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in his Big Bear account. Income earned by the taxpayer and
deposited into his bank account is taxable to him, even if he
fails to keeps track of how much money he has in the account.
See Donohue v. Commissioner, 323 F.2d 651 (7th Cir. 1963), affg.
39 T.C. 91 (1962).
Petitioner discovered the losses in 1998, and he sued Edgar
and Lewellen in 1999. The Lewellen lawsuit was resolved in 2002
and the Edgar lawsuit in 2003. If a casualty or other event
occurs which results in a loss and there exists a claim for
reimbursement with respect to which there is a reasonable
prospect of recovery, no loss is allowable as a deduction until
the tax year in which the taxpayer can ascertain with reasonable
certainty whether reimbursement will be received. Secs. 1.165-
1(d)(2)(i), 1.165-1(d)(3), 1.165-8(a)(2), Income Tax Regs.
A reasonable prospect of recovery exists when the taxpayer
has a bona fide claim for reimbursement from a third party and
when there is a substantial possibility that such claim will be
resolved in the taxpayer’s favor. See Ramsay Scarlett & Co v.
Commissioner, 61 T.C. 795, 811 (1974), affd. 521 F.2d 786 (4th
Cir. 1975). Petitioners may not deduct embezzlement losses for
any of the years in issue because (1) Edgar had a retirement
account and three houses in the years in issue, and (2)
petitioners conceded at trial that they still had a reasonable
prospect of recovery in 1999.
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