Stock Optionen Phantom Einkommen

Was sollten Trump Do8212Sie Fragen beantwortet Dies wird ein kürzeres Schreiben, im Einklang mit der Notwendigkeit für Urlaub Spaß und Entspannung. Allerdings hatte der letzte weekrsquos Brief mit meinen Gedanken, was Trump tun sollte, mehr Reaktionen hervorgebracht als jeder andere Brief in den letzten 17 Jahren. Wie Sie vielleicht vermuten, mit einem Thema so umstritten, nicht jeder mit mir einig. Aber es gab viele gute Fragen und Kommentare und einige nachdenkliche Meinungsverschiedenheiten, so möchte ich ein paar von denen ansprechen. Und ich gehe speziell darauf ein, warum ich scheinbar von den konservativen Grundprinzipien der Steuern abweiche. Itrsquos alles über Schulden und die Konsequenzen von Schulden ndash thatrsquos der übergeordnete Faktor für mich. Und Irsquoll versucht, den Fall zu machen, dass es Zeiten gibt, in denen wir nur harte, selbst philosophisch ungenießbare Entscheidungen treffen müssen. Einige Kommentare werde ich andere auszugraben, die ich im Allgemeinen beschreiben und gegebenenfalls Irsquoll kopieren und ganze Kommentare einfügen möchte. So letrsquos Sprung in. Bitte erläutern Sie weitere Körperschaftssteuer von 15 auf Einkommen über 100.000 ohne Abzugsperiode. Klingt wie eine 15 Umsatzsteuer. Was bedeuten Sie keine Abzüge Sind Betriebskosten Abzüge Allen, das war wahrscheinlich die am meisten gestellte Frage, und da Sie es am prägnantesten gefragt, erhalten Sie die Anerkennung für sie. Nein, dies ist keine Umsatzsteuer. Es ist eine 15 Steuer auf Unternehmenseinkommen. Das ist normal GAAP Buchhaltung Einkommen. Es gibt so etwas wie 3.400 verschiedene, gesetzliche, congressionally Mandat Unternehmen Steuerlücken und Abzüge. (I canrsquot finden Sie die genaue Zahl jetzt.) Viele dieser Steuerlücken gelten für nur eine Firma oder eine sehr kleine Industrie und sind Gefälligkeiten von einem Kongressabgeordneten oder Senator zu ihren Hauptbestandteilen. Also, wenn ich keine Abzüge sagen, ich meine, loszuwerden, jeder dieser Schlupflöcher. Ich weiß, ich weiß, ndash Ich werde goring praktisch jeder Businessrsquos Ochse in irgendeiner Weise oder so. Und das Problem: Zu viele Leute denken, dass ihre Branche einige Pausen verdient und ein kleines Schlupfloch ist nicht so groß ein Geschäft, und das nächste, was Sie wissen, gibt es 3400 dieser Welpen. Und dann finden Sie General Electric zahlen weniger Einkommensteuer als ich während der Herstellung von mehreren Milliarden Dollar pro Jahr. Ich könnte aus Texas laufen, weil dies wahrscheinlich bedeuten würde, die Öl-Erschöpfung Zulage, auch. Die normale Abschreibung würde weiterhin gelten. Für diejenigen, die über RampD Kosten besorgt sind, würde ich erlauben beschleunigte Abschreibung auf RampD, denn das sind wirklich Aufwendungen, zumindest in meinem Kopf. Aber der Punkt hier ist, so wenige Schlupflöcher wie möglich zu haben (mit den einzigen Ausnahmen zu denen, die deutlich, direkt Arbeitsplätze schaffen). Ich gebe nicht zu, kein Buchhalter zu sein, aber ich habe mir ein paar Bilanzen angesehen. Unternehmen müssten Steuern zahlen, was sie ihren Anteilseignern oder ihren Bankiers oder sogar sich selbst melden. Fünfzehn Prozent ist nicht so groß von einem Geschäft im großen Schema der Dinge. Es ist tatsächlich etwas niedriger als die aktuelle effektive Rate (je nachdem, welche Quelle Sie gehen). Ich denke, dass unter diesem Plan würden wir tatsächlich in mehr Steuern nehmen, denn wir würden sehen, Firmen kommen aus der ganzen Welt und Domizil hier in den Vereinigten Staaten. Und Unternehmen würden nicht gehen, um so drastische Längen zu vermeiden, Einkommen zu melden, so dass insgesamt Körperschaftssteuer würde sich erhöhen. VAT ist ein Widerstand auf Wachstum ndash Blick auf Großbritannien und EU ndash sowie schwierig für die unglücklichste Gruppe in allen unseren Volkswirtschaften. Diese heimtückische Steuer ist eine Zulassung des Versagens von Politikern, die Verringerung der Einkommensteuer als Gegenleistung für die Schaffung eines ldquofairerrdquo direkten Steuern anstelle der Kontrolle populistischen unerschwinglichen Versprechungen versprechen. Glen, ich stimme voll und ganz zu Ihnen: eine Mehrwertsteuer wird ein Widerstand auf Wachstum. Es gab eine Menge Pushback von vielen Lesern auf das Konzept der Mehrwertsteuer. So verwenden Letrsquos Ihre Frage als Sprungbrett in das Thema. Zuerst wenn Sie mich vor 10 Jahren fragten, ob ich überhaupt an eine VAT in den US denken würde, I wouldrsquove sagte, ldquoNot nein, aber Hölle nein. Double hell nordquo Wir waren noch zu einem Zeitpunkt im Jahr 2006, wo wir das Budget unter Kontrolle bringen, unsere Hände um die Berechtigung Probleme, Flatlined Ausgaben im Sinne von ClintonGingrich, und behandelte sowohl das Defizit und die Schulden. Aber das ist nicht das, was wir tun wollten. Und nun befinden wir uns zwischen dem Teufel und dem tiefblauen Meer. Der Teufel ist die Staatsverschuldung, und das tiefblaue Meer ist die Krise, dass wir segeln, wenn wir donrsquot herauszufinden, was zu tun, über diese Schulden. Das Diagramm unten geht bis 2014, und wenn es bis zum Ende dieses Jahres ausgedehnt wurde, würde es eine Staatsverschuldung bei 20 Billionen zeigen. An einem gewissen Punkt, Glen, Schulden an und für sich ist ein Widerstand auf Wachstum im Verhältnis zum Einkommen. Die ökonomische Literatur ist ziemlich konsistent auf dem. Ein Schulden-zu-BIP-Verhältnis von 40 ist kein Thema, aber US-Regierungsstellen schulden insgesamt 23 Billionen oder mehr als 120 Schulden-zu-BIP ndash und diese Menge steigt jedes Jahr. Wir sehen viel mehr wie Italien aus, als es jeder von uns zu betrachten wünscht. Während ich einverstanden bin, dass eine Mehrwertsteuer ein Wachstumsschub ist, ist das nicht das Problem in Europa. Es ist ihre Schuld, plus ihre sklerotischen Regulierungssysteme und ungöttlichen Haufen von Regeln und Vorschriften, die Arbeitsplätze zerstören und hemmen neue kleine Unternehmen vom Start. Als ich weiter predige, wenn (nicht wenn) wir die nächste Rezession haben, wird der Ballon zu weit über 1,5 Billionen und wahrscheinlich näher an 2 Billionen. Es ist nicht lange dauern, bis zu Billionen zu bekommen, und dann wersquoll verbringen 600ndash800 Milliarden von Steuergeldern Geld, nur um das Interesse an dem, was ich denke, werden normale Preise zu zahlen. Nun, wenn Sie es vorziehen, die CBOrsquos projizierten Zinsen zu verwenden, dann fügen Sie weitere 300 Milliarden pro Jahr, drückte insgesamt Zinsausgaben auf 1 Billionen pro Jahr. (Das CBO geht von einer viel stärkeren Konjunktur aus als auf der Höhe der Schulden.) Wenn ich falsch liege, werden die Zinszahlungen sehr viel höher sein. Wir haben weit über 120 Billionen an unfundierten Verbindlichkeiten gesammelt, und wenn wir unseren Anspruch nicht erhalten Ausgaben unter Kontrolle, wird die Schuld nur noch schlimmer kommen ndash viel schlimmer. Diese Wirklichkeit bringt die nächste, allgemeine Frage auf. Sie müssen wissen, wann zu falten rsquoEm John, wissen Sie, der einzige wirkliche Weg, um die Krise zu lösen ist, die Ausgaben auf der ganzen Linie zu reduzieren. Schneiden Sie alles. Sie müssen Berechtigungen und Verteidigungsausgaben senken und ganze Regierungsabteilungen befreien. Wir müssen lernen, in unserem Haushalt zu leben. Stoppen Sie, ein Teil des Mainstreams zu sein und das wirkliche Problem zu behandeln: zu viel Staatsausgaben. (Und es gab auch die libertäre Variation zu diesem Thema: Hungern Sie das Tier donrsquot es zu füttern. Jemand, der Gefühle in diesen Zeilen stimmte: Ich verstehe es, ich stimme mit Ihnen. Wenn es in meiner Macht wäre, würde ich es tun Itrsquos nicht ein Lied, das durch meinen Verstand gerade jetzt läuft Itrsquos der Chor von Kenny Rogersrsquo klassisches Lied, ldquoThe Gambler rdquo: ldquoYou lernte, wann rsquoem zu halten, wissen, wann man rsquoemhelliprdquo faltet Philosophisch, bin ich noch so viel ein kleines - Wie ich war in den rsquo80s. Ich möchte Regierung nur tun, was notwendig ist, um das Spiel fair zu halten, tun die Dinge, die wir brauchen, um als Gruppe zu tun, die meistens auf der getan werden kann Ndash und für Godrsquos willen halten seinen Daumen weg von den Skalen. Wir kämpften jene Schlachten in den rsquo80s und rsquo90s und machten großen Fortschritt ndash und wir verlor wirklich auf einer nationalen Ebene, als die Republikaner unter Bush II. Übernahmen Wir Republikaner wurden die Partei Der großen Regierung und während man viele Millennials und Gen Xers in Übereinstimmung mit dem Prinzip einer kleinen Regierung nicken kann, für die, die nicht die Abkehr von staatlich unterstützten Gesundheitsversorgung, die per Definition bedeutet, eine ziemlich große Regierung bedeutet. Und donrsquot sogar versuchen, die heiße dritte Schiene der Sozialversicherung zu berühren. Bush II versuchte tatsächlich, nur marginal, mit relativ einfachen Problemen mit soziale Sicherheit und bekam von beiden Parteien schlug. Tell Boomers und andere, die sie canrsquot haben ihre Medicare oder ihre anderen ldquoentitlementsrdquo Die einfache Tatsache ist, dass die Mehrheit der Wähler in diesem Land wollen soziale Sicherheit und Gesundheitsversorgung und erwarten, dass die Gesundheitsversorgung für diejenigen, die canrsquot leisten können, zur Verfügung gestellt werden. Sie wollen, dass bereits bestehende Bedingungen von Versicherern ignoriert werden. Und eine ganze Menge anderer Dinge. Ich glaube, dass es einen Weg gibt, die Ausgaben im Gesundheitswesen unter Kontrolle zu bringen und unsere Berechtigungsprobleme auf einen Gleitpfad zu lösen, auch wenn wir völlig anerkennen, dass unsere Demographie gegen uns arbeitet. Aber es gibt keine Möglichkeit, es ohne Geld getan werden kann. Es wird sehr viel Staatsausgaben zu nehmen, egal wie Sie es schneiden. Die Regierung hat nur drei Einnahmequellen: Steuern, Kreditaufnahme und Monetarisierung. Leihen Geld läuft die Schulden, und wir sind immer sehr nah an dem Punkt, wo Ballonschulden schwächenden wird. Mehr zur Monetarisierung später. Das bedeutet, dass wir irgendwie die Umsätze steigern müssen, wenn wir für alles zahlen, was die Ausgaben benötigt und die Schulden unter Kontrolle bringen. Ich donrsquot wie es, aber das sind nur die Fakten. So kommen wir zum Kern der Sache: Wie erhöhen wir die notwendigen Einnahmen in einer Weise, die es uns ermöglicht, die Wirtschaft so weit wie möglich zu wachsen, glaube ich, dass das Übergewicht der Wirtschaftsliteratur darauf hindeutet, dass die Verbrauchssteuern im Allgemeinen weniger sind Ein Zug auf das Wachstum als Einkommenssteuern. Die Verbrauchssteuern beinhalten Mehrwertsteuern und Mehrwertsteuer. Dann gibt es eine ganze Schule des Denkens gebaut rund um die so genannte Fair Tax, die eine nationale Umsatzsteuer, die auf alle Einzelhandelsumsätze zusätzlich zu den staatlichen Umsatzsteuern hinzugefügt werden würde. Die Befürworter der Fair Tax würden dann alle föderalen Einkommensteuern (einschließlich der alternativen Mindeststeuer, Körperschaftsteuer und Kapitalertragsteuer), Lohnsteuer (einschließlich der Sozialversicherung und Medicare Steuern), Geschenk Steuern und Erbschaftssteuern zu beseitigen. Ich kann mit dieser Regelung im Prinzip gehen, aber in der Praxis denke ich, das Äquivalent von einer 30 Umsatzsteuer (was die faire Steuer wäre, wenn kombiniert mit staatlichen und lokalen Verkäufe Steuern) würde eine Menge der Wirtschaft U-Bahn senden. Nur meine Meinung. Wenn Sie mit Ihrem Klempner oder Lieblings-Restaurant für 30 weniger mit Bargeld bezahlen können, die Versuchung ziemlich groß. Irsquove reiste auf der ganzen Welt, und diejenigen Länder mit hohen Einzelhandelsteuern oder kontrollierten Wechselkursen am Ende immer Kassengesellschaften so weit wie möglich. Die Argentinier und die Griechen und die Italiener sind lebenslange Großeltern, um in einer solchen Wirtschaft zu überleben. Rufen Sie mich zynisch, aber mit 30, ich denke, eine Menge meiner Nachbarn würde schnell beherrschen das Spiel, auch. Eine Mehrwertsteuer oder eine ihrer Schwestern hat den Vorteil, dass sie auf der geschäftlichen Ebene auf der inkrementellen Wertschöpfung für Produkte in jeder Produktionsstufe besteuert wird. Es ist also viel schwerer zu vermeiden, also zahlt jeder. Oder fast alle. Es würde tatsächlich erfassen eine Menge der aktuellen U-Wirtschaft. Warum also nicht machen die Mehrwertsteuer groß genug, um loszuwerden, alle anderen Steuern, da die Fair Tax Leute für mich vorschlagen, ist itrsquos eine rein politische Entscheidung. Die Mehrwertsteuer ist eine regressive Steuer. Das heißt, es fällt in der Regel stärker auf diejenigen mit niedrigeren Einkommen. Und Progressisten und Liberalen werden das hassen. Wir müssen also einen Kompromiss finden. Das bedeutet, dass Wersquore immer noch eine Einkommenssteuer haben muss, aber wir müssen es so niedrig wie möglich sein. Mein Vorschlag ist 20 auf alle Einkommen über 100.000. (Siehe letztes weekrsquos TFTF für Details.) Um die VAT kleiner einer regressiven Steuer zu machen, schlage ich vor, daß wir sie groß genug bilden, damit wir die Sozialversicherungssteuer beseitigen können. Das gibt sofort alle unteren Einkommen Einkommen eine 6 Lohnerhöhung. Plus, es senkt die Geschäftskosten 6. Das nimmt viel von der regressiven Art der Mehrwertsteuer. Nicht beginnen, Einkommenssteuer zu zahlen, bis Sie 100.000 löschen und nicht für soziale Sicherheit bezahlt werden doesnrsquot bedeuten, dass diejenigen, die zwischen 50.000 und 100.000 donrsquot zahlen Steuern. Sie zahlen Steuern in Form der Mehrwertsteuer, plus ihre lokalen Steuern so ihre Steuerbelastung sollte nicht viel anders sein, als es jetzt ist, und sie könnten sogar sehen, etwas von einer Steuersenkung. Denken Sie daran, das Objekt hier ist nicht nur Steuern zu senken, sondern um herauszufinden, wie man mehr Steuereinnahmen mit den am wenigsten möglichen Schmerzen für die Gesamtwirtschaft zu bekommen. Wenn Ihre Familie jemals konfrontiert wurde (wie meine hat bei mehreren Gelegenheiten) mit einer signifikanten Erhöhung der Ausgaben oder Abnahme des Einkommens, Sie wissen, mussten Sie einige harte Entscheidungen zu treffen. Auf nationaler Ebene wird auch jemand mehr bezahlen müssen, und jemand wird weniger bekommen. Ich erinnere mich, dass, wenn ich begann im Geschäft in meinem 30s, gab es Tage, wenn ich dunkel scherzte, ldquoIrsquoll zahlen, was ich zu haben, und alle anderen müssen wait. rdquo Das beinhaltete meine Frau und Kinder und was sie wollten oder sogar Erforderlich. Realityrsquos eine Hündin manchmal. Wir haben jetzt eine Realität. Das ist unser nationaler politischer Prozess. Wir müssen herausfinden, wo das Geld für das, was unsere Bürger sagen, sie wollen bezahlen. Wenn ein republikanischer Präsident und Kongress keine Gesetze erlassen, die den Wählern etwas annähern, was sie für nötig halten, werden Republikaner herausgeworfen und Demokraten eine neue Chance gegeben. Lassen Sie mich Ihnen sagen, dass die Ökonomen, die die Demokraten beraten, uns nicht nur eine Mehrwertsteuer geben, sondern auch eine hohe progressive Einkommenssteuer bekommen und die Körperschaftsteuer nicht so stark sinken wird. Sie einfach donrsquot kaufen meine ökonomische Sicht der Welt. Sie sind durch und durch Neo-Keynesians. Denken Sie Europa auf Steroide hellip, auch wenn wir beobachten, wie Europa in den nächsten vier Jahren implodieren wird. Es gibt eine Anzahl von Einwänden entlang den Linien von, ldquoIf, das wir tun, was Sie vorschlagen, es verletzt mich. Itrsquos nicht fair. rdquo Nun, in vielen Fällen stimme ich und sympathisieren mit Ihnen. Aber an diesem Punkt im Spiel, unsere gesamte politische und wirtschaftliche Situation ist ldquonot fairrdquo und wersquore links mit nur schwierig (aber notwendig) Entscheidungen. Ein besonders ergreifender Einwand kam von einem Leser, der seinen gesamten Pensionsplan zu einem Roth IRA umgebaut, seine Steuern bezahlt hatte, und jetzt war ich, eine Mehrwertsteuer vorzuschlagen, die ihn seine Steuern wieder zahlen lassen würde. Er hat ganz recht, dass es ihm unfair ist. Aber ich donrsquot wissen, was zu tun ist. Es ist einfach nicht möglich, ein in jeder Hinsicht faires System zu entwickeln. Wir müssen harte Entscheidungen treffen. Die Bedürfnisse der vielen müssen die Bedürfnisse der wenigen überwiegen. Und ich sage das mit einem vollen Verständnis, dass, wie Ayn Rand entdeckt und erklärt. Die Bedürfnisse des Individuums sind, was die Notwendigkeit und die Möglichkeit für Wert Urteile zu beginnen. Das ist das Problem, Entscheidungen in einer Regierung zu treffen, die so groß und komplex ist wie das US-System. Wir haben ihr Wachstum aus dem Ruder laufen lassen und zurückgehen würde so unglaublich störend in Bezug auf Leben und Vermögen und Arbeitsplätze und Futures, dass die Rückfahrt einfach nicht möglich ist. Wir canrsquot die Uhr zurückspulen. Als The Gambler sagte uns, ldquoEvery Handrsquos ein Gewinner und jeder handrsquos ein loser. rdquo Wir haben die Hand, die wir haben, und wir haben herauszufinden, wie man es spielen, um es eine gewinnende Hand. Falten ist keine Option. Was passiert, wenn wir Donrsquot Balance das Budget Und damit kommen wir in den Mittelpunkt der Frage im Hinblick auf meine Mehrwertsteuer Vorschlag. Wenn wir das Budgetdefizit unterhalb der nominalen Wachstumsrate des Bruttoinlandsprodukts (das in naher Zukunft nicht höher als 4 ist) bringen wird, werden unsere Schulden in den Rezessionen explodieren und letztlich einer Schuldenkrise begegnen. Die enden nie gut. Die Wahlen, die wir an diesem Punkt haben werden, sind viel weniger und sogar stärker. Letrsquos wargame unsere Situation für einige Minuten. Was passieren wird, wenn wir die Steuern erhöhen und die Ausgaben senken, um das Defizit und die Schulden im Griff zu haben, wird es möglich sein, Kompromisse nach dem, was Clinton und Gingrich getan haben, zu ergreifen, aber ich hoffe wirklich, dass Wersquore