                        T.C. Memo. 2004-173



                      UNITED STATES TAX COURT



         EDMAN AND DEBBIE KAY HACKWORTH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9786-02.              Filed July 22, 2004.



     William H. Thomas III, for petitioners.

     James R. Rich, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies and

penalties with respect to petitioners’ Federal income taxes for

1998 and 1999 as follows:
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                                        Penalties
             Year    Deficiency   Sec. 6662    Sec. 6663

             1998     $31,816       $4,063        $8,627
             1999      76,768        9,250        22,887

After concessions by the parties, the issue for decision is

whether petitioners are entitled to a loss deduction for 1999 for

the cash that petitioner Edman Hackworth forfeited to the State

of South Carolina as a result of his violation of South

Carolina’s gambling laws.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.     All amounts have been rounded to the nearest dollar.

                            FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.     At the

time that the petition in this case was filed, petitioners

resided in Greer, South Carolina.

Background

     During 1998 and 1999, petitioner Edman Hackworth

(petitioner) owned and operated Sand Trap, Inc., an

S corporation.      Sand Trap, Inc., operated a bar named “Sand Trap

Lounge” (the Sand Trap) in Greenville, South Carolina, during

those years.
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     In December 1997, the Greenville County (South Carolina)

Sheriff’s Office (GCSO) began an investigation of petitioner

based upon information that he was operating an illegal gambling

business out of his residence and out of the Sand Trap.   On or

about July 27, 1999, GCSO began surveillance on the Sand Trap and

on petitioners’ residence.   Between August 4 and September 2,

1999, a GCSO officer frequented the Sand Trap in an undercover

capacity.   While working undercover at the Sand Trap, this

officer placed bets on various sporting events and observed other

gambling and gambling-related activities.   On or about August 28,

1999, GCSO officers collected several trash bags from the

roadside in front of petitioners’ residence.    One of these trash

bags was filled with used gambling paraphernalia and business

records from petitioner’s gambling operation.

     On or about September 7, 1999, GCSO officers executed a

search warrant on petitioners’ residence.   Petitioner was at home

at the time that this search warrant was executed and was placed

under arrest for bookmaking and setting up a lottery.   Shortly

after arresting petitioner, GCSO officers placed petitioner

Debbie Kay Hackworth (Mrs. Hackworth) under arrest at one of her

business locations for bookmaking and brought her back to

petitioners’ residence.   Upon searching petitioners’ residence,

GCSO discovered, inter alia, (1) a betting room with seven

telephone lines, tape-recording devices, two computers, and
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gambling paraphernalia; (2) keys to petitioner’s safety deposit

box at Carolina First Bank; and (3) a total of $63,589 in cash,

all of which was seized.    The cash was discovered in the

following amounts and locations in petitioners’ residence:

(1) $46,814 in a safe in the betting room; (2) $3,516 in the

kitchen; (3) $1,259 in Mrs. Hackworth’s purse; and (4) $12,000 in

Mrs. Hackworth’s closet in the master bedroom.    Also on or about

this date, GCSO officers executed a search warrant on the Sand

Trap and discovered and seized gambling paraphernalia, $10,705 in

cash from a back room safe, and $81 in cash from behind the bar

that was part of a betting pool.

     On or about September 8, 1999, GCSO officers executed a

search warrant on petitioner’s safety deposit box at Carolina

First Bank and discovered and seized $90,900 in cash contained

therein.   With this seizure, GCSO had seized a total of $165,275

in cash from petitioners.

