Robert Lee and Rebecca Waters - Page 11

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          Petitioner’s testimony at trial graphically illustrates this                
                    Q:  Okay.  But the damage occurred prior to ‘97.                  
                    A:  Yes.                                                          
                    Q:  And the foreclosure occurred in ‘96.                          
                    A:  It started –- yes.                                            
                    Q:  Okay.  So there was no event –- no damage or                  
               vandalization in ‘97 that gave rise to the loss?                       
                    A:  No.  The rise to the loss happened in ‘96, not                
               It is clear, therefore, that any casualty or theft loss that           
          petitioner may have sustained from an unauthorized removal of               
          furnishings and fixtures from the Hazelwood property was not                
          sustained in 1997 but in an earlier year(s).  See sec. 165(e);              
          sec. 1.165-1(d)(3), Income Tax Regs; sec. 1.165-8(a)(2), Income             
          Tax Regs.  Thus, not only did petitioner discover the loss, at              
          the latest, in February or March 1996, but no reasonable prospect           
          of reimbursement existed at that time that would have served to             
          defer recognition of the loss to 1997.                                      
               Equally unpersuasive is petitioners’ related contention that           
          the foreclosure of the Hazelwood property was tantamount to a               
          casualty loss.  Rather, the disposition of mortgaged property               
          at a foreclosure sale is treated as a sale or exchange from which           
          the mortgagor may realize gain or loss under section 1001.  See             

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