Best of TaxLetter: Your Money Or Your Life

An officer and shareholder of a closely held corporation was kidnapped for ransom. IRS was asked to rule whether payment of the ransom was 1) a deductible theft loss, or 2) an ordinary and necessary business expense, or 3) dividend income to the victim.

In the tradition of Solomon, IRS reasoned that the kidnapping for ransom is illegal, and performed with criminal intent. The officer's absence from management denied the corporation of a vital asset. Therefore, money spent to recover him was for a valid business purpose. So, the ransom payment was deductible as a theft loss. (January 1980)