denying a loss deduction under section 165 based on public policy grounds where a taxpayer spent money on a sham counterfeiting scheme
How later courts described this case
- denying a loss deduction under section 165 based on public policy grounds where a taxpayer spent money on a sham counterfeiting scheme
- theft of cash in a scheme to counterfeit U.S. currency treated as a loss item
- Tannenwald , J ., concurring, and Sterrett , J ., dissenting
Written by the judges who cited it.
The opinion
Dawson, J., concurring: I agree with Judge Quealy and Judge Tannenwald. In my judgment this is neither the time nor the case to sanction a theft loss deduction where the petitioner clearly intended to conspire with others in a scheme to counterfeit United States currency. We wisely blocked such an attempt in Luther M. Richey, Jr., 83 T.C. 272 (1959), which remains a viable precedent. Nothing in Commissioner v. Tellier, 383 U.S. 687 (1966), or in any other pronouncement of the Supreme Court, points to a contrary result. In Tellier, the taxpayer was permitted to deduct as business expenses under section 162(a) legal fees incurred in his defense against charges of past criminal conduct. The Commissioner urged that such expenses, concededly ordinary and necessary, should have been disallowed on public policy grounds. This was rejected by the Supreme Court because income from a criminal enterprise is taxed in the same way as income from more conventional sources. Therefore, in view of the firm public policy to tax only net income, deductions for losses incurred in connection with a criminal business enterprise are allowed in determining “net income.” The exception to this rule, which is limited in application, occurs when the allowance of a deduction frustrates clearly defined national or State policy proscribing particular types of conduct. Tellier fell far outside any sharply defined category since no public policy is offended when a person faced with serious criminal charges employs a lawyer to aid him in his defense.
The claimed theft loss here was connected with an intended initiation of the criminal enterprise of counterfeiting. We are not confronted with income from the criminal enterprise, but only with a loss of capital invested in the scheme to counterfeit. And we are not dealing with any gross income from the “business” of counterfeiting, nor are we faced with a claimed “business expense.” This is purely and simply a situation in which the test of nondeductibility is the severity and immediacy of the frustration resulting from the allowance of the deduction. Tank Truck Rentals v. Commissioner, 356 U.S. 30, 35 (1958). There is a sharply defined national policy proscribing counterfeiting. It would be utterly senseless to frustrate this policy.
DeeNNEN, J., agrees with this concurring opinion.