     On September 30, 1999, petitioner voluntarily consented to

forfeit to the State of South Carolina $152,016 of the cash that

had been seized by GCSO in connection with his arrest and the

execution of the search warrants described above by signing and

dating a document entitled “CONSENT FORFEITURE OF MONIES DERIVED

FROM GAMBLING” (consent form).    The consent form provided, in

pertinent part, as follows:

     Defendant’s/respondent’s property was seized as a
     result of an investigation and arrest of the defendant
                              - 5 -

     on SEPT. 09, 1999 for a violation of South Carolina
     Gambling Statutes. The defendant was charged with
     ADVENTURING IN LOTTERY

     The parties now desire to enter into a compromise
     settlement to avoid litigation whereby the defendant
     agrees to voluntarily relinquish all rights and
     ownership to the defendant’s property.

     IT IS THEREFORE ORDERED that the
     defendant’s/respondent’s property of $152,016.00 (ONE
     HUNDRED AND FIFTY-TWO THOUSAND AND SIXTEEN DOLLARS) in
     United States Currency be forfeited pursuant to sec.
     16-19-80, Code of Laws of South Carolina (1976), as
     amended.

GCSO gave petitioner a form that explained the consent form.

Also on this date, the $1,259 in cash that had been seized from

Mrs. Hackworth’s purse and the $12,000 in cash that had been

seized from Mrs. Hackworth’s closet were returned to petitioner.

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

“Adventuring in lotteries” in violation of section 16-19-20 of

the Code of Laws of South Carolina (1976).   In connection with

petitioner’s guilty plea, he was issued a citation and paid a

$125 fine.

Petitioners’ Income Tax Return for 1999

     Petitioners’ joint Federal income tax return for 1999 was

due to be filed with the Internal Revenue Service (IRS) Center in

Atlanta, Georgia, by October 16, 2000.    Petitioners did not file

their 1999 return, however, until October 20, 2000.   Louis G.

Manios prepared petitioners’ 1999 return.
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     Petitioners attached three Schedules C, Profit or Loss From

Business, to their 1999 return.    The first two Schedules C

related to businesses operated by Mrs. Hackworth.     The third

Schedule C related to petitioner’s gambling activities.      On his

Schedule C, petitioner reported gross receipts of $178,236 from

his gambling activities, which were referred to as “services” on

this form.    Petitioner also deducted $152,016 for “legal and

professional services” on this form.     This deduction was taken

for the cash that petitioner forfeited to the State of South

Carolina as a result of his violation of South Carolina’s

gambling laws.

     In the statutory notice of deficiency sent to petitioners,

in addition to the adjustments no longer contested, the IRS

disallowed the $152,016 deduction claimed on petitioner’s

Schedule C.    The IRS determined that petitioners had not

established that any amount of this claimed deduction represented

a deductible expense, was an ordinary and necessary business

expense, or was expended for the purpose designated.

Accordingly, the IRS increased petitioners’ taxable income for

1999 by $152,016.

                               OPINION

     Petitioners seek a deduction for the cash that petitioner

voluntarily forfeited to the State of South Carolina under

section 16-19-80 (“Forfeiture of wagers”) of the Code of Laws of
                                  - 7 -

South Carolina (1976) as a result of his violation of South

Carolina’s gambling laws.   Petitioners have not argued that this

deduction falls under section 162 as an ordinary and necessary

business expense, so we rely on the general principle that a

deduction for property forfeited under Federal or State

forfeiture laws, if allowed at all, falls under the loss

deduction provisions of section 165.      See Fuller v. Commissioner,

213 F.2d 102, 105-106 (10th Cir. 1954), affg. 20 T.C. 308 (1953);

Holmes Enters., Inc. v. Commissioner, 69 T.C. 114, 116-117

(1977); Holt v. Commissioner, 69 T.C. 75, 78-79 (1977), affd. per

curiam 611 F.2d 1160 (5th Cir. 1980); see also Gambina v.

Commissioner, 91 T.C. 826, 827 n.3 (1988); Bailey v.

Commissioner, T.C. Memo. 1989-674, affd. without published

opinion 929 F.2d 700 (6th Cir. 1991); Mack v. Commissioner, T.C.

Memo. 1989-490; Farris v. Commissioner, T.C. Memo. 1985-346,

affd. without published opinion 823 F.2d 1552 (9th Cir. 1987).

