This might be a potential answer for the OP if the overpayment is paid back in a lump sum:
- "If the repayment occurs in a subsequent year, then the participant is entitled to a deduction under section 165(a) because the amount of the overpayment is attributable to compensation for services rendered to the employer. The deduction is allowed in the year of the repayment, but only if the taxpayer itemizes his deductions. If the amount of the excess distribution exceeds $3,000, the rules of section 1341 would apply in determining the taxpayer's income tax liability. The deduction under section 1341 is not subject to the two percent adjusted gross income floor."
I don't know how current or accurate that is but it refers to sections of the tax code so it shouldn't be too difficult for the OP to follow up on.
Unless the poster is a tax attorney, chances are just reading § 165 and § 1341 alone would mean nothing; indeed, it would likely not make a whole lot more sense to most folks than reading Greek. However, the problem is a "claim of right" issue, which is what § 1341 addresses. I don't really see that § 165, which provides for deductions for losses, applies here at all. Not having read whatever it is that you got that paragraph from, I can't say whether it's correct in the context it was provided.
But the basic approach here is that the repayment of previous overpayment is dealt with as a deduction on the return for the year the repayment is made, not as an amended return for the year the OP received the overpayment. The issue that arises, however, is that the taxpayer may have been in a higher tax bracket when the income was received than he is in the year he makes the repayment. In that case, the taxpayer loses out with just a regular deduction because deducting income taxed a lower rate than the rate that applied to the previous overpayment means that the taxpayer has paid in the end more tax than he should.
For example, suppose Amy received a $10,000 pension overpayment in 2006. During that year, while the economy was still booming, she had a lot of income, and thus her marginal tax rate that year was 31%. Her $10,000 overpayment thus means that she paid $3,100 tax on that overpayment. Then, in 2010, the pension administrator discovered the $10,000 overpayment and demands Amy pay it back. She does so in 2010. But in 2010, her income was lower and she was in the 28% bracket. A $10,000 deduction would result in reducing her 2010 tax by only $2,800. Thus, in the end she's paid $300 more in tax because she received $10,000 she never should have received in the first place. The right outcome would be to give her a deduction or credit that saves her $3,100 to put her back where she would be if she had never received the overpayment.
This is the problem that § 1341 addresses. If the amount that is subject to the claim of right doctrine (a repayment this year of income received in an earlier year that the taxpayer appeared to have the right to receive at the time) exceeds $3,000, then Amy can use § 1341 to get a deduction worth $3,100 in 2010 to get the right result. The actual mechanics of the provision are more complex, but this is the big picture of the end result.