Jewish World Review April 24, 2001 / 2 Iyar, 5761
Tax Tales by A. J. Cook
http://www.jewishworldreview.com -- The Internal Revenue Service said Michael J. Berardo's story of being duped in a pyramid scheme and losing $167,500 is a fantasy.
Berardo said it wasn't and explained. It started back when one of the customers at his Philadelphia restaurant, Sparns Seafood House, convinced him to invest in real estate ventures. During 14 months, Berardo gave Edward Malakoff $227,500. Later Malakoff gave Berardo $60,000 as the first profits.
Buoyed by success, the restaurateur tried to persuade an employee to invest, but his worker checked with a friend who discovered Malakoff was a fraud.
The day after Berardo received the bad news, he got a letter from Malakoff. He confessed that the real estate deals were frauds and he "got caught in circumstances which I wrongly thought were beyond my control, and instead of facing them, I was a coward and pyramided and ran. I lied, I cheated, and I have no excuse ... . At least I got you back $60,000 which you should not tell anyone about as they might try to take it away."
Later, authorities looking for Malakoff discovered a note saying most of the $600,000 he stole came from banks and institutions that could afford to lose it.
The FBI and local police never found him.
The seafood restaurateur deducted $167,500 ($227,500 minus the $60,000.)
At trial, Berardo was asked to give specifics about his payments. He testified he couldn't remember any details except for two checks he gave Malakoff totaling $30,000.
The IRS said Berardo's story is a fabrication. And he gets no deduction and must pay taxes on the $60,000. Malakoff apparently had given him this money to invest in a microfilm company. The IRS said Berardo misappropriated these funds and so has taxable income.
The judge had a difficult decision. Neither side had sufficient evidence. The taxpayer proved only that he invested $30,000. He didn't dredge up any other canceled checks, a written agreement or supporting evidence of any kind. Even Malakoff's letter is no proof of a loss. To the contrary, it says only banks and institutions got hurt.
The judge wasn't convinced the government's scenario was correct either, but that didn't matter. In case of a tie, the taxpayer has the burden of proof. Berardo had to prove the IRS's deduction disallowance was improper. He didn't.
The court concluded he gets a theft deduction of only $30,000 and
must report as income the $60,000 he received. And it tacked on a
negligence penalty. The judge found it incredible that a man with a
business producing $80,000 in profits each year could not
remember how he paid more than $200,000 - in cash or by
04/18/01: IRS doesn't require warrant to seize visible assests