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The IRS and Defrauded Investors: Theft Tax Loss - Casualty Loss (IRC Sec 165)(c)(3)

The IRS and Defrauded Investors: Theft Tax Loss - Casualty Loss (IRC Sec 165)(c)(3)

“Code Section 165(c)(3) permits a deduction for losses arising from "fire, storm, shipwreck, or other casualty, or from theft." (Casualty losses are also deductible for purposes of the alternative minimum tax (AMT). Code Section 56(b)(1)(A) provides that miscellaneous itemized deductions are not allowed for AMT purposes, but Code Section 67(b)(3) provides that the deductions for casualty and theft losses are not miscellaneous itemized deductions. In addition, a personal casualty or theft loss is deductible only if the taxpayer files a timely claim for any insurance covering the loss. Code Section 165(h)(4)(E).)

While losses attributable to fire, storm, and shipwreck are casualty losses, theft losses are not. (Treas. Reg. Sec. 1.165-7(a)(6).)

The definition of the remaining term, "other casualty" has been the subject of decades of litigation. The IRS, analogizing to fire, storm, and shipwreck, has taken the position that a casualty is "the complete or partial destruction or loss of the taxpayer's property resulting from an identifiable event that is sudden, unexpected and unusual in nature." (Rev. Rul. 72-592, 1972-2 C.B. 101. See also Martin Marietta Corp. v. United States, 83-2 U.S.T.C. para. 9607 (Cl. Ct. 1983); Maher v. Commissioner, 76 T.C. 593 (1981), aff'd, 680 F.2d 91 (11th Cir. 1982); Popa v. Commissioner, 73 T.C. 130 (1979); White v. Commissioner, 48 T.C. 430 (1967), acq., 1969-1 C.B. 21; Toten v. Commissioner, T.C. Memo. 1984-603,; Kielts v. Commissioner, T.C. Memo. 1981-329; Rev. Rul. 87-59, 1987-2 C.B. 59.)”

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Our author, Gary S. Wolfe, has more than 34 years of experience, specializing in IRS Tax Audits and International Tax Planning/Tax Compliance, and International Asset Protection.

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