Rev. Rul. 71-381

Rev. Rul. 71-381

Advice has been requested whether, under the circumstances described below, a taxpayer is entitled to a theft loss deduction under section 165(c)(3) of the Internal Revenue Code of 1954.

In January of 1968 the taxpayer, a resident of New Jersey, loaned money to a New Jersey corporation in exchange for an unsecured interest-bearing note of the corporation. The taxpayer's decision to loan the corporation funds was based on information contained in financial reports issued by the corporation and furnished to the taxpayer. In June of 1968 the president of the corporation who was also the majority shareholder testified at a bankruptcy proceeding of the corporation that the financial statements were fraudulent in that they did not reflect large liabilities that made the corporation insolvent. In December of 1968 the president of the corporation was convicted by a court for violating the state securities law by issuing false and misleading financial documents.

Section 165(a) of the Code provides that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Section 165(c)(3) of the Code, provides in part, that in the case of an individual, the loss deduction shall be limited to losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.

Section 1.165-8(d) of the Income Tax Regulations provides the term "theft" shall include, but shall not necessarily be limited to, larceny, embezzlement, and robbery. The court in W. Sam Edwards v. Arthur C. Bromberg, 232 F. 2d 107 (1956), defined theft as "a word of general and broad connotation, intended to cover and covering any criminal appropriation of another's property to the use of the taker, particularly including theft by swindling, false pretenses, and any other form of guile." The court also stated that whether a loss from theft occurs depends upon the law of the jurisdiction where it was sustained and the exact nature of the crime, whether larceny or embezzlement or other wrongful deprivation of the property of another, is of little importance as long as it amounts to theft.

In the instant case the president of the corporation knowingly, with intent to defraud, obtained money by means of false representations, and was found guilty under New Jersey Statutes of a misdemeanor.

Accordingly, it is held that the taxpayer in the instant case is entitled to a theft loss deduction under section 165(c)(3) of the Code.