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Petitioner’s proceeds from his illegal gambling enterprise
were not akin to the payments in dispute in Lilly. The moneys
seized from petitioner were presumptively the essence of his
illegal venture. The forfeiture was incidental to petitioner’s
violation of South Carolina’s gambling laws. Therefore, the
holding in Lilly does not support petitioner’s argument.
In Commissioner v. Sullivan, supra, the Supreme Court held
that an illegal gambling enterprise is a business for Federal tax
purposes and that deductions for ordinary and necessary business
expenses involved in operating the enterprise were allowable.
The Court reasoned that to deny such deductions would result in
taxing the gross receipts of the business rather than its net
income. In Commissioner v. Tellier, supra, the taxpayer sought a
deduction for legal fees incurred in the unsuccessful defense of
a criminal prosecution relating to his business. The
Commissioner conceded that the fees were ordinary and necessary
business expenses. The only question was whether the allowance
of a deduction would frustrate public policy. The Supreme Court
held that no public policy was frustrated by allowing these legal
fees to be deducted as ordinary and necessary business expenses.
Sullivan and Tellier stand for the proposition that a
taxpayer may be allowed to deduct legitimate (i.e., ordinary and
necessary) business expenses in the operation of an illegitimate
enterprise. That concept is not determinative in our analysis of
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