I am reading
a case involving tax consequences from a divorce.
More
specifically, the (ex) wife trying to deduct $2.5 million as a theft loss.
That is a
little different.
He and she got
married in 1987. Husband (Bruno) lifted a successful career in the financial
sector, and by 2005 was earning over $2 million annually.
There was an
affair.
There was a
divorce.
The Court
ordered an equitable distribution of marital properties.
That did not
seem to impress Bruno, who transferred no marital properties. The court held
him in contempt, ordered him to pay interest and yada yada yada.
QUESTION: Can’t a court place someone in jail for contempt?
It appeared
that the Court had enough of Bruno, and in 2010 the Court transferred real
estate to the (ex) wife, with instructions to sell, keep the first $300 grand
and transfer the balance to an escrow account. The property sold for $1.9
million. Th (ex) wife kept all the money, placing nothing in escrow.
Yep, the
Court held her in contempt.
By now I am
thinking that the contempt of this court is clearly meaningless.
In 2015 our
esteemed Bruno filed for bankruptcy. He claimed he was down to his last $2,500.
Which raised
the question of where all the money went.
In 2016 the
(ex) wife filed suit against Bruno’s new wife and several companies that he,
she or both owned.
Methinks we
found where the monies went.
She filed a
claim against the bankruptcy estate for $3.5 million.
Apparently,
there was something to the (ex) wife’s claim, as the bankruptcy trustee filed
suit against the new wife, against Bruno’s mother, the Bruno companies
previously mentioned and some poor guy Bruno talked to while walking his dog
around the neighborhood.
That case
was settled in 2019.
Let’s be
honest: there is really no likeable character in this story.
The (ex)
wife amended her 2015 tax return to report a $2.5 million theft.
That – not
surprisingly – created a net operating loss that went springing across tax
years like kids at a pre-COVID McDonald’s Playland.
The IRS
caught the amended return and said: No way. No theft. No loss. Get outta here.
And that is
how we got to the Tax Court.
Establishing
the existence of a deductible theft can be tricky in tax law. Yes, one always
has the question of what was stolen, how much was it worth and all that. Tax
law introduces an additional requirement:
· One must establish the year in which
the loss was sustained.
The blade is
in Reg 1.165-1(d):
However, if in the year of discovery there exists a claim for reimbursement to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained .. until the taxable year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received.”
It is not
the “what” that will trip you up; it is the “when.”
There of
course some Court guidance over the years, such as:
· The evaluation should not be made “through
the eyes of the ‘incorrigible’ optimist,” or
· … the “mere possibility or the bare
hope of a future development permitting recovery does not bar the deduction of
a loss clearly sustained.”
Yep. That is
like telling a baseball player to step to the plate against Jacob deGrom and
“just swing the bat.”
Thanks for
the advice there, pal.
And the
Court decided against the (ex) wife.
No one
believed Bruno when he filed bankruptcy in 2015 and claimed he was worth only
$2,500. The trustee filed suit; the (ex) wife filed suit. Lawsuits were everywhere.
The Court
stated that the (ex) wife may well have a theft loss. What she did not have was
a theft loss in 2015.
Our case
this time for the home gamers was Bruno v Commissioner, T.C. Memo
2020-156.
