If you make Nebraska adjustments to federal taxable income (for example, the deduction for U.S. government interest income), use the Nebraska-adjusted federal taxable income in the section 1341 computation for Nebraska, and attach the federal return and claim-of-right schedules.
• Losses. If the calculation produces a net operating loss or capital loss, the special rules in section 1341(b) for those losses are followed for Nebraska purposes.

What this means for you

Individuals who had to repay income taxed in an earlier year

If your repayment exceeded $3,000 and you used the federal section 1341 computation, you do not redo the analysis from scratch for Nebraska. Nebraska uses the same federal result -- either the deduction method or the tax-decrease method -- and if the federal tax decrease is larger than this year's tax, you can end up with a Nebraska credit rather than just a deduction.

Executives, salespeople, and others facing clawbacks

Claim-of-right situations often arise from repaid bonuses, commissions, or other compensation later determined not to be owed. The ruling confirms Nebraska honors the more favorable of the two federal section 1341 outcomes, so the choice you make federally drives the Nebraska result.

Accountants and tax preparers

Track which subsection you used. Under 1341(a)(4) you enter the recomputed federal tax on the federal-tax-before-credits line; under 1341(a)(5), the same, except that any excess tax decrease becomes a Nebraska overpayment on the credits line. Apply Nebraska modifications (like U.S. government interest) before running the section 1341 math, attach the federal schedules, and confirm the current statutes and rates, since this ruling dates to 1985.

Common questions

Q: Does Nebraska follow the federal section 1341 claim-of-right computation?
A: Yes. If you used section 1341 for federal purposes, the same computed federal tax is used for Nebraska, because Nebraska tax is a percentage of your adjusted federal income tax liability.

Q: What is the $3,000 threshold?
A: Section 1341 relief is available only when the amount you restore (repay) exceeds $3,000. Below that, you simply deduct the repayment.

Q: What if the federal tax decrease is bigger than this year's tax?
A: Under section 1341(a)(5), the excess is treated as an overpayment. For Nebraska, multiply the excess by the current Nebraska rate and enter it on the total credits line of your return.

Q: Do Nebraska adjustments change the calculation?
A: Yes. If you have Nebraska modifications to federal taxable income (such as the deduction for U.S. government interest), use the Nebraska-adjusted federal taxable income in the section 1341 computation, and attach the federal return and schedules.

Citations and references

• Nebraska Revenue Ruling 22-85-2, "Individual Income Tax -- Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right" (Nebraska Department of Revenue, issued May 1985; approved by State Tax Commissioner Donna Karnes).
• Neb. Rev. Stat. § 77-2715(1) -- Nebraska individual income tax imposed as a flat percentage of the taxpayer's adjusted federal income tax liability (quoted in the ruling); § 77-2716 -- Nebraska modifications to federal taxable income.
• Internal Revenue Code § 1341 (claim-of-right restorations), including §§ 1341(a)(4), 1341(a)(5), and 1341(b); IRC § 5(b) (directing use of the § 1341 computation).

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr228502_claim_of_right.pdf

Source-quality note: This ruling survives only as a scan and the machine-extracted text below has OCR artifacts (garbled headings, "13a1" for "1341", and a garbled signature/date block reading approximately "May 31, 1985"). The holding, the section 77-2715(1) quotation, the two section 1341 methods, the overpayment rule, and the Nebraska-adjustment and loss rules are legible and are the basis for this summary.

Original ruling text

Revenue Ruling 22-85'2

lndividual lncome Tax--Computation of Tax Where Taxpayer Restores
Substantial Amount Held Under Claim of Right. THE FEDERAL INCOME
TAX COMPUTED . UNDER SECTION 1341 OF THE INTERNAL REVENUE
CODE FOR INDIVIDUAL INCOME TAX WILL BE EMPLOYED FOR
NEBRASKA PURPOSES IF USED FOR FEDERAL PURPOSES.

