In a recent case involving an estate that underwent extreme loss due to theft (see Estate of Heller v. Comm’r, 147 T.C. No. 11 (2016)), the Tax Court declared that estates are eligible for theft loss deductions, even when the theft occurs to a company owned by the Estate.
The Estate of Heller owned a 99% interest in a company that was later affected by Ponzi scheme. The outcome of the scheme led the estate beneficiaries to file a claim for a theft loss deduction in an amount of over 5 million dollars. This claim resulted in an audit, as the IRS argued that the estate was not due a deduction since the theft occurred after the settlement of the estate.
Though Code Section 2054 states that estates are entitled to deductions due to losses due to theft, the IRS has argued that, when it comes to estates who own interests in companies, it is actually the company itself that should receive the deduction, not the estate. However, the court took estate tax into account in its determination. According to the court, the theft from the company clearly lowered the value of the estate’s interest in the company, thus lowering the estate’s overall property value. And since estate tax refers to the entire, overall value of the estate, the court deemed the estate entitled to a theft loss deduction.