ihnen fähig ist. Mit unserer Schuld so groß wie es ist, werden wir in einer etwas langsamer wachsenden Wirtschaft sein, aber wenn wir loswerden genug Schäkel auf Wachstum und die Anreiz-Struktur direkt mit der richtigen Steuer-Mix, der amerikanische Unternehmer kann uns wahrscheinlich bekommen Aus dem Loch wersquore in ohne seine immer zu viel tiefer. Mit den erstaunlichen neuen Technologien, die kommen, können wir wahrscheinlich zu einem Punkt, wo wir tatsächlich unseren Weg aus unserem Schuldenproblem in den nächsten 10 bis 15 Jahren wachsen können. Was passiert, wenn wir donrsquot Die gutartigere Ergebnis ist, dass wir am Ende aussehen wie Japan. Wir wachsen die Schulden bis zu dem Punkt, wo wir sie tatsächlich monetarisieren müssen. Vielleicht nicht das Ende der Welt, aber sicher nicht die wachstumsstarke, arbeitsplatzschaffende Maschine, die wir unsere Wirtschaft gerne hätten. Die Einkommens - und Vermögensverteilung würde sich vertiefen, und wenn man bedenkt, dass es bei den letzten Wahlen Pushback gab, warte nur. Wir könnten noch höhere Steuern und eine langsam wachsende Wirtschaft und Unternehmer, etablierte Unternehmen zu sehen, und Investoren würden nur größere Kopfschmerzen haben. Denken Sie daran, thatrsquos das bestmögliche Ergebnis, wenn wir donrsquot mit unserem Defizit und Schulden. Was passiert mit dem Wert des Dollars in diesem Szenario Vor sechs Jahren hätte ich mir sicher gesagt, dass es nach unten gehen würde. Jetzt, da ich die japanische Erfahrung beobachte (und obwohl ich eine Reihe von Unterschieden zwischen unseren Volkswirtschaften erkenne), vermute ich, dass der Dollar steigen, nicht fallen könnte. Oder besser gesagt, es würde nicht im Vergleich zu den anderen globalen Währungen fallen, und nicht annähernd so viel wie meine hart geldfreien Freunde zu denken scheinen. Wir würden uns wirklich in einer Welt befinden, für die wir kein historisches Analogon haben. Wenn das Land mit der Worldrsquos-Reservewährung beginnt, Geld zu drucken, nur um seine Schulden zu bedienen, weil die Menschen ihre Schulden kaufen, und in einer Welt, in der die meisten anderen großen Volkswirtschaften auch in Schwierigkeiten sind (wie ich logisch davon ausgehen würde), wo sind wir dann? Und denken Sie daran, dies wäre eine Zukunft, in der globale Verschuldung in der 500 Billionen-Bereich und globales BIP wäre 100 Billionen. Monetizing 1ndash2 Trillion ein Jahr (wir sprechen 10 Jahre heraus) ndash ungefähr das Äquivalent von, was Japan heute ndash tut, könnte sein, wie spucken im Ozean. Geld wird weit mehr fungible und flüssig und beweglich in der Finanz-Technologie-Welt, die wir entwickeln. Es wäre der Höhepunkt der Hybris zu denken, wir können mit einem gewissen Grad wissen, was passieren würde. Jetzt habe ich donrsquot denken, die Misserfolg-Szenario wird passieren, aber wersquore im Kriegsspiel-Modus, so dass wir das Undenkbare denken müssen. Vielleicht entscheidet die Welt, dass sie eine andere Reservewährung wünscht oder etwas Neues ersetzt. Wir donrsquot wissen. Viele Dinge werden in 10 Jahren möglich sein, dass wir heute keine Ahnung haben. In solch einem Szenario könnte der Dollar in der Tat einen großen Teil seiner Kaufkraft verlieren. Das würde eine große Unsicherheit und Volatilität schaffen, und ich sehe ein globales deflationäres Schulden-Szenario entfalten, gefolgt von massiven monetären Schöpfung. Ich schätze, dass der kritische Faktor für mich ist, dass ich kein Szenario sehen kann, in dem wir donrsquot mit dem Defizit und der Schuld beschäftigen und ein positives Ergebnis genießen. Itrsquos eine binäre Wahl für mich. So dass ich wählen, was ich denke, ist die einzige politisch mögliche Sache zu tun, und das ist die Umstrukturierung der Steuer-Code, das Gleichgewicht der Haushalt mit einer Erhöhung der Besteuerung, Roll-back so viele Regeln und Vorschriften wie wir können, hoffen, dass wir die Gesundheitsversorgung Ausgabe rechts ndash und dann sehen, was passiert. Lassen Sie mich mit einer Geschichte enden. Ich war auf einem Flugzeug, das von New York nach Bermuda ging und hatte Glück gehabt, um zur ersten Klasse aufgerüstet zu werden. Es war 1998 ndash nur ein paar Tage nach der Auflösung der Long-Term Capital Management Krise. Die Märkte hatten eine ziemlich erschütternde Zeit gesehen. Der Gentleman, der neben mir saß, befahl Scotch, sobald die Räder oben waren und grundsätzlich der Stewardess angezeigt wurden, um sie zu kommen. Man konnte sehen, dass er emotional erschüttert war. Ich verlobte ihn nach ein paar Drinks, und als er erfuhr, dass ich mit dem Hedgefondsgeschäft verbündet war und aus New York kam, nahm er an, dass ich viel mehr über die Welt wusste als ich. Es stellt sich heraus, dass er der stellvertretende Vorsitzende eines der größten Bankenkonglomerate der damaligen Zeit war. Wir kennen alle den Namen. Er fing an, die tiefe Hintergrundgeschichte von dem zu erzählen, was in den letzten Wochen geschehen war, und kulminierte in jener berühmten Sitzung, die von der New Yorker Federal Reserve genannt wurde, wo der Präsident der New Yorker Fed jedem im Saal spielte Im Sandkasten. Und zu peitschen ihre Scheckbücher. Dieser Gentleman war in der Versammlung gewesen und kannte die ganze Geschichte. Ich wusste, dass ich etwas Besonderes hörte, deshalb saß ich nur da und hörte zu und stellte sicher, dass der Flugbegleiter Scotches für ihn brachte. Er schien sich mehr zu öffnen mit dem Niedergang eines jeden. Schließlich drehte er sich um und schaute mir in die Augen und sagte, ldquoSon, gingen wir an den Rand des Abgrunds, und wir schauten hinüber. Und es war ein weiter Weg. Es erschreckte jeden von uns bis in die Tiefen unserer Seele. Und dann befahl er einem anderen Scotch und legte den Kopf zurück und versuchte, sich auszuruhen. Als ich auf die Krise von 1998 zurückblicke, die wir alle damals so riesig dachten, bringt es ein Lächeln. Wir sprachen Hunderte von Millionen, die von jedem der großen Banken, mehrere Milliarden Dollar insgesamt, gepongt werden mussten. Es war überschaubar im privaten System. Nur zehn Jahre später, in der von der Immobilienblase ausgelösten Krise von 2008, sprachen wir Hunderte von Milliarden, wenn nicht Billionen von Verlusten, und das private System konnte nicht damit fertig werden. Wenn wir unser Schuldenproblem behandeln, wird die Krise, in die wersquoll plunge wird die Schuld in einer oder anderen Weise lösen ndash und die damit verbundenen Turbulenzen machen 2008 sehen so gering wie 1998 tut heute. Ich möchte nicht, dass meine Kinder in einer Welt aufwachen, wo wir Frosch-marschiert an den Rand des Abgrunds und gezwungen, um zu sehen. Wir haben noch die Möglichkeit, die Zukunft für unsere Kinder zu sichern, aber nur, wenn wir den Moment ergreifen. Wenn wir donrsquot, wird es unusquisque pro se ndash jeder Mann für sich. Ein paar Gedanken über die Investition in eine Umgebung wie diese (seit der Investition in die Wirtschaft ist angeblich, was dieser Brief ist vor allem über). Mit allen gegenwärtigen und auftauchenden Herausforderungen, denen wir gegenüberstehen, wird Investition noch schwierig sein, selbst wenn wir mit unserem Schuldenproblem umgehen, aber diese Herausforderungen werden viel angenehmer sein, als die außerordentlich schwierigen Entscheidungen wersquoll gelassen werden, wenn wir donrsquot behandeln die Schuld. Mit den Tools und Strategien, die wir heute zur Verfügung haben, und mit noch leistungsstärkeren Tools für die Zukunft entwickelt, denke ich, dass Investoren, die richtig vorbereitet sind, herauszufinden, was in jedem Szenario zu tun. Aber durchschnittliche Investoren, die erwarten, dass die Zukunft etwas aussehen wie die Vergangenheit Theyrsquore wird schwer beschädigt werden. Ihre Ruhestand Futures werden von ihnen gerissen werden. Und sie werden zutiefst unglücklich sein. Das muss natürlich nicht sein. Es könnte gut gehen. Aber ich habe einen starken Verdacht, dass der massive Umzug, den wir von aktivem Management zu passiven Managementstrategien im vergangenen Jahr sehen, zu einer der allzeit schlimmsten Entscheidungen der Herde werden wird. Aber thatrsquos ein Thema für einen anderen Brief. Ich war wirklich traurig, diese Woche zu lernen, dass mein alter Freund Howard Ruff verstorben war. Er war 85 und leidet unter Parkinsonrsquos. Howard Ruff ist ein Name, dass meine jüngeren Leser (unter dem Alter von 40) wahrscheinlich nicht erkennen, aber diejenigen von uns, die rund um die Investment-Welt der rsquo70s und rsquo80s wurden sicherlich von Howard beeinflusst. Er war einer der wahren Gründer der Investment-Publishing-Welt und war eindeutig der Rockstar in den rsquo70s und rsquo80s. Sein Hauptbrief wurde die Ruff Times genannt. Dieser Titel war angemessen, denn seine ersten drei Bücher waren Hungersnot und Überleben in Amerika (1974), wie man in den kommenden schlechten Jahren gedeihen kann (1979 ndash NYT 1) und Survive und Win in den Inflationary Eighties (1981) ndash alle fest in Das Dunkel und das Untergangslager. Howard glaubte (von seinen 1979ndash1981 Schriften), daß die Vereinigten Staaten für eine hyperinflationäre ökonomische Depression geleitet wurden und daß es eine Gefahr gab, daß Regierung und private Pensionpläne im Begriff waren, zusammenzubrechen. Seine Mailing-Liste wuchs auf über 200.000 Abonnenten (ungehört für einen Newsletter zu der Zeit), und er hatte eine folgende, die erstaunlich war. Er war Teil der harten Geldmenge und ritt die Welle der Gold - und Nahrungsmittelspeicherung, Bereitschaft für die kommende Krise, während der rsquo70s und in die rsquo80s. Er machte eine Reihe von bemerkenswerten Anrufe, und die Leute dachten, er wüsste, worüber er sprach. Ich denke, dass manchmal sogar Howard selbst. (Sie können eine umfassendere Erinnerung von unserem gemeinsamen Freund Mark Skousen hier lesen (enthält auch einen Link zu einem New York Times-Stück auf Howard.) Ich erinnere mich an das erste Mal sah ich ihn. Ich war auf einer Investitionstagung in New Orleans (die Ldquogold conferencerdquo, die in ihrer Blütezeit 4.000 Teilnehmer und wurde von einer anderen Legende, Jim Blanchard gegründet wurde), und ich bemerkte eine kleine Menschenmenge (100 Personen oder so) auf eine Person in einem Flur konzentriert. Es war Howard Holding Gericht, die Beantwortung von Fragen, Ich habe gesehen, dass die Szene zu anderen Zeiten während dieser und anderen Konferenzen, alle während der rsquo80s wiederholt. Und dann änderte sich die Dinge. Die Märkte verändert, und Howardrsquos Nachricht didnrsquot. Sein Abonnent (Und älter) Man muss verstehen, Howard war ein komplizierter Mann, er ging durch mehrere Konkurse und kam zurück zu Millionen zu machen. Er war leidenschaftlich über alles, was er tat. Die Business-Rückschläge waren einfach Möglichkeiten, sich auf etwas anderes zu bewegen. Vorwärts und aufwärts. Er war immer optimistisch. Er war ein frommer Mormone, der 14 Kinder, 79 Enkelkinder und 48 Urenkel zu seiner Zeit hatte. Irgendwann in der Mitte des letzten Jahrzehnts sprach ich auf einer Investitionskonferenz in Las Vegas. Howard rief mich an und fragte, ob er von dort herunterkommen könne, wo er im Süden von Utah wohne, um mir ein Exemplar seines neuen Buches zu geben (was er mir zu überprüfen wünschte). Sie canrsquot sagen, eine Kraft der Natur nein, so sagte ich ihm zu kommen auf. Wir vereinbarten, an einem Stand auf dem Ausstellungsgelände am Nachmittag zu treffen. Der Boden war ziemlich beschäftigt, und ich sprach mit Freunden und Teilnehmern am hinteren Ende des Gangs. Ich schaute hinunter den Gang und sah Howard, der auf mich zuging, und es warnrsquot, bis er ungefähr 10 Fuß von mir war, daß ich realisierte, daß niemand ihn aufgehalten hatte, um zu plaudern. Howard war immer noch die gleiche Person, aber die Welt war weitergegangen, und er hatte sich nicht mit ihr bewegt. Ich erinnere mich lebhaft daran, zu denken, Transit Gloria. Diese Lektion, der Gedanke, dass es jedem passieren könnte, wurde in meinem Gehirn in den letzten 10 Jahren versenkt. Er schrieb eine Biographie, in der er über seine Erfolge und Misserfolge sprach, und wir verglichen Noten über seine Karriere und meine von Zeit zu Zeit, wenn wir Gelegenheit hatten, zusammen zu kommen. Ich hatte in der Nähe der Beginn der Investment-Publishing-Geschäft, sondern auf der Management-Seite gesprungen, und ich didnrsquot beginnen, wirklich mein eigenes Material schreiben, bis die späten rsquo90s. Howard war froh, mich zu mentorieren und frei über seine Höhen und Tiefen zu sprechen. Er teilte das, was er für seinen größten Fehler hielt. In den frühen rsquo80s, und sicherlich von den mid-rsquo80s, fing er an zu erkennen, dass Inflation wirklich nicht zurückkam und dass Gold herausgefordert werden könnte. Aber er hatte weit über 100 Angestellte und eine Abonnentenbasis, die rebellieren würde, wenn er seine Melodie änderte. Seine Botschaft zu ändern, bedeutete, dass er viele Menschen, darunter viele Freunde und Familienmitglieder, entlassen musste, und er konnte es einfach nicht tun. LdquoI wusste, dass es, in meinem Herzen, aber ich konnte einfach nicht, mich selbst zu beschädigen das Unternehmen, dass badly. rdquo Wir hatten diese Konversation mehrmals. Ich habe den einzigartigen Vorteil von Freunden mit einer Reihe von Schriftstellern und Verlagen in den letzten 35 Jahren gehabt. Irsquove gesehen Schriftsteller groß und dann verblassen. Andere scheinen auf der Oberseite ihres Spiels zu bleiben, die Welle zu reiten, wohin sie es nimmt. Der größte Fehler, der zu Stürzen führt, ist, an Ihre eigene Investitionsmagie zu glauben (oder, wie wir in Texas sagen, dass Sie Ihren eigenen Bullshit glauben). Howard war ein wahres, einzigartiges Marketing-Genie, und wenn er seine Melodie geändert hätte, wenn er wusste, dass er es brauchte, hätte er die Hälfte seiner Leser verloren, aber er hätte seine Liste wieder aufgebaut. Die Lektion: Seien Sie wahr, was Sie wissen und glauben, und lassen Sie die Chips fallen, wo sie können. Donrsquot sagen den Leuten, was sie hören wollen, Howard würde sagen, aber was du wirklich denkst. Nur stellen Sie sicher, dass Sie es glauben. Howard war ein Freund für jeden, dem er begegnete, für immer großzügig mit seiner Zeit und seinen Ressourcen. Diejenigen von uns in der Investment-Publishing-Welt verdanken eine große Schuld, ob wir es wissen oder nicht, Howard Ruff. Ihr Verlagsunternehmen hat Howardrsquos DNA tief darin versteckt. Möge er in Frieden ruhen. Washington DC, New York, Atlanta und Florida Ich habe selten gefragt, meine Leser, mich mit jemand zu verbinden, aber wenn ich habe, habe ich nie versäumt, diese E-Mail-Adresse oder Telefonnummer zu bekommen. Also mit dieser Hoffnung im Sinn, könnte jemand bitte geben Sie mir E-Mail andor Telefonverbindungen für beide Matt Ridley und Bill Gross Sie können sie an mary2000wave senden. Vielen Dank. Woche nach dem nächsten werde ich meinen Weg nach Washington DC und New York für eine Reihe von Treffen und dann nach Atlanta für ein Galectin Therapeutics Board Treffen. Dann ist Irsquoll zu Hause für die Ferien. Irsquoll ist in Florida für die innere ETFs-Konferenz in Hollywood, Florida, am 22. Januar 2012. Und dann ist Irsquoll bei der Orlando Money Show 8. Februar bei der Omni in Orlando. Die Registrierung ist kostenlos. Itrsquos Zeit, zum der senden Knopf zu schlagen. Nachdem ich so dramatische und emotionale Inhalte geschrieben habe, denke ich, dass Irsquoll den neuesten Harry-Potter-Film ansehen und einfach unterhalten wird. Ich bin immer noch erstaunt, dass ich ein Leben machen kann, was mir Spaß macht, ndash zu schreiben, zu denken und zu reden. Jedes Mal wenn ich mich an diesen Computer setze, um meinen Brief zu schreiben, denke ich wirklich, ldquoDear Gott, donrsquot ließ die Magie dieses week. rdquo stoppen Aber dann ist die reale Magie Sie. Itrsquos wurden 17 Jahre, und ich noch genießen jeden Schritt unserer Reise zusammen. Vielen Dank. Denken Sie daran, ich wirklich lesen Sie Ihre Kommentare und nehmen sie zu Herzen. Also, wenn Sie mir etwas sagen wollen, gehen Sie nach rechts. In der Zwischenzeit haben Sie eine tolle Woche. Es wird interessant sein zu sehen, wie Trump von Showman zum Präsidenten übergeht, von einem Kandidaten, der etwas zu ldquoOh meinen Gott sagen kann. Ich muss Entscheidungen treffen, und das ist die wahre Welt. Vielleicht fragt Irsquom nach dem Triumph der Hoffnung, aber ich Glauben, er kann. Ihr flüsternder memento mori Analytiker, erhalten Sie eine Vogelaugen-Ansicht der Wirtschaft mit John Mauldins Gedanken von der Frontlinie Dieser wild populäre Rundschreiben durch gefeierten ökonomischen Kommentator, John Mauldin, ist ein Muss für informierte Investoren, die über die Mainstream-Medien hinausgehen möchten Hype und finden Sie heraus, über die Trends und Fallen aufpassen. Join hundreds of thousands of fans worldwide, as John uncovers macroeconomic truths in Thoughts from the Frontline . Get it free in your inbox every Monday. Steve Althaus Dec. 7, 2016, 10:44 p. m. Hello, John, I applaud your recognition that it is time to make major changes to the tax code and to reduce spending in order to address our debt. But, I fear the suggestions you make will only make the situation worse, in the long run, not better. You have often said that as a nation we must come to grips with how much we want to spend on health care. In the Thoughts from the Frontline - What Should Trump Do letter you stated The simple fact is, a majority of the voters in this country want Social Security and healthcare and expect healthcare to be provided to those who cant afford it. They want pre-existing conditions to be ignored by insurers. And a whole slew of other things. My largest concern is that those voters you mention and the nation as a whole that needs to have a discussion of how much of these things we want have no idea of what the cost to them is. It is an undeniable fact that human