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prospect of recovery, a loss is not considered sustained until
the tax year in which it can be ascertained with reasonable
certainty whether such reimbursement will be received. Secs.
1.165-1(d)(3), 1.165-8(a)(2), Income Tax Regs. Only the taxpayer
who was the owner of the stolen property when it was criminally
appropriated is entitled to a theft loss deduction. Draper v.
Commissioner, 15 T.C. 135 (1950); Lupton v. Commissioner, 19
B.T.A. 166 (1930); Malik v. Commissioner, T.C. Memo. 1995-204.
In order to be entitled to a theft loss deduction under
section 165, petitioners must satisfy the following three
requirements: (1) That they were the owners of the allegedly
embezzled corporate employment tax funds, (2) that embezzlement
actually occurred, and (3) that during the year for which the
deduction is claimed, it could be ascertained with reasonable
certainty that no recovery could be made. We hold that
petitioners are not entitled to any theft loss deduction under
section 165 because they satisfy none of the three requirements.5
5Respondent advances two alternative arguments why
petitioners are not entitled to a theft loss deduction even if
they meet the requirements of sec. 165. First, respondent claims
that the collateral agreement executed by Mr. Grothues and Mr.
Kanz is equivalent in value to the judgment. Second, respondent
claims that petitioners did not include the allegedly embezzled
corporate employment tax funds in their income. Because we have
ruled that petitioners have not satisfied the requirements of
sec. 165 and secs. 1.165-1(d)(3) and 1.165-8(a)(2), Income Tax
Regs., we need not address respondent’s alternative arguments.
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