Thursday, June 25, 2015
VICTIM OF A “PUMP AND DUMP” SCHEME NOT ENTITLED TO THEFT LOSS DEDUCTION FOR LOSSES INCURRED
VICTIM OF A “PUMP AND DUMP” SCHEME NOT ENTITLED TO THEFT LOSS DEDUCTION FOR LOSSES INCURRED In a recent decision: Greenberger v. U.S., 115 AFTR 2d ¶2015-844 (D. Oh. 6/19/15). The District Court of Ohio ruled that a taxpayer was only entitled to a capital loss on the loss from the sale of stock rather than a theft loss as the taxpayer claimed. The taxpayer was the victim of a “pump and dump.” “Pump and dump” is a scheme whereby schemers “pump” up the value of shares through fictitious or fraudulent sales, then “dump” their shares at the inflated prices leaving the public with worthless shares. The taxpayer in Greenberger was one such victim. Yet, the Ohio District court ruled consistent with an Internal Revenue Service Notice. In Notice 2004-27, 2004-1 CB 782, the Internal Revenue Service stated that theft losses for declines in stock value resulting from corporate misconduct where the stock was purchased on an open market and not from the officers who may have made misrepresentations were to be disallowed. The Internal Revenue Service, in that Notice, said such losses due to corporate misconduct may only qualify as capital losses. I.R.C. Sec. 165(c)(3) allows individual taxpayers to deduct from their taxable income losses arising from theft crimes such as "larceny, embezzlement, and robbery." Treas. Reg. §1.165-8(d)) amplifies this stating: To deduct a theft loss, a taxpayer must show that the loss resulted from a taking of property that is illegal under the law of the state where it occurred, and that the taking was done with criminal intent. (Rev Rul 72-112, 1972-1 CB 60). In many cases, this requires that the perpetrator have specific intent to deprive the victim of his property, which in turn requires a degree of privity (i.e., close connection or relationship) between the perpetrator and the victim. Even though the court said the executives of the company committed a "theft offense," the court ruled that the fact that the taxpayer bought his shares on the open market meant that there was no direct transfer of funds to the culprits, and thus the taxpayer was ineligible for a theft loss deduction. The case was decided under Ohio law so a case similar to this in another state may be decided differently.