Theft Defined
Theft is the illegal taking of money or property with the intent to deprive the owner of it. (W. Lafave, Criminal Law section 8.5, at 721 (2d Ed. 1986)). Theft includes, but is not limited to, larceny, embezzlement, and robbery. (Reg. Section 1.165-8(d)).
Federal Law
Gerstell v. Commisioner of IRS (Federal Law)
In the case of Gerstell (Petitioner) v. Commisioner of Internal Revenue (Respondent) 46 T.C. 161 (Docket No. 4299-64, filed May 4,1966) (Exhibit “2”), the Tax Court States (at Page 7):
Section 165 of the Internal Revenue Code of 1954 provides for the deduction of losses arising from theft. The term Theft . . . converting any criminal appropriation of another’s property to the use of the taker, particularly including theft by swindling, false pretenses, and any other form of guile.
Edwards v. Bromberg (C.A. 5) 232 F. 2d 107, Perry A. Nichols, 43 T.C. 842 (appeal dismissed C.A. 5) See also Sec. 1.165-8(d), Income Tax Regs. The parties are not at odds on this respect. Indeed, the Respondent concedes on brief that losses sustained by reason of criminally false pretenses are deductible under Section 165 of the Code. Whether a loss arises from theft depends upon the law of the jurisdiction where the loss was sustained. Edwards v. Bromberg, supra.
And it has been held that a criminal conviction is not a necessary element in a Taxpayer’s proof that a theft loss has been sustained.
See: Michele Montelone 34 T.C. 688 and Paul C.F. Vietzke 37 T.C. 504
Statement of Law: Theft Losses (Summary)
IRC § 165(a) provides as a general rule that “any loss sustained during the taxable year” may be deducted if it is not compensated for by insurance or otherwise. Section 165(a), however, limits this broad rule by restricting an individual’s deductions to:
The “theft loss,” which only includes losses to property not connected with the taxpayer’s trade or business or for-profit transactions, and is further restricted by rules denying the deduction for the first $500 (2009)of loss from each casualty and allowing losses above this floor only to the extent they exceed 10 percent (10%) of adjusted gross income (IRC §165(h)). The courts have found a further limitation implicit in Section 165(a) – that a casualty loss is not allowable in any part if the deduction would frustrate well-defined public policy.
(See, Blackman v. CIR, 88 TC 677, 682 (1987) – taxpayer intentionally set fire to wife’s clothes and negligently allowed fire to spread to entire house; held no casualty loss deduction because deduction “would severely and immediately frustrate the articulated public policy … against arson and burning,” even though taxpayer never charged with crime; Mazzei v. CIR, 61 TC 497 (1974) – taxpayer defrauded by co-conspirators in scheme to counterfeit U.S. currency; held, theft loss of participant in criminal activity not deductible; Rev. Rul. 82-74, 1982-1 CB 110 (where taxpayer, in order to collect insurance, paid another to burn down taxpayer’s building, public policy, precludes amount paid from being taken into account in determining gain on building’s conversion). However, see, Hossbach v. CIR, 42 TCM (CCH) 80 (1981) [public policy not offended by allowing deduction for destruction by explosion of building used by taxpayer to manufacture illegal drugs]. IRC § 641(b) rules make § 165(c) apply to trusts and estates.)
Since losses attributable to business and profit-oriented property are deductible regardless of cause, the principal significance of the deduction allowed by § 165(c)(3) for casualty losses is that it encompasses personal residences, private automobiles, jewelry, home furnishings, and other property owned and used for personal purposes. Property of this type does not qualify for depreciation deductions while the taxpayer owns it, and losses on sales of such property are also nondeductible. (Reg. § 1.165-9(a).) If the property is damaged or destroyed by casualty, however, the resulting loss may be deducted under § 165 (c)(3).)
Taxpayer Theft Loss Deduction
(IRC §165(c)(2)(3))
Under IRC §165, an individual may deduct losses arising from “fire, storm, shipwreck, or other casualty or from theft.”
Under IRC §165(c)(2), an individual may deduct theft losses involving a transaction entered into for profit.
Under IRC §165(c)(3), an individual may deduct losses due to theft (see Treas. Reg. Section 1.165-8(d)).
A loss arising from theft is treated as sustained during the taxable year in which the Taxpayer discovers the loss (IRC §165(e)(1)).
The deductible amount is the lesser of the fair market value or basis of the property stolen (Treas. Reg. §1.165-8(c)), IRC §165(b).
An individual is permitted to deduct losses to her property arising from "fire, storm, shipwreck, or other casualty, or from theft." The term "other casualty" defined as a sudden, unexpected event that is unusual in nature and beyond the control of the taxpayer.
A theft loss technically is not a casualty loss, but theft losses are aggregated with casualty losses for most purposes. The first $500 (2009) of each personal casualty or theft loss is not deductible, and personal casualty and theft losses are generally deductible only to the extent they exceed 10 percent of the taxpayer's AGI.
Casualty and theft losses that arise in a trade or business or activity engaged in for profit are deductible (as are other losses arising in these activities) and may qualify for beneficial treatment under Code Section 1231.
The portion of a loss that is reimbursed by insurance is not deductible (Code Section 165(a)). 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) (5) (E).
Taxpayers claiming casualty and theft losses must file Form 4684, Casualties and Thefts, with their tax returns to claim the deduction. The IRS has also made available two workbooks, IRS Publication 584, Casualty, Disaster, and Theft Workbook, and IRS Publication 584B, Business Casualty, Disaster, and Theft Workbook, which contain schedules used to compute personal and business casualty and theft losses, respectively.
Theft is the illegal taking of money or property with the intent to deprive the owner of it. (W. Lafave, Criminal Law section 8.5, at 721 (2d Ed. 1986)). Theft includes, but is not limited to, larceny, embezzlement, and robbery. (Reg. Section 1.165-8(d)).
Federal Law
Gerstell v. Commisioner of IRS (Federal Law)
In the case of Gerstell (Petitioner) v. Commisioner of Internal Revenue (Respondent) 46 T.C. 161 (Docket No. 4299-64, filed May 4,1966) (Exhibit “2”), the Tax Court States (at Page 7):
Section 165 of the Internal Revenue Code of 1954 provides for the deduction of losses arising from theft. The term Theft . . . converting any criminal appropriation of another’s property to the use of the taker, particularly including theft by swindling, false pretenses, and any other form of guile.
Edwards v. Bromberg (C.A. 5) 232 F. 2d 107, Perry A. Nichols, 43 T.C. 842 (appeal dismissed C.A. 5) See also Sec. 1.165-8(d), Income Tax Regs. The parties are not at odds on this respect. Indeed, the Respondent concedes on brief that losses sustained by reason of criminally false pretenses are deductible under Section 165 of the Code. Whether a loss arises from theft depends upon the law of the jurisdiction where the loss was sustained. Edwards v. Bromberg, supra.
And it has been held that a criminal conviction is not a necessary element in a Taxpayer’s proof that a theft loss has been sustained.
See: Michele Montelone 34 T.C. 688 and Paul C.F. Vietzke 37 T.C. 504
Statement of Law: Theft Losses (Summary)
IRC § 165(a) provides as a general rule that “any loss sustained during the taxable year” may be deducted if it is not compensated for by insurance or otherwise. Section 165(a), however, limits this broad rule by restricting an individual’s deductions to:
- Losses incurred in a trade or business or a transaction entered into for profit; and
- Losses “from fire, storm, shipwreck, or other casualty, or from theft.”
The “theft loss,” which only includes losses to property not connected with the taxpayer’s trade or business or for-profit transactions, and is further restricted by rules denying the deduction for the first $500 (2009)of loss from each casualty and allowing losses above this floor only to the extent they exceed 10 percent (10%) of adjusted gross income (IRC §165(h)). The courts have found a further limitation implicit in Section 165(a) – that a casualty loss is not allowable in any part if the deduction would frustrate well-defined public policy.
(See, Blackman v. CIR, 88 TC 677, 682 (1987) – taxpayer intentionally set fire to wife’s clothes and negligently allowed fire to spread to entire house; held no casualty loss deduction because deduction “would severely and immediately frustrate the articulated public policy … against arson and burning,” even though taxpayer never charged with crime; Mazzei v. CIR, 61 TC 497 (1974) – taxpayer defrauded by co-conspirators in scheme to counterfeit U.S. currency; held, theft loss of participant in criminal activity not deductible; Rev. Rul. 82-74, 1982-1 CB 110 (where taxpayer, in order to collect insurance, paid another to burn down taxpayer’s building, public policy, precludes amount paid from being taken into account in determining gain on building’s conversion). However, see, Hossbach v. CIR, 42 TCM (CCH) 80 (1981) [public policy not offended by allowing deduction for destruction by explosion of building used by taxpayer to manufacture illegal drugs]. IRC § 641(b) rules make § 165(c) apply to trusts and estates.)
Since losses attributable to business and profit-oriented property are deductible regardless of cause, the principal significance of the deduction allowed by § 165(c)(3) for casualty losses is that it encompasses personal residences, private automobiles, jewelry, home furnishings, and other property owned and used for personal purposes. Property of this type does not qualify for depreciation deductions while the taxpayer owns it, and losses on sales of such property are also nondeductible. (Reg. § 1.165-9(a).) If the property is damaged or destroyed by casualty, however, the resulting loss may be deducted under § 165 (c)(3).)
Taxpayer Theft Loss Deduction
(IRC §165(c)(2)(3))
Under IRC §165, an individual may deduct losses arising from “fire, storm, shipwreck, or other casualty or from theft.”
Under IRC §165(c)(2), an individual may deduct theft losses involving a transaction entered into for profit.
Under IRC §165(c)(3), an individual may deduct losses due to theft (see Treas. Reg. Section 1.165-8(d)).
A loss arising from theft is treated as sustained during the taxable year in which the Taxpayer discovers the loss (IRC §165(e)(1)).
The deductible amount is the lesser of the fair market value or basis of the property stolen (Treas. Reg. §1.165-8(c)), IRC §165(b).
An individual is permitted to deduct losses to her property arising from "fire, storm, shipwreck, or other casualty, or from theft." The term "other casualty" defined as a sudden, unexpected event that is unusual in nature and beyond the control of the taxpayer.
A theft loss technically is not a casualty loss, but theft losses are aggregated with casualty losses for most purposes. The first $500 (2009) of each personal casualty or theft loss is not deductible, and personal casualty and theft losses are generally deductible only to the extent they exceed 10 percent of the taxpayer's AGI.
Casualty and theft losses that arise in a trade or business or activity engaged in for profit are deductible (as are other losses arising in these activities) and may qualify for beneficial treatment under Code Section 1231.
The portion of a loss that is reimbursed by insurance is not deductible (Code Section 165(a)). 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) (5) (E).
Taxpayers claiming casualty and theft losses must file Form 4684, Casualties and Thefts, with their tax returns to claim the deduction. The IRS has also made available two workbooks, IRS Publication 584, Casualty, Disaster, and Theft Workbook, and IRS Publication 584B, Business Casualty, Disaster, and Theft Workbook, which contain schedules used to compute personal and business casualty and theft losses, respectively.
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