                        T.C. Memo. 1998-41



                      UNITED STATES TAX COURT



                  JOHN DIFRONZO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18476-96.                    Filed February 4, 1998.



     Carl M. Walsh, for petitioner.

     Warren M. Joseph and Donna C. Hansberry, for respondent.


                        MEMORANDUM OPINION

     RAUM, Judge:   The Commissioner determined a $31,635

deficiency in petitioner's 1993 Federal income taxes.    There are

two issues for consideration:   (1) Whether petitioner properly

substantiated payment of $125,000 in legal fees to his attorney,

and (2) whether those fees, which were paid to defend petitioner,

unsuccessfully, against charges of conspiracy and mail and wire
                                - 2 -


fraud, are, to the extent substantiated, deductible as ordinary

and necessary business expenses under section 162(a).1   This case

was submitted on the basis of a stipulation of facts.

     Petitioner, John DiFronzo, resided in River Grove, Illinois,

when the petition in this case was filed.    On January 9, 1992,

petitioner was indicted by the Grand Jury in the United States

District Court for the Southern District of California, Criminal

Case No. 92-0026 E.    He was charged with a variety of federal

offenses, including mail and wire fraud, and conspiracy to commit

mail and wire fraud.

     The indictment generally alleged that petitioner and other

members of the Chicago organized crime family planned to contract

with the Rincon Band of Mission Indians to control gambling

operations on the Rincon Indian Reservation.    The defendants

meant to conceal that the money they invested came from the

Chicago organized crime family.    The defendants intended to

structure the operation so as to maximize their profits.    They

intended to skim profits from the operation without the knowledge

of the Rincon Indians.    They also intended to use the operation

to launder the proceeds from other illegal enterprises of the

Chicago organized crime family.


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 3 -


     Petitioner was found guilty of conspiracy and substantive

counts of mail and wire fraud.    On May 25, 1993, he was sentenced

to 37 months' imprisonment, a $10,000 fine, and a $200 special

assessment.   Petitioner subsequently filed an appeal with the

Court of Appeals for the Ninth Circuit.   On May 24, 1994, the

Ninth Circuit affirmed petitioner's conviction but reversed the

sentence and remanded for resentencing.   On July 18, 1994,

petitioner was resentenced to 16 months' imprisonment, a $10,000

fine, and a $200 special assessment.

     On his 1993 Individual Income Tax Return, petitioner took a

deduction of $125,000 for "Legal fees incurred in the defense of

indictment no CR92-62-WBE in the United States District Court for

the Southern District of California in which taxpayer was

convicted of mail fraud.   Deduction pursuant to IRC section 162

and Commissioner v. Tellier 383 U.S. 687 (1966)."   Petitioner's

filing status was married filing separate.   On May 28, 1996, the

Commissioner issued a notice of deficiency to petitioner

disallowing the $125,000 deduction.2

1.   Substantiation

     Petitioner deducted $125,000 in legal fees on his 1993

return.   His substantiation consists of three sets of documents.

     2
        A number of other issues were raised in the notice of
deficiency. However, they appear to have resulted from the
disallowance of the deduction for legal fees. Both parties
argued only the deductibility of the legal fees in their briefs
and trial memoranda.
                                 - 4 -


First, there is a cashier's check for $50,000 made out to Carl M.

Walsh and remitted by John DiFronzo.     The check is dated January

18, 1993.   With it is a deposit slip for Carl M. Walsh dated

January 25, 1993.   Among the checks listed for deposit is one for

$50,000.

     Second, there is a check for $25,000 from RoseMary DiFronzo

made payable to Carl M. Walsh.    That check is dated April 9, 1993

and is payable from the account of RoseMary DiFronzo.      On April

12, 1993, a deposit was made on behalf of Carl M. Walsh.

Included in that deposit was a check for $25,000.    Third, there

is a deposit slip from Carl M. Walsh dated May 11, 1993.     Only

one check is listed, for $50,000.    The deposit slip is

accompanied by two check stubs from the register of Carl M.