beings, when asked how much of an item that they perceive as valuable to them they would like to have, if they also perceive that there is no cost to them for that item, will always answer, As much as I can get. Reduce the perceived cost of a perceived valuable item to zero and demand becomes unlimited. I agree that the addition of a VAT will be able to generate large tax revenues. BUT, that tax is invisible to nearly all voters. Companies do not pay tax, they only collect it. They get it by increasing prices, reducing dividends, laying people off, or using cheaper suppliers, andor increasing productivity. The point is that people who have earned money pay those corporate taxes, one way or the other. But, the vast majority of voters have no concept of where those costs are coming from, even if the costs are coming out of their own pockets. One of the primary purposes of the withholding scheme for income tax that was instituted in 1913, abolished because of public outcry in 1917, and finally, permanently reinstituted in 1943, is to hide from the tax payer, how much he is actually paying. It is much clearer to him what he is paying if he writes a check for the total he owes. If, by continuing to make it impossible or difficult for the average voter to understand the cost of the benefits you pointed out that they expect, they will only ask for more. And after the changes you propose, the long line of politicians that got us into this mess, will be only too happy to double down on the mess by using the additional source of revenue presented by the VAT, and by being able to continue to abuse the income tax system by raising rates and re-instituting their power base by granting again those exemptions you propose to eliminate. Adding to the problem, for the average voter, there is no perceived debt problem. There have been no observable negative consequences to him for the largeness of the debt, or its rate of increase. To the average voter, it really does seem to be a free lunch. Politicians also perceive it as such. If we were blessed with a responsible Congress and an informed electorate, we would not likely be in the mess we are in. But we dont, and we are in a mess, and I greatly fear that the system you propose will do nothing to correct the irresponsibility or the ignorance, but will give the irresponsible even more tools to spend even more money with no negative consequences to them. This is why I strongly prefer the FairTax approach. You mentioned a couple of areas of concern with the FairTax. One, being that when people are confronted with a 30 total burden of national, state, and local sales tax, they will go to a cash position to avoid it. Second, you mentioned the regressiveness of the FairTax proposal. Just to make sure we are on the same page with respect to definitions, I copied a short summary of the FairTax below. Summary: H. R.25 114th Congress (2015-2016) All Bill Information (Except Text) There is one summary for H. R.25. Bill summaries are authored by CRS. Shown Here: Introduced in House (01062015) FairTax Act of 2015 This bill is a tax reform proposal that imposes a national sales tax on the use or consumption in the United States of taxable property or services in lieu of the current income and corporate income tax, employment and self-employment taxes, and estate and gift taxes. The rate of the sales tax will be 23 in 2017, with adjustments to the rate in subsequent years. There are exemptions from the tax for used and intangible property, for property or services purchased for business, export, or investment purposes, and for state government functions. Under the bill, family members who are lawful U. S. residents receive a monthly sales tax rebate (Family Consumption Allowance) based upon criteria related to family size and poverty guidelines. The states have the responsibility for administering, collecting, and remitting the sales tax to the Treasury. Tax revenues are to be allocated among: (1) the general revenue, (2) the old-age and survivors insurance trust fund, (3) the disability insurance trust fund, (4) the hospital insurance trust fund, and (5) the federal supplementary medical insurance trust fund. No funding is allowed for the operations of the Internal Revenue Service after FY2019. Finally, the bill terminates the national sales tax if the Sixteenth Amendment to the Constitution (authorizing an income tax) is not repealed within seven years after the enactment of this Act. The entire bill is less than 24,000 words, or about 61 pages. It is available at: congress. govbill114th-congresshouse-bill25text In discussing your concerns, I am drawing from two books, The Fair Tax Book and FairTax: The Truth by Boortz and Linder. Boortz and Linder ( BampL) claim that tax avoidance under the FairTax would be less than it is under the current system. Currently they claim that the IRS admits to a 16 tax gap of collecting what they know is owed. But, the IRS claims they have no way of knowing how much they should be collecting from the current underground economy. So, it is not as if the current system is air tight with respect to collecting what is owed. The FairTax system takes two people to cheat. The current system only takes one. And with the FairTax one of the cheaters is a business owner who risks his livelihood to cheat. BampL claim that 0.3 of all companies sell 48.5 of what is sold in the US and 3.6 of all companies (approximately 92,334 companies) make 85.7 of all sales. Their point is that these are large companies who are not likely to risk their business by cheating. They also point out that by looking at companies, instead of looking at individual tax payers, the workload of observation is reduced to about 16 of what it would be if each tax payer needed to be observed. Their conclusion is that the FairTax would suffer less loss from cheating. The regressiveness concern is addressed by the Prebate to all US citizens of the amount of taxes that they would be paying on poverty level expenditures. Of course, the FairTax also includes the elimination of the Social Security tax you mentioned. I think there is real value in people seeing on their receipt every time they spend any money on anything just how much of it went to fund the government. I would prefer that the total funding of government were visible on that receipt. If the amount of the tax causes sticker shock it is accomplishing feedback to voters that perhaps they should rethink the choices they are making and the policies they are supporting. A poorer alternative, assuming the adoption of what you propose, would be to eliminate withholding and print an estimate of the total VAT on each receipt. But, without these feedback mechanisms, the average voter is ignorant of the cost of government, and that ignorance will prevent any meaningful, informed discussion of trade-offs of costs vs services and that ignorance will doom us to never reducing the debt. David Smith 34504 Dec. 7, 2016, 8:14 p. m. Following up on your comments about replacing the FDA, Bloomberg reports that Trumps transition team is considering Jim O8217Neill to head the Food and Drug Administration. In a 2014 speech, Jim O8217Neill said he supported reforming FDA approval rules so that drugs could hit the market after theyve been proven safe, but without any proof that they worked, something he called progressive approval. ONeill is a managing director at Thiels Mithril Capital Management, and served the George W. Bush administration as principal associate deputy secretary at the Department of Health and Human Services. John Mauldin Dec. 2, 2016, 7:10 p. m. Jerry, you are right. There would have to be some way to determine who gets how much or we would just simply say that everybody gets the same upon retirement. very good point. John Ralph Casale Dec. 1, 2016, 7:15 p. m. I8217ve long enjoyed your 8216Thoughts from the Frontline8217 newsletter and have periodically dabbled in some of the other services subscriptions. Thank you for your informative and educational content. I have not had much frequency to drop you a note (once or twice in the past I believe), but did want to comment on the recent letter. I believe you well summarized the challenges and shortfalls of a VAT. I consider a VAT to be just another transactional flow-of-funds tax, not adequately dissimilar from taxing income. Both seek to tap into the velocity of money. I worry that taxes on economic activity create both real and behavioral disincentives directed at the activities we would be better served to encourage. Governments need to be very careful at the margin, and never discourage either 8216earning the next dollar8217, or 8216buying the additional item8217. My opinion is that you are right in presuming this would just create an underground economy. You did not touch on the possibility of a tax on wealth. I understand there are constitutional provisions against asset based taxes, ones somewhat circumvented when the asset is transactional i. e. estate or capital gains taxes. Locally, real estate taxes are the most recognized form of wealth tax. I would enjoy a considered opinion on such options. I see there is a reference (correct) to a 1999 Trump statement that he once considered a wealth tax, though I do not recall this from the recent campaign. cnnALLPOLITICSstories19991109trump. richindex. html An indirect tax on wealth could be as simple as a means test on government benefits like social security and Medicare. I was surprised this election cycle saw very little discussion on either the FICA wage cap or benefit eligibility of such programs. I don8217t want to see the government too heavy in the role of 8216wealth distribution8217, but also believe there should be an anti-aristocracy slant to a democracy one that attempts to favor the capitalistic creation of wealth over the preservation of wealth. Wealth will always lobby in self interest for increased policy that seeks favor or preservation. You also suggested a lowering of the corporate tax. My inclination is to agree with this philosophically, but I worry that it will not spur the growth you expect. I see too many charts like the one below to believe that corporations are currently struggling (in aggregate) or that improving corporate wealth will honestly trickle out to improving economic activity. econdatauswascurcp12.png I do most enjoy economic commentary that is delivered through a behavioral lens, as you often do. It is worth considering what provides the better incentive, a low base tax or a higher base tax with incentives (deductions). The latter makes the tax code more cumbersome, which creates cost (jobs for accountants), but has governmental appeal. As you have past noted, laws can be used to discourage, but the tax code is one of only a few ways a government can attempt to encourage behavior. Moneyed parties will always influence peddle to try and take advantage of that for their own self-interest, but a truly representative government should be able to mitigate such factors for the public good. Rarely do we note that businesses are responsible for most all the taxes, be they income, sales, profits, etc. Would we (as employees) be better served by an additional corporate deduction for income taxes paid on behalf of employees, particularly US employees The creation of a double deduction on US payroll taxes should be no less challenging than the double taxation on dividends that exists today. Thank you for reading, and pardon the multiple asides. Off topic, but I can8217t help but be curious why the government does not do more to encourage non-cash transactions. I8217d love to see you write on the efforts in India right now to limit paper currency. Doesn8217t the inherent 8216traceability8217 of technology like block-chain transactions e. g. bitcoin-like exchanges, make it something governments should encourage and back rather than avoid. It could do much to diminish black market economies, which perhaps is not the issue in the US as other realms, but not absent either. I believe a core tenant of government is that one has to set the institution to a higher standard than will be ever be honestly achieved by the individuals tasked with delivery of that standard. We do that in the US, but perhaps not as well as we once did. I see the over riding role of government as relatively simple step in when 8216tragedy of the commons8217 situations arise and the self interest of the few is detrimental to the populace at large, step aside when self interest is neutral to the populace, and encourage (at least with infrastructure) when self interest benefits the populace. The category is not always immediately obvious, but the standard is clear. A tax code such as we have that favors share buybacks, and thus option holding, over dividends and equity holding strikes me as ridiculous. I wrote on this for The Motley Fool some years back. Patrick Grimes 38293 Nov. 29, 2016, 8:23 a. m. John - thanks for the letter. I8217ve followed you closely for years. You8217ve been very consistent and pragmatic. It seems to me that you are slowly, pushing the alarm button. At 59 years young, I am one of those people who are not sure what to expect over the next ten years for my investments, let8217s just say, I am keeping a lot of powder dry. This comment gave me some pause - 8220And remember, this would be a future in which total global debt would be in the 500 trillion range and global GDP would top 100 trillion. Monetizing 12 trillion a year (we are talking 10 years out) roughly the equivalent of what Japan is doing today Did you know, in ten years, the peak of the baby boom, me and my wife, those born in 1957 and 1958 reach full retirement age Maximum debt with most of the boom retired, UGH mhbplusyahoo. au Nov. 29, 2016, 6:13 a. m. In order to tackle the State and Federal debt, there is one obvious way which, for some reason, is never mentioned - the sale of government assets. If all airports and other state-owned facilities were privatised, the funds generated would play a really significant role in debt reduction - or would fund new infrastructure without the need for future borrowings, The example of Australia, which has privatised many previously State-run enterprises with enormous benefits in both efficiency and funds generation, is well worth studying. William McCarthy Nov. 28, 2016, 8:01 p. m. Great ideas and you spent a great deal of time thinking about solutions. But, John, in jest, you are guilty of rational reality based thinking ( to borrow an admonishment within the Bush Administration to someone who questioned the wisdom of invading Iraq). And, don8217t many societies have VAT8217s and lower corporate tax rates etc. And, yet they still have high deficits and debts. You are fighting human nature or, Bastiat8217s great quote 8220Government (or the State) is the great fiction whereby everyone attempts to live at the expense of everyone else.8221 (I hope I did not torture the quote too badly). I think we will muddle through (to borrow your term), nip and tuck around the edges to buy time (can kicking), 8220reform8221 this and that (Screw someone because we politically can) and pray, pray and pray some more for inflation. No challenges that a good ten years of inflation at 5 would not solve while schlepping CPI inflators on entitlements. And, of course, it will get out of control and we will have to find son of Volcker to fix that problem. Robert Hardcastle Nov. 28, 2016, 2:28 p. m. In all of the budget balancing mania the demographics of Baby Boomers isn8217t fully taken taken into account. The average lifespans of 78 for males and 81 for females is just that, an average. By definition this means that half are deceased before these ages. It is now been actuarialy determined that half of all Baby Boomers will be dead by 2025 or just 9 years from now. Once deceased there will be significantly lesser demand for Medicare, Medicaid, Veterans services, Senior services and Social Security. If your concern is getting to this point, it is understandable, but beyond 2025 demand on the budget will be significantly lessened. Charles DuBois Nov. 28, 2016, 2:19 p. m. John Thanks for all of the hard work. Writing frequently is not easy One important note on 8220deficits and debt8221. I believe you are well-intentioned but misinformed on this topic. For starters, absent self-imposition, a nation with its own free floating currency, no foreign debt and a functioning central bank will not have a 8220financial crisis8221 related to national public debt. For example, Japan has not had, and never will have, such a crisis - absent self-imposition. Second, public sector deficits are private sector surpluses by accounting law. Indeed, public deficits translate almost dollar for dollar into business profits (See Kalecki profit equation in economics). Massive deficits were the reason why profits were strong in 2010-11 despite a still weak economy. Point being 8220be careful what you wish for8221. Future entitlements do present a potential problem but the problem is not 8220financial crisis8221. But until we understand how the monetary system works in the first place, discussions will not be productive. Hope useful. Kindly, Charles DuBois Keynes D. Von Elsner Nov. 28, 2016, 11:02 a. m. I like your thinking and agree with you for the most part. I have 2 concerns. 