diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/psi/JetCallExpression.java b/compiler/frontend/src/org/jetbrains/jet/lang/psi/JetCallExpression.java
index 80e8548375a..a9caca9cc61 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/psi/JetCallExpression.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/psi/JetCallExpression.java
@@ -19,7 +19,6 @@ package org.jetbrains.jet.lang.psi;
 import com.intellij.lang.ASTNode;
 import com.intellij.psi.PsiElement;
 import com.intellij.psi.PsiReference;
-import com.intellij.psi.PsiReferenceService;
 import com.intellij.psi.impl.source.resolve.reference.ReferenceProvidersRegistry;
 import com.intellij.util.SmartList;
 import org.jetbrains.annotations.NotNull;
@@ -98,7 +97,7 @@ public class JetCallExpression extends JetReferenceExpression implements JetCall
                 if (JetTokens.LABELS.contains(prefixExpression.getOperationReference().getReferencedNameElementType())) {
                     JetExpression labeledExpression = prefixExpression.getBaseExpression();
                     if (labeledExpression instanceof JetFunctionLiteralExpression) {
-                        result.add(labeledExpression);
+                        result.add(prefixExpression);
                     }
                 }
             }
diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/resolve/calls/ValueArgumentsToParametersMapper.java b/compiler/frontend/src/org/jetbrains/jet/lang/resolve/calls/ValueArgumentsToParametersMapper.java
index bfca07f031f..225b54e7d70 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/resolve/calls/ValueArgumentsToParametersMapper.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/resolve/calls/ValueArgumentsToParametersMapper.java
@@ -215,15 +215,6 @@ import static org.jetbrains.jet.lang.resolve.calls.ValueArgumentsToParametersMap
                     setStatus(ERROR);
                 }
                 else {
-                    JetFunctionLiteralExpression functionLiteral;
-                    if (possiblyLabeledFunctionLiteral instanceof JetLabelQualifiedExpression) {
-                        JetLabelQualifiedExpression labeledFunctionLiteral = (JetLabelQualifiedExpression) possiblyLabeledFunctionLiteral;
-                        functionLiteral = (JetFunctionLiteralExpression) labeledFunctionLiteral.getLabeledExpression();
-                    }
-                    else {
-                        functionLiteral = (JetFunctionLiteralExpression) possiblyLabeledFunctionLiteral;
-                    }
-
                     ValueParameterDescriptor valueParameterDescriptor = valueParameters.get(valueParameters.size() - 1);
                     if (valueParameterDescriptor.getVarargElementType() != null) {
                         report(VARARG_OUTSIDE_PARENTHESES.on(possiblyLabeledFunctionLiteral));
@@ -235,7 +226,7 @@ import static org.jetbrains.jet.lang.resolve.calls.ValueArgumentsToParametersMap
                             setStatus(WEAK_ERROR);
                         }
                         else {
-                            putVararg(valueParameterDescriptor, CallMaker.makeValueArgument(functionLiteral));
+                            putVararg(valueParameterDescriptor, CallMaker.makeValueArgument(possiblyLabeledFunctionLiteral));
                         }
                     }
                 }
diff --git a/compiler/testData/diagnostics/tests/functionLiterals/return/LocalReturnExplicitLabelNoParens.kt b/compiler/testData/diagnostics/tests/functionLiterals/return/LocalReturnExplicitLabelNoParens.kt
new file mode 100644
index 00000000000..9d4d7b89be9
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/functionLiterals/return/LocalReturnExplicitLabelNoParens.kt
@@ -0,0 +1,5 @@
+fun test2() {
+    run @f{return@f 1}
+}
+
+fun run<T>(f: () -> T): T { return f() }
\ No newline at end of file
diff --git a/compiler/testData/diagnostics/tests/functionLiterals/return/LocalReturnExplicitLabelParens.kt b/compiler/testData/diagnostics/tests/functionLiterals/return/LocalReturnExplicitLabelParens.kt
new file mode 100644
index 00000000000..24d4e2d6455
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/functionLiterals/return/LocalReturnExplicitLabelParens.kt
@@ -0,0 +1,10 @@
+fun test() {
+    run(@f{return@f 1})
+}
+
+
+fun test1() {
+    run(@{return@ 1})
+}
+
+fun run<T>(f: () -> T): T { return f() }
\ No newline at end of file
diff --git a/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java b/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
index 5a84190e06e..d7403c98ece 100644
--- a/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
+++ b/compiler/tests/org/jetbrains/jet/checkers/JetDiagnosticsTestGenerated.java
@@ -2436,6 +2436,17 @@ public class JetDiagnosticsTestGenerated extends AbstractDiagnosticsTestWithEage
                 public void testForbiddenNonLocalReturnNoType() throws Exception {
                     doTest("compiler/testData/diagnostics/tests/functionLiterals/return/ForbiddenNonLocalReturnNoType.kt");
                 }
+                
+                @TestMetadata("LocalReturnExplicitLabelNoParens.kt")
+                public void testLocalReturnExplicitLabelNoParens() throws Exception {
+                    doTest("compiler/testData/diagnostics/tests/functionLiterals/return/LocalReturnExplicitLabelNoParens.kt");
+                }
+                
+                @TestMetadata("LocalReturnExplicitLabelParens.kt")
+                public void testLocalReturnExplicitLabelParens() throws Exception {
+                    doTest("compiler/testData/diagnostics/tests/functionLiterals/return/LocalReturnExplicitLabelParens.kt");
+                }
+                
             }
             
             public static Test innerSuite() {
diff --git a/compiler/tests/org/jetbrains/jet/types/JetTypeCheckerTest.java b/compiler/tests/org/jetbrains/jet/types/JetTypeCheckerTest.java
index 96006d483c5..d94730a589b 100644
--- a/compiler/tests/org/jetbrains/jet/types/JetTypeCheckerTest.java
+++ b/compiler/tests/org/jetbrains/jet/types/JetTypeCheckerTest.java
@@ -148,8 +148,8 @@ public class JetTypeCheckerTest extends JetLiteFixture {
     public void testIf() throws Exception {
         assertType("if (true) 1", "Unit");
         assertType("if (true) 1 else 1", "Int");
-        assertType("if (true) 1 else return", "Int");
-        assertType("if (true) return else 1", "Int");
+        assertType("if (true) 1 else throw Exception()", "Int");
+        assertType("if (true) throw Exception() else 1", "Int");
         assertType("if (true) throw Exception() else throw Exception()", "Nothing");
 
         assertType("if (true) 1 else null", "Int?");