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was losing money. Also, the taxpayers
did not establish that the transaction If a spousal rollover of a Roth IRA is desired,
would be considered theft under Il-
linois law, the state where it occurred, in the spouse should be named as a beneficiary,
addition to meeting the requirements but that does not always happen.
of Sec. 165. The investment was made
through corporate entities, and they
could not show that any loss was theirs losses passed through by the partner- disaster. Affected taxpayers were to
to claim. The IRS was granted sum- ships but not the losses passed through enter their Federal Emergency Man-
mary judgment. by the S corporation. agement Agency (FEMA) number on
A small partial victory occurred in Demolition loss: In Parker,22 the the Form 4684, Casualties and Thefts,
the Vennes case.21 Frank E. Vennes Jr., Tax Court held that taxpayers could not attached to their return to claim the
a former felon, met Thomas Petters, a deduct a loss under Sec. 165 for demoli- loss. A TIGTA examination25 showed
well-known businessperson. Although tion of a building. The loss was original- that IRS procedures in connection with
Vennes was not wealthy, he loaned Pet- ly claimed on Schedule E, Supplemental these losses were not adequate to find
ters $300,000 and assisted him with a Income and Loss, as repairs in 2015. errors. A review of 2019 returns claim-
business venture by finding additional Vandals lit a fire in 2014 in a building ing casualty losses indicated that 35%
investors for PCI, Petter’s company. The acquired by the taxpayers. The building gave no FEMA number or an incorrect
investors would invest in notes with PCI was never rented, and the taxpayers paid FEMA number. Those returns claimed
and receive above-market interest pay- to have it demolished in 2015. The court $309 million in casualty losses that
ments. Vennes created an S corporation held that Sec. 165 did not apply and that TIGTA indicates resulted in over $40
to invest in PCI. He interested another Sec. 280B required the cost of demoli- million of underpaid tax. Existing IRS
pair of individuals in PCI. They cre- tion to be added to the basis of the land. procedure indicates that only 2.4% of
ated two limited partnerships to invest Loss of income: Another taxpayer those returns are likely to be examined.
in PCI, and the Vennes S corporation tried to stretch the scope of Sec. 165 The IRS did not agree with all of the
invested in PCI as a limited partner in even further.23 Mark Staples retired as TIGTA recommendations but did agree
those partnerships as well. a federal employee due to disability. In to review 12,075 of the returns that
In 2008, it came out that Petters was addition to his federal disability pension, TIGTA identified.
running a Ponzi scheme through PCI. he qualified for Social Security disabil-
The S corporation was owed $130 mil- ity. His federal disability pension was Sec. 183: Hobby loss
lion by PCI at that time. The taxpayer reduced by a large portion of the Social On Sept. 7, 2021, the IRS released an
computed his tax loss relying on Rev. Security disability payments. Because a updated audit guide relating to hobby
Proc. 2009-20, which provides an op- loss of income does not seem to qualify losses: Publication 5558, IRS Audit Tech-
tional safe harbor that qualified investors as a Sec. 165 loss, Staples likened it to a nique Guide: Activities Not Engaged in for
can use to deduct qualified theft losses gambling loss, which is deductible under Profit — Internal Revenue Code Section
from a specified fraudulent arrangement. Sec. 165. The Tax Court denied his 183. The publication was last revised
Although the Tax Court indicated that theory in 2020, and the Tenth Circuit in 2009.
it is not bound by revenue procedures, affirmed in 2021.
it applied Rev. Proc. 2009-20. It found Casualty losses after TCJA: The Sec. 212: Expenses for
that the taxpayer did not meet all the Treasury Inspector General for Tax production of income
requirements of Rev. Proc. 2009-20 with Administration (TIGTA) examined In Ray,26 the Tax Court determined
respect to the S corporation (failing to IRS procedures for casualty losses after that the taxpayer was entitled to deduct
meet the qualified investor and qualified Sec. 165 amendments by the 2017 law certain legal fees he incurred in lawsuits
investment requirements) but did meet known as the Tax Cuts and Jobs Act to recover losses under a commodities
all of its requirements with respect to the (TCJA).24 The TCJA limited personal trading agreement that he had entered
partnerships. Thus, under the revenue casualty and theft losses for 2018–2025 into with his ex-wife, who was a finance
procedure, the taxpayer could deduct the to those arising from a federally declared professional. Under the agreement,

21. Vennes, T.C. Memo. 2021-93. 24. P.L. 115-97.
22. Parker, T.C. Memo. 2021-111. 25. TIGTA Rep’t No. 2021-40-045 (7/14/21).
23. Staples, No. 20-9006 (10th Cir. 6/15/21), aff’g T.C. Memo. 2020-34. 26. Ray, 13 F.4th 467 (5th Cir. 2021).

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