Accordingly, we must decide whether petitioners are entitled to a

loss deduction under section 165 for 1999.

     Section 165(a) allows a deduction for “any loss sustained

during the taxable year and not compensated for by insurance or

otherwise.”   In the case of an individual, the deduction is

limited to losses incurred in the individual’s trade or business

or in any transaction entered into for profit and to certain

casualty losses.   Sec. 165(c).    The facts disclose that
                               - 8 -

petitioner was operating an illegal gambling enterprise in 1999.

Thus, the deduction asserted by petitioners falls conceptually

within the ambit of section 165(a) and (c)(1).   Courts have

consistently found that a loss deduction will be denied, however,

where the deduction would frustrate a sharply defined Federal or

State policy.   See, e.g., Wood v. United States, 863 F.2d 417,

420-422 (5th Cir. 1989); United States v. Algemene Kunstzijde

Unie, N.V., 226 F.2d 115, 119-120 (4th Cir. 1955); Fuller v.

Commissioner, supra at 105-106; Blackman v. Commissioner, 88 T.C.

677, 682-683 (1987), affd. without published opinion 867 F.2d 605

(1st Cir. 1988); Holmes Enters., Inc. v. Commissioner, supra at

117-118; Holt v. Commissioner, supra at 79-81; Murillo v.

Commissioner, T.C. Memo. 1998-13, affd. without published opinion

166 F.3d 1201 (2d Cir. 1998); Bailey v. Commissioner, supra; Mack

v. Commissioner, supra; Farris v. Commissioner, supra; Hopka v.

United States, 195 F. Supp. 474, 477-483 (N.D. Iowa 1961); see

also King v. United States, 152 F.3d 1200, 1202 (9th Cir. 1998);

Standard Oil Co. v. Commissioner, 129 F.2d 363, 370-371 (7th Cir.

1942), affg. 43 B.T.A. 973 (1941).

     Respondent contends that petitioners should not be allowed a

loss deduction for the cash that petitioner forfeited to the

State of South Carolina because the allowance of such a deduction

would frustrate South Carolina’s sharply defined policy against

illegal gambling.   Petitioners assert, without citation of
                               - 9 -

authority, that respondent has the burden of proving by clear and

convincing evidence that the “public policy exception” applies to

deny the loss deduction for the cash that petitioner forfeited.

Petitioners rely vaguely on the “legislative design under sec.

162".   Neither the statutory language of section 165 nor the

caselaw interpreting that section supports petitioners’

proposition.   In any event, the issue in this case is essentially

legal, and the outcome does not depend on the burden of proof.

     South Carolina had a sharply defined policy against illegal

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

GCSO.   Petitioner acknowledged that the forfeiture was made

pursuant to the laws of South Carolina and pleaded guilty.

(Petitioner’s claim that his consent to the forfeiture was

“revoked” is uncorroborated and unpersuasive.)   To allow

petitioners a deduction for a loss arising out of petitioner’s

illegal activities would undermine South Carolina’s policy by

permitting a portion of the forfeiture to be borne by the Federal

Government, thus taking the “sting” out of the forfeiture.     See

Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30, 35-36

(1958); Wood v. United States, supra at 422; Holt v.

Commissioner, supra at 81; Murillo v. Commissioner, supra; Mack

v. Commissioner, supra; Farris v. Commissioner, supra; Hopka v.

United States, supra at 482-483.   In accordance with these

controlling precedents, petitioners are not entitled to a loss
                               - 10 -

deduction under section 165 for 1999 for the cash that petitioner

forfeited to the State of South Carolina.

