DocketNumber: No. 9786-02
Citation Numbers: 2004 T.C. Memo. 173, 88 T.C.M. 44, 2004 Tax Ct. Memo LEXIS 177
Judges: \"Cohen, Mary Ann\"
Filed Date: 7/22/2004
Status: Non-Precedential
Modified Date: 4/18/2021
Petitioners were not entitled to loss deduction for 1999 for cash that petitioner forfeited to South Carolina.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies and penalties with respect to petitioners' Federal income taxes for 1998 and 1999 as follows:
Penalties | |||
Year | Deficiency | Sec. 6662 | Sec. 6663 |
1998 | $ 31,816 | $ 4,063 | $ 8,627 |
1999 | 76,768 | 9,250 | 22,887 |
After concessions by the parties, the issue for decision is whether petitioners are entitled to a loss deduction for 1999 for the cash that petitioner Edman Hackworth forfeited to the State of South Carolina as a result of his violation of South Carolina's gambling laws.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. All amounts have been rounded to the nearest dollar. FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by*178 this reference. At the time that the petition in this case was filed, petitioners resided in Greer, South Carolina. Background
During 1998 and 1999, petitioner Edman Hackworth (petitioner) owned and operated Sand Trap, Inc., an S corporation. Sand Trap, Inc., operated a bar named "Sand Trap Lounge" (the Sand Trap) in Greenville, South Carolina, during those years.
In December 1997, the Greenville County (South Carolina) Sheriff's Office (GCSO) began an investigation of petitioner based upon information that he was operating an illegal gambling business out of his residence and out of the Sand Trap. On or about July 27, 1999, GCSO began surveillance on the Sand Trap and on petitioners' residence. Between August 4 and September 2, 1999, a GCSO officer frequented the Sand Trap in an undercover capacity. While working undercover at the Sand Trap, this officer placed bets on various sporting events and observed other gambling and gambling-related activities. On or about August 28, 1999, GCSO officers collected several trash bags from the roadside in front of petitioners' residence. One of these trash bags was filled with used gambling paraphernalia and business records from petitioner's*179 gambling operation.
On or about September 7, 1999, GCSO officers executed a search warrant on petitioners' residence. Petitioner was at home at the time that this search warrant was executed and was placed under arrest for bookmaking and setting up a lottery. Shortly after arresting petitioner, GCSO officers placed petitioner Debbie Kay Hackworth (Mrs. Hackworth) under arrest at one of her business locations for bookmaking and brought her back to petitioners' residence. Upon searching petitioners' residence, GCSO discovered, inter alia, (1) a betting room with seven telephone lines, tape-recording devices, two computers, and gambling paraphernalia; (2) keys to petitioner's safety deposit box at Carolina First Bank; and (3) a total of $ 63,589 in cash, all of which was seized. The cash was discovered in the following amounts and locations in petitioners' residence: (1) $ 46,814 in a safe in the betting room; (2) $ 3,516 in the kitchen; (3) $ 1,259 in Mrs. Hackworth's purse; and (4) $ 12,000 in Mrs. Hackworth's closet in the master bedroom. Also on or about this date, GCSO officers executed a search warrant on the Sand Trap and discovered and seized gambling paraphernalia, $ 10,705*180 in cash from a back room safe, and $ 81 in cash from behind the bar that was part of a betting pool.
On or about September 8, 1999, GCSO officers executed a search warrant on petitioner's safety deposit box at Carolina First Bank and discovered and seized $ 90,900 in cash contained therein. With this seizure, GCSO had seized a total of $ 165,275 in cash from petitioners.
On September 30, 1999, petitioner voluntarily consented to forfeit to the State of South Carolina $ 152,016 of the cash that had been seized by GCSO in connection with his arrest and the execution of the search warrants described above by signing and dating a document entitled "CONSENT FORFEITURE OF MONIES DERIVED FROM GAMBLING" (consent form). The consent form provided, in pertinent part, as follows: Defendant's/respondent's property was seized as a result of an nvestigation and arrest of the defendant on SEPT. 09, 1999 for a violation of South Carolina Gambling Statutes. The defendant was charged with ADVENTURING IN LOTTERY The parties now desire to enter into a compromise settlement to avoid litigation whereby the defendant agrees to voluntarily relinquish all rights and ownership to the defendant's property. *181 IT IS THEREFORE ORDERED that the defendant's/respondent's property of $ 152,016.00 (ONE HUNDRED AND FIFTY-TWO THOUSAND AND SIXTEEN DOLLARS) in United States Currency be forfeited pursuant to sec.
