Tax Research Problem I: 8-68
Under Section 165 taxpayers are allowed to deduct uncompensated losses sustained in the taxable year as a result of theft. Sec. 165 (a), (e). In order to be able to claim the casualty loss deduction the loss must qualify as theft, the tax payer must prove the amount of loss due to theft and the taxpayer must also prove the date the theft was discovered.
As mentioned in both Robert S. Gerstell, 46 T.C. 161 (1966), and Michael Monteleone, 34 T.C. 688 (1960), “for tax purposes, whether a theft loss has been sustained depends on the law of the jurisdiction wherein the particular loss occurred.” In Keith’s case we are assuming that the state in which he resides in would consider the loan made to Dan theft because Keith gave Dan money under false pretenses. Under this assumption the money that Keith lent to Dan would be an eligible theft loss deduction.
The amount of loss due to theft can be proved with the written agreement in which Dan agrees to pay Keith the $30,000 over a five year period plus 14% interest per annum on the unpaid balance. In Michael Monteleone, 34 T.C. 688 (1960) the IRS commissioner argued that the loss sustained was a nonbusiness bad debt and not a casualty loss. Although there is a bona fide debtor-creditor relationship between Keith and Dan the loan is not considered a nonbusiness bad debt since Dan falsely, fraudulently, and deceitfully represented that the money would be invested and repaid.
The loan Keith made to Dan was in early 2013 and later in 2013 is when Keith discovered the theft loss. Keith discovered that Dan never intended to use the money for the reasons originally presented to him. Dan instead used the money for his own benefit. Under Sec. 165 (e) a loss arising from theft shall be treated as a sustained loss during the taxable year in which the taxpayer discovers such loss. Because Keith made the theft discovery in 2013 the theft loss deduction would be taken in that taxable year.
Because the loan Keith made to Dan
As mentioned in both Robert S. Gerstell, 46 T.C. 161 (1966), and Michael Monteleone, 34 T.C. 688 (1960), “for tax purposes, whether a theft loss has been sustained depends on the law of the jurisdiction wherein the particular loss occurred.” In Keith’s case we are assuming that the state in which he resides in would consider the loan made to Dan theft because Keith gave Dan money under false pretenses. Under this assumption the money that Keith lent to Dan would be an eligible theft loss deduction.
The amount of loss due to theft can be proved with the written agreement in which Dan agrees to pay Keith the $30,000 over a five year period plus 14% interest per annum on the unpaid balance. In Michael Monteleone, 34 T.C. 688 (1960) the IRS commissioner argued that the loss sustained was a nonbusiness bad debt and not a casualty loss. Although there is a bona fide debtor-creditor relationship between Keith and Dan the loan is not considered a nonbusiness bad debt since Dan falsely, fraudulently, and deceitfully represented that the money would be invested and repaid.
The loan Keith made to Dan was in early 2013 and later in 2013 is when Keith discovered the theft loss. Keith discovered that Dan never intended to use the money for the reasons originally presented to him. Dan instead used the money for his own benefit. Under Sec. 165 (e) a loss arising from theft shall be treated as a sustained loss during the taxable year in which the taxpayer discovers such loss. Because Keith made the theft discovery in 2013 the theft loss deduction would be taken in that taxable year.
Because the loan Keith made to Dan
References: Gerstell v. Commissioner, 46 T.C. 161 (1966) (United States Tax Court May 4, 1966). Internal Revenue S. (2012). Title 26 - Internal Revenue Code. Sec. 165 (a), (e), pp. 663 - 664. Monteleone v. Commissioner, 34 T.C. 688 (1960) (United States Tax Court July 13, 1960).