Cramer v. Commissioner
55 T.C. 1125, 1971 U.S. Tax Ct. LEXIS 162 (1971)
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Rule of Law:
A theft loss is deductible in the taxable year that the taxpayer discovers the loss, which occurs when a reasonable person in similar circumstances would have realized that a theft had occurred and that there was no reasonable prospect of recovery.
Facts:
- In 1961, Virginia Cramer entrusted two diamond rings and a .38 caliber revolver to a business associate, Fred J. Neidermiller, for safekeeping.
- Neidermiller agreed to keep the items in a safety-deposit box and return them to Cramer at her request.
- After 1961, Cramer made several unsuccessful attempts by telephone to contact Neidermiller to recover her property.
- In either 1963 or 1964, after becoming concerned, Cramer reported the matter to the police.
- Cramer waited for the results of the police investigation before taking further action.
- Having received no report from the police and concluding that she would not recover her property, Cramer claimed a theft loss deduction on her 1965 income tax return.
Procedural Posture:
- The Commissioner of Internal Revenue (Respondent) determined deficiencies in Virginia Cramer's (Petitioner) income tax for the years 1964, 1965, and 1966.
- The Commissioner disallowed Cramer's claimed theft loss deduction of $600 on her 1965 return, asserting it had not been established that a deductible loss was sustained during that specific taxable year.
- Cramer filed a petition with the United States Tax Court to contest the deficiencies determined by the Commissioner.
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Issue:
Is a taxpayer's theft loss deductible in the year she claims it, even if she became suspicious in a prior year, when she reasonably waited for the outcome of a police investigation before concluding the property was unrecoverable?
Opinions:
Majority - Featherston, Judge
Yes. A theft loss is deductible in the year the taxpayer discovers the loss, and discovery is determined by a standard of reasonableness based on all facts and circumstances. Section 165(e) of the Internal Revenue Code provides that a theft loss is treated as sustained in the year the taxpayer 'discovers' it. The court defined 'discovery' not as the moment of first suspicion, but as the point in time when a reasonable person in similar circumstances would have realized a theft occurred and that there was no reasonable prospect of recovering the property. Here, Cramer's actions were reasonable; she did not suspect Neidermiller had absconded with her property until 1963 or 1964 when she contacted the police. It was also reasonable for her to await the results of the police investigation before concluding the property was irrevocably lost. Therefore, her conclusion in 1965 that the property was unrecoverable was reasonable, making 1965 the proper year for the deduction.
Analysis:
This case clarifies the application of the 'discovery' rule for theft losses under IRC § 165(e), establishing that the timing of a deduction is based on an objective, reasonable-person standard. The decision provides taxpayers with a practical framework, indicating that 'discovery' is not merely the moment of initial suspicion but the point at which a reasonable person would abandon hope of recovery. This allows taxpayers to pursue reasonable recovery efforts, such as waiting for a police investigation, without forfeiting the right to claim the deduction in a later year when those efforts prove fruitless. The ruling prevents the IRS from forcing a taxpayer to claim a loss prematurely while a reasonable prospect of recovery still exists.
