Opinion
CASE NO. 97-75476
February 7, 2001
ORDER GRANTING MOTION FOR SUMMARY JUDGMENT
This tax matter is before the Court on the Government's Motion for Summary Judgment. For the reasons stated below, the Court will grant the Motion.
On December 10, 1993, Plaintiff Venture Funding, Ltd. sought to amend its 1991 income tax return because of an alleged conversion of its assets. Venture asserted that the conversion entitled it to claim a "Theft/Casualty loss" deduction of $1,839,706. The Government disallowed the deduction and this lawsuit followed.
In its Motion for Summary Judgment, the Government argues that there is no genuine issue of material fact that Venture is not entitled to the claimed theft and/or casualty loss deduction for taxable year 1991. Under Fed.R.Civ.P. 56(c), summary judgment maybe granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Copeland v. Machulis, 57 F.3d 476, 478 (6th Cir. 1995). In this case, the Court agrees with the Government that it is entitled to judgment as a matter of law.
As a general rule, a loss deduction must be taken for the taxable year in which the loss is sustained. 26 U.S.C. § 165(a). In order for the Court to find that Venture "sustained" its theft loss in 1991, Venture must demonstrate that it discovered the loss that year. Section 165(e) (providing that "any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss."); 26 C.F.R. § 1.165-8(a)(2) (stating that "a theft loss is not deductible under section 165(a) for the taxable year in which the theft actually occurs unless that is also the year in which the taxpayer discovers the loss."). Fatal to its theft loss claim, Venture admitted in Answers to United States' First Requests for Admissions to the Plaintiff that it "did not discover the loss that it claimed as a theft loss deduction on its claim for refund for 1991, until after December 31, 1991." (Dft's Ex. 1A, ¶ 6). Venture acknowledged that it did not discover the alleged theft until early 1992. (Dft's Ex. 1A, ¶ 22).
Furthermore, deductions taken under § 165(a) are only allowed to the extent that they are "not compensated from by insurance or otherwise." Accordingly, "the existence of a claim of reimbursement with a reasonable prospect of recovery will prevent a loss from being considered as `sustained' unless and until it is determined with reasonable certainty that such reimbursement will not be obtained." Jeppsen v. C.I.R., 128 F.3d 1410, 1414 (10th Cir. 1997), citing 26 C.F.R. § 1.165-1(d)(2)(i) (pertaining to casualty losses) and § 1.165-1(d)(3) (pertaining to theft losses).
Here, Venture cannot demonstrate that, in 1991, it had no reasonable prospect for reimbursement. First, Venture did not even discover the loss until early 1992; it could not have determined in 1991 that it could not be reimbursed because it did not even know that the loss had been sustained. Secondly, Venture's dispute with those that allegedly converted its assets resulted in years of litigation in various lawsuits. Eugene I. Schuster, Venture's Chief Executive Officer, testified that he believed that the claims of conversion would be successful, although he did not know how much Venture would recover (Schuster dep. vol.I pp, 247-249; vol. II, 37, 133). Notably, Venture first asserted its conversion argument its counterclaim before the United States District Court for the Northern District of California. That counterclaim was not filed until October 1993. (Dft's Ex. 9). It may, therefore, be presumed that Venture believed as late as October 1993 that it had a reasonable prospect for recovery. "Taxpayers' presumptive state of mind, as evidenced by the filing of a lawsuit, goes far toward showing the reasonableness of their prospect of recovery." Dawn v. C.I.R., 675 F.2d 1077, 1078-1079 (9th Cir. Apr 30, 1982).
There is, thus, no genuine dispute that, in taxable year 1991, Venture could not have reasonably determined its prospect for recovery. Consequently, pursuant to § 1.165(d)(2) and (3), Venture cannot claim a theft or casualty loss deduction for taxable year 1991 and the Government's Motion for Summary Judgment [document 83] is HEREBY GRANTED.