A recent Tax Court decision was reported dealing with Restitution Payments as Part of a Criminal Sentence. J. Frank Best, Tax Controversy CPA/U. S. Tax Court Litigator in Raleigh and Wilmington, NC & North Myrtle Beach and Myrtle Beach, SC works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.
The Tax Court held that a taxpayer was not entitled to a miscellaneous itemized deduction for a $400,000 restitution payment made in 2014. The court concluded that (1) the taxpayer did not show that the restitution payment promoted or protected his trade or business of being an employee; (2) the taxpayer did not present any evidence that the primary purpose or motive for the payment was other than that he was required to make the payment as part of a criminal sentence; and (3) the taxpayer did not enter into the restitution transaction with the intention of making a profit. Washburn v. Comm’r, T.C. Memo. 2018-110.
The Tax Court held that Washburn could not deduct the restitution payments as a miscellaneous itemized deduction in 2014. The court began by noting that the restitution payments would be deductible as a miscellaneous itemized deduction if they constituted expenses attributable to the performance of services as an employee under Code Sec. 162(a), losses related to the performance of services as an employee under Code Sec. 165(c)(1), or losses incurred in a transaction entered into for profit under Code Sec. 165(c)(2).