Presentation:
Federal Income Taxation
Chapter 14 Losses
Professors Wells
October 26, 2015
Losses:
United States v. White Dental Mgfr.
p.835
FACTS: German government seized business assets when in March
1918. Taxpayer wrote off entire investment in 1918 but pursued
remedies. Assets returned in $6,000 but were now worth only $6,000. In
1924, taxpayer was awarded a $70,000 judgment but collectibility of that
judgment was uncertain. IRS asserted that the loss was not deductible in
1918 as the matter was not part of a closed and completed transaction.
Issue: When and in what amount is the taxpayer entitled to claim a loss?
Supreme Court: allowed deduction in 1918.
2 Losses:
p.839
Rev. Rul. 2009-9 (The Bernie Madoff Ruling)
Issues:
1.  Is a loss from criminal fraud or embezzlement in a transaction entered
into for profit a theft loss or a capital loss under §165? Yes.
2.  Is such a loss subject to either the personal loss limits in §165(h) or the
limits on itemized deductions in §§67 and 68? No.
3.  In what year is such a loss deductible? Year of discovery as long as no
reasonable prospect for recovery.
4.  How is the amount of such a loss determined? Basis less amount
reasonable expected for recovery.
5.  Can such a loss create or increase a net operating loss under §172? Yes.
6.  Does such a loss qualify for the computation of tax provided by §1341
for the restoration of an amount held under a claim of right? No.
7.  Does such a loss qualify for the application of §§1311-1314 to adjust tax
liability in years that are otherwise barred by the period of limitations on
filing a claim for refund under §6511? No.
3 Wash Sales:
McWilliams v. Commissioner
p.847
Taxpayer sold stock from his estate to his wife’s estate in an effort to
recognize built-in losses. IRS disallows loss under Section 267.
Taxpayer says sells through the public markets are not subject to
Section 267 as they are sold/bought with unrelated parties. Section
1091 does not have family attribution and could have done so if
Congress so wanted.
Court held that Section 267 applies. This transaction was an intrafamily transfer where no interruption in investment existed.
4 Capital Losses:
O.L. Burnett
p.847
FACTS: Taxpayer was in the business of buying and selling stocks and
securities and incurred $18,964.21 of losses trading in commodities and
securities in 1934. Taxpayer claimed a deduction for these losses, and
the IRS disallowed all but $2,000 of the losses.
5 Code §1231
Trade or Business Assets
p.836
1231 Asset
§1231 is an amphibian regime.
1.  Aggregate Code §1231 gains are
treated as long term capital gain.
Aggregate Code §1231 losses
(including from involuntary
conversions) are treated as ordinary
losses. A five year meshing rule
applies to preclude staggering of these
gains and losses to enable arbitraging
the tax rate differential - Code
§1231(c).
2.  But, remember §1245 recapture rules
Hypo: asset tax basis is reduced (below FMV?) by tax depreciation.
Code §1016(a)(2). §1245 steps in to treat all disposition gain equal to
prior tax depreciations deductions is ordinary.
3.  Interplay of statute: §1221 è §1221(a)(2) è§1231 è §1245
6 Bad Debts:
Whipple v. Commissioner
p.847
FACTS: Taxpayer was an active business person who had made sizable
loans to corporations to which he was the major shareholder. These
loans eventually became worthless.
Issue: Is the taxpayer’s loss a business or nonbusiness bad debt?
Supreme Court held that the taxpayer’s loss was a nonbusiness bad debt.
“Devoting one’s time and energies to the affairs of a corporation is not of
itself, and without more, a trade or business of the person so engaged. Though
such activities may produce income, profit or gain in the form of dividends or
enhancement in the value of an investment, this return is distinctive to the
process of investing and is generated by the successful operation of the
corporation’s business as distinguished from the trade or business of the
taxpayer himself. When the only return is that of an investor, the taxpayer
has not satisfied his burden of demonstrating that he is engaged in a trade
or business since investing is not a trade or business and the return to the
taxpayer, though substantially the product of his services, legally arises not
from his own trade or business but from that of the corporation.
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