Property confiscated by sheriff

[Koss]

Not a real client...

Former student of mine called, she's taking a course in federal taxation, and wanted my take on a question in her textbook:

Taxpayer is running an illegal bookmaking business out of his home. County sheriff shows up with a warrant, and seizes a large quantity of cash.

Can the taxpayer take a deduction for the loss of the money under IRC Section 165?

Section 165 appears to be losses on the sale or "other disposition" [LMAO] of assets "used in a trade or business," i.e., Form 4797...

Assume for the sake of argument that the client will not get the money back, because it is subject to forfeiture. So it is indeed a complete loss.

My answer, for now, is this:

It's a trick question, to be sure.

The loss appears to be deductible, and the fact that his business activity was illegal under local laws does not necessarily bar him from taking a loss that is deductible under federal tax law.

But what is his basis?

The deductible amount of the loss is limited to his adjusted basis.

If the cash in question is the "fruits" of his illegal wagering business, then his basis in the money is zero. In fact, even if the cash was money that he legitimately earned at some other job, which he is now using in the wagering business, the basis is still zero. He didn't buy the money...

Someone else asked me the other day if I knew how to depreciate indentured servants...

[TaxBird]

Yes, deductible

Seems to me, 'seizure by Sherriff' is a normal business risk in this industry, similar to spoilage in the food industry.

To me this is deductible and the basis would be the straight amount of the cash.

However, since money/dollars is/are only a representative of value (ie has no value in and of itself - especially absent a gold standard), you may be able to play with the fiat value, especially given the quickly devaluating dollar, by using an inflation adder or rather subtractor.

Over the top? Yes. But so is this question.

[Gene V]

This may not relate to your question, however, it may throw some light on the subject.

My observation, first the income would have to be reported, before I would consider taking any deduction.


This is what my textbook says,
Expenses Relating to an Illegal Business. The usual expenses of operating an illegal business (e.g. a numbers racket) are deductible. (Comm.v.Sullivan, 58-1 USTC 9368)
However, Sec. 162 disallows a deduction for fines, bribes to public officials, illegal kickbacks, and other illegal payments.

Sam owns and operates an illegal gambling establishment. In connection with this activity, he has the following expenses during the year.
Rent. $60,000
Payoffs to the police $40,000
Wages $140,000
Interest $30,000
Criminal fines $50,000
Illegal kickbacks $10,000
Total $430,000
All of the usual expenses (rent, depreciation, wages and interest) are deductible; payoffs, fines, and kickbacks are not deductible. Of the $430,000 spent, $330,000 is deductible and $100,000 is not.

[veritas]

I agree with Gene

The seized cash would be income to the bookmaker.