Taxing Definitions

Theft Losses and Legal Fiction

Thanks for sharing!
2 minute read


When you think of legal fiction, best-selling authors such as John Grisham and Scott Turow may come to mind—and if you’re a tax preparer, you might want to add Judge Francis M. Allegra of the US Court of Federal Claims to your list. In Goeller v. U.S., (Ct Fed Cl 3/20/2013), Judge Allegra writes of a long-entrenched legal fiction dealing with theft losses and the federal income tax code.

According to the US Court of Federal Claims, “theft” has a long-standing and well-accepted meaning. The court references Black’s Law Dictionary, which defines the term as “[t]he fraudulent taking of corporeal personal property belonging to another, from his possession, or from the possession of some person holding the same for him, without his consent, with intent to deprive the owner of the value of the same, and to appropriate it to the use or benefit of the person taking.” [Black’s Law Dictionary 1647-48 (4th ed. 1951)]

In treasury regulations, the term “theft” is “deemed to include, but shall not necessarily be limited to, larceny, embezzlement, and robbery.”

If you’ve suffered a theft loss as defined by those rules, you can claim a deduction on your federal income tax return. When there’s a disagreement between the IRS and taxpayers over whether a theft loss is allowable, courts—including the US Tax Court—look to state law to determine whether a theft actually occurs.

According to the Court of Federal Claims, adding that deciding factor is a non sequitur—a legal fiction.

In Goeller, the taxpayers claimed a theft loss from an investment in a private real estate venture that went bankrupt. The taxpayers lived in California and the real estate venture was based in Ohio, leading to a dispute with the IRS as to which state’s laws were controlling.

The Court of Federal Claims says both parties are wrong to look to state law. Instead, the court says a uniform, common-law definition is applicable. “The court sees no reason why this rule ought not apply to section 165(c)(3). Certainly, nothing in the statutory language, its legislative history, or the relevant Treasury Regulations suggests otherwise.”

The case may not read as easily as a novel of legal fiction. Nonetheless, it’s an interesting tale, and since the Court of Federal Claims is a trial court of original jurisdiction whose authority is on par with the Tax Court, tax preparers might want to skim through the very informative reasoning.


Other posts you might enjoy

Definition — Laughter and other medical dedu... Image source: Laughter may be the best medicine, but it's also one you can't get a tax deduction for. Fortunately, plenty of other medical expenses qualify. What are those expenses? Here's a quiz to test your knowledge. 1 As a general rule, when adding up you...
Definition — Safe harbors and taxes Image source: Back in August, the IRS issued proposed regulations about the new limitation on federal income tax deductions for state and local income taxes (see Taxing Lessons post here). After the proposed regulations were issued, the IRS continued to receive questio...
Definitions — More and less, yes or no   Image source:   In general, you're required to file a federal income tax return when your gross income is equal to or exceeds the sum of your exemption plus standard deduction (internal revenue code section 6012(a)(1)). For 2018 returns, to be filed in 2019, the...
Definition — Convenient meals   Image source: Public domain image from   Are you eating lunch at your desk? Perhaps your employer provides meals for a business reason, such as when the meals are necessary for you to do your job properly. These "convenience of employer" meals are not taxable to ...
Tagged , ,