## Facts

- Raymond and Elizabeth Mazzei filed a joint 1965 federal income tax return; Raymond operated a sheet-metal business.
- An employee told Raymond of a purported scheme to “reproduce” U.S. currency using a “black box” device.
- Raymond agreed to participate by supplying genuine cash with the expectation it would be used in the process and returned with additional proceeds.
- Raymond assembled a large amount of cash in $100 bills and traveled to meet the supposed counterfeiters.
- During a staged “reproduction” session, men posing as law enforcement entered, took the cash at gunpoint, and fled; the device was later found to be fake and the money was not recovered.
- The IRS determined a 1965 deficiency; after concessions, the remaining dispute was whether Raymond could deduct the loss as a theft loss or a loss from a profit-seeking transaction under I.R.C. § 165(c)(2) or § 165(c)(3).

## Issues

1. Whether the evidence established that the taxpayer actually sustained the claimed loss.
2. Whether a substantiated theft loss is deductible under I.R.C. § 165(c)(2) or § 165(c)(3) when the loss directly results from the taxpayer’s participation in an illegal counterfeiting scheme.

## Decision

- The Tax Court found the loss was substantiated and could be characterized as a theft in ordinary terms.
- The court held the loss was not deductible under § 165(c)(2) or § 165(c)(3) because it directly resulted from the taxpayer’s own criminal conduct.
- Decision entered for the Commissioner.

## Legal Principles

- Deductions under I.R.C. § 165, including theft losses and losses from profit-seeking transactions, may be denied on public-policy grounds.
- A deduction is disallowed where allowing it would frustrate a sharply defined public policy reflected in criminal statutes by reducing the economic consequences of illegal conduct.
- A taxpayer cannot deduct losses that are the direct outgrowth of the taxpayer’s participation in a criminal enterprise, even if the immediate taking is accomplished by fraud or theft by others.

## Conclusion

The Tax Court denied the claimed § 165 theft-loss (and profit-transaction loss) deduction because the loss flowed directly from the taxpayer’s attempt to participate in a counterfeiting scheme, and allowing the deduction would conflict with strong federal policy against such criminal conduct.


Mazzei v. Commissioner, 61 T.C. 497 (1974)