Walsh.   Beside check stub 535, dated May 15, 1993, there is a

notation under deposits "5/11/93 DiFronzo 50,000".

     Section 162(a) allows as a deduction "all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business".    For a deduction for legal

expenses, the taxpayer must also prove that he paid for the

services performed for him.   Lussy v. Commissioner, T.C. Memo.

1995-393, affd. without published opinion 114 F.3d 1201 (11th

Cir. 1997).   Petitioner's filing status is married filing

separate.   As a result, he must demonstrate that he alone made

all of the payments.
                                - 5 -


     Here, there is no evidence that the $25,000 check signed by

RoseMary DiFronzo was from any source other than her.     There is

also nothing in the record indicating that petitioner paid the

second $50,000.    The deposit ticket with its vague notation

(DiFronzo) is not adequate proof that petitioner actually paid

the check in view of our finding that RoseMary DiFronzo made the

$25,000 payment.    Accordingly, petitioner has adequately

substantiated only $50,000 of the $125,000 deduction.

2.   Deductibility of legal fees

     The origin and character of the claim with respect to which

legal fees are incurred controls whether the expense is a

deductible business expense or a nondeductible personal expense.

United States v. Gilmore, 372 U.S. 39, 49 (1963).    In

Commissioner v. Tellier, 383 U.S. 687 (1966), the taxpayer

underwrote public stock offerings and bought securities to resell

to customers.   He was convicted of violating the fraud section of

the Securities Act of 1933, mail fraud, and conspiracy to violate

those statutes.    He spent $22,964 in legal fees during 1956,

which amount he deducted on his income tax return for that year.

Id. at 688.   The Supreme Court held that the taxpayer's legal

fees were deductible.    "The criminal charges against the

* * * [taxpayer] found their source in his business activities as

a securities dealer.    The * * * [taxpayer's] legal fees, paid in

defense against those charges, therefore clearly qualify under
                                - 6 -


Gilmore as 'expenses paid or incurred * * * in carrying on any

trade or business' within the meaning of section 162(a)."       Id. at

689.

       The criminal convictions in this case provide proof of

petitioner's involvement in an illegal trade or business.     The

indictment alleges that

            6. The Chicago organized crime family obtained
       income through the pursuit of a variety of illegal
       activities, including but not limited to bookmaking,
       loansharking, extortion, illegal gambling, trafficking
       in stolen property, and fraud, and would travel in
       interstate commerce in furtherance of those activities.

It also alleges that petitioner was a "crew chief", or a mid-

level leader in the Chicago organized crime family.     The

indictment chronicles petitioner's involvement in one particular

money-making scheme.    Specifically, petitioner and his

confederates planned to invest money in a gambling operation

without disclosing to the Rincon Indians that the money came from

the Chicago organized crime family.     They planned to structure

the gambling operation in such a way that the crime family would

maximize its profits at the Indians' expense.     They also planned

to skim profits and use the operation to launder funds from other

illegal activities of the crime family.

       The criminal charges against petitioner originated from his

business activities as a member of the Chicago organized crime

family.    His legal fees, incurred in defense of those charges,

are deductible under section 162(a).
                                 - 7 -


     The Government contends that petitioner was not engaged in a

trade or business.    According to the Government, petitioner

merely conspired to set up a gambling operation with the Rincon

Indians.    The Government characterizes this as "a mere

expectation" of a future business that is not deductible.    See

Ellis v. Commissioner, T.C. Memo. 1967-94 (expenses for a

business that never materialized were not deductible).

     As we indicated above, petitioner's trade or business

consisted of furthering the interests of the Chicago organized

crime family.    These interests, as listed in the indictment,

included bookmaking, loansharking, extortion, illegal gambling,

and fraud.    The Rincon gambling operation was one such endeavor.

