This Article focuses on some of these problems in the field of federal income tax. It suggests that when part of the IRC appears to direct a particular outcome, courts are prone to error when they override that command by imposing a penalty based on the judges’ moral condemnation of a party’s behavior. It would be better for courts to employ the statute’s intrinsic set of public policies to guide their decision making. In some instances, the results will not change because of other overlooked provisions in the statute. However, adherence to the legislature’s balance of conflicting interests will likely lead to greater coherence and more consistent application of state policies.
Part I of this Article focuses on theft losses suffered by confidence-scheme victims who thought they would profit from counterfeiting or other illegal activity. Courts usually disallow these deductions so as to discourage illegal activity. This Article criticizes such a rationale and suggests instead that a tax deduction would be contrary to state policy in those situations where states in effect penalize victims by denying them restitution from the thieves. Part II discusses the cases that have denied deductions for fines and civil penalties, and explores how these apply to the denial of restitution. Part III assesses the wisdom of disallowing deductions in these cases and suggests that it would make more sense for society to punish the wrongdoer solely in the criminal courts and to allow the would-be counterfeiter a theft loss deduction.