This was the downfall of Ana M. Franklin, T. C. Memo. 2025-8, filed 1/22/25. That’s Sheriff Ana M., as she was Sheriff of Morgan County, AL during the years at issue. Among Sheriff Ana M.’s responsibilities was the feeding of prisoners housed in the County slammer, most of whom were awaiting trial. Sheriff Ana M.’s predecessor fed said prisoners on corn dogs from a truckload which he bought cheap, and pocketed the rest of the meal money the State and Feds paid him. This led to a class action and consent decree.

Sheriff Ana M. had problems making the money she got stretch to feed the large number of incarcerateds. So she raided the food money to invest in a Ponzi scheme her boyfriend guaranteed. Of course the money was lost, the boyfriend made good, but Sheriff Ana got 24 months probation for willful nonfiling, and a $1K fine.

IRS claims the $150K Sheriff Ana M. grabbed was embezzlement proceeds, and taxable.

No, says Judge Elizabeth Crewson Paris. It was a loan repaid, even without all the usual loan papering.

“Petitioner maintains that she did not embezzle the funds, but that they were a loan from the jail food money account, which she withdrew with the intention of repaying them with interest when she herself was repaid by [Ponzis]. Petitioner points to the fact that, as signatory authority on the jail food money account, she always had dominion and control over the funds in the account, and that she received no accession to wealth when she withdrew the funds because she created a corresponding obligation to repay the funds and that she ultimately did repay them.

“While it is true that, under the terms of Amended Paragraph 22 of the Consent Decree, petitioner was not authorized to use the funds in the manner that she did, the Court has long distinguished between unauthorized loans and embezzlement. A taxpayer has income when she ‘acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition.’ In circumstances where misappropriations do not enrich or benefit the misappropriator, and there is a consensual recognition of an obligation to repay the funds, income does not arise.” T. C. Memo. 2025-8, at p. 12. (Citations omitted).

Thus, no unreported income or SE tax, but no NOL, and no business deductions for the money Sheriff Ana M. spent trying to defend herself. Sheriff Ana M. was not in the prisoner-feeding business, except as she was obligated as Sheriff to do so, and unreimbursed employee business expenses were scuppered by TCJA.

Sheriff Ana M.’s trusty attorneys reduced the deficiency from $46K to $15K. They get a Taishoff “Good Job.”