When Claiming a Theft Loss as Deduction Goes Wrong

theft losses

I’ve previously written columns about deductions for theft losses. Taxpayers whose deductions are disallowed often ask for hearings before the Tax Court.

Right close to the top of my list of favorite cases is a holding by the court that sustained the IRS’s disallowance of a theft-loss deduction for the cost of an adultery cover-up. Richard C.Y. Ing, a married man, wrote off $192,660 for paying a former lover to have an abortion and destroy medical records.

Whereas Richard thought the payment was extortion and allowable as a theft loss, the court disagreed. He failed to show that his former lover had broken any criminal law.

The court came up with a nifty one-liner when it noted that “It is against public policy to have the government pick up the cost of a failed extramarital affair.”

In another win for the IRS, the court refused to allow a theft-loss deduction for costs incurred by a father trying to find a daughter who had been abducted by a former wife. The deduction is allowed only for a loss of property. Moreover, the item stolen must have an adjusted cost basis and a fair market value at the time of the theft.

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About Julian Block

Julian Block

Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com


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