Fred, a cash basis taxpayer, received a $15,000 bonus from his employer in 2015. The bonus was based on the company’s profits for 2014. In 2016, the company discovered that its 2014 profits were incorrectly computed. As a result, Fred received an additional $10,000 with respect to 2014 profits. Fred’s marginal tax rate in 2015 was 15%, and it was 35% in 2016. Sue, also a cash basis taxpayer, received a $35,000 bonus in 2016 that was based on 2015 profits. In 2016, the company discovered that it had overstated its profits in 2015. As a result, Sue was required to repay $10,000 of her bonus in 2016. Sue was in the 35% marginal tax bracket in 2015 and in the 15% marginal bracket in 2016. What special tax treatment is available to Fred and Sue as a result of their employer’s errors?
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