1. In the Internet Age how do you enforce a VAT Won8217t the wealthy find a way skirt it, so the middle class will bear the burden 2. I think a progressive VAT may be desirable. Why should there be the same level of tax on an inexpensive car as on a BMW or Porsche or Mercedes or on a meal at a 5 star restaurant vs a meal at Mickey D copy 2017 Mauldin Economics. Alle Rechte vorbehalten. Thoughts from the Frontline is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting MauldinEconomics . Any full reproduction of Thoughts from the Frontline is prohibited without express written permission. If you would like to quote brief portions only, please reference MauldinEconomics. keep all links within the portion being used fully active and intact, and include a link to mauldineconomicsimportant-disclosures. You can contact affiliatesmauldineconomics for more information about our content use policy. To subscribe to John Mauldins e-letter, please click here: mauldineconomicssubscribe Thoughts From the Frontline and MauldinEconomics is not an offering for any investment. It represents only the opinions of John Mauldin and those that he interviews. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Mauldins other firms. John Mauldin is the Chairman of Mauldin Economics, LLC. He also is the President and registered representative of Mauldin Solutions, LLC, which is an investment advisory firm registered with multiple states, President and registered representative of Millennium Wave Securities, LLC, (MWS) member FINRA and SIPC. through which securities may be offered. MWS is also a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB) and NFA Member. 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Follow Mauldin on Recent Articles TFTF ArchivesThe Totality of the Facts and Circumstances Govern Reasonable Prospect of Recovery and Reasonable Certainty Tests. 28 Shifting the Burden of Proof on the Issue of Timing of the Theft Loss Deduction to the Service Under IRC 7491. 34 A Portion of a Loss Determined, With Reasonable Certainty, to be Non-Recoverable Is Deductible Notwithstanding the Existence of Pending Claims or Litigation as to the Remaining Loss. 35 The Defrauded Taxpayer or Theft Victim is Not Required to File Litigation Against the Perpetrator as a Prerequisite to Taking a Theft Loss. 37 The classic Ponzi scheme may soon be renamed the Madoff scheme, simply by virtue of the massive amounts of monies, an estimated 50 billion, invested with Madoff. It is now known that Bernie Madoff, like his famous predecessor, Charles Ponzi, used monies given to him by new investors to pay prior investors promised returns on their earlier investments. Madoff, like Ponzi, and also allegedly like Arthur Nadel and others, robbed Peter to pay Paul. Their massive scams wrongfully deprived thousands of investors of billions of dollars. I. THE SHORTCOMINGS OF CAPITAL LOSS TREATMENT For individual investors, the Internal Revenue Code (IRC) generally treats investment losses as capital losses, deductible only to the extent of 3000 in excess of the capital gain experienced by the taxpayer for the year in question.3 Even though the excess capital loss may be carried forward to later tax years, the deductibility of these losses is still subject to the same limitations. 4 In addition, because a capital gain is only experienced upon the sale or exchange of property (see IRC 1221), capital gains are less likely to be recurring income. Thus, there is the potential that a significant loss suffered by a defrauded investor may never be utilized in the investors lifetime. Theft losses, on the other hand, are not limited in the same manner that capital losses are limited. More importantly, a theft loss can be used by individuals as a deduction against ordinary income such as wages or interest income to the extent that the theft loss is not covered by insurance or otherwise.5 In addition, in Revenue Ruling 2009-9, 2009-14 I. R.B. 735, issued March 17, 2009, the Internal Revenue Service (Service) announced that theft losses resulting from investment transactions are deductible under IRC 165(c)(2) rather than (c)(3). As such, they are not subject to the limitations of IRC 165(h), limiting certain losses to the excess of 100 and 10 of adjusted gross income. Nor, announced the Service, are theft losses resulting from investments subject to the limitations on itemized deductions found in IRC 67 and 68. Ordinary income, of course, is more likely to be recurring, substantial, and taxed at higher marginal rates. Thus, a theft loss deduction that can be deducted against ordinary income can give the victim of a fraudulent investment scheme greater, more immediate relief than can a deduction for a capital loss. But, is it proper under federal income tax law, to treat an investment loss as a theft loss The answer for victims of Ponzi schemes is often yes. For victims of other kinds of investment loss caused by securities fraud or other wrongdoing, theft loss treatment might be available under certain circumstances. II. ESTABLISHING A THEFT UNDER FEDERAL INCOME TAX LAWS The court in Edwards v. Bromberg . 232 F. 2d 107 (5 th Cir. 1956) provided what is the most often-cited definition of theft for purposes of IRC 165, as follows: The word theft is not. a technical word of art with a narrowly defined meaning but is. a word of general and broad connotation, intended to cover. any criminal appropriation of anothers property to the use of the taker, particularly including theft by swindling, false pretenses, and any other form of guile . The exact nature of the crime. is of little importance so long as it amounts to theft.6 The broad approach of the Bromberg court to the definition of theft is reflected in the Treasury Regulations promulgated under IRC 165, deeming theft to include, but not be limited to, larceny, embezzlement, and robbery.7 Whether a theft has occurred depends upon the law of the jurisdiction where the loss was sustained.8 Either state or federal law can provide the requisite basis for establishing a theft loss to the extent applicable to the conduct at issue in the jurisdiction where the theft occurred. And the record before us establishes that Livingstones fraud in obtaining money from petitioners brings this case within the applicable Florida criminal statute in respect of obtaining money by false representations or pretense, Fla. Stat. sec. 811.021(s), as well as within the provisions of the United States Code which makes it a crime to use the mails to defraud, 18 U. S.C. sec. 1341. The crime under either Florida or Federal law was a theft within section 165 of the Internal Revenue Code .9 Furthermore, it is unnecessary that the perpetrator of the theft be convicted or even charged with theft.10 Examples of Conduct Giving Rise to Theft for Purposes of IRC 165. The Bromberg Courts inclusion of any other form of guile within the ambit of theft for purposes of 165 is certainly broad enough to include the Ponzis, the Madoffs, and the Nadels. The courts emphasis, in particular, on swindling, false pretenses, and any other form of guile potentially includes securities fraud within its scope. The Service acknowledged this possibility in Chief Counsel Advice 200811016.11 In CCA 200811016, the investors invested in Company X, a mortgage lending company. Company X was later acquired by Company Y, but Company X remained in existence and continued soliciting funds from investors. After some time, Company Y was staying afloat only through loans from Company X, and Company X was solvent only by treating its loans to Company Y as assets on its financial statements. Company Xs officers and directors misrepresented the financial condition of Company X in its financial statements and prospectuses, and the officers and directors were later criminally charged with securities fraud. In addition, at least one Company X Officer was indicted for obtaining property by false pretenses under the applicable state law. Chief Counsels Office opined that these facts establish that a theft occurred, notwithstanding the structure of the transactions. A loss that is the direct result of fraud or theft is deductible under 165, even though the theft is accomplished through a purported borrowing or offer to sell a security.12 Counsels Office relied, in part, on Revenue Ruling 71-381, as follows.13 In Rev. Rul. 71-381, the taxpayer was induced to lend money to a corporation by fraudulent financial statements provided by the corporations president . As a result, the president of the corporation was convicted by a court for violating the state securities law by issuing false and misleading financial documents. Since the money was obtained by false representations constituting a misdemeanor under state law, the taxpayer was entitled to a theft loss deduction. Citing the requirements reflected in Revenue Ruling 71-381 of (i) reliance on the part of the investor and (ii) specific intent to defraud or misappropriate monies, Counsels Office withheld a finding of theft as to any particular investor in X Company without additional facts.14 In Revenue Ruling 77-18, 1977-1 C. B. 46, the Service similarly concluded that a theft loss occurred under circumstances in which a taxpayer received shares of stock in a company (X Company) in exchange for his shares of stock in another company (G Company) pursuant to a merger agreement between the two companies. Soon thereafter, X Company filed for bankruptcy. The bankruptcy trustee reported that the primary goal of the fraud participants was to inflate. the market price of Xs stock. by reporting nonexistent income and assets on the corporate books and failing to record liabilities.15 The law of the state in which the taxpayer in Revenue Ruling 77-18 resided included within its definition of theft, the obtaining of property by false pretenses. Thus, the Service concluded as follows: In the instant case, false representations about the financial condition of X were made to Gs stockholders with the intent to induce them to vote for the merger. The responsible X officials knew of the falsity of the financial statements they issued. The stockholders of G relied upon the false financial statements at the time they decided to exchange their stock for X stock which was worth substantially less than was represented. The exchange was a theft by false pretenses under the laws of. the State and therefore, meets the definition of theft for Federal Income tax purposes . 16 A number of states include the obtaining of property by false pretenses within their definition of theft.17 Thus, circumstances that give rise (or would give rise) to a charge of theft by false pretenses are favorable to a characterization of theft under IRC 165. Circumstances resulting in criminal charges for the sale of unregistered securities can also give rise to a theft characterization under IRC 165. In Vietzke v. Commissioner . 37 T. C. 504 (1961), the Tax Court upheld the taxpayers theft loss treatment for funds invested in what was purported to be an insurance company directly through the company principals. Contrary to the representations in the prospectus, the stock and the company were not properly registered. The company principals were criminally indicted on charges of violating Indiana Securities Law by selling unregistered securities through an unregistered agent. The Tax Court rejected the Services claim that the company principals lacked criminal intent, finding as follows: To the contrary, we view it as a blundering but intentional attempt on the part of. the principals to increase their personal resources without benefit of law. We agree with. the taxpayers contention that he was swindled. 18 Fortunately for the taxpayer in this case, the Tax Court found that the perpetrators were not fumbling fools, but felonious villains. Interestingly, the Tax Court in Vietzke did not rely on the elements of the crime with which the principals were charged (i. e. the sale of unregistered securities) in concluding that the taxpayer had suffered a theft loss. Nor did the Tax Court rely on the statutory crime of theft under Indiana law, having found none denoted theft per se . Instead, the Tax Court pointed to the broad definition of theft established by the Bromberg Court.19 The court was simply satisfied that, based on the facts, the principals acted with a criminal intent to deprive the taxpayerinvestor of his funds. The Service agreed that churning of, and unauthorized transactions in, the taxpayers brokerage account by his broker constituted theft under the applicable state law for purposes of IRC 165 in Jeppsen v. Commissioner . 70 T. C.M. (CCH) 199 (1995).20 There, the taxpayer, a carpet installer, invested monies he was saving with a nationally-recognized brokerage firm. The broker (i) falsified the taxpayers new account documents, labeling him an experienced investor, (ii) engaged in unauthorized transactions, including purchasing stocks on margin, and (iii) churned the taxpayers account. Although finding the conduct constituted theft, the court nonetheless denied the theft loss deduction for the year in which the taxpayer claimed it as, in that year, the taxpayer was exploring the possibility of filing a lawsuit against the brokerage firms involved. Thus, the taxpayers claim of a theft loss was premature, as he retained, and was pursuing, a reasonable prospect of recovering his loss.21 The Use of Judicial Estoppel to Support a Theft Characterization. The test for theft characterization under IRC 165, as previously explained, is not dependent upon a criminal indictment or conviction. Rather, the test depends upon whether the conduct evidences a criminal appropriation of anothers property by theft, false pretenses, and any other form of guile. without regard to the exact nature of the crime. 22 Thus, there have been cases in which the Service and courts have allowed theft loss treatment even in the absence of a criminal indictment or conviction of the perpetrators.23 Nonetheless, a criminal charge or conviction is helpful in supporting the specific intent required of the perpetrator.24 When there is a criminal conviction of, or a guilty plea from, the perpetrator of the fraud, the defrauded investor should be able to assert that the Service is judicially estopped from contesting the characterization of the investment loss as a theft loss if the federal government has successfully prosecuted the perpetrator for the conduct at issue. Judicial estoppel prevents a party from asserting a position in a legal proceeding that is contrary to a position previously taken in the same or earlier proceeding.25 The doctrine of judicial estoppel is similar to the doctrines of res judicata and collateral estoppel, which prevent parties from relitigating issues decided in prior proceedings by a court of competent jurisdiction.26 However, judicial estoppel focuses only on the relationship between a party and the courts and seeks to protect the integrity of the judicial process by preventing a party from successfully asserting one position before a court and then asserting a contradictory position before the same or another court merely because it is now in that partys favor to do so.27 In Vincentini v. Commissioner . 96 T. C.M. (CCH) 400 (2008), the Tax Court applied judicial estoppel to prevent the Service from denying that a theft occurred with respect to a taxpayers investment in a convoluted factoring program involving U. S. and Costa Rican participants. The federal government had prosecuted successfully the principals of the factoring program on various federal charges, including money laundering, mail and wire fraud, and aiding and assisting the filing of false income tax returns. Rejecting the Services contention that the taxpayer was not a victim of theft, the Tax Court held as follows: Because respondents position is inconsistent with the position asserted by the Government in the. criminal case, we conclude that the application of the doctrine of judicial estoppel is appropriate. Applying the doctrine, we hold that respondent is precluded from arguing that petitioner was not a victim of theft. 28 In short, because the federal governments position, in the criminal case, was that the taxpayer was one of the victims of the fraud for which the government was prosecuting the principals of the factoring program, the federal government, through the Service, was rightfully estopped from taking a contrary position in Tax Court.29 The Use of the Services Safe Harbor for Theft Loss Treatment for Losses Resulting From Ponzi Schemes. On March 17, 2009, the Service issued Revenue Procedure 2009-20,30 creating an optional safe harbor for treatment of certain investment losses as theft losses (think Madoff). Under this Procedure, if the taxpayer elects the safe harbor, a theft loss is deemed to occur. The deemed theft loss, called a qualified loss, occurs when a taxpayer has invested in a specified fraudulent arrangement and one or more of the perpetrators has been criminally charged with one or more crimes that would meet the definition of theft for purposes of IRC 165, provided certain other conditions are satisfied. This safe-harbor treatment is available to losses for which the discovery year, as specifically defined in the Procedure, is 2008 or later.31 1. Establishing the Loss as a Qualified Loss. First, to utilize the safe harbor, the taxpayer must have invested in a specified fraudulent arrangement. A specified fraudulent arrangement is, generally speaking, a Ponzi scheme.32 Second, to utilize the safe harbor, one or more of the perpetrators must have been charged, criminally, by indictment, information, or complaint (not withdrawn or dismissed) under state or federal law. The criminal charges, as previously mentioned, must constitute theft under the law of the jurisdiction in which the theft occurred, consistent with the existing case law governing this issue.33 It is worth noting that there are a number of reasons criminal charges may not be filed against the perpetrator, such as death of the perpetrator, a disinclination to prosecute while SEC civil investigations are ongoing, or the small size of the fraudulent scheme in comparison to other schemes given limited prosecutorial resources. The conduct of the perpetrator may nonetheless constitute theft under the law of the applicable jurisdiction, and the victims may still qualify for theft loss treatment for their investment losses, just not under the safe harbor of Revenue Procedure 2009-20. The third requirement of a qualified loss under the safe harbor applies only if the criminal charges are by complaint versus indictment or information. If the charges are by complaint (versus indictment or information), then one of the following three factors must also be present: (i) the complaint must allege an admission by the lead figure, or, (ii)a receiver or trustee must have been appointed for the specified fraudulent arrangement or, (iii) the assets of the specified fraudulent arrangement must have been frozen.34 The reason for this added requirement for criminal charges by complaint versus indictment or information is the lesser standard of probable cause generally applicable to criminal charges by complaint. In addition, the taxpayer must have clean hands. If the taxpayer had actual knowledge of the fraudulent nature of the arrangement prior to its public outing, the taxpayer cannot utilize the safe harbor. Nor is the safe harbor available to investors in tax shelters (as defined in IRC 6662(d)(2)(C)(ii)) or to those who invested in the fraudulent arrangement through a fund or other entity.35 This latter restriction retains the Services historic hostility to granting theft loss treatment to defrauded investors who were not in privity with the perpetrator of the fraud. 