Archive for December 30th, 2011

Imagine you’re a doctor. You’ve endured the demanding curriculum, steadily mounting debt, and cut-throat culture that come standard with the medical school experience. You persevered, however; driven not by a desire or sense of obligation to heal the sick, but by the knowledge that when it was all said and done you’d be a doctor, and that alone would be enough to procure the best crazy-young-stripper-wife money could buy. 

But, things don’t always work out as planned in matters of the heart. I mean, other than your friends, co-workers, kids from a previous marriage, and any number of restaurant patrons who witnessed the two of you dining at your favorite Italian place, you droning on about fine art while she admired her nails and mentally undressed the waiter, who could have possibly foreseen that your crazy-young-stripper-wife would liquidate your bank accounts and run off with another guy?

But sadly, it happens. And when you’re left destitute, alone, and in desperate need of some penicillin, you’d think the IRS would have the common decency to allow you to recover a portion of your financial de-pantsing in the form of a theft loss deduction, right?

Not so fast.

First, a primer on theft losses:

A deduction is allowed for any theft loss sustained by taxpayer that is not compensated for by insurance or otherwise.[1] A theft loss is generally only permitted for the tax year in which the taxpayer discovers it.[2]

Whether certain actions constitute theft depends on the law defining the crime of theft in the jurisdiction where the alleged theft occurred.[3]

To summarize, in order to deduct a theft loss, a taxpayer has the rather obvious obligation to establish that a theft has actually occurred, a fact that appeared lost on the taxpayer in Moragne v. Commissioner.

While in his late 60’s and suffering from poor health, Dr. Moragne married Loretta Hill (Loretta). Shortly thereafter, Dr. Moragne asked his former assistant to turn over his checkbook to Loretta, who would have check writing responsibilities and general responsibility over his financial affairs. Dr. Moragne arranged with his bank for Loretta to have check writing authority and authorized her to make various payments on his behalf.

Dr. Moragne solely owned a residence in Chicago (the Ellis property) before he married Loretta. In late 2004 the Ellis property was sold for $450,000, with some of the proceeds used to purchase a residence in Olympia Fields, Illinois for $425,000 (the Graymoor property), which was titled in Loretta’s name only. Loretta then took out a home equity line of credit of $250,000 on the Graymoor property.

Also in 2004, Dr. Moragne and Loretta’s joint checking account reflected that 1) $12,500 was paid for a Jaguar for Loretta; 2) Loretta wrote a check to herself for $26,000 and to “cash” for $50,015; and 3) Loretta wrote checks of $15,000 and $413,000 to Dr. Moragne and herself that both Dr. Moragne and Loretta endorsed.

In 2005, Dr. Morange filed for divorce, which was granted in 2007. On his tax returns for 2002 and 2004, Dr. Morange claimed $319,569 and $384,540 in theft losses related to the amounts spent by Loretta.

The IRS denied the theft loss deductions, and the Tax Court agreed, holding that Dr. Morange did nothing to establish that he’s actually been the victim of a crime, rather than simply being the victim of poor taste and an unreasonable amount of trust:

Petitioner failed to provide any explanation, however, how Loretta used the funds or more importantly whether Dr. Moragne approved or authorized the expenditures. In addition, several of the checks were endorsed by Dr. Moragne along with Loretta. We are compelled to find that Dr. Moragne authorized Loretta to control his checkbook and expend his funds in the same way he had authorized [his former assistant] to do before his 7-year marriage to Loretta. Petitioner also failed to present any evidence demonstrating that every dollar deposited into the account was Dr. Moragne’s and that every dollar withdrawn was spent for Loretta’s benefit, not Dr. Moragne’s. We hold that petitioner failed to establish the amount of any loss and is therefore not entitled to any deduction.

What’s the lesson? Escorts are a fine source of companionship and generally considerably cheaper than a bad marriage, as they rarely require check writing authority.

Estate of Rudolph Moragne v Commissioner, T.C. Memo 2011-299

[1] I.R.C. § 165(a)

[2] Sec. 165(e); Marine v. Commissioner, 92 T.C. 958, 976 (1989).

[3] Edwards v. Bromberg, 232 F.2d 107, 111 (5th Cir. 1956);

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