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individual such as petitioner, however, losses are deductible
only to the extent that they (1) were incurred in a trade or
business, (2) were incurred in a transaction entered into for
profit, or (3) arose from a casualty or a theft. Sec. 165(c)(3).
For this purpose, the amount of a theft loss deduction generally
equals the lesser of (1) the reduction in the property’s fair
market value from the time immediately before the theft until the
time immediately after the theft, or (2) the property’s cost or
other basis. See sec. 1.165-7(b)(1), Income Tax Regs.; see also
sec. 1.1011-1, Income Tax Regs. Whereas a loss in general is
deductible in the year in which it is sustained, sec. 165(a), a
loss from a theft is deductible in the year in which it is
discovered, sec. 165(e).
The parties dispute primarily whether the brokers’
activities amounted to a “theft” committed against petitioner
under applicable law, which the parties agree is the law of New
York. We need not decide this dispute. Even assuming arguendo
that petitioner’s loss was attributable to a theft that was
discovered in 1997, he would still not prevail because he has
failed to establish that he had any basis in HPI stock that he
could deduct as a theft loss for 1997.
Petitioner claimed for 1993 a capital loss of $2,816,540
from the sale of HPI stock and reported for 1997 that he had a
$460,486 capital loss carryover as of the beginning of that year.
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