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of insider information, it is unnecessary to decide whether he
paid the legal expenses. That is so because respondent has
already allowed the deduction of the disgorgement under section
165(c)(2) consuming all of the income reportable for 1988.
Petitioner’s ability to deduct any portion of the 1988 or 1989
legal payments is governed by the section 172 net operating loss
provisions.
A taxpayer engaged in a trade or business may be entitled to
carry a resulting NOL deduction to other taxable years. An NOL
is the excess of deductions over the taxpayer's gross income,
subject to certain modifications specified in section 172(d)(4).
Sec. 172(c). Nonbusiness expenses and losses are not included in
NOL’s and may not be carried back. Sec. 172(d)(4); Todd v.
Commissioner, 77 T.C. 246, 248 (1981), affd. per curiam 682 F.2d
207 (9th Cir. 1982). The section 165(c)(2) loss (not from a
trade or business)6 of the disgorgement would not create an NOL
for petitioner’s 1988 or 1989 tax year that could be carried back
to prior years, including 1987. Sec. 172(d)(4). Likewise,
because petitioner is not in a trade or business in connection
6 The disgorgement of petitioner’s profits is governed by
sec. 165(c)(2). The distinction between losses and expenses is
found primarily in the nature and occasion of the expenditure.
It is well settled that deductions for cash forfeitures and
confiscations, if allowed at all, are normally allowed as loss
deductions under sec. 165. Holt v. Commissioner, 69 T.C. 75, 78
(1977), affd. per curiam 611 F.2d 1160 (5th Cir. 1980).
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