                               UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT


                               No. 05-1001



EDMAN HACKWORTH; DEBBIE KAY HACKWORTH,

                                             Petitioners - Appellants,


           versus

COMMISSIONER OF INTERNAL REVENUE,

                                                Respondent - Appellee.


Appeal from the United States Tax Court.      (Tax Ct. No. 02-9786)


Argued:   September 21, 2005             Decided:    November 16, 2005


Before KING and GREGORY, Circuit Judges, and R. Bryan HARWELL,
United States District Judge for the District of South Carolina,
sitting by designation.


Affirmed by unpublished per curiam opinion.


ARGUED: William Henry Thomas, III, Greenville, South Carolina, for
Appellants.    Randolph L. Hutter, UNITED STATES DEPARTMENT OF
JUSTICE, Tax Division, Washington, D.C., for Appellee. ON BRIEF:
Eileen J. O’Connor, Assistant Attorney General, Kenneth L. Greene,
UNITED STATES DEPARTMENT OF JUSTICE, Tax Division, Washington,
D.C., for Appellee.


Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
PER CURIAM:

        This case arises from the denial by the Commissioner of

Internal Revenue of a $152,016 claimed loss deduction under I.R.C.

§ 165 by Edman and Debbie Kay Hackworth (“taxpayers”) on their 1999

income tax return.        On February 22, 2002, the Commissioner issued

a tax notice of deficiency to the taxpayers.              The taxpayers timely

filed    a   petition   in    the     United   States    Tax    Court   seeking   a

redetermination of their liabilities.                On July 22, 2004, the Tax

Court issued a memorandum opinion and on October 15, 2004, entered

a final decision determining tax liabilities and additions to tax

against the taxpayers for tax years 1998 and 1999.                 The taxpayers

filed a notice of appeal on December 21, 2004.                 We affirm.



                                         I.

     The     Hackworths      are    citizens   and    residents    of   Greenville

County, South Carolina.            Edman Hackworth owned and operated a bar

called the “Sand Trap” in Greenville, South Carolina. In 1997, the

Greenville County Sheriff’s Office began an investigation into

whether the Hackworths were conducting illegal gambling operations

in their house and at the Sand Trap.           In 1999, the Sheriff’s Office

began surveillance of the taxpayers’ house and the Sand Trap.

After    several   months      of    surveillance,      the    Greenville   County

Sheriff’s Office arrested both Edman and Debbie Kay Hackworth and

charged them with bookmaking and other gambling offenses.                    In a


                                          2
search of the taxpayers’ residence, the Sheriff’s Office discovered

a betting room with seven telephone lines, tape-recording devices,

two computers, gambling paraphernalia, keys to a safety deposit

box, and $63,589 in cash, all of which were seized.                      At or about

the same time, the Sheriff’s Office executed a search warrant on

the Sand Trap and seized $10,786.               On or about September 8, 1999,

the Sheriff’s Office executed a search warrant on the safety

deposit box, located at Carolina First Bank, and seized $90,900 in

cash.       In total, the Sheriff’s Office seized more than $165,000 in

cash.

     Following the arrest, the Sheriff’s Office returned some

$13,000 in currency, retaining $152,000 as well as computers and

office equipment.         On that same date, Edman Hackworth signed a

“Consent Forfeiture of Monies Derived from Gambling” in which he

agreed “to voluntarily relinquish all rights and ownership” to the

remaining $152,016 in order “to avoid litigation.”                  That document

also states that he forfeits the money under “[Section] 16-19-80,

Code of Laws of South Carolina (1976), as amended.”

     On      or   about   November   22,       1999,   Edman   pleaded    guilty   to

“Adventuring in lotteries” in violation of South Carolina Code

Annotated § 16-19-20 (1976).1              He received a citation and paid a




        1
      Although there is no copy of a plea agreement in the record,
appellants’ counsel indicated to the Court that the Consent
Forfeiture was signed as part of a plea deal.

                                           3
fine of $125.         The charges against Debbie Kay Hackworth were

dismissed.

      On October 20, 2000, taxpayers untimely filed their 1999

individual    federal       income   tax      return.         On     one   of     the   three

Schedules C (Profit or Loss From Business) filed with the return,

they reported $178,236 in gross receipts from gambling activities,

which were referred to as “services” on the tax return.                             On that

same Schedule C, taxpayers claimed a deduction for “legal and

professional services” in the amount of $152,016 with respect to

the cash forfeited to the State of South Carolina.

