Tax Research Paper: Tax Treatment Of Theft Losses (Research Paper Sample)
This is a tax research problem: "Early in the current year, Keith meets Dan through a business associate. Dan tells Keith that he is directing a business venture that purchases poorly managed restaurants in order to turn them around and make them profitable. Dan mentions that he is currently involved in acquiring a real “gold mine” but needs to raise additional cash in order to purchase it. On the strength of Dan's representations, Keith loans Dan $30,000 for the venture. An agreement is written up between Keith and Dan, wherein Dan agrees to repay Keith the entire amount over a five-year period plus 14% interest per annum on the unpaid balance. Later in the year, however, Keith discovers that Dan had never intended to purchase the restaurant and, in fact, had used most of the money for his own benefit. Upon making this discovery, Keith sues Dan for recovery of the money, alleging that Dan falsely, fraudulently, and deceitfully represented that the money would be invested and repaid, in order to cheat and defraud Keith out of his money. Unfortunately for Keith, he is never able to recover any amount of the loan. Discuss the tax treatment that Keith may claim with regard to the loss.source..
Tax Research Paper
Tax Research Paper
Date: March, 24 22018
Re: Tax treatment of theft losses
Keith seeks advice on the tax treatment of theft loss resulting from loss of funds due to fraud. Keith lent money to Dan based on an agreement that Dan would purchase a restaurant having claimed he was involved in buying restaurants and renovating them. Subsequently, Dan accepted a $ 30,000 loan payable in 5 years plus the 14% interest per annum, but Dan used the money for his personal use. Keith has tried recovering the amount to no avail and he seeks advice on whether is a deduction of the theft loss.
A theft loss took place and it was not merely a false promise and was related to losses incurred when engaged in an activity to make a profit. Secondly, the theft loss resulted from fraud and thirdly; can Keith declare an income tax deduction for the theft loss.
Under IRC sec. 165, individuals are allowed to deduct theft losses sustained during a taxable year when there is no insurance compensation or otherwise. 165(c) (2) highlights that taxpayers are expected to take reasonable action and recover the loss. The losses are sustained when the transactions are closed and completed and then there are also fixed by identifiable events.
In the case Robert S. Gerstell, 46 T.C. 161 (1966), the judges reaffirmed that the taxpayers ought to provide
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