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In Grossman & Sons, Inc., the taxpayer settled a breach of
contract dispute with the Government and was allowed to deduct
the settlement amount as an ordinary and necessary business
expense. Unlike the facts of Grossman & Sons, Inc., petitioner’s
“payment” (i.e., forfeiture) to the State of South Carolina
resulted from his violation of South Carolina’s gambling laws and
not from a settlement of a breach of contract dispute.
In Edwards v. Bromberg, supra, the taxpayer sought a loss
deduction for the theft of his money. The taxpayer had agreed to
provide money to another individual in order to bet on a “fixed”
horse race. The individual absconded with the taxpayer’s money.
After deciding that there was no scheme to defraud anyone except
the taxpayer himself, the court allowed the deduction.
Bromberg is also distinguishable. Petitioner’s funds were
seized by the State of South Carolina in the enforcement of its
gambling laws. The purpose of the seizure and forfeiture was to
cripple petitioner’s illegal gambling activities. If a loss
deduction were allowed in this case, the Federal Government would
in effect be carrying a portion of the loss inflicted on
petitioners by the State of South Carolina because of
petitioner’s illegal activities.
Finally, petitioners contend that imposing a liability for
Federal income taxes on the cash that petitioner forfeited
without allowing a loss deduction for the forfeited amount
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Last modified: May 25, 2011