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Section 165(a) allows a deduction for any loss sustained in the
taxable year. However, before a loss may be claimed as a
deduction, it must be evidenced by a closed or completed
transaction. See 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); Applegate v. Commissioner, T.C. Memo. 1992-156;
sec. 1.165-1(b), Income Tax Regs.5 If a claim for reimbursement
exists and there is a reasonable prospect of recovery, the loss
is not deductible until it can be ascertained with reasonable
certainty whether reimbursement will be received. See Ramsay
Scarlett & Co. v. Commissioner, supra; sec. 1.165-1(d)(2)(i) and
(3), Income Tax Regs. In determining whether a taxpayer had a
reasonable prospect for reimbursement, the fact that the taxpayer
has filed a lawsuit to recover the loss gives rise to an
inference that he or she had such a prospect. See Ramsay
Scarlett & Co. v. Commissioner, supra at 812-813; see also Dawn
5Sec. 1.165-1(b), Income Tax Regs., provides:
To be allowable as a deduction under section 165(a), a
loss must be evidenced by closed and completed
transactions, fixed by identifiable events, and, except
as otherwise provided in section 165(h) and �1.165-11,
relating to disaster losses, actually sustained during
the taxable year. Only a bona fide loss is allowable.
Substance and not mere form shall govern in determining
a deductible loss.
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Last modified: May 25, 2011