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1995, Ms. Dugan received a bankruptcy discharge, and petitioners
did not receive any funds.
In 1993, several trust fund representatives were indicted in
the U.S. District Court for the District of New Jersey for wire
fraud, money laundering, and tax evasion relating to the trust
fund's activities. In 1995, two of these individuals pled guilty
and were convicted of the charged offenses.
On their 1993 joint Federal income tax returns, petitioners
claimed a theft loss of $769,800 (i.e., $470,000, less $100
pursuant to section 165(h)(1), attributable to the loans to
Casey, Treasures, and Electra and $300,000, less $100 pursuant to
section 165(h)(1), attributable to Treasures' stock). On October
15, 1996, respondent issued a notice of deficiency to
petitioners. Respondent determined that petitioners were not
entitled to the theft loss but were entitled to a nonbusiness bad
debt subject to the $3,000 annual limitation.
OPINION
Section 165(c)(3) allows a deduction for any theft loss that
is not compensated by insurance or otherwise. Whether a theft
has occurred is determined under State law. Paine v.
Commissioner, 63 T.C. 736, 740 (1975), affd. without published
opinion 523 F.2d 1053 (5th Cir. 1975). The Delaware Code
provides that a person commits theft when "the person takes,
exercises control over or obtains property of another person
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Last modified: May 25, 2011