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Prove theft loss or lose it

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in Small Business Tax,Small Business Tax Deduction Strategies

If you’re the victim of a personal theft, at least there’s a small silver tax lining: The amount of the loss is deductible if it qualifies under the casualty and theft loss rules.

Strategy: Tally up the loss amount for the year after reducing each casualty or theft event by $100.Then you can deduct the excess above 10% of your adjusted gross income.

But establishing that a theft actually occurred can be difficult. A taxpayer who was a CPA learned this lesson the hard way in a new case. (West, TC Memo 2014-2)

Facts: When he was on the brink of a second divorce and entering an alcoholism treatment program, the CPA asked his first wife of 25 years to take control of his finances. Significantly, he requested that she protect $120,000 of funds for his children’s college education. In 2006, the ex-wife set up custodial accounts and Section 529 plans for this purpose.

The CPA tried to regain control over the money in 2008 by drafting revocable trusts for the children and naming himself as trustee. In 2009 he filed an amended 2006 return, claiming he had suffered a loss of the funds because he had instructed his ex-wife to use trusts.

But the Tax Court wasn’t buying it. The CPA failed to produce any hard evidence that the ex-wife had stolen any funds. The mere allegation that she had acted contrary to his wishes is not enough. What’s more, there still was a reasonable expectation of recovery.

Tip: The courts aren’t inclined to get in the middle of domestic disputes. Make sure you’re standing on firm tax ground.

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