Crime doesn't pay ... but it may save taxes.

AuthorCohen, Robert L.

However desirable the tax advantages of a particular transaction may be, it is important to remember that they should be kept in perspective; the "tax tail should not wag the economic dog." The paradox presented in a recent case may give tax professionals pause to consider a new twist to this advice, namely, to encourage clients not to let "the tax tail wag the criminal dog."

In Accardo, 7th Cir., 1991, aff'g 94 TC 96 (1990), the taxpayer and several other individuals were indicted under the Racketeer Influenced and Corrupt Organizations Act (RICO) for their involvement in certain labor union affairs. The taxpayer and three other defendants were acquitted, while eight defendants were convicted and sentenced. On his 1981 and 1982 tax returns, the taxpayer deducted the legal fees of his successful defense to the RICO charges. The IRS denied the deduction and was upheld by the Tax Court. On appeal, the Seventh Circuit, noting that the case presented a "somewhat paradoxical situation in which the IRS treats convicted taxpayers more favorably than acquitted taxpayers," affirmed.

The paradox referred to by the court arose because the eight defendants found guilty were (as conceded by the Service on brief) entitled to deduct the legal fees they incurred in unsuccessfully defending against the RICO charges under Sec. 162(a), while the legal expenses incurred by those defendants who mounted a successful defense were nondeductible personal expenditures under Sec. 262. The legal expenses of the convicted defendants were deductible because they were incurred in the trade or business of racketeering--an illegal business, but, under the Code, a business nevertheless. Conversely, by proving his innocence, the taxpayer apparently was precluded from arguing that he was engaged in a business (racketeering or otherwise), leaving the taxpayer with the argument that the legal fees could only be deductible under Sec. 212(2).

Sec. 212(2) allows individuals to deduct expenses incurred to conserve or maintain income-producing property. As part of the RICO indictment, the IRS sought forfeiture of all proceeds from the alleged racketeering activities and of all interests in property acquired with such proceeds. Consequently, to support his deduction under Sec. 212(2), the taxpayer argued that in defending the RICO charges, he was not only seeking to prove his innocence, but was also attempting to prevent forfeiture of three certificates of deposit (CDs) totaling $1.5...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT