Theft Loss or Bad Decision?

That was the question before the Tax Court in the recent case of Oscar C. Hawaii, et ux. v. Commissioner.  Seems the taxpayer was approached by a church friend (And if you can’t trust them, just who can you trust?) about making an investment in the friend’s company.  The taxpayer initially declined, claiming that the lion’s share of his dough was tied up in his retirement account, and further, he didn’t have a lot of knowledge about investments, leaving the chore to his custodian, Charles Schwab.

But the church friend persisted, later introducing the taxpayer here to the company’s chief financial officer (who also was a CPA)  Ultimately, the taxpayer made the investment because, quoting the decision of the Court, “He trusted Mr. Popp, since they attended church together.”

So, out came $100 grand from the retirement account and the new investment was in place.  One thing led to another, and the taxpayer started becoming increasingly concerned about the safety of his new investment, and thus started asking questions, and eventually hired lawyers to help him not only get answers, but hopefully to get his dough back.  He even went so far as to file a complaint with the Ohio Department of Commerce, requesting that the investee company’s officers be investigated and criminally prosecuted for defrauding him.

And when it came time to file his tax return, our taxpayer friend decided to deduct what he thought was a “theft” loss, given all of the circumstances as he saw them.  Not so fast, claimed the IRS, and the Tax Court agreed.

The term “theft,” noted the Court, is a word of general and broad meaning that includes any criminal appropriation of another’s property, including theft by swindling, false pretenses, and other forms of guile.  The exact nature of a theft, whether it be larceny, embezzlement, obtaining money by false pretenses, or other wrongful misappropriation of property of another, is of little importance provided it constitutes a theft.

But the taxpayer just couldn’t come up with any convincing evidence that his investment was truly “stolen,” and no evidence, other than his testimony (i.e. – hurt feelings, maybe?) to establish that his investment was actually valueless during the tax year in question, or that it had ever become valueless, for that matter.

Bottom line – Uncle Sam won’t automatically agree that your dumb investment decision was anybody’s fault other than your own!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes/.