286 U.S. 417 (1932), Supreme Court of the United States
North American Oil Consolidated v. Burnet is a cornerstone of federal income tax law on the timing of income recognition when a taxpayer's entitlement to funds is contested.
In which taxable year must a taxpayer include profits from property the taxpayer operated while title was in litigation: (1) the year the profits were earned but held by a receiver, (2) the year the taxpayer received the funds under a court decree while the government's appeal was pending, or (3) the year the litigation finally concluded?
Claim-of-right doctrine: Amounts received by a taxpayer under a claim of right and without restriction as to disposition constitute taxable income in the year of receipt, even if the taxpayer's right to retain the money is disputed and the taxpayer may be required to restore it in a later year. If the taxpayer later is required to repay the amount, the proper remedy is a deduction (or other relief as provided by statute) in the year of repayment, not a retroactive adjustment to the earlier year. Relatedly, for accrual-method taxpayers, income does not accrue until the right to receive it becomes fixed and unconditional; funds held by a receiver while ownership is in bona fide dispute are not income to the claimant in that earlier year.
The profits were taxable to North American Oil in 1917, the year the company received them under a court decree and exercised unrestricted dominion over the funds, notwithstanding the pending government appeal.
North American Oil anchors the claim-of-right doctrine and remains a foundational case on timing of income. It is frequently cited for the proposition that dominion and control in the year of receipt trigger income, even amid disputes, and that later-required repayments are handled in the year they occur. The decision reinforces the annual accounting principle and clarifies that accrual requires a fixed, unconditional right to receive amounts—conditions not met when a receiver holds disputed funds. The case also set the stage for later statutory mitigation of harsh outcomes, most notably Internal Revenue Code § 1341 (enacted after this case), which can provide a credit or deduction in the year of repayment when income previously included under a claim of right must be restored. The doctrine has broad reach, influencing cases involving contested bonuses, escrowed funds, receiverships, and even illegal income, and it is essential for understanding timing, accounting methods, and the treatment of contingencies in federal income taxation.