Double trouble: Tax law changes penalize scam victims twice

First story. Randy Hundley was a catcher, mostly for the Chicago Cubs. He was a defensive specialist who won several Gold Glove awards.

In 1958 Hundley was a teenager. He played for his high school team and an American Legion team. He was known as a very good player.

In 1958 MLB suspended a rule that limited player signing bonuses to $4,000. Hundley dreamed of a future signing bonus.

Hundley’s dad was a former semi-professional catcher. He had developed a unique one-handed catching style that helped to avoid injuries common at that time.

Hundley decided that his best chance to make the majors was to enlist the help of his dad. He offered his dad 50% of any signing bonus to help him.

Hundley’s dad agreed to serve as Hundley’s personal coach, business manager, publicist and agent.

In exchange, Dad Hundley would take 50% of any future signing bonus. The Hundleys thought that might be as high as $25,000.

In 1960 Hundley signed with the San Francisco Giants for a bonus of $110,000. The Giants agreed to pay half to his dad and half to Hundley.

Hundley claimed a tax deduction for the payment to his father. The IRS said the entire bonus was for Hundley’s services and taxable to him.

Hundley’s deduction was under section 162 of the tax law, which applies to expenses paid by a business.

The IRS said Hundley’s dad would have provided the services without payment. They also said Hundley was not in business in 1958 when the deal was struck.

The tax court said the IRS could not assume Hundley’s dad would work without pay. The court also said the payment was made when Hundley was a professional baseball player.

Next story. Judith Boivin, an 80-year-old retiree, was scammed of just under $600,000 of funds from her retirement accounts.

The scam was quite sophisticated, and convinced Boivin she was dealing with the FBI. She even dropped cash in a bag at designated sites.

The scam made Boivin withdraw IRA funds. She faces a tax liability of $137,000 to the IRS and $42,000 to the State of Maryland for the withdrawals.

So, after wiping out her retirement account in a scam, she now faces almost $180,000 in taxes for income paid to scammers.

Boivin is not the only senior facing a tax problem like this. Now, if she could deduct the payments to the scammers, at least her tax problem would be solved.

Hundley Hundley could deduct the payments to his dad for services, because Hundley expected to make money from the arrangement.

The Hundley arrangement was a business one. Note that Hundley still had to include the entire bonus on his return as income.

What saved Hundley was his ability to claim a business deduction for half of the bonus. Reporting all the income and then deducting half nets to paying tax on half.

Boivin must report all her retirement distributions as income. This much is not only clear but is logical tax policy.

The issue is whether the law should allow Boivin a deduction to offset the income. Unlike Hundley, Boivin was not in a business. She did not expect to earn a positive return.

Boivin thought she was just moving funds to a safer account at the direction of the FBI. She expected no gain or loss.

So, for Boivin, there could not be a business deduction. But there used to be a theft loss deduction allowed. A scam would be a theft.

What do you mean, used to be? Well, it was eliminated in the 2017 tax legislation. Certain deductions had to be eliminated to allow for other tax breaks.

Through the end of 2025 there is no theft deduction. That may be extended based on what is done this year. Either way, Boivin got scammed too early.

The fickle finger of fate. There have been several proposals in Congress to allow tax relief for victims of scams.

Boivin’s case is particularly sad because the IRA funds that the scammers took triggered a dollar-for-dollar income reporting for her.

Boivin feels guilty and foolish for being scammed. It seems that Congress should work out a way that she doesn’t get punished twice for the same offense.