And while it is true that an expense incurred in a mere

expectation of a future business is not deductible, an expense

incurred from an activity entered into with the genuine intention

of making a profit is.     International Trading Co. v.

Commissioner, 275 F.2d 578, 584 (7th Cir. 1960), affg. T.C. Memo.

1958-104.     Petitioner entered into the Rincon gambling operation

with the genuine intention of making a profit.

     The Government also relies on Accardo v. Commissioner, 942

F.2d 444 (7th Cir. 1991), affg. 94 T.C. 96 (1990).    In Accardo,

the taxpayer was indicted but acquitted of racketeering charges.

Id. at 446.    He attempted to deduct his legal fees from the RICO

prosecution.     The taxpayer could not validly claim a deduction
                                   - 8 -


under section 162(a) because he was acquitted of being engaged in

the racketeering business.   He turned instead to section 212(2).3

He claimed he was entitled to a deduction because he was

protecting certain certificates of deposit from forfeiture.

Under the RICO statute, assets purchased with racketeering funds

are subject to forfeiture. Id. at 446-448.               The Seventh Circuit

denied the deduction on the ground that, because petitioner was

acquitted, and because the certificates of deposit were not

obtained with the proceeds of the alleged racketeering activities

in any event, there was no nexus between the certificates and the

racketeering legal expenses.       Id.     at 449.

     The Government interprets Accardo to mean that Accardo's

fellow defendants there were entitled to deduct their legal fees

because they were involved in the racketeering business and their

property was subject to forfeiture and seizure.              The Government

attempts to distinguish petitioner's case on the basis that his

property was not subject to forfeiture and seizure.              In its

brief, the Government also relies on the differences in the

statutes themselves:   "Unlike the racketeering statute, which

     3
        Sec. 212(2) provides:
     In the case of an individual, there shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred during the taxable year--

             *    *     *      *     *       *       *

     (2) for the management, conservation, or maintenance of
     property held for the production of income;
                               - 9 -


refers to receiving income from racketeering activity, the

conspiracy statute uses only the word 'conspire'.     See 18 U.S.C.

1962 and 371.   Conspiring to commit an offense is not the

equivalent of engaging in a business activity."

     The Government places too much emphasis on the forfeiture

and seizure provisions.    The forfeiture provisions were

discussed in Accardo because the risk of forfeiture was integral

to the taxpayer's claim of a deduction under section 212(2).     Id.

at 447.   Those provisions have no bearing here, since

petitioner's claim for deduction is pursuant to section 162(a).

Moreover, the statute itself is not determinative of petitioner's

business activity.   Rather, the indictment chronicles a business

transaction undertaken by petitioner as a member of the Chicago

organized crime family.   Petitioner's involvement in this

business was confirmed by his criminal conviction.

     Although it would seem contrary to public policy to allow a

deduction in the conduct of an illegal and highly reprehensible

criminal activity, it has been established that such is not

sufficient to deny a deduction otherwise allowable.    See

Commissioner v. Tellier, 383 U.S. at 691-695; Commissioner v.

Sullivan, 356 U.S. 27, 27-29 (1958); Brizell v. Commissioner, 93

T.C. 151, 166 (1989); O'Malley v. Commissioner, 91 T.C. 352, 362-

366 (1988).   True, the payment of expenses in such activity may

not be deductible where the expense itself is illegal, see secs.
                             - 10 -


162(c),(f); Hawronsky v. Commissioner, 105 T.C. 94, 97-101

(1995), affd. without published opinion 98   F.3d 1338 (5th Cir.

1996); Tippin v. Commissioner, 104 T.C. 518, 528 (1995); Zecchini

v. Commissioner, T.C. Memo. 1992-8, but the payment here of legal

expenses is no more illegal than the payment of rent or utility

charges.

     To the extent that petitioner has established the payment of

the legal fee in question, we hold that he is entitled to the

claimed deduction.

                                   Decision will be entered

                         under Rule 155.
