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IRS Sec. 165 classification.

Bart H. Siegel's article ("Tax Benefits of IRC Sec. 165," September 2004) may need clarification of two points.

First, Mr. Siegel stated that a taxpayer does not have any tax basis in a traditional IRA. This isn't always true. A taxpayer may have been an active participant in an employer's plan and have an AGI high enough to eliminate the deduction (Sec. 219(g)), or may have made nondeductible contributions reported on Form 8606.

Second, Mr. Siegel stated that a loss attributable to theft is deductible in the year during which the taxpayer discovers the loss, and he is correct (Sec. 165(e)). Mr. Siegel said that this may result in the extension of the statute of limitations for a taxpayer who discovers a loss and later learns that it was due to theft.

I know of no provision that will extend the statute of limitations for claiming a theft loss. Mr. Siegel may have meant that where a taxpayer discovers a loss in one year, and later discovers that the loss was due to theft, the deduction is postponed to the later year.

For example, a taxpayer who discovers on Dec. 31 that the amount he invested with a broker is gone, but after investigating, discovers that the broker stole the money, the theft loss is deductible in the later year.

Court cases support this concept: Elliott, 40 T.C. 304 (1963, Acq.)--theft loss deductible in earlier year that theft was discovered, not in later years when additional items were discovered to have been stolen; McKinley, 34 T.C. 59 (1960)--taxpayer could not establish whether the year in which the theft occurred, or the subsequent year, was the year in which he discovered the loss; Cramer, 55 T.C. 1125 (1971, Acq.)--taxpayer who reported a loss of jewelry to police in one year could deduct theft loss in later year after police investigation.

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David M. Fogel, CPA

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Title Annotation:Speak Out
Author:Fogel, David M.
Publication:California CPA
Geographic Code:1U9CA
Date:Nov 1, 2004
Previous Article:Litigation Sections.
Next Article:A quick disaster-related tax tip.

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