No, this is not the chronicle of a yuppie romance. Rather, this is how Judge Albert G (“Scholar Al”) Lauber describes Randy McRae’s low-income housing operation. Randy wound up paying $25K each to HUD and to Kenneth Brewer as restitution for criminal violations of the Prince George’s County, MD, housing code. He wanted to deduct these payments as Section 162 ordinaries and necessaries.

You’ll find the whole story in Randy McRae and Shelby McRae, 2019 T. C. Memo. 163, filed 12/12/19. Shelby did PR and Randy did accounting and tax, according to their Sched Cs, but their bookkeeping was a wee bit casual, their record keeping more than sparse, and their trial evidence was more than a trifle scanty.

There’s argy-bargy about their Form 872 SOL extension, but the bottom line is that, had they not signed, they’d have been hit with a big deficiency forthwith.

And here’s the story behind the headline. Although Randy wanted to deduct the aforesaid restitution, note that for the years at issue, Section 162(f) barred deduction for “any fine or similar penalty paid to a government for the violation of any law.”  The term “government” was defined to include “a State” or any “political subdivision” thereof.  Sec. 1.162-21(a)(1), (3).

But Judge Scholar Al doesn’t need to go there.

“Regardless of whether section 162(f) would bar the claimed deduction and whether petitioners previously included in income the funds of which they made restitution, they have failed to establish that the restitution payments of $50,000 were ordinary and necessary expenses of Mr. McRae’s Schedule C2 business.

“Mr. McRae’s Schedule C2 business involved general accounting work and tax return preparation.  He supplied no testimony or documentary evidence to establish any link between these activities and his restitution payments.  He testified that he was ‘accused of having improperly taken some money from Mr. Brewer and from HUD’ in connection with a project to develop low-income housing in Prince George’s County.  For all that appears, this project involved an investment activity on Mr. McRae’s part, not an activity having any relationship to his Schedule C2 business.” 2019 T. C. Memo. 163, at p. 21.

Quoting Wang v. Commissioner, T.C. Memo. 1998-389, 76 T.C.M. (CCH) 753, 757, Judge Scholar Al finds Randy’s housing gig was “sporadic activity arising from “a limited opportunistic transactional relationship”). 2019 T. C. Memo. 163, at pp. 21-22.

More to the point, Randy “… submitted no evidence to show that Mr. McRae’s payment of restitution to HUD and Mr. Brewer was necessary to preserve the client base of his Schedule C2 business or otherwise to benefit that business.  For all that appears, Mr. McRae paid the restitution, as the court ordered him to do, for purely personal reasons, viz., to satisfy the conditions of his probation and thus avoid jail time.” 2019 T. C. Memo. 163, at p. 22.

Sure, it was necessary, but hardly ordinary, and definitely not deductible.