John R. Bullis: Another theft loss
November 29, 2016
Maria Leslie was another victim of an Internet scam. She suffered a theft loss of $405,000!
She was involved in getting a divorce and a friend she trusted completely urged she send money to get a "large shipment of diamonds" from Africa.
The con artist said they needed money to allow the export of the diamonds, but she would get about $1,000,000 when the diamonds were in hand and then resold.
There was no agreement to sign. She sent money and lost it all since it was a fraud, a con game and a theft.
IRS argued her payment in 2008 was not a deductible loss because she did not notify the police and did not file any claims against the scammer. The Court did not agree with IRS on that.
The Court explained that neither a criminal case nor even a civil lawsuit was necessary or required to prove a theft loss and Maria did not have to even know who the thief was.
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The Tax Court explained that a theft loss if allowed in the year it is sustained. The year the loss is discovered is when it is sustained. Maria finally realized in mid-2009 she was a victim of a theft.
To prove a theft loss, first it is necessary to determine which state laws apply. In Maria's case it was California. California law says there must be a false representation with intent to defraud that causes the owner (Maria) to part with property (or cash) in reliance on the false representation.
The Tax Court found the African diamond scammer's representations were fraudulent and it was a scam. The transaction was fictitious, a phony deal. The lack of a contract was consistent with a scam, there was no investment when she wired the money to the scammer. The court found the scammer never did perform the deal he promised. California courts found even reliance by a foolish victim of an absurb fraud is reliance. The loss of her $405,000 was a deductible theft loss.
This all reminds us of couple of things. IRS is not always right. Here IRS said she had to notify the police or other government agency of the theft. The Tax Court ruled that was not required. If you receive an IRS Notice that does not seem correct, it is your right to protest and try to have IRS withdraw or cancel the Notice or holding.
Of course we all should avoid becoming a victim of a theft or con game. The telephone or email that indicates you can get a big payment is probably not true. It may be better to just hang up.
Did you hear? "To pay attention, this is our endless and proper work," by Mary Oliver.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.