FROM THE OFFICE OF PUBLIC AFFAIRS

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Today, the Treasury Department and IRS issued a notice advising taxpayers that the IRS will disallow theft losses claimed by taxpayers with respect to decreases in the market value of stock, purchased on the open market, that may be attributable to corporate misconduct. The IRS understands that some taxpayers have been advised, in the media and elsewhere, that they may deduct as theft losses decreases in the market value of their stock caused by misrepresentations made by the 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,” stated Acting Treasury Assistant Secretary for Tax Policy Greg Jenner. 

Taxpayers generally are permitted to deduct as a capital loss a decline in value that is recognized by the taxpayer because the stock is sold or exchanged or becomes wholly worthless. 

Related Documents:

• Notice 2004-27