      In 2002, the Commissioner of Internal Revenue issued a notice

of deficiency to the taxpayers determining, among other things,

that taxpayers were not entitled to a deduction in 1999 for

$152,016    in   cash     forfeited     to       the    State      of   South     Carolina.

Taxpayers    filed    a   petition      in       the    Tax   Court      challenging     the

Commissioner’s determinations.             The taxpayers and the Commissioner

conceded to several issues so that the only issue remaining for

trial was whether taxpayers were entitled to a deduction for the

$152,016    that   was    forfeited      to       the    State     of    South    Carolina.

Taxpayers argued that they were entitled to deduct the amount

forfeited as a business-related loss under Internal Revenue Code §

165   because    it   was    a   loss   associated            with      Edman’s    gambling

enterprise.      The Commissioner argued against the deduction on the

basis that allowing such a deduction would frustrate the public


                                             4
policy of the State of South Carolina against illegal gambling.

The Tax Court upheld the Commissioner’s denial of the deduction and

this appeal followed.



                                        II.

       Whether taxpayers are entitled to a deduction for money

forfeited to the State of South Carolina is a question of law we

review de novo.        See Metzger v. Comm’r, 38 F.3d 118, 120 (4th Cir.

1994).

       The Hackworths argue that application of the “public policy”

doctrine in denying the deduction of funds seized by the Sheriff’s

Office was erroneous because a civil forfeiture never took place

and that the penalty imposed is illegal and by definition is not a

“fine,” “forfeiture,” or “similar penalty” paid “to the government”

such that the public policy doctrine should apply.           Taxpayers also

challenge the Tax Court’s determination that, in this case, they

are attempting a “collateral attack” on the penalty imposed by the

Sheriff’s Office. Finally, taxpayers argue that under the facts of

this     case,    to   disallow   the    deduction   would   run    afoul   of

Congressional intent that only net income be taxed.

       Internal Revenue Code § 165(a) provides a deduction for “any

loss sustained during the taxable year and not compensated for by

insurance    or    otherwise.”      Section   165(c)   limits      the   losses

deductible by individuals to those losses incurred in a trade or


                                         5
business, those incurred in a transaction entered into for profit,

and   those   caused   by    fire,    storm,     shipwreck,   theft,    or   other

casualty.     The United States Supreme Court has held that rent and

wages paid in the operation of bookmaking establishments are

deductible as ordinary and necessary business expenses within the

meaning of IRC § 23(a)(1)(A) in computing net income for tax

purposes, even though the gambling enterprises were illegal under

state law.    See Comm’r v. Sullivan, 356 U.S. 27 (1958).2

      A deduction for a state imposed fine or penalty will not be

allowed “if the allowance would frustrate sharply defined national

or    state   policies      proscribing       particular   types   of    conduct,

evidenced by some governmental declaration thereof.”                   Tank Truck

Rentals, Inc. v. Comm’r, 356 U.S. 30, 33-34 (1958).                The Supreme

Court has stated that “[d]eduction of fines and penalties uniformly

has been held to frustrate state policy in severe and direct

fashion by reducing the ‘sting’ of the penalty prescribed by the

state legislature.”          Id.     This “frustration of public policy”

doctrine has consistently been applied to preclude tax deductions


      2
       That Court stated:

      The amounts paid as wages to employees and to the
      landlord as rent are “ordinary and necessary expenses” in
      the accepted meaning of the words. That is enough to
      permit the deduction, unless it is clear that the
      allowance is a device to avoid the consequence of
      violations of a law . . . or otherwise contravenes the
      federal policy expressed in a statute or regulation.

Sullivan, 356 U.S. at 28 (emphasis added).

                                          6
for forfeitures of property to the Government.       See e.g., United

States v. Algemene Kunstzijde, N.V., 226 F.2d 115 (4th Cir. 1955).

One reason for the disallowance is that “to allow a deduction . .

. [for a fine or penalty] would have directly and substantially

diluted the actual punishment imposed.”       Comm’r v. Tellier, 383

U.S. 687, 694 (1966).     See also Wood v. United States, 863 F.2d

417, 421 (5th Cir. 1989) (“It is obvious . . . that the public

policy embodied in this nation’s drug laws is not enhanced by

allowing a tax deduction to offset a forfeiture.”).