Advice has been requested whether the amount of federal income tax
calculated under code section 1341 of lnternal Revenue Code, computation
of tax where taxpayer restores a substantial amount held under claim of
right, is the amount of tax to be calculated for Nebraska índividual
income tax purposes.
Section 77-2715(1) of the Nebraska Revised Statutes, in part, states

the following:

A tax is hereby imposed for each taxable year on
the entire income of every resident individual of this
state and on the income of every nonresident individual of this state which is derived f rom sources
within this state. The tax shall be a flat percentage
of , for each resident individual, the taxpayerrs
adjusted federal income tax liability for the taxable
year and, for each nonresident individual , the
taxpayerrs adjusted federal income tax liability for
the taxable year which is attributable to income
derived from sources within this state.
The taxpayer's adjusted federal income tax liability
shall be the amount of federal income tax, as determined under Subtitle A, Chapter I I subchapter A,
Pants I, V I and Vl of the lntennal Revenue Code,
for which the taxpayer would have been liable if
such taxpayer had paíd federal income tax based on
federal taxable income as adjusted by the modifications provided in section 77-?716 without any allowance for credits against such tax permitted under
the lnternal Revenue Code.
Code section 5(b) of the lnternal Revenue Code is a section within
Subtitle A / Chapter 1 , Subchapter A, Part I of the lnternal Revenue
Code. This section indicates that where the taxpayer restores a substantial amount held under the claim of right the federal tax liability
shall be computed under the provisions of code section 1341.
Payments received under a claim of right must be included in gross
income. This is true even though it is established at a later time that
the taxpayer d¡d not have an unrestricted right to the payments and

Revenue Ruling 22-85-2

Page 2

must repay the same amount. A taxpayer is allowed to deduct the
repayments in the year in which the repayments are made. However,
the deduction may not adequately compensate for the tax paid in the
earlier year. This inequity is eliminated if the amount repaid exceeds
$3,000. ln such case, under Code section 1341(a)(5), the taxpayer may
decrease his tax for the year of repayment. The amount of tax for the
year of repayment will be the tax for the taxable year computed without
deduction minus the decrease in tax for the prior taxable year which
would result from the exclusion of such item(s) from gross income for
the prior taxable year. However, under Code section 1341(a)(4), if a
lesser tax liability results by the taxpayer simply deducting the repaid
amount in the year of repayment, the taxpayer is to claim the deduction
instead. ln either instance, the adjustment is made for the year of
repayment.

The method of calculating the federal tax liability under either Code
section 13a1(a)(a) or Code section 1341(a)(5) on the federal return filed
with the lnternal Revenue Service is to be used for the Nebraska individual income tax return. lf adjustments for Nebraska purposes are
made to federal taxable income, such as the deduction for U.S. government interest income, the federal taxable income after Nebras ka
adjustments is to be used in the section 1341 computation for Nebraska.
A copy of the federal return and schedules of claim of right computations must be attached to the Nebraska return, including any
recomputations required by Nebraska adjustments.
Nebraska tax will be computed as follows:

(1) lf federal tax liability has been calculated under Code section
13a1(a)(a) (computed w¡th the deduction), the amount of
federal income tax liability for the taxable year shall be
entered on the line of the Nebraska individual income tax
return that indicates federal tax before credits. Write on this
line 'rsection 1341 Claim of Right--see attached schedules.'l
Add any alternative minimum tax as recomputed for Nebraska
purposes, if applicable, to this amount. This tax amount will
be multiplied by.the current Nebraska income tax rate which is
the rate in the year in which repayment is made.

(2) lf federal tax liability has been calculated under.Code section
1341(a)(5) (computed without the deduction minus the decrease
in federal tax for the prior year resulting solely from the
exclusion of the payments from gross income for the prior
year), and ¡f the decrease in federal tax is equal to or' less
than the federal tax imposed for the taxable year computed
without deduction, then the amount of federal tax liability as
computed wíll be entered on the line of the Nebraska
lndividual lncome Tax Return that indicates federal tax before
credits. Write on this line "section 1341 Claim of Right--see
attached schedules. " Add any alternative minimum tax as
recomputed for Nebraska purposes, if applicable, to this
amount. This tax will be multiplied by the curnent Nebraska

Revenue Ruling 22-85-2

Page 3

income tax rate which is the rate for the year in which repayment is made.

lf the decrease in federal tax exceeds the federal tax imposed
for the taxable year (computed without deduction), the amount
of such excess (reduced after adding any alternative minimum
tax as recomputed for Nebraska purposes, if applicable) shall
be considered an ovenpayment of tax on the last day prescribed by law for the payment of tax for the year of
repayment. The amount of such overpayment shall be multiplied
by the current Nebraska income tax rate which is the rate for
the year of repayment to determine the amount of Nebraska
overpayment. This amount of Nebraska overpayment will be
added to the total credits line of the Nebnaska individual
income tax return. Write on this line "section 1341 Claim of
Right--see attached schedules. "

Where the calculation results in a net operating loss or capital loss, th e
special rules in Code section 1341(b) governing such losses shall b e
followed for Nebraska tax purposes.
APPROVED:

Donna Karnes
State Tax Commissioner
¡vt.v

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