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June 27, 1996, they remained in possession of the Hazelwood
property until mid-January 1997, when, for the first time since
the foreclosure sale, they were contacted by First Independence
and told that the bank would immediately take possession of the
property.
Respondent acknowledges that a theft loss may be deductible,
as may be a loss attributable to the foreclosure of property.
However, respondent contends that any loss to which petitioners
may be entitled is deductible in 1996, the year in which any
theft was allegedly discovered and the year in which petitioners’
equity of redemption was extinguished.
2. Deductibility of Losses, in General
As a general rule, section 165(a) allows as a deduction any
loss sustained during the taxable year and not compensated for by
insurance or otherwise. However, in the case of an individual,
section 165(c) limits the deduction to: (1) Losses incurred in a
trade or business; (2) losses incurred in any transaction entered
into for profit; and (3) losses of property not connected with a
trade or business or with a transaction entered into for profit,
if such losses arise from fire, storm, shipwreck, or other
casualty, or from theft.
A loss is “treated as sustained during the taxable year in
which the loss occurs as evidenced by closed and completed
transactions and as fixed by identifiable events occurring in
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