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When Claiming a Theft Loss as Deduction Goes Wrong

Jan 30th 2018
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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.

Once again, the court displayed its fondness for one-liners. The daughter can’t be considered property because it ruled that “the ownership, purchase and sale of human beings, commonly known as slavery, has been barred since the adoption in 1865 of the Thirteenth Amendment to the Constitution.”

The budget-strapped IRS isn’t a paper tiger, as I’ve noted previously. The agency’s ever-vigilant computers bounced the return of an imaginative individual who claimed a theft-loss deduction for the cost of his unused dance lessons when it turned out the dance studio wouldn’t permit its instructors to date customers. An unsympathetic examiner refused to believe he’d been victimized by the studio and knocked out the entire deduction. So he tried to persuade the court. But it sided with the IRS. Merely because the studio had pretty instructors didn’t imply the girls would date customers.

Nor, according to an IRS ruling, can a parent deduct payments to ransom a kidnapped child.

Someone other than the taxpayer can’t claim the loss. The court barred a theft-loss deduction by a shareholder of a corporation for funds embezzled.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 225 and counting). 

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