     South Carolina law provides that “[a]ll and every sum or sums

of money staked, betted or pending on the event of any such game or

games as aforesaid are hereby declared to be forfeited.” S.C. Code

Ann. § 16-19-80 (1976).     The statute permits the forfeiture of

property that is “‘an integral part of’ or ‘fruit of’ a gambling

operation.” South Carolina v. Petty, 241 S.E.2d 561, 562-563 (S.C.

1978).   The Tax Court reasoned that, as a result of these statutes,

“South Carolina had a sharply defined policy against illegal

gambling in 1999 as expressed in its statutes and enforced by the

[Greenville County Sheriff’s Office].” (J.A. 190.) The forfeiture

was clearly a part of South Carolina’s enforcement of its public

policy against illegal gambling.       Appellants do not contest that

the State of South Carolina has such a policy.

     Appellants   argue   that   the   forfeiture   was   invalid   and,

therefore, the deduction cannot be denied on the grounds of public


                                   7
policy.      The Tax Court observed that, by questioning the validity

of the forfeiture, the Hackworths were attempting to collaterally

attack    the   forfeiture,    a   matter       which   the    Tax    Court    had    no

jurisdiction to hear.         Appellants argue that their deduction was

proper because no proper civil forfeiture took place under South

Carolina law.      Rather, they argue that the alleged property has

been illegally retained by the Greenville County Sheriff’s Office

and that the illegal retention of the monies is not a government

sanctioned penalty under state law.                   However, Edman Hackworth

voluntarily signed a form entitled “Consent Forfeiture of Monies

Derived from Gambling” which stated that the $152,016 had been

seized as a result of Edman’s arrest for violation of the South

Carolina gambling statutes.           (J.A. 279.)          The Consent further

stated that the parties were entering into “a compromise settlement

to   avoid    litigation”   and    that       the   $152,016   seized     was     being

forfeited pursuant to South Carolina Code § 16-19-80.

      Taxpayers argue that the consent form is “incomplete” and,

consequently, ineffective, because it is not signed in the space

provided for an assistant solicitor or a judge to sign.                       However,

they have not provided any legal authority to demonstrate that

Edman    Hackworth’s    signature,        along     with   his       conviction      for

adventuring in lotteries, is insufficient to effect a consent to

forfeiture.     Before the Tax Court, Lieutenant Robert L. Gillespie,

with the Greenville County Sheriff’s Office, testified that he


                                          8
understood the consent to be effective upon conviction without a

judge’s signature.   (J.A. 155.)       While the taxpayers assert that

this is only Gillespie’s interpretation of the law, they point to

no legal authority that would render his understanding of the law

to be erroneous.

     Appellants argue that no forfeiture took place because no in

rem action took place.   See Ducworth v. Neely, 459 S.E.2d 896, 899

(S.C. Ct. App. 1995) (an action for forfeiture is an action in rem

against the property itself ).     Relying on Petty, 241 S.E.2d 561,

they assert that an in rem action was necessary to determine, among

other things, whether Edman’s consent was knowledgeable.      However,

that case does not discuss a situation where, as here, there was a

consent forfeiture.3 Importantly, in the instant case, the Consent

provides that it is a “compromise settlement” entered into for the

express purpose of “avoid[ing] litigation.”

     Appellants also rely on the case of Moore v. Timmerman, 276

S.E.2d 290 (S.C. 1981), which they characterize as a case that

requires a forfeiture hearing to be held even where the statute in


     3
      In that case, pursuant to a search warrant, SLED agents found
and seized cash and checks totally $23,549.58, in the same room
where gambling paraphernalia was discovered. Petty pled guilty to
South Carolina Code § 52-15-10 and the State subsequently
petitioned to have the seized monies and checks forfeited to the
state pursuant to South Carolina Code § 16-19-80. Petty appealed
the forfeiture on the grounds that the evidence was insufficient to
support a finding that the monies and checks found were “staked,
betted or pending” within in the meaning of § 16-19-80 in that
there was no direct showing that the money was involved in
gambling. Petty, 241 S.E.2d at 562.

                                   9
question provides for an automatic forfeiture.4                In that case, the

South Carolina Supreme Court determined that the criminal defendant

was charged with hunting deer at night and the criminal trial

provided      the    due    process   necessary    to    support   the    statutory

forfeiture of the guns in his possession at the time of his arrest.

