Discussion:Restitution Payment for Federal Crime
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Discussion Forum Index --> Advanced Tax Questions --> Restitution Payment for Federal Crime
Discussion Forum Index --> Tax Questions --> Restitution Payment for Federal Crime
| 16 May 2008 | |
| Here is an interesting question for you all.
Let’s say a client made income (W2) years ago, and paid taxes on that income. But in earning that income the client committed fraud. Was convicted of this fraud and ordered to pay restitution to the government. Let’s say the amount is $250,000 If his uncle or parent was to pay it for him… Does this create a taxable gift? | |
| 16 May 2008 | |
| Either a gift or a loan. The more interesting question is whether the client will be able to claim a tax deduction for the restitution. | |
| 17 May 2008 | |
| After reading some other post here it appeared that if the court ordered restitution was from a criminal trial then no deduction is allowed. Can someone clarify this? A deduction would be great! | |
| 17 May 2008 | |
| No deduction. See Sec. 162(f) of the Internal Revenue Code:
(f) Fines and Penalties - No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law. | |
| 17 May 2008 | |
| If the restitution was a form of punishment, then no deduction would be allowed. | |
| 17 May 2008 | |
| However, if the restitution was compensatory in nature, the restitution should be deductible. | |
TheTinCook (talk|edits) said: | 17 May 2008 |
| As a claim of right? He may not have had an apperant claim of right to the income. | |
| 18 May 2008 | |
| No, I don’t believe that a taxpayer can ever have a claim of right to stolen money. | |
| 18 May 2008 | |
| Let's say it was compensatory and deductible. How would you match this deduction to income? Say he is a W-2 employee currently, does this become an unreimbursed business expense that he can take agaisnt any earned income? Or say he owned a small business from which the fraud was committed, and still owns it today, does this then become a current expense of this business? I would doubt the latter as the restitution would probably be personal restitution, and hence could probably not be claimed by any business qua business. How might this work out practically?
I note Deadmony indicates this was "years ago". | |
| 19 May 2008 | |
| This is actually a Sec. 165 loss, rather than a Sec. 162 deduction. See Rev. Rul. 65-254.
Don't believe that a Sec. 1341 claim of right credit would be available unless the taxpayer sincerely believed that he had an unrestricted right to the embezzled funds. | |