2. Year of Discovery of the Loss and Timing of the Deduction. Under IRC 165(e), all theft losses are treated as sustained during the taxable year in which the taxpayer discovers the loss.36 Discovery of the theft, whether from a fraud, embezzlement, or other kind of misappropriation of the taxpayers property, has not, however, ended the query. Taxpayers also have had to grapple with the general limitation applicable to all losses subject to IRC 165(a). That general limitation has required consideration of whether there exists a reasonable prospect of recovery from insurance or otherwise.37 If a reasonable prospect of recovery exists as to part of a theft loss, then a deduction as to that part of the loss is unavailable until the year in which it can be determined, with reasonable certainty, that no recovery or reimbursement will be received.38 These two issues 8211 8211 whether a reasonable prospect of recovery exists and whether it can be ascertained with reasonable certainty that no recovery or reimbursement will be received have generated much litigation, because they have are based upon the facts and circumstances of each case. For victims of Ponzi schemes who choose the safe harbor provisions of Revenue Procedure 2009-20, the uncertainty concerning the timing of the deduction is eliminated. Under the Procedure, the year of discovery of the loss of a qualified investment, is also the year that the amount to be deducted can be deducted. The discovery year is the year in which occurs the previously-described criminal indictment, information, or complaint. 39 The amount deductible in the discovery year is determined by simply applying one of two fixed percentages to the qualified investment. Subject to certain exclusions, qualified investment generally means all amounts (cash or basis of property) invested in the fraudulent arrangement, plus income from the arrangement previously included in income for federal tax purposes over amounts of cash or other property withdrawn from the arrangement, whether designated principal or income.40 If recovery is not pursued against potential third parties,41 ninety-five percent (95) of the qualified investment is considered in the year of discovery. If recovery is being, or intended to be, pursued from potential third parties,42 then seventy-five percent (75) of the qualified investment is considered in the year of discovery. The product of whichever of the foregoing formulas applies is then reduced by the following: (i) any actual recovery, (ii) any actual or potential claim for reimbursement under the qualified investors insurance policy, (iii) any actual or potential claim for reimbursement under contractual arrangements (other than insurance), and (iv) any actual or potential insurance recovery from SIPC.43 The resulting amount is then available as a deduction in the year of discovery.44 If a taxpayer electing safe-harbor treatment later recovers amounts in excess of the amount of qualified investment deducted under the safe harbor, that excess amount is includible in income under the tax benefit rule. Likewise, an additional deduction may be available in a later year provided that the additional deduction has been determined, with reasonable certainty, to be non-recoverable.45 Unfortunately, as previously mentioned and as discussed further below, the application of the determined with reasonable certainty test is fact-intensive and troublesome. Fortunately, under the safe harbor, the taxpayer escapes this troublesome query for much of the theft loss. 3. Special Filing Requirements. A taxpayer qualifying for, and electing, the safe-harbor treatment of Revenue Procedure 2009-20 must complete a statement in the form of the statement attached as Appendix A to the Revenue Procedure. The statement is filed with the taxpayers federal income tax return for the discovery year, along with IRS Form 4684 (Casualties and Thefts), which is to be completed in accordance with Section 6.01 of the Revenue Procedure. Lastly, taxpayers who elect not to apply the safe harbor treatment of Revenue Procedure 2009-20 are subject to all of the requirements for establishing a theft loss under existing law.46 In summary, investment fraud has dire consequences for those defrauded. It can mean the loss of a lifetime of savings, the burden of unpaid bills, and the prospect of working well beyond an age of physical capability. Whether it occurs through the unauthorized churning of an investors account, the presentation of fraudulent financial statements, or the stealing from Peter to pay Paul found in the classic Ponzi scheme, it is right for the Service to provide investors robbed in this fashion the same relief provided other victims of theft. Unfortunately, many more situations fall outside of the safe harbor of Revenue Procedure 2009-20 than fall within it. It is incumbent upon the taxpayer taking a theft loss resulting from an investment arrangement, whether within or without the safe harbor, to be sure that the theft loss deduction is well supported. III. THE PRIVITY REQUIREMENT AND THE CORRESPONDING DENIAL OF THEFT LOSS TREATMENT FOR OPEN-MARKET TRANSACTIONS. The court in Edwards v. Bromberg . 232 F. 2d 107, articulated the most frequently cited definition of theft for purposes of 165. The Bromberg courts broad definition of theft, intended to cover and covering any criminal appropriation of anothers property is still cited.47 Even the Service continues to cite the broad Bromberg definition of theft.48 Yet, in application, there are seemingly illogical inconsistencies that suggest a hostility to providing a theft loss deduction to investors who have been victimized by fraud committed by the principals of companies in which they invested, but with whom they did not deal directly. For example, in DeFusco v. Commissioner . 38 T. C.M. 920 (CCH 1979), the Tax Court held (and the IRS agreed) that the taxpayer suffered a theft loss with respect to stock acquired through an employee stock option plan offered by his employer, Equity Funding, a publicly traded company.49 Following the bankruptcy of Equity Funding, its officers were criminally charged with filing false statements and securities fraud under federal law for reporting non-existent assets and income. Even though the taxpayer resided in California, and the company officers were criminally charged under federal law and not under the Penal Code of California, the Tax Court found that the facts and circumstances supported theft loss treatment as to the stock acquired through the Equity Fundings employee stock option plan.50 The taxpayer, however, purchased only a small percentage of his Equity Funding stock through the Companys employee stock option plan. The bulk of his Equity Funding stock was purchased on the open market. As to this stock, the Tax Court upheld the Services denial of theft loss treatment, reasoning that the states criminal theft statute required that there be an appropriation by the defrauder of the victims property.51 This misappropriation by the defrauder of the victims property could only occur, concluded the Tax Court, if there was privity between the taxpayer and the defrauder as to the stock purchased. Finding no privity between the Equity Funding officers and the taxpayer with respect to the stock the taxpayer purchased on the open market, the Tax Court refused to find a theft, notwithstanding that the taxpayer relied on the same fraudulent representations of the Equity Funding officers with respect to both the stock acquired through the Companys employee stock option plan and the stock acquired on the open market. The imposition of a privity requirement originates from the Services and the courts interpretation of the specific intent prerequisite for criminal theft, appropriation of anothers property by false pretenses, and other conduct amounting to theft under the law of many states. If there is no privity between the defrauded investor and the defrauder, reason the courts, then the defrauder could not have specifically intended to defraud the investor.52 This constrained approach is illogical when the investor can show reliance on fraudulent representations and omissions of the issuer of the securities in purchasing the securities, even though the securities are purchased on the open market. In fact, in some cases, it is clear that the court denied theft characterization only after analyzing whether the evidences supported the taxpayers reliance on the criminal conduct of the defrauders in purchasing the securities. In Paine v. Commissioner . 63 T. C. 736 (1975), the Tax Court denied theft loss treatment for shares in Westec Corp. purchased by the taxpayer on the open market. Subsequent to the taxpayers purchase, the principal officers and employees of Westec were indicted for violations of federal securities and mail fraud statutes for falsely representing acquisitions, transactions, and revenue growth with respect to the company. Bankruptcy followed. The taxpayer argued that Westecs fraud caused him to purchase the Westec stock at artificially-inflated prices, thereby constituting a theft to that extent.53 The Paine Court noted the lack of privity between the taxpayer and the Westec officers and employees, as well as the corresponding lack of specific intent on the part of the perpetrators to defraud Mr. Paine in particular. More troubling for the taxpayer, however, was the taxpayers inability to present evidence establishing that his Westec purchases were induced by the misrepresentations of the Westec officers, an element of theft by false pretenses under the applicable Texas law. Because the record contained no evidence of when the stock was purchased, it was impossible to determine whether the misrepresentations were made before the taxpayer purchased the stock. 54 The absence of any evidence establishing what portion of the loss was attributable to the fraud also led to the denial of theft loss treatment. Even if the decline in value were known, it would be impossible on the record of this case to estimate the specific portion of the decline attributable to the illegal activities of the corporate officers. as opposed to the decline that might be attributable to business risks.55 The foregoing analysis raises the question whether the Tax Court in Paine would have found privity had the taxpayer been able to prove the amount of loss due to the fraud and that he relied upon the fraudulent representations prior to purchasing his Westec stock. Criticism of the Privity Requirement. The Tax Court in DeFusco recognized that the taxpayer suffered a financial disaster. The Equity Funding losses nearly wiped out the taxpayers entire life savings.56 The Court was willing to consider disaster treatment, i. e. treatment as a theft under IRC 165(c), only for those losses resulting from the stock acquired through the employee stock option program. Yet, the same fraudulent representations were made as to both the stock option stock and the open market stock. The same losses were incurred for both the stock option stock and the open market stock. The only difference was in the form taken by the taxpayers purchase of the Equity Funding stock. The result in DeFusco is at odds with the directive found in the Treasury Regulations promulgated under IRC 165 which provides that substance and not mere form shall govern in determining a deductible loss.57 While a substance over form doctrine as to the tax treatment of transactions has been used against taxpayers by the Service and recognized by the courts since the Supreme Courts decision in Gregory v. Helvering . 293 U. S. 465 (1935), taxpayers have not been as fortunate in their attempted use of this doctrine. Instead, taxpayers, once having chosen the form of their transaction, are generally stuck with the tax consequences of the chosen form.58 Nonetheless, there are instances in which the taxpayer has prevailed by using a substance-over-form argument. For example, in Estate of Durkin v. Commissioner . 99 T. C. 561, 575 (1992), the Tax Court stated that resort to substance is not a right reserved for the Commissioners exclusive benefit, to use or not use depending on the amount of tax to be realized.59 Courts have recognized taxpayers right to use substance over form in the absence of dishonesty, inconsistency in tax treatment, and unjust enrichment.60 In the context of theft losses, there is no taxpayer dishonesty, no unjust enrichment (theft losses are not deductible if they are reimbursed through insurance or otherwise), and little opportunity for inconsistent tax treatment. There are only individuals who suffer some calamity as the result of someone elses criminal conduct. The Tax Court in Vietzke v. Commissioner . 37 T. C. 504 (1961), looked at the substance of what occurred and found a theft of monies invested by the taxpayer in a company established by perpetrators of a fraud. The perpetrators, also the principals of the company, proceeded to use the companys funds for their own personal use. Rejecting the Services contention that the theft was actually from the company and not the taxpayer, the Tax Court found as follows: While the parties disagree as to whether. the company ever came into existence as a corporate entity, whether it did or not is unimportant in this case. Respondents regulations under section 165 provide, in part: Substance and not mere form shall govern in determining a deductible loss. Sek. 1.165-1(b), Income Tax Regs. The shell of the corporation cannot cast a shadow so deep that the true purposes of. the perpetrators are hidden from the light of judicial scrutiny. The corporate entity was the device. the perpetrators used to route the subscribers money into their pockets .61 The Services position, in Vietzke was, in effect, a privity argument. The Service argued that the theft did not occur directly from the taxpayer but, instead, through the corporation. The Tax Court rightfully declined to elevate the form of the transactions above what occurred in substance, i. e. the monies invested in the company by the taxpayers were wrongfully used to enrich the principals of the company. The Tax Court, in Vietzke . recognized that a company can be wrongfully used to enrich its principals and that such use constitutes a theft from investors. Despite this recognition, neither the Service nor the Tax Court has applied this principle to investments purchased on the open market, even when the companies principals or executives have intentionally misrepresented the companies financial conditions for the purpose of maintaining an inflated stock value and enriching themselves. The reasoning for precluding a theft characterization in all cases in which the investor purchases the security on the open market is weak. For example, the facts in the WorldCom debacle are similar to those in Vietzke . which included the use of a company by the companys principals to enrich themselves at the cost of the companys investors. In the case of WorldCom, numerous investigative bodies concluded that WorldComs CEO, Bernie Ebbers, its Chief Financial Officer, Scott Sullivan, and certain other of its executives and officers engaged in fraudulent omissions and misrepresentations of the WorldComs financial condition in order to enrich themselves by keeping the value of the stock artificially high. The Special Investigative Committee of the Board of Directors of WorldCom, newly appointed following its bankruptcy filing, drew the following conclusions. From 1999 until 2002, WorldCom suffered one of the largest public company accounting frauds in history. As enormous as the fraud was, it was accomplished in a relatively mundane way more than 9 billion in false or unsupported accounting entries were made in WorldComs financial systems in order to achieve desired reported financial results . Most of WorldComs people did not know it was occurring. Rather, the fraud occurred as a result of knowing misconduct directed by a few senior executives. and implemented by personnel in its financial and accounting departments in several locations. The fraud was the consequence of the way WorldComs Chief Executive