     Petitioners contend that petitioner’s forfeiture is invalid

because it was disproportionate to his crime and violated the

Eighth Amendment to the Constitution and, also, because it did

not comply with the laws of South Carolina.   Accordingly,

petitioners conclude that they should be allowed a loss deduction

for the cash that petitioner forfeited because the “public policy

exception” applies only “when the underlying action by the

government is legal and properly conducted by the state

authorities under their own laws and the laws of the United

States”.   Petitioners’ contention as to the validity of the

forfeiture, however, is not properly an issue in this Court.    The

Tax Court is a court of limited jurisdiction, and we may exercise

our jurisdiction only to the extent authorized by Congress.    See

sec. 7442; Naftel v. Commissioner, 85 T.C. 527, 529 (1985); see

also Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418,

420, 422 (1943).   This Court lacks jurisdiction over petitioners’

collateral attack on the forfeiture.

     Petitioners further contend that the damage done to South

Carolina’s policy against illegal gambling is outweighed by

congressional intent that “business losses” be allowed to be

deducted and that the income tax be imposed upon a taxpayer’s net

income.    In support of this contention, petitioners cite Lilly v.
                                - 11 -

Commissioner, 343 U.S. 90 (1952); Commissioner v. Sullivan, 356

U.S. 27 (1958); Commissioner v. Tellier, 383 U.S. 687 (1966);

Grossman & Sons, Inc. v. Commissioner, 48 T.C. 15 (1967); and

Edwards v. Bromberg, 232 F.2d 107 (5th Cir. 1956).     As we discuss

below, petitioners’ reliance on these cases is misplaced.

Consequently, petitioners’ contention is unpersuasive.

     In Lilly v. Commissioner, supra, opticians sought to deduct

payments that they made to eye doctors as ordinary and necessary

business expenses.    These payments were made pursuant to

agreements that reflected an established and widespread practice

in that industry whereby the eye doctors agreed to recommend

their patients to certain opticians and the opticians agreed to

pay those referring eye doctors one-third of the retail sales

price that they received for the eyeglasses that they sold.       The

Court of Appeals for the Fourth Circuit held such payments

nondeductible on the grounds that they were against public

policy.   The Supreme Court reversed, however, holding that the

payments did not stand on the same basis as expenditures that

violated some Federal or State law or that were incidental to

such violations.     The Court drew a distinction between these

payments, which were at most professionally unethical, and

outlawed expenditures, which, by virtue of their illegality,

frustrated some sharply defined Federal or State policy.
                              - 12 -

     Petitioner’s proceeds from his illegal gambling enterprise

were not akin to the payments in dispute in Lilly.    The moneys

seized from petitioner were presumptively the essence of his

illegal venture.   The forfeiture was incidental to petitioner’s

violation of South Carolina’s gambling laws.    Therefore, the

holding in Lilly does not support petitioner’s argument.

     In Commissioner v. Sullivan, supra, the Supreme Court held

that an illegal gambling enterprise is a business for Federal tax

purposes and that deductions for ordinary and necessary business

expenses involved in operating the enterprise were allowable.

The Court reasoned that to deny such deductions would result in

taxing the gross receipts of the business rather than its net

income.   In Commissioner v. Tellier, supra, the taxpayer sought a

deduction for legal fees incurred in the unsuccessful defense of

a criminal prosecution relating to his business.    The

Commissioner conceded that the fees were ordinary and necessary

business expenses.   The only question was whether the allowance

of a deduction would frustrate public policy.    The Supreme Court

held that no public policy was frustrated by allowing these legal

fees to be deducted as ordinary and necessary business expenses.

     Sullivan and Tellier stand for the proposition that a

taxpayer may be allowed to deduct legitimate (i.e., ordinary and

necessary) business expenses in the operation of an illegitimate

enterprise.   That concept is not determinative in our analysis of
                              - 13 -

this case because we are dealing with a forfeiture that does not

qualify as an ordinary and necessary business expense under

section 162.   Furthermore, the allowance of a loss deduction in

this case would undermine the impact of South Carolina’s sharply

defined policy against illegal gambling.    Accordingly, Sullivan

and Tellier are inapposite.