Id. at 292.         The South Carolina Supreme Court held that the only

hearing required, when there is an automatic forfeiture, is one to

allow an innocent third party claiming an interest in one of the

forfeited guns to be heard.            Id. at 292-293.      In the instant case,

there    is   no    third    party    claiming    an    interest   in    the   monies

forfeited and, consequently, Moore is inapplicable.                 The taxpayers

have presented this Court with no legal authority to support their

argument that a consent to forfeiture does not permit the State to

forego an in rem proceeding when that consent specifically states

that it is signed to “avoid litigation.”

     Appellants also argue that, shortly before the trial before

the Tax Court, Edman “revoked” his consent to the forfeiture.

Appellants have failed to address whether the attempt to revoke his

consent, long after the forfeiture had been completed, could have

any legal effect.           Regardless, the Tax Court found the argument



     4
      Appellants concede that there are South Carolina decisions
that have found an automatic forfeiture upon conviction of a crime
or from the possession of contraband, but assert that those cases
were not pursuant to the gambling statute used in the instant case.
See Ducworth, 459 S.E.2d 896; South Carolina v. Coin-Op. Video Game
Mach., 525 S.E.2d 872 (S.C. 2000).

                                          10
that Edman revoked his consent to forfeiture to be “uncorroborated

and unpersuasive.”      This Court defers to a trier of fact on a

question of credibility.      McCrary v. Runyon, 515 F.2d 1082, 1086

(4th Cir. 1975); see also Anderson v. City of Bessemer City, N.C.,

470 U.S. 564, 575 (1985).

      Appellee asserts, and the Tax Court agreed, that appellants

are   attempting   to   collaterally    attack   the   forfeiture   of   the

gambling funds.     Appellants contend that they are not attacking

whether the funds should be retained by the Greenville County

Sheriff’s Office, an issue they concede is not within the Tax

Court’s jurisdiction.     Rather, appellants assert that the issue is

whether a deduction should be allowed as a business loss. Appellee

asserts that whether or not the forfeiture was valid under South

Carolina law is an issue between the taxpayers and the Greenville

County Sheriff’s Office.      This Court agrees.        If the taxpayers

believe that the forfeiture was invalid, the proper remedy is for

them to sue the Greenville County Sheriff’s Office and seek return

of the funds.   Appellants’ counsel indicated at oral argument that

the taxpayers were, in fact, now trying to challenge the forfeiture

in the South Carolina state courts, but that such challenge may

prove to be untimely. Regardless of whether that action is timely,

the Tax Court has no jurisdiction to determine whether a forfeiture

was valid or invalid and until it is determined to be invalid the

retention of the $152,016 by the Greenville County Sheriff’s Office


                                   11
is a “forfeiture” paid “to the government” rather than a “business

loss”    (as   appellants     now    argue)   or     payment     for    “legal     and

professional services” (as they claimed on their Schedule C).

     Appellants argue that the result in this case violates the

“principle” that only net income should be subjected to tax.                        A

taxpayer    generally    is   not    taxed    on   the   gross       income   of   his

business,      but   rather   is    allowed   to    deduct     the    ordinary     and

necessary business expenses that are incurred.                 See I.R.C. § 162.5

Appellants argue that they should be able to deduct the monies

retained by the Greenville County Sheriff’s Office for “reasons

analogous to a theft or casualty loss.”              The appellants point out

that the United States Supreme Court has allowed a gambler to

deduct business expenses or losses.                See Sullivan, 356 U.S. 27.

While the Court in Sullivan specifically acknowledged that a

deduction for “ordinary and necessary expenses” will ordinarily be

permitted, such a deduction will not be permitted if “the allowance

is a device to avoid the consequence of violations of a law.”                      Id.

at 28.     The taxpayers in Sullivan were seeking a deduction for

wages and rent, not for the forfeiture of funds as in the instant

case.    Such a deduction would run contrary to the public policy and

laws of the State of South Carolina.




     5
      As discussed above, appellants are seeking a deduction under
§ 165 rather than § 162.

                                        12
    We are of opinion the Tax Court correctly decided, as a matter

of public policy, that the Hackworths are not entitled to a

deduction for the $152,016 forfeited to the Greenville County

Sheriff’s Office.   The judgment of the Tax Court is accordingly



                                                         AFFIRMED.




                                13
