What is the effect of the tax benefit rule on an individual's income?

The tax benefit rule is a judicially developed doctrine that is designed to relieve some of the inequities that can result from strict adherence to an annual accounting system. Hillsboro Nat'l Bank v. Comm'r, 460 U.S. 370, 377 (1983). In an example given in that case, the rule prevented an inequitable tax windfall to the taxpayer. The taxpayer had taken a deduction for an apparently uncollectible debt in one year, only to be repaid when the debtor made an unexpected financial recovery the following year. Ordinarily, the debt repayment in the second year would not be taxable, since it represents a return of capital. Under the tax benefit rule, however, the taxpayer had to include the repayment as income, in order to allow the government to recoup the tax attributable to the improper deduction. Id. at 377-79.