The trade or business issue is a facts & circumstances question.
Merely filing a 1065 and being a GP does not make it a trade or
business (T or B). On the other hand, you do not have to be in a
partnership to have a T or B nor does it have to be your main source of
income. There are many sole proprietors who file a Schedule C with
their 1040 and also have "regular" jobs as the main source of income.
Again, I encourage you to seek out a CPA or EA to help make this
determination.

To recap my earlier post, if it was not a T or B, the restitution is
not deductible. If it was a T or B, it probably is deductible, but
there may be a chance that it is not.

As for the fine to the government, that is most definetley not
deductible.

Another issue that I did not raise earlier are legal fees. If you had
a T or B, then I believe the legal fees have to be allocated along the
lines of restitution versus fine. The portion allocated to the fine
may not be deductible. This is a fine point and definitely needs a
professional.

Another point: was the partnership the named defendant along with you
(since you were the GP)? If only you were named, then perhaps none of
the legal fees are deductible / perhaps some are deductible (subject to
2% AGI limitations) / perhaps deductible outside of the partnership,
but on Schedule E (where you would have reported your share of the
partnership's income / expenses / gains / losses.

Definitely a lot of things to think about. The numbers are big, so
contact that CPA / EA.

Peter C. Gatto, CPA

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Thanks for your reply. The investment club was a sideline. I
work for an engineering firm. The club was organized as a
limited partnership with me as the general partner. I filed
partnership returns (1065). The payments increase by 25%
every 2 years. That is how they get to 400K. After the
payments are done I have to pay a fine of 125K to the
government.

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"Randy" <nelson[at]huntsville.sparta.com> wrote:

- quote -

It depends on what you mean by lost trading. My impression
is that they bought stock which they claimed they paid too
much for, and as a result incurred capital losses. So you
are paying back those losses.

I haven't spent the time to do the research on that specific
point, but my guess is that you should be able to deduct
that as a business expense.

Stu

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Randy wrote:

- quote -

You do not give enough information for any type of answer to
you particularly. That being said, I'll talk in
generalities with the admonition that you talk to a CPA or
EA about your specific facts & circumstances.

First hurdle: If your "investment club" was not your trade
or business for tax purposes, then the restitution is
probably a personal expense and, therefore, not deductible.
If it was your trade or business, then see the remainder of
my response.

Second hurdle: The wording of the document ordering the
restitution. Some circuit courts are split on this issue.
The second circuit, in Allied Signal v. Com (1995) ruled
that if restitution was made in lieu of a fine to the
government, that the payment was not deductible. There was
one disenting opinion stating that the plain language of the
code states that the payment must be to a government entity.
The third circuit follows the language of the Code and says
the restitution would be deductible (since you state the
payments are to investors). (I believe the case is Stephens
v. Com. (1990 or 1992).) Generally, payments are made into
an escrow account with a trustee who disburses the monies to
the victims.

Note that the above cases are about 100% guaranteed to not
exactly duplicate your situation.

Alabama is in the 11th circuit and I'm not sure if they have
ruled on this issue. I just did a cursory search and did
not see anything immediately pop up.

You talk about paying back $400,000; however, your payments
only add up to $240,000. So either the victims are getting
$0.60 on the dollar or there is a math error somewhere.

If there is an interest component to your payments, the
deductibility / non-deductibility of the interest will
generally follow that of the principal payments.

As I mentioned at the outset, talk to a CPA or EA and bring
them the court order and provide them ALL of the facts &
circumstances - even those you do not think are relevant.

Peter C. Gatto, CPA

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Basically I am paying them back for money that was lost
trading. They have already claimed the loss and I suppose
that they will have to claim what I pay them as some kind of
income. In effect the trading loss is gradually being
shifted from them to me. That is why I thought it might be
deductible. By the way, I am making the payments to the
National Futures Association and they are dispersing the
money to the investors.

Thanks for your help.

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"Randy" <nelson[at]huntsville.sparta.com> wrote:

- quote -

What would you think it be deductible as? Under some
circumstances I can see it MIGHT be deductible, but just
because you are a civil defendant doesn't make it so.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"Randy" <nelson[at]huntsville.sparta.com> wrote

- quote -

If it's been worded as a return of your sales commissions,
then most likely you can deduct it.

If it's worded something other than a return of the
commissions you earned, then most likely not.

--
Paul A. Thomas, CPA
Athens, Georgia
taxman at negia.net

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I was the defendant in a civil suit with the Alabama
Securities Commission and the Commodity Futures Trading
Commission which resulted in an order for me to pay
restitution of $2000 per month to investors in my investment
club (for 10 years). I am basically paying back $400K that
was lost in commodity trading by the club. Is there any way
that this is tax deductible?

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