Alice Phelan Sullivan Corp. v. United States 381 F.2d 399 (1967) APS Corp. donated some real estate (worth about $8.7k) to a charity with the stipulation that it be used for a religious or educational purpose. APS took deductions on their taxes for a charitable donation. At the applicable tax rate, that saved APS about $1.9k in taxes. In 1957 (seventeen years later) the charity decided that they didn't want the real estate so they gave it back to APS. When they filed their 1957 taxes, APS did not report the return of the property. The IRS assessed a deficiency. The IRS argued that the $8.7k should be included as gross income, which at APS's current tax rate would result in them having to pay about $4.5k in taxes. APS argued that the recovery of the property was a nontaxable return of capital (they were just getting back what was theirs to start with). See Clark v. Commissioner (40 B.T.A. 333 (B.T.A.1939)). APS also argued that the most the IRS could demand was the amount of the tax benefit they received when they made the donation ($1.9k). The Tax Court found for the IRS. APS appealed. The Appellate Court affirmed. The Appellate Court found that since APS originally got a deduction for giving up the property, they would have to pay taxes on the recovery of that property. Basically the return of capital principle doesn't apply because APS got a benefit when they gave up the property. The Court looked to 26 U.S.C. §111 and found that it requires recovered property to be taxed at the tax rate of the year of recovery, regardless of what the tax rate was in the year that the property was donated. Note that this works both ways. Under §111 a taxpayer can benefit if their tax bracket is lower when the money is returned, and is hurt when their tax bracket is higher when the money is returned (like what happened to APS).