Officer, Bernard J. Ebbers, ran the Company. Ebbers presented a substantially false picture to the market, to the Board of Directors, and to most of the Companys own employees. At the time he was projecting, and then reporting, continued vigorous growth, he was receiving internal information that was increasingly inconsistent with those projections and reports. Ebbers was aware, at a minimum, that WorldCom was meeting revenue expectations through financial gimmickry. Yet, he. failed to disclose the existence of these devices or their magnitude. The fraud was implemented by and under the direction of WorldComs Chief Financial Officer, Scott Sullivan. As business operations fell further and further short of financial targets announced by Ebbers, Sullivan directed the making of accounting entries that had no basis. in order to create the false appearance that WorldCom had achieved those targets.62 That Committee also found as follows: Policy was disregarded in connection with a transaction in which Ebbers agreed to sell three million shares of WorldCom stock on September 28, 2000. The sale occurred less than 30 days before an earnings announcement, in violation of a policy Ebbers himself had circulated just a few months earlier. Moreover, there is compelling evidence that this sale took place while Ebbers was in possession of significant nonpublic information about a downturn in revenue growth and about proposed actions that could have a negative impact on WorldComs stock price .63 In sum, the evidence in WorldCom supported findings that Ebbers, Sullivan, and certain other WorldCom officers knowingly, intentionally, and criminally falsely represented WorldComs financial condition to keep the value of the stock artificially high, crimes for which the foregoing individuals received prison sentences. They criminally enriched themselves, through use of WorldCom, at the expense of public investors yet, because these public investors purchased their WorldCom stock on the open market, in the Services view, these public investors would not be the victims of a theft entitled to a theft loss deduction under IRC 165. The Services position on the use of a theft characterization for open market transactions is unambiguously articulated in IRS Notice 2004-27, 2004-16 IRB (March 25, 2004). The holding of that Notice reads as follows: IRS wont allow Code Sec. 165 loss deduction equal to decline in market value of stock that may have been caused by fraudulent accounting practices or misconduct of corp. officers . Only deduction allowed under Code Sec. 165(a) is for completely worthless stock decline in value of stock isnt allowable until year in which loss is sustained through sale or exchange of stock. Code Sec. 165(f) states that losses from sales and exchanges of capital assets are capital losses and thus allowed only as permitted in Code Sec. 1211 and Code Sec. 1212.64 In short, if a companys principals or executives, through fraudulent or other wrongful conduct, may have caused a decrease in the value of stock purchased on the open market, the purchaser cannot characterize the decrease in value as a theft under Section 165. In support of its position in IRS Notice 2004-27, the Service cited Treasury Regulation 1.165-4(a) which provides, in part, as follows: No deduction shall be allowed under section 165(a) solely on account of a decline in the value of stock owned by the taxpayer when the decline is due to a fluctuation in the market price of the stock or to other similar cause . (Emphasis added.) That regulation, however, expressly addresses only those situations where the decline in value is caused by fluctuations in market price. The regulation does not address those situations where the decline in market price is caused by intentional, criminal malfeasance of a companys principals that would amount to a theft under the law of the applicable jurisdiction. To get to its seemingly blanket prohibition on theft loss characterization for investments purchased on the open market, the Service, in Notice 2004-27, simply concludes that the courts have consistently disallowed theft loss deductions relating to a decline in the value of the stock that was attributable to corporate officers misrepresenting the financial condition of the corporation, even when the officers were indicted for securities fraud or other criminal violations.65 Yet, even the Paine v. Commissioner 66 case cited by the Service in Notice 2004-27, a case that involved criminal misrepresentations of the financial condition of a publicly-traded company by its principals, fails to support the Services conclusion. Initially, the Paine Court pointed to the difficulty the taxpayer had in satisfying the specific intent requirement of the applicable state laws concept of theft, requiring that the perpetrator have the specific intent to appropriate the victims property. Presumably, if the taxpayer could have proven that the perpetrators specifically intended to enrich themselves at the expense of the investors in their publicly-traded company, the taxpayer would have been able to satisfy this element. Thus, it was not the existence of the transaction on the open market, per se . which precluded a theft characterization, but the inability to prove that the taxpayer was among the perpetrators intended victims.67 Also troubling to the Paine Court was the taxpayers inability to prove that he relied upon the fraudulent misrepresentations when he acquired his stock on the open market and what portion of the decline in value of the stock was due to the fraudulent representations. It is well settled that when a theft is accomplished through false representations, the false representations must have induced the injured party to part with his property. Petitioner has not only failed to produce evidence that he relied on the misrepresentations, but has also failed to show that his loss was related to those misrepresentations. To establish a causal connection between the fraudulent representations and petitioners purchase, the representations must have been made prior to the purchase. Since the record contains no evidence indicating when the stock was purchased, it is impossible to determine whether the representations were made before or after petitioners purchase. Finally, the deduction must also be denied because the petitioner has failed to produce any evidence regarding the amount of the loss. Even if the decline in value were known, it would be impossible on the record of this case to estimate the specific portion of the decline attributable to the illegal activities of the corporate officers petitioner describes as theft, as opposed to the decline that might be attributable to business risks, market decline, poor or derelict management . 68 What is missing from both the holding and the analysis of the Tax Court in Paine is any hint of a per se prohibition on characterizing the loss of money invested by purchasing stock on the open market as a theft regardless of the circumstances. Similarly, in MTS International, Inc. v. Commissioner . 169 F. 3d 1018 (6 th Cir. 1999), the other significant case cited by the Service as support for its position, there is neither a holding nor an analysis concluding with a per se ban on theft characterizations for stock purchased on the open market. Instead, as in Paine . the court pointed to the lack of evidence establishing the taxpayers reliance on the fraudulent misrepresentations in denying a theft characterization, stating as follows: Given. the taxpayers concession that he did not believe that the information received. was truthful, it would be illogical to find that. the taxpayer relied upon that information in making a significant investment. Such reliance is a necessary element of theft by deception under. the state law.69 The courts denial of theft loss treatment, then, was not based on the existence of a purchase on the open market rather, the courts denial was based on the taxpayers inability to satisfy the reliance element of the law of the jurisdictions concept of theft. Lastly, in Jensen v. Commissioner . 66 T. C.M. (CCH) 543, 1993 WL 325102 (1993), the Tax Court articulated what is perhaps the strongest repudiation of a per se privity requirement. In Jensen . the Tax Court rejected the Services position that the taxpayers were not entitled to a theft loss deduction for monies invested in a Ponzi scheme through a friend who acted as a broker with respect to the taxpayers and other investors in the scheme, stating as follows: We find, as a factual matter, that petitioners were investors in. the Ponzi scheme. There is no requirement that an investor have direct contact with the entity in which he is investing. It is not uncommon for investors to deal only with their brokers and never have direct contact with their investments. In such cases, the brokers act as conduits for the investors funds. The record in the case before us indicates that. the brokers role in the. Ponzi scheme was that of a broker he was clearly acting as a conduit for his clients funds. All of the parties involved, including. the perpetrators of the Ponzi scheme, understood that the funds that. the broker provided to. the Ponzi scheme were not merely. the brokers funds but were also his clients funds.70 The Service had argued that the taxpayers were not entitled to a theft loss deduction, contending that they only had direct contact with the broker and thus invested with the broker and not the Ponzi scheme. The Tax Court unambiguously rejected a requirement of direct contact.71 As the foregoing cases and cited Treasury Regulation illustrate, open market purchases of stock in companies whose principals criminally misrepresent the companies financial condition or otherwise criminally use the companies to enrich themselves, create problems of proof with respect to intent, reliance, and causation. They, however, do not logically support a per se ban on theft loss treatment for investments purchased on the open market based on the lack of privity between the investors and the investment or fraud perpetrators. In the context of open market transactions, issues of intent, reliance, and causation should not bar a theft loss deduction provided the taxpayer has established some causal connection between the securities fraud and the loss in value of his investment.72 Difficulties in proof surely will exist. These difficulties, however, should not deny the taxpayer the right to a lawful ordinary, theft loss deduction for a loss caused by the criminal wrongdoing of another. IV. TIMING IS EVERYTHING IRC Section 165(a) articulates the general rule for the timing of a deduction for losses allowable under Section 165, permitting a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. Under the general rule applicable to all losses deductible under Section 165 (i. e. certain business losses, certain investment losses, and certain casualty and theft losses), a loss is sustained when it is evidenced by closed and completed transactions and when it is fixed by identifiable events.73 For example, the dousing of a fire pretty much fixes the event of a casualty loss resulting from a fire. However, in the case of theft losses resulting, for example, from fraud or embezzlement, often the loss is not discovered until long after the perpetrator has successfully misappropriated the victims property. Because a loss allowable as a deduction under Section 165 is allowable only for the taxable year in which. the loss is sustained, accurately determining the year in which the loss is sustained is crucial.74 For this reason, in 1954, Congress enacted IRC 165(e) to provide that any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers the loss.75 Prior to the enactment of IRC Section 165(e), taxpayers were denied theft loss deductions for thefts that were not discovered until years after the actual theft or embezzlement. By then, the running of the statute of limitations for amending the victims tax return for the year in which the theft or embezzlement or fraud occurred precluded the taxpayer from ever taking the loss. Section 165(e), providing that a theft loss is sustained in the year it is discovered, however, does not trump the requirement under Section 165(a), which includes consideration of prospects of recovery.76 That is, the Service will not allow the deduction of a loss if the taxpayer is pursuing recovery or reimbursement of the loss from other sources. For theft losses, then, a loss is sustained when it is discovered. Even after discovery of the loss, however, it is not sustained if there is a claim for reimbursement as to which there is a reasonable prospect of recovery. If the loss (or a portion of the loss) is subject to a claim with respect to which there is a reasonable prospect of recovery, then the loss (or that portion of the loss) is not sustained until the taxable year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received. 77 The applicable Treasury Regulation provides verbatim as follows: A loss arising from theft shall be treated under section 165(a) as sustained during the taxable year in which the taxpayer discovers the loss. See Section 165(e). Thus, a theft loss is not deductible under section 165(a) for the taxable year in which the theft actually occurs unless that is also the year in which the taxpayer discovers the loss. However, if in the year of discovery there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, see paragraph (d) of Treasury Regulation 1.165-1.78 Treasury Regulation 1.165-1, in turn, provides in pertinent part as follows: If. there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained. until it can be ascertained with reasonable certainty whether or not such reimbursement will be received.79 In short, the following two questions must be addressed following discovery of a theft loss: (1) Is there a pending claim with a reasonable prospect of recovery as to some or all of the loss and (2) When can it be determined, with reasonable certainty . what the amount, if any, of the reimbursement will be as to some or all of the loss If there is no claim with a reasonable prospect of recovery in the year of discovery of the theft loss, then the year of discovery is the year of the deduction. If, however, there is a claim with a reasonable prospect of recovery, then the proper year of deduction is the year in which it can be determined with reasonable certainty that the loss is non-recoverable, a determination which can be made partially in one year and partially in another year if the reasonable certainty test is not satisfied in one year as to all of the loss.80 The questions of whether there exists a claim with a reasonable prospect of recovery and when a recovery, if any, will be forthcoming as determined with reasonable certainty are, unfortunately, highly fact-intensive issues.81 They are, nonetheless, very important issues to get right. A mistimed loss deduction may become a permanently lost deduction if the proper year of the deduction is an earlier year and the tax return for that earlier year cannot be amended because of the application of the statute of limitations on amending tax returns.82 The general limitations period for filing an amended return to report an additional deduction and claim a refund of previously paid taxes is the later of three (3) years from the date the return was filed or two (2) years from the date the associated tax was paid.83 Accordingly, if a taxpayer discovers a theft loss in year 1 for which a taxpayer has filed or intends to file a suit or claim for recovery or reimbursement, the taxpayer will be required to postpone any deduction until the taxpayer has determined, with reasonable certainty, that some or all of the loss subject to the suit or claim is non-recoverable. If the taxpayer determines incorrectly that the loss is non-recoverable in, for example, year 6, when the loss could have been determined, with reasonable certainty, to be non-recoverable in year 2, then the taxpayer will have lost the opportunity to amend the year 2 tax return to claim the loss. The foregoing result may sound too harsh to occur in actuality, but this was exactly the situation in which the taxpayers in Wisnewski v. United States . 