Academic journal article Journal of Accountancy

No Theft Loss for "Phantom" Income

Academic journal article Journal of Accountancy

No Theft Loss for "Phantom" Income

Article excerpt

The section 165 theft loss deduction seldom benefits taxpayers to the extent they think it should. This can be especially true if the thief is their investment manager and they discover only belatedly they've .been paying taxes on investment income that never existed.

Between 1992 and 2000, Michael and Anita Kaplan transferred approximately $5.7 million to Reed Slatkin, an investment adviser and money manager in California. He reported to them that their investment earned $519,157 from 1992 through 1996 and $3,617,953 from 1997 through 1999. The Kaplans reported this income on their tax returns and paid tax on it. Slatkin, however, was running a Ponzi scheme, for which he pleaded guilty in 2002 to 15 felony counts. A year earlier, Slatkin filed for bankruptcy, and the trustee notified the Kaplans and other creditors that they could expect approximately a 21% recovery

The government agreed to refund taxes the Kaplans paid on the "phantom" income for years still within the statute of limitations--1997 through 1999. The Kaplans then filed a refund claim on their 2001 return stemming from a theft loss deduction under section 165(a) equal to their investment, fictitious income and taxes paid on that income for 1992 through 1996. The claim was denied, and the issue went to district court in Tampa, Fla.

Based on Slatkin's guilty plea, there was no question that a theft loss existed. …

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