The taxpayers in Partyka v. Commissioner were victims of scammers who rented the Partyka’s furnished house and stole the furniture. While not a common occurrence, the case does discuss some common problems with substantiating loss deductions claimed for income taxes. The heart of the discussion is substantiating the loss through the Cohan rule. The Cohan rule has developed through various courts’ rulings from the original statement in Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).
The general rule under the Cohan doctrine is that taxpayers can establish their right to deduct loss expenses through virtually any form of admissible evidence, including the taxpayer’s own statement that he or she owned the property, and that it was stolen. If records are incomplete and documentary proof is missing, all that the taxpayer needs to show to establish his or her right to a deduction is that he or she has incurred some amount of loss or theft deductible expenses. Based on that, that taxpayer can approximate the deductible portion, provided that the claimed expenses are reasonable in light of the taxpayer’s income and occupation. However, there is a limit on when the Cohan rule applies: the courts have developed a rule that the doctrine does not apply if the taxpayer fails to produce sufficient evidence that he or she actually incurred any deductible loss expenses (there is not enough evidence to allow the IRS or the court to make a reasonable estimate of the total deductible amount of loss expenses incurred), or where the taxpayer’s records of deductible loss expenses could have been produced, but the taxpayer failed to cooperate in producing those records.
A business must also show the bases of the lost property at the time of the theft.
Most people do not keep their receipts for purchases of personal items. However, a wide variety of ‘proof’ is usable: pictures and affidavits as well as the paperwork for insurance claims can be helpful. However, reimbursement by insurance companies will count against a loss. In addition, the deduction is generally for the ‘fair market value’ of the lost property, not the full replacement value, and any evidence provided must show that fair market value. Comparative property can also be used to prove value. This includes listings from sources like EBay, Craig’s List, similar items in second-hand stores, and other less common sources. The key is that the cost must be reasonable and realistic.
Please contact me for further information as deducting theft losses on your income taxes.