79-2 USTC (CCH) 9496 (N. D. Tex. 1979) found themselves. There the taxpayers discovered a loss deductible under IRC 165(a) in 1968, and they filed suit against the alleged perpetrator in that same year. The litigation settled by consent decree in 1972, and the taxpayers claimed their losses, which proved uncollectable, as reasonably ascertainable, in that year, 1972. In the latter part of 1975, the Service examined the taxpayers 1972 return and disallowed the loss, contending that the amount of the loss was ascertainable with reasonable certainty in an earlier year, 1971, a year now time-barred by the general three-year statute of limitations for amending tax returns. The court upheld the Services position, noting that, by 1971, the alleged perpetrator had disposed of all of his assets that were not exempt from creditors and that the taxpayers had been advised of this fact by their attorney, thereby exemplifying the importance of getting the timing issue correct. One option for taxpayers facing uncertainty regarding the proper year of the timing of a deduction because of the pendency of litigation against the perpetrator or the collectability of a claim or judgment is to file a protective refund claim. Protective claims preserve the deduction or position of the taxpayer until the completion of events or contingencies upon which the deduction or position is based. Protective refund claims are creatures of case law and the Service has discretion in deciding how to process protective claims. If treated as such by the Service, protective refund claims have the effect of a continuing claim, thereby preserving the position notwithstanding the running of the statute of limitations on amending returns. Generally, the Service will delay acting on the protective claim, thereby preserving its status as a continuing claim until the pending litigation or other contingency is resolved.84 The Totality of the Facts and Circumstances Govern Reasonable Prospect of Recovery and Reasonable Certainty Tests. There is little guidance in the treasury regulations promulgated under IRC 165 concerning the facts and circumstances relevant to the determination of whether a reasonable prospect of recovery exists and at what point it can be determined, with reasonable certainty, what the amount, if any, of the recovery will be. The guidance in the regulations is as follows: Whether a reasonable prospect of recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances. Whether or not such reimbursement will be received may be ascertained with reasonable certainty, for example, by a settlement of the claim, by an adjudication of the claim, or by an abandonment of the claim. When a taxpayer claims that the taxable year in which a loss is sustained is fixed by his abandonment of the claim for reimbursement, he must be able to produce objective evidence of his having abandoned the claim, such as the execution of a release.85 At least the foregoing guidance is some guidance, even though the examples of facts giving rise to a determination with reasonable certainty of no recovery seem fairly obvious. The settlement or adjudication of a taxpayers pending litigation to recover a theft loss from the perpetrator allows for a determination of the amount of the unrecoverable loss with enough certainty to allow for a deduction. A taxpayers release or abandonment of a pending claim does likewise. Less obvious are those situations where a court has appointed a receiver or trustee with respect to the assets of the perpetrator of the fraudulent scheme. A case in point is Kaplan v. United States . 2007 WL 2330841 (M. D. Fla. Aug. 15, 2007), a case in which the taxpayers, a husband and wife, lost millions of dollars in a Ponzi scheme. As previously discussed, for victims of certain Ponzi schemes that elect and qualify for the safe harbor treatment of Revenue Procedure 2009-20, the timing issues associated with determining the year in which the losses are deductible are mostly moot. The safe harbor applies fixed percentages of 75 or 95, depending upon the existence of certain claims for recovery, to the qualifying losses to arrive at the amount deductible in the year of discovery of the loss, as defined in the Revenue Procedure. For cases falling outside the safe harbor, Kaplan illustrates the frustration associated with application of the timing issues. The perpetrator in the Kaplan case ran a Ponzi scheme from 1986 until May of 2001. The taxpayers in Kaplan invested over 5 million with the perpetrator from 1992 through October of 2000. Prior to discovery of the Ponzi scheme, the Kaplans reported on their tax returns millions more in income purportedly earned (but not distributed) on the monies they had invested. Income such as that purportedly earned by the Kaplans on their monies invested is often referred to as phantom income in the context of Ponzi schemes. In 2001, the perpetrator filed for bankruptcy. In 2002, the perpetrator pled guilty to fifteen felony counts and admitted to operating a Ponzi scheme. Had the safe harbor been available to the. Kaplans, the year of the deductibility of their resulting theft losses would have been 2002, the year in which the perpetrator pled guilty to conduct that would have constituted theft under the law of the state where the conduct occurred.86 Instead, the taxpayers were left to pick a year for the deduction seemingly reasonable based on all of the facts and circumstances. They settled on their 2001 tax year as the year in which to claim the theft losses. At first glance, 2001 might appear to be a reasonable year in which to claim the loss, given that the perpetrator filed bankruptcy in 2001. In fact, as to the year 2001, the taxpayers presented the interim report of the bankruptcy trustee estimating that the recovery for creditors would not exceed 21. The court, however, disagreed with the Kaplans choice, concluding that the bankruptcy trustees 2001 interim report did not rise to the level of a determination with reasonable certainty . stating as follows: The trustee stated in the report that the estimated recovery of 20.92 was not his estimate for final recovery, because there were a number of unresolved factors that could either increase or decrease that final estimate. Therefore, at best, the trustees report shows that the amount that Plaintiffs would not be able to recover was unknown, and thus, could not be determined with reasonable certainty as of December 31, 2001.87 Thus, after years of court and administrative proceedings, the Kaplans learned that their theft loss deduction was not quite ripe. The Kaplans disappointment was not over. The court also addressed their claim for a theft loss for the income purportedly earned on their investment, i. e. the phantom income. This income was reinvested and thus not distributed to them. They did, however, report the income on their tax returns over the years, and they did pay taxes on the income. The Service argued that there was no income because the investment was a Ponzi scheme and there was thus no income to steal. The court agreed with the Service, notwithstanding that the taxpayers produced an IRS Memorandum addressing this particular Ponzi scheme that concluded that investors who reported income, dubbed phantom income, could take a theft loss for that phantom income under certain circumstances.88 The Kaplan case underscores the benefits of the clarity recently received from the Service for victims of certain Ponzi schemes. The safe harbor of Revenue Procedure 2009-20 eliminates the guess work associated with determining when most of the theft loss is deductible. The safe harbor includes phantom income in the calculation of the theft loss. And, even as to those taxpayers who do not elect the safe harbor treatment, the Revenue Procedure recognizes the right of taxpayers to amend prior returns to remove the phantom income and claim refunds of associated tax paid, or, if the prior year is closed by application of the statute of limitations, to include the phantom income in the principal amount of any theft loss allowable in a later year.89 Despite the poor result for the taxpayers in Kaplan . the Kaplan case and other cases are replete with language that suggests that the taxpayer need not be an incorrigible optimist with respect to determining when a loss is really lost.90 Hence, claims for recovery whose potential for success are remote or nebulous will not demand a postponement of the deduction . The standard is to be applied by foresight. We do not look at facts whose existence and production for use in later proceedings was not reasonably foreseeable as of the close of the particular year. Nor does the fact of a future settlement or favorable judicial action on the claim control our determination, if we find that as of the close of the particular year, no reasonable prospect of recovery existed.91 Courts also recognize that where the financial condition of the person against whom a claim is filed is such that no actual recovery could realistically be expected, the loss deduction need not be postponed.92 For example, in Jensen v. Commissioner . 66 T. C.M. (CCH) 543 (1993), the Tax Court rejected the Services position that the taxpayers were premature in deducting a theft loss resulting from investment in a Ponzi scheme because they had filed a claim in the bankruptcy proceeding of the broker through whom they invested. Neither the brokers bankruptcy estate, with which the taxpayers filed a claim, nor the bankruptcy estate of the Ponzi scheme perpetrators, with which the taxpayers had not filed a claim, had assets sufficient to pay the millions of dollars owed the many investors. Noting an earlier decision, the Tax Court stated: Although we held in Huey v. Commissioner, that the filing of a lawsuit creates an inference of a reasonable prospect of recovery, we conclude that petitioners filing of a proof of claim in the bankruptcy case here does not lead to the same inference. Filing the proof of claim in the bankruptcy estate was merely a ministerial act that did not require the same degree of effort as pursuing a lawsuit. 93 Thus, the court gave little weight to the taxpayers claim in the pending bankruptcy. The Jensen Court did not address the evidence upon which it relied in concluding that the year in which the taxpayers took their theft loss, 1984, was the correct year. The court did note that the bankruptcy estate of the Ponzi scheme perpetrator was converted from a Chapter 11(reorganization) to a Chapter 7 (liquidation) in early 1985 and that the brokers bankruptcy petition in early 1985 was in Chapter 7 (liquidation). One of the pertinent differences, then, between the result in Kaplan and the result in Jensen appears to be the rapidity with which the available sources of recovery were to be liquidated in bankruptcy. In circumstances where the perpetrator of the fraud has filed a Chapter 11 bankruptcy petition, a reorganization consistent with ongoing operations, postponement of the theft loss deduction beyond the year of discovery is the more likely rule. In Premji v. Commissioner . 98-1 USTC (CCH) 50,218 (10 th Cir. 1998), the court, in an unpublished opinion, upheld the Tax Courts denial of theft losses taken in the year 1990. The taxpayers in question invested in a corporation that filed for Chapter 11 bankruptcy in 1990, the year in which they claimed they were entitled to take the associated theft loss. In 1990, however, the corporations principal was assuring investors, including the taxpayers, that the corporation would emerge as a viable entity and the bankruptcy schedules reflected that the corporation had assets in excess of liabilities. In 1991, the court-appointed bankruptcy trustee determined that, in reality, the corporation had been used to perpetrate a Ponzi scheme and that its assets were less than its liabilities. The trustee then filed lawsuits to set aside preferential and fraudulent transfers, recovering, by 1995, over 8 million and expecting, at that time, to recover 14 million more. The court therefore upheld the Tax Courts conclusion that the taxpayers had a reasonable prospect of recovery in 1990, thereby denying the taxpayers deduction for the tax year 1990. The court did not suggest the year in which the taxpayers might rightfully claim all or some of the loss as without a reasonable prospect or recovery, other than to repeat the often-repeated, sometimes-seemingly-contradictory guidelines articulated by the courts, paraphrased as follows: 94 Bona fide claims for recoupment filed against third parties with a substantial possibility of success constitute a reasonable prospect of recovery, but the taxpayer is not required to be an incorrigible optimist The standard for determining whether a reasonable prospect of recovery is primarily an objective one to be applied at the close of the taxable year in which the deduction is claimed, but the taxpayers subjective beliefs at the close of that taxable year are not to be ignored. Even the substantial possibility of success guideline for recovery by litigation is muddied by language in other decisions noting that even a small chance of success might make the pursuit of legal remedies objectively reasonable, especially when the stakes are high.822195 And, this guidance is counterbalanced by the notion that a theft loss deduction need not be postponed where the financial condition of the party against whom the claim is filed is such that no recovery could be expected.96 Shifting the Burden of Proof on the Issue of Timing of the Theft Loss Deduction to the Service Under IRC 7491. Unfortunately, outside of the safe harbor of Revenue Procedure 2009-20, there is no bright-line test for determining the correct year for deducting a theft loss, whether associated with a fraudulent investment scheme or other form of theft, larceny, embezzlement, or guile. The burden of proof is, nonetheless, on the taxpayer as to the issue of the timing of the deduction, as it is with respect to whether the investment loss qualifies for theft loss treatment.97 If, however, the taxpayer produces credible evidence supporting the theft characterization and the year of deduction as the correct year, the burden shifts to the Service to prove otherwise under IRC 7491.98 Credible evidence for purposes of IRC 7491, is evidence of a quality such that, after critical analysis, the court would find the evidence sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness).99 Application of the foregoing standard does not require the court to accept testimony the court fails to find credible. A tax court is not compelled to believe evidence which to it seems improbable, or to accept as true uncorroborated evidence of interested witnesses even though uncontradicted.100 Under IRC 7491, taxpayers who can only offer their own testimony regarding their subjective belief that pursuit of litigation against the perpetrator would have been useless will likely fail to shift the burden to the Service on the issue of whether there is a reasonable likelihood of recovery.101 Subjective belief regarding the fruitlessness of retaining an attorney will also likely fail to sustain the taxpayers burden, particularly when the taxpayer files suit after the year in which the deduction is taken.102 On the other hand, taxpayers who actively monitor the bankruptcy proceedings of the fraud perpetrator, testify as to the bleak prospects for any financial recovery, and offer other corroborating evidence of the unlikelihood of recovery from the bankruptcy estate or otherwise will have a greater chance of shifting the burden of proof to the Service.103 A Portion of a Loss Determined, With Reasonable Certainty, to be Non-Recoverable Is Deductible Notwithstanding the Existence of Pending Claims or Litigation as to the Remaining Loss. Pursuant to the applicable Treasury Regulations, a taxpayer is not required to wait until final recovery or resolution with respect to a claim or claims before taking a theft loss deduction for that portion of the loss that is unrecoverable. If in the year of the casualty or other event a portion of the loss is not covered by a claim for reimbursement with respect to which there is a reasonable prospect of recovery, then such portion of the loss is sustained during the taxable year in which the casualty or other event occurs.104 The cited regulation then uses, as an example, the total loss of an automobile because of anothers negligence to show how a loss might be trifurcated for purposes of deductibility. In year 1, the year of the auto accident, a total loss of 5000 occurs, which represents the taxpayers adjusted basis or cost in the auto. Because the taxpayer sues the driver who caused the accident, the loss is not deductible in year 1. In year 2, a judgment is received for 4,000 thus, a 1000 deduction is allowed in year 2. In year 3, it becomes reasonably certain that only 3500 can ever be collected on the judgment thus, an additional 500 is deductible in year 3. 105 Notwithstanding the direction provided by the cited regulation, the Service took a contrary position in a relatively recent case, Johnson v. United States . 80 Fed. Cl. 96, 2008-1 U. S.T. C. 50,142 (Cl. Ct. 2008), contending that the taxpayers in that case were not entitled to a theft loss deduction for any portion of their 78 million loss until all of the many lawsuits filed seeking to recover the loss had been resolved. The court rejected this position, stating as follows: The government reads the phrase no portion of the loss to mean that the regulation Treas. Reg. 1.165-1(d)(2) requires that a taxpayer refrain from taking any portion of a theft loss deduction until the taxpayer had determined exactly how much of the entire loss the taxpayer will recover. The governments reading. is not supported by the examples contained in Treas. Reg. 1.165-1(d)(2)(ii). Contrary to the governments contention, the plaintiffs were not required to wait until the total amount of recovery from every source was established to take a theft loss deduction for a portion of their loss. Id. at 199-120. Thus, notwithstanding pending lawsuits against a myriad of third parties for recovery of portions of the losses sustained, the taxpayers were permitted to deduct that portion of the loss that was determined, with reasonable certainty, to be nonrecoverable prior to resolution of all of the pending litigation. The Defrauded Taxpayer or Theft Victim is Not Required to File Litigation Against the Perpetrator as a Prerequisite to Taking a Theft Loss. An issue apparently infrequently litigated, but nonetheless pertinent, is whether a theft victim must pursue recovery from the perpetrator or other third parties prior to taking a theft loss. The answer appears to be no. The court in Bromberg . 