I LOVE WRITING FOR YOU and helping guide you through the treacherous shoals of the US tax system’s surging seas.
I love researching tax issues from a different perspective. Sometimes I even take on challenges like the one that got me my MarketWatch.com column at Dow Jones. In the Introduction, I promised to tell you the story.
In 2002, I started getting emails from a TaxMama.com subscriber named Roger B. Adams. He was an American tax preparer in Portugal. Wow . . . that was impressive. He sent me this one email about a situation where a client had made an investment of about $700,000 into a company—and lost it all due to the president’s mismanagement or theft. If his client reported this as a capital loss, they would only be able to deduct $3,000 per year in excess of any capital gains. Since this client had lost his money, there were no capital gains anticipated in the foreseeable future. In other words, it would take more than two hundred years to deduct these losses.
Adams’s question was whether there was enough justification to claim this as a casualty loss. Doing that would let them deduct the full amount in the year of the loss. Since there would obviously be a lot of loss left over, it would become a Net Operating Loss (NOL; see Tip #251). They could carry the loss back two years and forward for fifteen years (see Tip #255). This client would get immediate refunds and not owe taxes for a decade or so. This way, at least, Adams’s client would be able to recoup some of his money.
Hmmm . . . I read the question and thought, oh you poor naïve, inexperienced tax professional. I proceeded to spend twenty minutes writing up an explanation of what casualty losses really are and why this isn’t a casualty loss. Feeling very smug, I was about to press the send button when a light went off over my head. (Yeah, exactly like in a cartoon.)
Wow! He’s a genius! What if this is a theft loss. If he can prove the president of the company deliberately defrauded the client, this strategy would work. Of course, he would have to file a police report—and they would probably have to get the attorney general to file charges. But with this much money at stake . . . it was worth pursuing.
I got really excited. Erased everything I had written and wrote a whole new enthusiastic response. Roger (no longer Mr. Adams) and I spent a lot of time researching this. Meanwhile, Roger sat for and passed the IRS’s Special Enrollment Examination and became an Enrolled Agent. Now he had status—he was no longer just some tax pro out in some foreign country. (In fact, he is now the only tax professional listed on the IRS website for Certified Acceptance Agents in Portugal [https://www.irs.gov/Individuals/Acceptance-Agents---Portugal].)
I asked every expert at the IRS that I knew of to please look over our logic and tell us if this was reasonable. They all warned me this made no sense and we would get into trouble taking this position.
But Roger and I believed the IRS was wrong. So I had him write an article about this. Admittedly, his first draft was rather stiff and pedantic, but I knew I could punch it up. So I started calling publications that I was already writing for to see if they would be interested in his article. No one was interested in this article by some guy they had never heard of. Then one of my editors referred me to Chris Plummer at MarketWatch.com. He was polite but firm. Absolutely not.
But wait! Plummer went on to say, “One of my columnists just got a new gig and can’t file his article for this week. If you can get me an article within an hour, the rest of the column (six more weeks) is yours.” After swooning from joy, I recovered quickly and got him the article within about an hour and a half. (It took us a half hour to determine the best topic.) The rest is history. Because I tried to help a reader (who became a special friend), I have now been writing for MarketWatch.com (and sometimes for the Wall Street Journal) for more than a dozen years. (See, sometimes, good deeds do get rewarded!)
Oh yes, whatever happened to the notorious article about the casualty theft loss? We got my rewrite of it published in time for Valentine’s Day 2004 (http://www.marketwatch.com/story/when-might-stock-losses-count-as-a-theft-claim). Roger got credit for the information. I turned my fee over to him. He has been teaching International Tax Law at TaxMama’s EA Exam School for years (http://irsexams.com/instructors/#roger).
And the IRS? Uh oh. The IRS had a fit! They were so upset with me that they issued Notice 2004-27 warning taxpayers that they could not use this casualty loss treatment for stocks purchased on the open market even if the officers had been convicted of criminal offenses (https://www.irs.gov/irb/2004-16_IRB/ar09.html).
Ironically, in one of the last paragraphs of the notice, they inadvertently pointed out that Roger’s and my treatment was kosher:
In cases involving stock purchased on the open market, the courts have consistently disallowed theft loss deductions relating to a decline in the value of the stock that was attributable to corporate officers misrepresenting the financial condition of the corporation, even when the officers were indicted for securities fraud or other criminal violations. In Paine v. Commissioner, 63 T.C. 736, aff’d without published opinion, 523 F.2d 1053 (5th Cir. 1975), the taxpayers claimed a theft loss deduction for a decline in value of stock stemming from misrepresentations of the financial status of the corporation by corporate officials. The court noted that the taxpayers did not purchase the stock from the corporate officers who made the misrepresentations, but on the open market.
Since, in fact, the situation was all about buying the stock directly from the corporate officer, this IRS notice specified that the casualty loss treatment was valid.
In fact, this same treatment was the foundation of the IRS’s position on how to treat the Bernie Madoff and other Ponzi scheme losses (https://www.irs.gov/uac/Commissioner-Shulman’s-Senate-Finance-Testimony-on-Ponzi-Schemes-and-Offshore-Tax-Evasion-Legislation).
The point to all this? Don’t rely on the IRS’s interpretation of the tax laws passed by Congress. After all, the courts don’t. If you firmly and honestly believe you are right—do the research (or pay someone with experience to do the research).
The US Internal Revenue Code is a fluid and growing body of law. It’s actually rather fun to swim in this sea! And remember, if you have good tax tips or stories, please send them to me at DeductEverything@gmail.com. If your stories are included in the next book, you will receive a TaxNerd T-Shirt with your name on it. You may pick the three S’s—style, sex, and size—or even select one for your baby (http://www.zazzle.com/taxnerd+clothing).