Casualties And Thefts; How To Recover Some of Your Losses – Part I

What is a Casualty/Theft –

Normally, a casualty occurs when a taxpayer’s property is damaged as the result of a storm, fire, accident, natural disaster, or other similar event. A casualty loss is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, and unusual. This includes flooding, even if there is no flood insurance coverage, as long as it meets the unexpected and/or unusual definition. (Rev. Rul. 72-592 and IRC §165(h))

IRC §165(c)(3) provides an abbreviated listing of the types of casualties that are commonly allowed for deductions and the courts, in some of the cases listed here, have expanded that definition to keep up with technology and current world situations.

A casualty must be to property that is owned by the taxpayer or the taxpayer must be in a leasehold agreement.

A casualty must be an identifiable event as the cause of the provable loss.

A casualty must cause a realized loss, not just a recognized loss such as some hypothetical future sales price. (George W. Finkbohner, Jr. and Beverly R. Finkbohner, …788 F.2d 723 (1986))

The casualty must not have been caused by willful negligence, a willful act, or gross negligence of the taxpayer or someone acting on the taxpayers behalf. (Heyn v. Comm’r, 46 T.C. 302 (1966); White v. Comm’r, 48 T.C. 430 (1967) and Rev. Rul. 72-592 and IRC §165(h))

A theft occurs when someone steals or deprives the taxpayer of the use of his property. For federal income tax purposes, “theft” is a word of general and broad connotation, covering any criminal appropriation of another’s property to the use of the taker, including theft by swindling, false pretenses and any other form of guile. To constitute theft for federal income tax purposes, the taking of property must be illegal under the law of the state where it occurred and must have been done with criminal intent. (Edwards v. Bromberg, 232 F.2d 107 (5th Cir. 1956)

Theft may include the taking of money or property by blackmail, burglary, embezzlement, extortion, kidnapping for ransom, larceny, and robbery. The taxpayer does not need to show a conviction for theft (Vietzke v. Comm’r, 37 T.C. 504 (1961)).

As with a casualty the taxpayer must have a realized loss in the year of the claim.

Also, as with casualties, the taxpayer must have an identifiable event that causes a provable loss. The accidental loss or disappearance of money and/or property is not considered a theft (Allen v. Comm’r, 16 T.C. 163 (1951)).

Theft losses also include losses in a “Ponzi Scheme”. We will discuss this later in the series. Tomorrow, What is not a casualty/theft.

In accordance with Circular 230 Disclosure

Anything and everything taxes. I also write the Louisiana State book to go to our new Income Tax Course learners and the state-wide training for upper level Tax Professionals. I am an Instructor of all levels of tax related classes. I love to teach and write as well as taking the absolute best care of my clients all year round.

26 years in Law Enforcement (13 in the Air Force and 13 at the Bossier City PD), 20 years doing income taxes professionally.
My goals now are to spend many years being my 3 grandchildren’s MeeMaw, taking the absolute best care of my clients, and continually learning new things.
Taxes! I specialize in military, states, small business, and rentals.
The postings made on this site are my own and do not necessarily represent HR Block’s positions, strategies or opinions.

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2 comments on “Casualties And Thefts; How To Recover Some of Your Losses – Part I

  • Thanks for these reminders, which are just as valuable as the key instructions I received in my tax CPE course. For instance, I’m glad you mentioned that theft by extortion is not considered a willful act that invalidates the loss claim. I just hope I don’t have a tax client who’s defending that situation.

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