Robert Lee and Rebecca Waters - Page 9

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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             
               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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