In Year 1, Farb, a cash-basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November Year 2, the matter was resolved in Farb's favor, and he received a $5,000 refund. Farb itemizes deductions on his tax returns. Which of the following statements is true regarding the deductibility of the property taxes?
a. Farb should deduct $8,000 in his Year 1 income tax return and report the $5,000 refund as income in his Year 2 income tax return.
b. Farb should deduct $3,000 in his Year 2 income tax return.
c. Farb should deduct $3,000 in his Year 1 income tax return.
d. Farb should not deduct any amount in his Year 1 income tax return when originally filed, and he should file an amended Year 1 income tax return in Year 2.
Ans: a. Farb should deduct $8,000 in his Year 1 income tax return and report the $5,000 refund as income in his Year 2 income tax return.
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