Washington (March 29, 2004) -- The Internal Revenue Service will disallow deductions for theft losses claimed by taxpayers with respect to decreases in the market value of stock purchased in the open market that may be attributable to fraudulent misrepresentations or other illegal misconduct of corporate officials.

The Treasury Department and the IRS have issued Notice 2004-37, noting that some taxpayers have been advised, in the media and elsewhere, that they may deduct decreases in the market value of their stock as theft losses if they were caused by misrepresentations made by corporate officials about the financial condition of the corporation or other illegal misconduct of corporate officials.

A taxpayer generally is allowed to deduct uninsured losses from the theft of property in the year the theft is discovered.  State law governs whether a theft loss has occurred for federal income tax purposes.

 “Shareholders who purchased stock of some high-profile corporations on the open market have suffered declines in the value of their investments as a result of misconduct by corporate executives.  However, these losses are not theft losses under state law, and therefore are not deductible theft losses for federal income tax purposes,” said acting Treasury assistant secretary for tax policy Greg Jenner.


-- WebCPA staff

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