Opinion ID: 566858
Heading Depth: 2
Heading Rank: 2

Heading: Taxpayer's equitable estoppel argument

Text: 22 At his criminal trial, taxpayer denied that he engaged in racketeering activities under RICO and the jury agreed. It is taxpayer's acquittal and his subsequent inability to deduct legal fees as a business expense that forms the basis of taxpayer's equitable estoppel argument. As noted earlier, the Code treats the guilty more favorably than the innocent. As taxpayer correctly recognized, had he been convicted for racketeering activity, he would have been able to claim his deduction under Section 162(a), for the legal fees would have originated out of the defense of criminal charges arising from the taxpayer's trade or business. In Tellier, 383 U.S. at 687, 86 S.Ct. at 1118, the Supreme Court upheld the deductibility of legal fees as a business expense under Section 162(a) of the Code, where they were incurred in the unsuccessful defense of a criminal prosecution for securities fraud. Despite the fact that the taxpayer's gains were proffered illegally, the Court recognized that it is income nonetheless, taxed at a rate no higher and no lower than income from more conventional sources. Id. at 691, 86 S.Ct. at 1120. Therefore, the deductibility of expenses incurred in income-producing activities must be subject to the same analysis. If the Code does not distinguish between legally and illegally earned income for purposes of income tax, then the Commissioner may not apply the deductibility provision selectively, distinguishing between the convicted and the acquitted. The Court in Tellier found that to deny the business expense deduction would be to turn the Code into a punitive measure where none was authorized or intended by Congress. Id. at 694-695, 86 S.Ct. at 1122-1123. While Tellier would have allowed a Section 162(a) deduction if Accardo had been found to be in the racketeering business, taxpayer did not claim his deduction under that provision, nor was he found to be in that business. 23 Despite Tellier's inapplicability to his case, taxpayer attempts to have us overlook the fact that his defense in the RICO prosecution ultimately convinced the jury that he was innocent. He asserts that the Government is estopped from denying the deductibility of the legal expenses because it previously argued that taxpayer was engaged in an illegal business activity. Therefore, according to taxpayer's equitable estoppel argument, the Government should be prevented from changing the position it took in the RICO prosecution, so that his legal fees should be deductible. This argument ignores taxpayer's unwavering denial of involvement in any racketeering activity and his acquittal at trial. In any event, because the assets were not forfeitable, taxpayer may not claim a deduction under Section 212(2). 24 Taxpayer also fails to satisfy the legal requirements of equitable estoppel. He did not show that he relied on any misrepresentation by the Government in changing his position for the worse, nor did the government make a misleading representation to him on which he reasonably relied to his detriment. Therefore, equitable estoppel does not apply. Heckler v. Community Health Servs., Inc., 467 U.S. 51, 59, 104 S.Ct. 2218, 2223, 81 L.Ed.2d 42 (1984); Black v. TIC Inv. Corp., 900 F.2d 112, 115 (7th Cir.1990). 25