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Section 165(a) allows a deduction for “any loss sustained
during the taxable year and not compensated for by insurance or
otherwise.” Concerning theft losses, section 165(a) is
applicable for the year “in which the taxpayer discovers such
loss.” Sec. 165(e). For purposes of section 165(e), theft
includes embezzlement. Sec. 1.165-8(d), Income Tax Regs. If in
the year of discovery there is a claim for reimbursement that has
a reasonable prospect for recovery, a loss is not considered
sustained until the tax year in which it can be ascertained with
reasonable certainty. Secs. 1.165-1(d)(3), 1.165-8(a)(2), Income
Tax Regs.
Petitioner bears the burden of proving a deductible loss,
and he must establish the extent and amount of the loss. Citron
v. Commissioner, 97 T.C. 200, 207 (1991). We apply the law of
the jurisdiction where the loss was sustained to determine
whether a theft or embezzlement has occurred. Bellis v.
Commissioner, 540 F.2d 448, 449 (9th Cir. 1976), affg. 61 T.C.
354 (1973); Luman v. Commissioner, 79 T.C. 846, 860 (1982).
It is unclear where petitioner resided in 2002. As a
result, it is also unclear where petitioner may have sustained
his claimed theft loss. The record indicates that petitioner
formerly resided in Illinois and currently resides in California.
We set forth each State’s theft statute.
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Last modified: May 25, 2011