Fraud Victims Cannot Deduct Payments Made to Thief

Elder Law Answers case summary.The United States District Court for the Middle District of Florida holds that fraud victims must pay income tax on money transferred due to the fraud because they exercised discretion over the funds, remaining the primary distributees, and the withdrawals were not business expenses. In Gomas v. United States (M.D. Fla., No. 8:22-cv-1271-TPB-TGW, July 17, 2023).

Retirees Dennis and Suzanne Gomas lost approximately $2 million due to fraud over several years. Suzanne Anderson, the daughter of Mrs. Gomas, assisted Mr. Gomas with his pet food business. When her mother and stepfather retired, she lied to them. She told them that Mr. Gomas needed a lawyer to fight charges arising from a former employee’s misconduct. Drawing on their retirement accounts, they supplied money for nonexistent legal services while Ms. Anderson took the funds. After the Gomases learned of the scam, Ms. Anderson was sentenced to 25 years in prison for theft and fraud.

In 2020, the couple took action against the IRS to be reimbursed for the income taxes they paid in 2017, which reflected the $1,174,020 they lost to Ms. Anderson’s fraud that year. They brought this action against the IRS, seeking a refund for the income taxes they paid on the stolen money.

Although theft victims could recover losses in the year discovered historically, Congress suspended the rule from tax years 2018 through 2025, and the Gomases learned of the debt before tax year 2019, when they sought reimbursement.

The couple claims that since Ms. Anderson, rather than themselves, received their retirement benefits, Ms. Anderson should be the taxable distributee. Yet, despite the theft, the Gomases – not Ms. Anderson – remain the taxable distributees because they authorized each stock sale and exercised discretion in giving money to Ms. Anderson. Ms. Anderson never forged their signatures to get money; they gave it to her directly.

In the alternative, they assert they should be able to deduct the money as business expenses. For spending to qualify as a business expense, the taxpayer must hope to make a resultant profit. They intended none of the funds to support their business, as they were retired in 2017. The purported legal fees were unrelated to income-generating activities, as the business had closed, and they believed the money was to shield Mr. Gomas from civil and criminal liability.

Since the Gomases were the primary distributees and the funds were not business expenses, their attempt to deduct the funds fails. Applying the law, the district court finds the result unjust and chastises the IRS for permitting the deduction by its discretion.

Read the full opinion.