⚖️ Norwich Commercial Group, Inc., TC Memo 2025-43 (May 12, 2025)

🧾 Case Summary

A Connecticut-based mortgage company, Norwich Commercial Group, has secured a significant win at the U.S. Tax Court — claiming a $6.95 million deduction in 2014 for income it mistakenly reported years earlier and later repaid. The Court agreed the company met the standards of the Claim of Right Doctrine.

🔍 Background: What Happened?

🏢 The Business:

Norwich Commercial Group, Inc. — a mortgage originator.

📅 The Timeline:

• From 2007–2013, Norwich reported income that later turned out to be “phantom” — the result of accounting mistakes.
• The funds originated from warehouse lending transactions with Liberty Bank and Farmington Bank.

In 2014, Norwich identified the errors and repaid the funds.

🧾 What Is the Claim of Right Doctrine?

📘 The Claim of Right Doctrine allows a taxpayer to:

1. Report income in good faith and with full control at the time.
2. Later deduct it if required to return it due to a mistake, legal obligation, or error.

🧠 Think of it like this:

You paid tax on income you didn’t actually get to keep. The doctrine helps correct that unfairness.

⚠️ The IRS Disagrees

The IRS rejected Norwich’s 2014 deduction:

• 🚫 Claiming the funds were loans, not income.
• 🧾 Arguing they should have never been included as taxable income.
• ➕ Making other upward adjustments to Norwich’s taxable income.

✅ What the Tax Court Said

The Tax Court sided with Norwich — but with some nuance:

✅ The Court ruled:

• Advances from Liberty Bank were mistakenly treated as income and qualify under the Claim of Right Doctrine.
• These were not clearly loans and were used as income by Norwich at the time.
• ❌ But:Funds from Farmington Bank, clearly structured as loans, were never income, so not deductible.

💬 Court’s Comments in Conclusion

In its opinion, the Tax Court made the following observations:

🧾 “Norwich was under no obligation to repay the Liberty Bank advances at the time it reported them as income. It had unrestricted use and control, thus satisfying the conditions of the Claim of Right.”

❌ “However, the inclusion of Farmington Bank loan proceeds was a clear error in classification. They were loans ab initio and never income, therefore outside the scope of the doctrine.”

These distinctions helped the Court determine which repayments were deductible and which were not.

🔚 Final Thoughts

This case is a major reminder for businesses:

💡 Mistakes happen — but if you’re taxed on income you didn’t ultimately retain, the law has mechanisms like the Claim of Right Doctrine to correct that.

👩‍⚖️ As the Tax Court emphasized, context and control matter. If your business had unrestricted use of the funds and was later legally obligated to return them, you’re likely eligible for a deduction in the year of repayment.