Famspear wrote:Arthur Rubin wrote:Famspear wrote:He has not explained why a union official who embezzles over $700,000 from a union and an insurance company must, under the Internal Revenue Code, include the receipt of the money as his income for Federal income tax purposes, even though he does not really own the money, even if he has to return the money to its rightful owner, and even if he cannot take a deduction when he has to return the money.
If I were the embezzler, I'd try "claim of right" for the deduction.
Yeah, section 1341. I haven't studied the subject in depth, but the theory did not work in
McKinney v. United States, 574 F.2d 1240 (5th Cir. 1978),
cert. denied, 439 U.S. 1072 (1979), or in
Wood v. United States, 863 F.2d 417 (5th Cir. 1989).
EDIT: Added denial of cert. on McKinney.
Section 1341 essentially provides something better than an ordinary deduction in the year of payment, i.e., it provides a benefit equivalent to what the payor would have received had he returned the funds in the year that he received them (and taken a deduction at that time). For example, if the taxpayer reported receipts of $750k in Year 1 when funds were received (paying $250k in tax), and then returned the entire $750k in Year 4, even if the taxpayer had no other income in Year 4, he could get a refund of $250k if he qualified for section 1341 treatment.
Embezzlers do not qualify for the section 1341 claim of right deduction (because they never had a valid claim to the property taken), but it is possible that, if the embezzlement was systematic and continuous enough, the taxpayer can argue that the embezzlement constituted a "trade or business" and the repayments create ordinary deductions, perhaps going into an NOL, which could reduce tax in two prior years and can be taken against other income into the future.
If funds are repaid in the year that they are taken, it is clear that there is no tax liability. For a fun read - and an interesting take on collateral estoppel -
see Senyszyn v. CIR, 146 T.C. No. 9 (2016)
http://www.ustaxcourt.gov/UstcInOp/Opin ... x?ID=10737