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OPINION
Section 165(a) provides a deduction for any loss sustained
during the taxable year and not compensated for by insurance or
otherwise. Section 165(c) limits the deduction in the case of an
individual to losses incurred in a trade or business or any
transaction entered into for profit, casualty losses, and theft
losses.
Before a loss may be claimed as a deduction, however, it
must be evidenced by a closed or completed transaction. United
States v. S.S. White Dental Manufacturing Co., 274 U.S. 398, 401
(1927); Ramsay Scarlett & Co. v. Commissioner, 61 T.C. 795, 807
(1974), affd. 521 F.2d 786 (4th Cir. 1975); sec. 1.165-1(b),
Income Tax Regs. Thus, if there exists a claim for reimbursement
with respect to which there is a reasonable prospect of recovery,
the loss is not deductible until it can be ascertained with
reasonable certainty whether or not such reimbursement will be
received. Estate of Scofield v. Commissioner, 266 F.2d 154, 159
(6th Cir. 1959), affg. in part and revg. in part 25 T.C. 774
(1956); Ramsay Scarlett & Co. v. Commissioner, supra; sec. 1.165-
1(d)(2)(i) and (3), Income Tax Regs. This determination requires
an objective inquiry into the facts and circumstances surrounding
the loss as of the close of the taxable year in which the
deduction is claimed. Boehm v. Commissioner, 326 U.S. 287, 292-
293 (1945); Ramsay Scarlett & Co. v. Commissioner, supra at 811.
In determining whether a taxpayer had a reasonable prospect for
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Last modified: May 25, 2011