If You Stole It, You Owe Tax
That’s the lesson Judge Goeke has for William Bradley Wood and Nancy Lynn Wood, in 2011 T.C. Mem. 190, filed 8/10/11.
Woodie was general manager of a door store and had signatory power over the bank account. He was running a grocery store on the side that wasn’t doing too well, so he helped himself to nearly half a million of the door store’s dollars, to keep himself and Nancy Lynn in the style to which they were rapidly becoming accustomed, and keep the bacon and beans flowing at Woodie’s, his eponymous grocery store.
Woodie gets busted and does three years hard, plus owes the door store $200K restitution. IRS gets into the act and assesses Woodie and Nancy Lynn (she was treasurer of the grocery store and beneficiary of the lifestyle) for taxes on the stolen money, which they neither reported nor ever paid tax.
Judge Goeke takes up the story: “Mr. Wood used the misappropriated money to cover personal expenses, pay credit card bills, and support Woodie’s. The Woods were unable to produce at trial any books or records of Woodie’s’ finances. The Woods failed to report any of the misappropriated funds on their joint income tax returns….
“The Woods have conceded taxes and accuracy-related penalties are owed on the funds used for personal expenses and credit card bills. However, the disposition of the money put directly into the Woodie’s account remains in dispute.” 2011 T.C. Mem. 190, at p. 3.
Woodie’s attorney, who got fired between trial and judgment (I hope he got paid up front), argues that since Woodie’s the grocery store got some of the stolen loot, the grocery store owes tax on that money, not Woodie himself nor sweet Nancy Lynn.
No, says Judge Goeke. What you do with what you stole is nothing to the point. The point is, you stole. As the underwear ad used to say, what goes on after that is up to you. But you got the money, so you owe the tax, whatever you did later.
Or in legalese, “The parties dispute the proper treatment of the money Mr. Wood misappropriated from … and used in the Woodie’s business. The Woods claim Mr. Wood acted as the president of Woodie’s, not in an individual capacity, when he wrote checks from … to Woodie’s and thus the money should be counted as income to Woodie’s, not to the Woods. Respondent argues that Mr. Wood, as an employee of …, misappropriated funds and determined whether to use them for personal expenses, credit card bills, or to support Woodie’s. Therefore, respondent asserts that how the misappropriated funds were put to use is of no consequence to this matter because Mr. Wood’s control over the funds requires inclusion in the Woods’ income. We agree with respondent. The Woods are confusing how the money was used with how the money was acquired. Mr. Wood misused his position at … to misappropriate the funds and used the money in whatever manner he chose. Because he had dominion over the misappropriated funds from …, all of the misappropriated funds became part of the Woods’ gross income.” 2011 T.C. Mem. 190, at p. 4.
In a marvelous example of chutzpah, Woodie’s attorney argues that since the grocery store got the disputed monies and didn’t treat them as income on the grocery store’s income tax return, they were a contribution to capital and not taxable either to Woodie or to the grocery store. You really have to hope he got paid up front. To use the vernacular, ya gotta love Woodie’s attorney.
Of course, as aforesaid, Woodie never put any financial records from the grocery store in evidence on the trial. Judge Goeke misses a really great opportunity for an ironic blast at Woodie’s attorney, when he writes drily, “Using the stolen funds as a contribution to capital does not relieve the Woods of their responsibility to report the funds as income, and Woodie’s is not a party to this case.” 2011 T.C. Mem. 190, at p. 5.
So Woodie and sweet Nancy Lynn lose.
In short, if you got it, it’s yours, whatever you did with it later.