Fraud and taxes

Dennis Gomas inherited a pet food business from his brother in 2010. Dennis lived in Florida, and the business was in New York, which made supervision difficult. When a key employee was discovered stealing inventory and selling customer lists to a competitor, Dennis fired her and moved the business to Florida in 2014. He then put his wife’s daughter from an earlier marriage, Suzanne Anderson, in charge of the business. Dennis and his wife retired in 2016, turning over all the business assets to Suzanne. She began to operate the business out of her home.

In 2017, Ms. Anderson reported to Dennis that his former New York employees had committed frauds using his personal information, and that he needed to hire a lawyer right away to avoid being arrested. She recommended Attorney Anthony Rickman, who needed $125,000 to start working on the case. Dennis agreed, and gave her the money. And then still more money. He overlooked the red flag that he had never met the attorney personally, that all communications ran through Ms. Anderson. Ultimately, some $2 million was withdrawn from the Gomas’ retirement accounts for the purported attorney’s fees, and income taxes on the withdrawalswere paid in full.

In 2019, six friends of the Gomas family alerted them to the fraud. Attorney Rickman was contacted, and confirmed that he was not involved in any way. The police were called; Ms. Anderson was arrested after an investigation; she was convicted and sent to prison for 25 years. Tax consequences?

To mitigate the loss, Mr. and Mrs. Gomas filed an amended tax return for the 2017 tax year. They sought to remove from their income the $1,174,020 in IRA and pension distributions that were transferred to Ms. Anderson, and asked for a refund of the $412,259 in income taxes that they had paid on the distribution.

They lost again.

A deduction for a loss due to theft has been allowable in the year the loss was discovered. However, that rule was suspended for the period from 2018 through 2025. Accordingly, the couple offered alternate theories for excluding the distributions from income. They argued that the payments were for business expenses—but there was no business; they were already retired. Had Ms.

Anderson forged their names on the distribution checks, they might have had a chance, but they willingly turned the money over to her.

The Court concluded: “In view of the egregious and undisputed facts presented here, it is unfortunate that the IRS is unwilling—or believes it lacks the authority—to exercise its discretion and excuse payment of taxes on the stolen funds. It is highly unlikely that Congress, when it eliminated the theft loss deduction beginning in 2018, envisioned injustices like the case before this Court.”

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