Since the timing of the theft loss deduction is critical to the real economics of the recovery, this phrase is all important. Therefore, before considering tax planning opportunities, on must study the phrase “a reasonable prospect of recovery” in more depth.

The phrase finds its origin in the early internal revenue codes that permitted a theft loss deduction for losses sustained in a taxable year but did not define the word sustained. Therefore, prior to 1954 the law was unsettled as to when a loss was sustained. This caused taxpayers to often lose their tax deduction for a theft loss when the statute of limitations had run on prior years; and it was later found that a loss had been sustained in one of those prior years that was no longer open for change. Read More