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• W172193669 abstract "Investment theft losses that result from nonbusiness, for-profit transactions may qualify for advantageous tax treatment. When a client is the victim of fraud or embezzlement, for example, CPAs can reduce the client's ordinary income, recoup any previously paid taxes and minimize future tax obligations by using IRC section 165(c)(2). Be aware that CPAs who prepare and defend an investment loss deduction under IRC section 165(c)(2) must meet numerous technical requirements and make certain determinations based on examining the circumstances. Section 165(c)(2) deductions also frequently prompt IRS oversight, and in many instances, the standard tax preparation software does not adequately address this deduction, since it's generally geared to the more familiar section 1211 capital loss treatment. But while section 1211 is an appropriate treatment, using it may result in clients' paying more taxes than are required. If a client suffers an investment loss as a result of a fraudulent investment or unethical sales practice, probably the most prudent action a CPA can take, even though there is no requirement to do so, is to suggest the client first discuss it with his or her lawyer. Taxpayers are required to take reasonable action to recover a loss and not doing so disqualifies it for section 165(c)(2) treatment. If the lawyer feels there was malfeasance and it is not practical to pursue recovery due to a lack of recoverable assets, the cost of litigation or other reasons, the loss probably is deductible in the current period. Losses from embezzlement, blackmail, kidnapping for ransom, burglary, larceny, extortion and threats also may qualify for section 165 treatment. THEFT LOSS VS, CAPITAL LOSS Section 165(c)(2) theft loss deductions can be more advantageous than capital loss ones for the following reasons: * As ordinary deductions, they're not subject to limitations imposed by IRC section 1211. * They're not miscellaneous itemized deductions subject to the 2% floor imposed under section 67(a). * They're excluded from the phase-out of itemized deductions required by section 68(b). * Theft losses that exceed a taxpayer's gross income give rise to net operating losses that can be carried back three years or forward for 20 years. * They can be used to reduce a taxpayer's tax liability to zero without resulting in any liability for alternative minimum tax (AMT). DETERMINE THEFT LOSS In Edwards v. Bromberg, 232 F2d 107 (5th Cir. 1956), the court defined theft as a word of general and broad connotation, covering any criminal appropriation of another's property by swindling, false pretenses or any other form of guile. The court also stated that whether a loss from theft occurred depended on the law of the jurisdiction where it was sustained and the exact nature of the crime. If a transaction did not amount to theft in the state where the loss was sustained, then section 165(c)(2) is not applicable. RECOGNIZE FRAUD For section 165(c)(2) to be applicable, there must be scienter, that is, requisite knowledge of the wrongness or illegality of an act. In Ottmann v. Hanger Orthopedic Group, the Fourth Circuit Court of Appeals determined that scienter could be established by pleading not only intentional misconduct, but also severe recklessness. The court further found a plaintiff must meet the requirement of the Private Securities Litigation Reform Act of 1995. Congress did not specify what would or would not show a strong inference of scienter, so a case-specific analysis is appropriate to determine it. …" @default.
• W172193669 created "2016-06-24" @default.
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• W172193669 date "2005-04-01" @default.
• W172193669 modified "2023-09-27" @default.
• W172193669 title "Maximize Tax Benefits under IRC Section 165: CPAs Often Overlook the Deductibility of Investment Theft Losses" @default.
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