Tax Court In Brief | Ziroli v. Commissioner | Is A Disgorgement Payment A Deductible Business Expense Under Section 162?

Published date19 July 2022
Subject MatterCorporate/Commercial Law, Tax, Corporate and Company Law, Income Tax, Tax Authorities, Securities
Law FirmFreeman Law
AuthorFreeman Law

The Tax Court in Brief - July 11th - July 15th, 2022

Freeman Law's "The Tax Court in Brief" covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation: The Week of July 11th, 2022, through July 15th, 2022

  • Estate of DeMuth, v. Comm'r, T.C Memo. 2022-72 | July 12, 2022 | Jones, J. | Dkt. No 18724-19
  • Whistleblower 972-17W v. Comm'r, 159 T.C. No. 1 | July 13, 2022 | Toro, J. | Dkt. No 972-17W
  • Larochelle and Larochelle v. Commissioner T.C. Summary Opinion 2022-12 | July 12, 2022 | Leyden | Dkt 10416-20S

Ziroli v. Comm'r, T.C. Memo. 2022-75 | July 14, 2022 | Nega, J. | Dkt. No. 1041-20

Opinion

Short Summary: This case regards deficiencies determined for Clement and Dawn Ziroli (Zirolis) for adjustments regarding "Other Gains or Losses from Form 4797 - Disgorgement" for taxable year 2016. Specifically, the case focuses on whether the disgorgement of payment to the U.S. Securities and Exchange Commission by Mr. Ziroli constitutes a "fine or similar penalty" within the meaning of section 162(f) of the Code. Mr. Ziroli reached a settlement with the SEC on a federal securities violation. In an underlying Consent with the SEC, Mr. Ziroli made various concessions with respect to the alleged securities violations, which included orders of disgorgement of funds. The Consent also stated that Mr. Ziroli "further agrees that he shall not claim, assert, or apply for a tax deduction or tax credit with regard to any federal, state, or local tax for any penalty amounts that Defendant [Mr. Ziroli] pays pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof are added to the distribution fund or otherwise used for the benefit of investors." Mr. Ziroli paid the disgorgement and related amounts ordered in the SEC proceeding. Then, the Zirolis filed a Form 1040, U.S. Individual Income Tax Return, for the 2016 taxable year, claiming a deduction of $411,422 for "Other gains or (losses)." They attached a Form 4797, Sales of Business Property, reporting that the claimed loss deduction was for the disgorgement portion of the amount Mr. Ziroli paid to the SEC. The IRS determined that the Zirolis were not entitled to a deduction for the disgorgement.

Key Issues:

  • Whether the Zirolis are entitled to a deduction under section 162(a) for the disgorgement...

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