     In Grossman & Sons, Inc. v. Commissioner, supra, we

considered a situation in which a taxpayer sought a deduction for

the amount that it had paid to the United States in settlement of

a proceeding under the False Claims Act, 31 U.S.C. secs. 231-233

(the 1952 version).   After examining the record of the settlement

negotiations and the settlement agreement between the United

States and the taxpayer, we concluded that this payment was made

to reimburse the Government for its damages for breach of

contract and was not a penalty or forfeiture.   We also examined

the False Claims Act and concluded that the Act was partly

remedial and compensatory in nature and partly punitive.    Based

upon that conclusion, we rejected the argument that no amounts

paid or incurred in satisfaction of claims of the United States

under the False Claims Act, whether by judgment or by settlement,

were deductible because of public policy.   Accordingly, we

allowed the taxpayer to deduct the settlement amount as an

ordinary and necessary business expense under the pre-1969

version of section 162.
                              - 14 -

     In Grossman & Sons, Inc., the taxpayer settled a breach of

contract dispute with the Government and was allowed to deduct

the settlement amount as an ordinary and necessary business

expense.   Unlike the facts of Grossman & Sons, Inc., petitioner’s

“payment” (i.e., forfeiture) to the State of South Carolina

resulted from his violation of South Carolina’s gambling laws and

not from a settlement of a breach of contract dispute.

     In Edwards v. Bromberg, supra, the taxpayer sought a loss

deduction for the theft of his money.    The taxpayer had agreed to

provide money to another individual in order to bet on a “fixed”

horse race.   The individual absconded with the taxpayer’s money.

After deciding that there was no scheme to defraud anyone except

the taxpayer himself, the court allowed the deduction.

     Bromberg is also distinguishable.    Petitioner’s funds were

seized by the State of South Carolina in the enforcement of its

gambling laws.   The purpose of the seizure and forfeiture was to

cripple petitioner’s illegal gambling activities.   If a loss

deduction were allowed in this case, the Federal Government would

in effect be carrying a portion of the loss inflicted on

petitioners by the State of South Carolina because of

petitioner’s illegal activities.

     Finally, petitioners contend that imposing a liability for

Federal income taxes on the cash that petitioner forfeited

without allowing a loss deduction for the forfeited amount
                               - 15 -

violates the Double Jeopardy Clause of the Fifth Amendment to the

Constitution.    In support of this contention, petitioners cite

United States v. Halper, 490 U.S. 435 (1989).

     The Double Jeopardy Clause protects individuals only against

the imposition of multiple criminal punishments for the same

offense.   Hudson v. United States, 522 U.S. 93, 99 (1997)

(abrogating United States v. Halper, supra, on this issue); see

also Helvering v. Mitchell, 303 U.S. 391, 399 (1938).    The

imposition of a liability for a Federal income tax deficiency is

remedial and is not a criminal punishment.    See Ames v.

Commissioner, 112 T.C. 304, 317 (1999); see also Ianniello v.

Commissioner, 98 T.C. 165, 178-180 (1992); cf. McNichols v.

Commissioner, 13 F.3d 432, 435-436 (1st Cir. 1993), affg. T.C.

Memo. 1993-61.    A fortiori, the denial of a deduction (i.e., the

item that gave rise to the income tax deficiency in this case) is

not a criminal punishment.    See, e.g., Murillo v. Commissioner,

T.C. Memo. 1998-13, affd. without published opinion 166 F.3d 1201

(2d Cir. 1998).    Accordingly, denying petitioners a loss

deduction for the cash that petitioner forfeited does not violate

the Double Jeopardy Clause.

     We have considered the arguments of the parties that were

not specifically addressed in this opinion.    Those arguments are

either without merit or irrelevant to our decision.
                        - 16 -

To reflect the foregoing and the concessions of the parties,


                                   Decision will be entered

                              under Rule 155.