GCSO gave petitioner a form that explained the consent form. Also on this date, the $ 1,259 in cash that had been seized from Mrs. Hackworth's purse and the $ 12,000 in cash that had been seized from Mrs. Hackworth's closet were returned to petitioner.
On or about November 22, 1999, petitioner pleaded guilty to "Adventuring in lotteries" in violation of
Petitioners' Income Tax Return for 1999
Petitioners' joint Federal income tax return for 1999 was due to be filed with the Internal Revenue Service (IRS) Center in Atlanta, Georgia, by October 16, 2000. Petitioners did not file their 1999 return, however, until October 20, 2000. Louis G. Manios prepared petitioners' 1999 return.
Petitioners attached*182 three Schedules C, Profit or Loss From Business, to their 1999 return. The first two Schedules C related to businesses operated by Mrs. Hackworth. The third Schedule C related to petitioner's gambling activities. On his Schedule C, petitioner reported gross receipts of $ 178,236 from his gambling activities, which were referred to as "services" on this form. Petitioner also deducted $ 152,016 for "legal and professional services" on this form. This deduction was taken for the cash that petitioner forfeited to the State of South Carolina as a result of his violation of South Carolina's gambling laws.
In the statutory notice of deficiency sent to petitioners, in addition to the adjustments no longer contested, the IRS disallowed the $ 152,016 deduction claimed on petitioner's Schedule C. The IRS determined that petitioners had not established that any amount of this claimed deduction represented a deductible expense, was an ordinary and necessary business expense, or was expended for the purpose designated. Accordingly, the IRS increased petitioners' taxable income for 1999 by $ 152,016. OPINION Petitioners seek a deduction for the cash that petitioner voluntarily forfeited to*183 the State of South Carolina under Respondent contends that petitioners should not be allowed a loss deduction for the cash that petitioner forfeited to the State of South Carolina because the allowance of such a deduction would frustrate South Carolina's sharply defined policy against illegal gambling. Petitioners*186 assert, without citation of authority, that respondent has the burden of proving by clear and convincing evidence that the "public policy exception" applies to deny the loss deduction for the cash that petitioner forfeited. Petitioners rely vaguely on the "legislative design under South Carolina had a sharply defined policy against illegal gambling in 1999 as expressed in its statutes and enforced by the GCSO. Petitioner acknowledged that the forfeiture was made pursuant to the laws of South Carolina and pleaded guilty. (Petitioner's claim that his consent to the forfeiture was "revoked" is uncorroborated and unpersuasive.) To allow petitioners a deduction for a loss arising out of petitioner's illegal activities would undermine South Carolina's policy by permitting a portion of the forfeiture to be borne by the Federal Government, thus taking the "sting" out of the forfeiture. See Petitioners contend that petitioner's forfeiture is invalid because it was disproportionate to his crime and violated the Petitioners further contend that the damage done to South Carolina's policy against illegal gambling is outweighed by congressional intent that "business losses" be allowed to be deducted and that the income tax be imposed upon a taxpayer's net income. In support of this contention, petitioners cite In Petitioner's proceeds*190 from his illegal gambling enterprise were not akin to the payments in dispute in In In In Grossman & Sons, Inc., the taxpayer settled a breach of contract dispute with the Government and was allowed to deduct the settlement amount as an ordinary and necessary business expense. Unlike the facts of In Finally, petitioners contend that imposing a liability for Federal income taxes on the cash that petitioner forfeited without allowing a loss deduction for the forfeited amount violates the The We have considered the arguments of the parties that were not specifically addressed in this opinion. Those arguments are either without merit or irrelevant to our decision. To reflect the foregoing and the concessions of the parties, Decision will be entered under
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