Generally speaking, the IRS allows an individual to take an itemized deduction for nonbusiness losses resulting from a casualty or theft not compensated for by insurance or otherwise. See IRC § 165. While the United States Tax Court has explicitly ruled that the decrease in the value of one’s home as a result of being next door neighbors to the house where the the murders of Nicole Brown Simpson and Ron Goldman took place is not deductible under this rule, (Chamales v. C.I.R., 79 T.C.M. (CCH) 1428 (T.C. 2000)), there is no case law (at least I am unaware of any) that explicitly says ransoms paid to pirates are or are not deductible under IRC § 165.
A clever person asked the Freakonomics blog a couple weeks ago that exact question, and their answer was fairly amusing. If we are to rely on IRS Publication 17, then it seems very likely that a ransom paid to a pirate would be deductible under IRC § 165, assuming the existence of criminal intent and assuming the taxpayer can show proof of the loss. So, I guess I have to suggest that the next time you feel compelled to go to Somalia and have to pay a ransom to pirates in order to return home safely, make sure to ask for a receipt…
I have some more jokes to make if you’ll bear with me:
Q. Why don’t pirates need lawyers?
A. They prefer to settle through ARRrrrbitration!
Q. When does a pirate become a lawyer?
A. When he passes the barrrrr.
One more…
Q. What kind of grades did the pirate get in law school?
A. HIGH SEAS!
If you have any more pirate/lawyer jokes, please post them.
I came across this story on the TaxProf Blog.
The underlying rationale cited in these hypotheticals all point back to the fact that the taxpayer has suffered some loss due to theft (any illegal taking done with criminal intent), which would translate into a deductible theft loss or nonbusiness casualty loss. Although we are talking about pirates in this particular instance, ransom payments are also made when a loved one is kidnapped within the United States, not just in places like Somalia. In fact, according to the Forbes article included in this story, India recently allowed ransom payments to be deductible. While the deductibility of something like pirate ransom sounds outrageous, the TaxProf Blog story pointed out an interesting flip side to the coin: will people begin to stage fake kidnappings in order to allow for tax deductions of these ransom payments?