Elliot Pisem and David E. Kahen
A taxpayer is allowed an income deduction for many losses “sustained during the taxable year and not compensated for by insurance or otherwise.” For these purposes, a loss from theft is generally treated as “sustained” during the taxable year in which the taxpayer discovers the loss. However, if a claim for reimbursement with a “reasonable prospect of recovery” exists, no part of any loss for which reimbursement may be received is considered to be “sustained” until the taxable year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received. The allowability of a theft loss deduction in a particular year has often been challenged by the IRS, particularly on the grounds that the injured taxpayer had a “reasonable prospect of recovery” against the wrongdoer or someone else in the year of discovery.
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