The Magazine of Corporate Responsibility

Chutzpah: Embezzler Claims Restitution as Tax Deduction

by Michael Connor

From the recent annals of the New York State tax court comes the audacious tale of Hannah Shin, who pleaded guilty in 2007 to embezzling $449,064 from her employer, Fusebox Technologies, by creating false invoices and having client payments directed to companies and bank accounts she controlled.

Financial IRS tax formsAs part of her felony plea agreement, Ms. Shin was required to make restitution to Fusebox in the amount of $342,678. She was also required to file amended tax returns for the years 2004 and 2005 as well as tax returns for the year 2006.

When Ms. Shin filed her tax returns, she claimed her “restitution to pay back fees” as deductible business expenses.  These justified, she said, a “tax loss carryback,” a standard tax benefit for legitimate businesses that incur legitimate business losses.

Tax officials denied Ms. Shin’s claim that restitution qualified as business expense, noting that “Ms. Shin is making restitution payments in lieu of imprisonment which under the internal revenue code constitutes a ‘fine or similar penalty.’”    Ms. Shin appealed.

In November 2010, an appeals judge ruled against Ms. Shin, noting: “There is nothing in the record to establish that petitioner was engaged in a trade or business while regularly embezzling funds from her employer, and therefore she was not entitled to receive the benefits of carryback provisions when she repaid the stolen money after being caught.”

The judge disallowed all business expenses claimed by Ms. Shin, including $7,000 for “formal wear” and $16,400 for meals and entertainment.  “Petitioner introduced no documentation to substantiate the claimed business expenses in the areas of travel expenses, utilities, cell phone, research material and gratuities,” he said.

The judge suggested that Ms. Shin’s attitude hadn’t helped her case.

"Finally," he wrote, "it is noted that petitioner’s written arguments consisted mainly of unsubstantiated personal attacks on both the auditor and the Division’s representative in this matter. These unsubstantiated allegations added nothing to petitioner’s legal position or the validity of the business expenses claimed, and due to their nature, will not receive a response in this determination.”

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