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petitioners have not established that a theft occurred. We
conclude that Ms. Dugan committed a theft from Mr. Willey when
she solicited and received payment for, but failed to deliver,
Treasures stock.
Respondent further contends that even if petitioners
establish that a theft occurred, they are not entitled to a
deduction in 1993 because at the end of that year Ms. Dugan's
bankruptcy proceeding was pending and, as a result, petitioners
had a reasonable expectation of recovering some of their funds.
See sec. 1.165-1(d)(3), Income Tax Regs. We disagree. "A
reasonable prospect of recovery exists when the taxpayer has bona
fide claims for recoupment from third parties or otherwise, and
when there is a substantial possibility that such claims will be
decided in his favor." Ramsay Scarlett & Co. v. Commissioner, 61
T.C. 795, 811 (1974), affd. 521 F.2d 786 (4th Cir. 1975).
Petitioners did not file a proof of claim until 1994, and even
then their chances of recovery were remote. Therefore, in 1993
petitioners did not have a reasonable expectation of recovery.
Accordingly, we hold that petitioners are entitled to deduct a
theft loss of $299,900.
To reflect the foregoing,
Decision will be entered
under Rule 155.
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Last modified: May 25, 2011