232 F. 2d 107, pointedly rejected the Services contention that the taxpayer, a victim of swindling, could not take a theft loss until he satisfied his burden of showing that he tried, but failed, to recover his losses, stating as follows: The statute makes no such requirement, and when the nature of the matter dealt with, thieving and thievery, is considered, it seems clear, we think, that only if there were a specific provision imposing this requirement, would a court be authorized to hold that it exists.106 The treasury regulations under IRC 165 further support the lack of an obligation on the part of the taxpayer to initiate or file a lawsuit against the perpetrator or third parties for recovery of a theft loss. Treasury Regulation 1.165-1(d)(2)(i) includes in a listing of examples of possible, non-exclusive bases for determining, with reasonable certainty, that there is no reasonable prospect of recovery the release or settlement of a claim and the abandonment of a claim. Presumably, if a claim can be abandoned, a claim for recovery need not be filed. As the court in Kaplan v. U. S. stated: The mere existence of a possible claim or pending litigation will not alone warrant postponing loss recognition instead, the inquiry should be directed to the probability of recovery as opposed to the mere possibility.107 Nonetheless, where there is a probability (versus a mere possibility) of some recovery, it would behoove a taxpayer to pursue recovery, given the facts-and-circumstances nature of the tests applied to determining whether there has been a closed and competed transaction for purposes of claiming a theft loss. It should also be noted that for traditional theft cases, not involving investment transactions, there is a clear, statutory requirement to file an insurance claim when the loss is covered by insurance. Under that circumstance, a timely insurance claim must be filed or the deduction of the loss will be denied to the extent covered by insurance.108 The excesses of the past few years have seemingly culminated in a wave of fraudulent schemes, from Enron, to WorldCom, to Ponzi schemes and Wall Street firm debacles. Regulators have admitted to less-than-diligent enforcement of laws intended to protect public investors. Little, however, has been done to compensate the investing public who placed their trust, their confidence, and their lifelong earnings in a capital and financial system touted as the soundest in the world. Yet, many of these investors have lost their lifelong earnings to intentional fraud, whether through direct investments with the perpetrators of the fraud or through brokers who recommended the fraudulent investments, or on the open market often in reliance upon fraudulent financial statements and projections. For these investors, deducting their losses as capital losses from investing in arrangements or companies later found to have committed fraud provides little relief. And, deducting these losses as theft losses resulting from fraud, deceit, or other forms of guile as theft under the applicable local law has been fraught with ambiguity as to the correctness of the position, particularly given the highly fact-intensive nature of the theft characterization and the timing of the deduction. Fortunately, for certain victims of Ponzi schemes, the Service has issued Revenue Procedure 2009-20, sanctioning theft loss treatment for qualifying investors in a Ponzi scheme and establishing a bright line test for determining when to take most (either 95 or 75) of the loss as an ordinary, theft loss deduction. At the same time, the Service issued Revenue Ruling 2009-9, putting to rest the question whether theft losses in the context of investment transactions were subject to the limitations on other kinds of casualty losses. The hope is that Revenue Procedure 2009-20 and Revenue Ruling 2009-9 are evidence of more to come in the way of a recognition by the Service of the theft-like nature of investment fraud and the right of taxpayers to treat the losses as such rather than as capital losses. Less focus on privity and more focus on the role issues of reliance, intent, and causation play in the context of investments purchased on the open market would be welcomed, as would clearer guidance on the facts and circumstances material to determining when a loss can be determined, with reasonable certainty, to be non-recoverable. Until then, outside the safe harbor of Revenue Procedure 2009-20, the characterization of an investment loss as a theft loss and the timing of the deduction of that loss will require an extraordinary degree of care. Prudent attention to supporting the characterization of the investment loss as a theft loss and the timing of the theft loss deduction with credible evidence will place the burden upon the Service to support any disallowance of the deduction under IRC 7491. 1 Coleman Law Firm, Jeffrey P. Coleman, Esq. 581 South Duncan Ave. Clearwater, FL 33756, ColemanLaw. A portion of this chapter will be published, in substantially the same form, by The Florida Bar in a forthcoming issue of The Florida Bar Journal. 2 Jeffrey P. Coleman is the President and shareholder of Coleman Law Firm, a firm established in 1997. He is also a member of the Public Investors Arbitration Bar Association (PIABA) with years of experience representing defrauded investors in securities-related arbitration or litigation and in advising them on certain tax-related issues. He can be reached at 727-461-7474 or by email at jeffcolemanlaw. Jennifer R. Newsom is an associate attorney with Coleman Law Firm. She received her law degree, cum laude, from The University of Toledo College of Law and her Masters of Law (LL. M.) in Taxation from The University of Florida. 6 Bromberg . 232 F. 2d at 110-111(emphasis added). 8 MTS International, Inc. v. Commissioner . 169 F. 3d 1018, 1021 (6 th Cir. 1999) Bromberg . 232 F. 2d at 111. 9 Nichols v. Commissioner . 43 T. C. 842, 884-885 (1965)(emphasis added). See also Vincentini v. Commissioner . 96 T. C.M. 400 (CCH), 2008 WL 5137345, at 4 -5(Dec. 8, 2008)(A violation of a Federal criminal statute may also establish that a theft occurred for purposes of section 165.) 10 Marr v. Commissioner . 69 T. C.M. (CCH) 2837, 1995 WL 350895, at 3 (June 12, 1995). 11 2008 WL 686354 (March 14, 2008). 12 Id . (citations omitted). 13 Revenue Ruling 71-381, 1971-2 C. B. 126 is obsolete as the result of Rev. Rul. 2009-09 to the extent that it finds theft losses associated with transactions entered into for profit deductible under 165(c)(3) rather than 165(c)(2). 14 CCA 200811016 (emphasis added). 17 See, e. g. . Cal. Penal Code 584. 18 Vietzke . 37 T. C. at 510-511. 20 Jeppsen, 70 T. C.M. (CCH) 199 (1995) affd 128 F. 3d 1410 (10 th Cir. 1997) . 22 Bromberg . 232 F. 2d at 110-111. 23 See e. g . Rev. Rul. 77-18 (theft loss from stock exchanged pursuant to merger in reliance on false statements and representations regarding merged companys financial condition). 24 Rev. Rul. 71-112, 1972-1 C. B. 60. 25 Hall v. GE Plastic Pacific PTE LTD . 327 F.3d 391, 396 (5 th Cir. 2003). 26 See 47 Am. Jur. 2d Judgments 464 (2006). 27 Vincentini . 96 T. C.M. (CCH) 400, 2008 WL 5137345, at 5 (2008). 29 Id . The taxpayer in Vincentini, 2008 WL 5137345 lost on the issue of the timing of his theft loss deduction. He failed to establish that, in the year that he took his deduction, he was without a reasonable prospect of recovery. 30 2009-14 I. R.B. 749, 2009 WL 678785 (March 17, 2009) 31 Rev. Proc 2009-20, Section 7. 32Rev. Proc. 2009-20, Section 4.01. 33 See Rev. Rul. 2009-9, 2009-14 I. R.B. 735 (citing Bromber g s broad definition of theft). 34 Rev. Proc. 2009-20, 4.02. 35 Rev. Proc. 2009-20, 4.03. Presumably, investors who invested in Ponzi schemes through flow-through entities would be able to benefit from a pass-through of a theft loss deduction, a topic beyond the scope of this column. 36 This discovery rule puts theft losses on par with casualty losses, as a theft loss from, for example, fraud, might not be discovered until years after the actual wrongdoing. See Ramsay Scarlett amp Co. v. Commissioner . 61 T. C. 795, 808-812 (March 25, 1974). 38 Treas. Reg. 1.165-1(d) Johnson v. U. S. 80 Fed. Cl. 96, 119-121 (2008). 39 Rev. Proc. 2009-20 at Section 4.04. 41 Excluded from the definition of potential third-party recovery, are actual or potential claims against various sources of recovery, including (i) the investors insurance company, (ii) the Securities Investor Protection Corporation (SIPC), (iii) other entities or parties contractually bound to cover the loss, (iv) the perpetrators of the fraud, and (vi) receiverships or similar arrangements established with respect to the perpetrators of the fraud. Id . at 4.10. Thus it is possible to pursue claims against the foregoing excluded sources and still deduct 95 of the qualified investment, subject to reductions for actual recovery and potential insurance or SIPC recovery. 43 Rev. Proc. 2009-20 at 5.02. 44 See also Revenue Ruling 2009-9 for issues relating to the taxpayers basis, the availability of a 3, 4, or 5 year net operating loss carry back for qualifying 2008 theft losses, among other related issues. 45 Rev. Proc. 2009-20 at 5.03. 46 One gift from the Service to defrauded investors who either do not elect or qualify for safe harbor treatment is the Services newly pronounced position on phantom income. Phantom income is income reported as income by the fraudulent arrangement, but not income in reality because the monies labeled income were derived from other investors and not from a return on the investment. If a defrauded taxpayer included the phantom income in income for purposes of federal taxes, the amount included will increase the taxpayers basis in the amount allowable as a theft loss. Id . at 8.02. 47 See, e. g . Vincentini v. Commissioner. 96 T. C.M. 400 (CCH 2008) Stoltz v. U. S. 410 F. Supp. 2d 734, 742 (S. D.Ind. 2006). 48 See, e. g . Revenue Ruling 2009-9(For federal income tax purposes, theft is a word of general and broad connotation, covering any criminal appropriation of anothers property to the use of the taker, including theft by swindling, false pretenses and any other form of guile.) Treas. Reg. 1.165-8(d)(providing that the term theft shall be deemed to include, but shall not necessarily be limited to, larceny, embezzlement, and robbery). 49 DeFusco . 38 T. C.M. 920. The Tax Court, nonetheless, denied the theft loss deduction as to the option stock for the year in which it was claimed based on the possibility of recovery from the claim filed by the taxpayer in Equity Fundings bankruptcy proceeding and possible legal actions against responsible third parties. 50 DeFusco 38 T. C.M. 920. The Tax Court, nonetheless, denied the loss for the year in question because the taxpayer (unlike in this case) had a reasonable prospect of recovery as to his stock. The Tax Court also upheld the IRSs denial of a theft loss for stock the taxpayer had acquired other than through exercise of his options under his employee stock option plan with his employer, Equity Funding 52 See, e. g. . Paine v. Commissioner . 63 T. C. 736 (1975)(finding applicable state law to require fraudulent misrepresentations to have been made with specific intent of appropriating taxpayers property) Singerman v. Commissioner . T. C. Summ. Op. 2005-4 (Jan. 5, 2005)decided under IRC 7463(b) and thus not precedential(finding applicable state law to require intent of defrauder to obtain victims property for himself and, thereby, to implicitly require a relationship of privity). 56 See notes 48-50 supra and accompanying text. 57 Treas. Reg. 1.165-1(b). 58 See Shepherd v. Commissioner . 283 F.3d 1258, 1261 (11 th Cir. 2002). The reluctance to allow the use of substance over form by taxpayers in the context of transactions stems from concerns that taxpayers will be unjustly enriched and the Service will be whipsawed between one party claiming taxation based on the form, and the opposite party claiming taxation based on the substance. Estate of Durkin v. Commissioner . 99 T. C. 561, 575 (1992). 60 See Taiyo Hawaii Co. Ltd. v. Commissioner . 108 T. C. 590, 602 (1997)(recognizing availability to taxpayers of substance over form, but rejecting its application to taxpayer seeking to treat debt as equity). 61 Id . at 511-512 (emphasis added). 62 Report of Investigation by the Special Investigative Committee of the Board of Directors of WorldCom, Inc. dated March 31, 2003 (Investigative Committee Report), at 1, 5, amp 6 (emphasis added). 63 Investigative Committee Report at 33 (emphasis added). 64 IRS Notice 2004-27. 68 Id . at 742-743(emphasis added)(citations omitted). 69 MTS International, Inc., 169 F. 3d at 1022. 71 Id. But see Electric Picture Solutions, Inc. v. Commissioner . 96 T. C.M. (CCH) 146, 2008 WL 4132050, at 2 (2008)(noting that generally a taxpayer cannot support a theft under California law for stock purchased on the open market because there is no privity between the perpetrator and the victim)(citing Marr v. Commissioner . T. C. Memo 1995-250, DeFusco v. Commissioner . T. C. Memo 1979-230)(other citations omitted). 72 See Rev. Rul. 2009-9 (March 17, 2009)(noting losses from stock purchased on open market are capital losses rather than theft losses because the officers or directors did not have the specific intent to deprive the shareholder of money or property). 73 Treas. Reg. 1.165-1(d)(1). 75 See Ramsay Scarlett amp Co. v. Commissioner . 61 T. C. 795, 808-812 (1974)(finding purpose of 165(e) to neutralize discovery problems associated with theft loss and place on par with other casualty losses). 76 Ramsay Scarlett amp Co. v. Commissioner . 61 T. C. at 811. 77 Treas. Reg. 1.165-1(d)(3)(emphasis added). 78 Treas. Reg. 1.165-8(a)(2). 79 Treas. Reg. 1.165-1(d)(2). 80 Treas. Reg. 1.165-1(d)(2)(ii). 81 Treas. Reg. 1.165-1(d)(2)(i). 82 See, e. g.,Wisnewski v. U. S . 79-2 U. S.T. C. 9496 (N. D. Tex. 1979)(finding taxpayers 1968 theft loss was improperly taken in 1972, notwithstanding that earlier year was time-barred) Korn v. Commissioner . 524 F. 2d 888 (9 th Cir. 1975)(finding theft loss time-barred because taken years after year in which loss sustained pursuant to Services determination). 84 See IRS ILM 200547001 (Nov. 25, 2005). 85 Treas. Reg. 1.165-1(d)(2)(i) (emphasis added). 86 IRC 165(e) Rev. Proc. 2009-20, Section 4.04. 87 Kaplan . 2007 WL 2330841, at 8. 89 Rev. Proc. 2009-20, Sections 4.06 and 8.02. 90 Ramsay Scarlett amp Co. v. Commissioner . 61 T. C. 795, 811 (1974)(citations omitted)(emphasis added) Vincentini v. Commissioner . 96 T. C.M. (CCH) 400, 2008 WL 5137345, at 7 (2008) Kaplan . 2007 WL 2330841, at 6 . 91 Ramsay Scarlett amp Co . 61 T. C. at 811. 92 Jeppsen v. Commissioner . 70 T. C.M. (CCH) 199 (1995)(citations omitted). 93 Jensen . 66 T. C.M. (CCH) 543 (citations omitted)(emphasis added). 94 See Id . (citing Jeppsen v. Commissioner . 128 F. 3d 1410, 1418 (10 th Cir. 1997), Ramsay Scarlett amp Co. Inc . 61 T. C. at 811, United States v. S. S. White Dental Mfg. Co . 274 U. S. 398, 402-03 (1927)). 95 Jeppsen v. Commissioner . 128 F. 3d 1410 (citations omitted). 96 Kaplan . 2007 WL 2330841, at 6 (citations omitted). 97 Jeppsen v. Commissioner . 128 F. 3d 1410 (citations omitted) Vincentini . 96 T. C.M. (CCH) 400, 2008 WL 5137345, at 4. 98 Note that the benefits of IRC 7491 are available provided that the taxpayer has properly maintained required records, is able to substantiate items of income reported and deductions taken as required by the IRC, and has cooperated with requests by the Service for information. 99 Blodgett v. Commissioner . 394 F. 3d 1030, 1035 (8 th Cir. 2005). 101 See Vincentini . 96 T. C.M. (CCH) 400, 2008 WL 5137345, at 7-8 (finding taxpayers testimony that he chose not to hire attorneys because he thought it was a waste of money and lack of testimony regarding his status under a restitution order insufficient support for the year in which the taxpayer chose to deduct his theft loss). 102 See Ramsay Scarlett amp Co . 61 T. C. at 812-813 (finding taxpayers deduction of embezzlement loss in year it was discovered unsupportable in view of taxpayers retention of experienced attorney for thorough study of law related to the potential filing of claims against perpetrator and third parties) Jeppsen . 128 F. 3d 1410 (finding taxpayer failed to support year in which theft loss deduction taken, given that taxpayer later retained attorney and pursued claim in securities arbitration against defendants with sufficient assets in relation to amount of claim) 103 See Bubb v. United States . 93-2 USTC (CCH) 50,572, 1993 WL 476193 (W. D. Pa. 1993)(finding taxpayers deduction of theft loss from fraudulent investment scheme taken in year of discovery to be correct year, given testimony of taxpayers who actively monitored perpetrators bankruptcy proceedings, testimony of chair of creditors committee regarding the unlikelihood of recovery beyond a few cents on the dollar, and similar testimony from attorney for the committee of unsecured creditors). 104 Treas. Reg. 1.165-1(d)(2)(ii). 106 Id . at 111. See also Vietzke v. Commissioner . 37 T. C. 504, 510 (1961)(refusing to find requirement that taxpayer move against the thief in order to obtain benefits under IRC 165). 107 Kaplan . 2007 WL 2330841, at 6 (M. D. Fla. 2007)(citations omitted). 108 IRC 165(h)(4)(E).The cited section applies only to casualty losses, including theft losses, falling under IRC 165(c)(3). As previously noted, the Service took the position in Revenue Ruling 2009-9 that losses from investments are losses incurred in connection with transactions entered into for profit, which fall under IRC 165(c)(2) and, as such, they are not subject to the special limitations and rules of 165(h) governing losses falling under IRC 165(c)(3). For more information about Securities fraud, or estate planning, particularly if you are in Clearwater, Palm Harbor, Tarpon Springs or the Tampa Bay, Florida area, go to our website colemanlaw Share this entry colemanlawwp-contentuploads201512logo. png 0 0 Jeff Coleman colemanlawwp-contentuploads201512logo. png Jeff Coleman 2010-11-30 22:13:47 2010-11-30 22:13:47 IRS LOSS TREATMENT FOR CERTAIN INVESTMENT LOSSES Coleman Law Firm: Clearwater Securities Litigation Attorney