C.F.R. » Title 26 » CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY › SUBCHAPTER A—INCOME TAX › PART 1—INCOME TAXES

26 C.F.R. § 1.165-1

Losses

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(a) Allowance of deduction. Section 165(a) provides that, in computing taxable income under section 63, any loss actually sustained during the taxable year and not made good by insurance or some other form of compensation shall be allowed as a deduction subject to any provision of the internal revenue laws which prohibits or limits the amount of the deduction. This deduction for losses sustained shall be taken in accordance with section 165 and the regulations thereunder. For the disallowance of deductions for worthless securities issued by a political party, see § 1.271-1.

(b) Nature of loss allowable. To be allowable as a deduction under section 165(a), a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and, except as otherwise provided in section 165(h) and § 1.165-11, relating to disaster losses, actually sustained during the taxable year. Only a bona fide loss is allowable. Substance and not mere form shall govern in determining a deductible loss.

(c) Amount deductible. (1) The amount of loss allowable as a deduction under section 165(a) shall not exceed the amount prescribed by § 1.1011-1 as the adjusted basis for determining the loss from the sale or other disposition of the property involved. In the case of each such deduction claimed, therefore, the basis of the property must be properly adjusted as prescribed by § 1.1011-1 for such items as expenditures, receipts, or losses, properly chargeable to capital account, and for such items as depreciation, obsolescence, amortization, and depletion, in order to determine the amount of loss allowable as a deduction. To determine the allowable loss in the case of property acquired before March 1, 1913, see also paragraph (b) of § 1.1053-1.

(2) The amount of loss recognized upon the sale or exchange of property shall be determined for purposes of section 165(a) in accordance with § 1.1002-1.

(3) A loss from the sale or exchange of a capital asset shall be allowed as a deduction under section 165(a) but only to the extent allowed in section 1211 (relating to limitation on capital losses) and section 1212 (relating to capital loss carrybacks and carryovers), and in the regulations under those sections.

(4) In determining the amount of loss actually sustained for purposes of section 165(a), proper adjustment shall be made for any salvage value and for any insurance or other compensation received.

(d) Year of deduction. (1) A loss shall be allowed as a deduction under section 165(a) only for the taxable year in which the loss is sustained. For this purpose, a loss shall be treated as sustained during the taxable year in which the loss occurs as evidenced by closed and completed transactions and as fixed by identifiable events occurring in such taxable year. For provisions relating to situations where a loss attributable to a disaster will be treated as sustained in the taxable year immediately preceding the taxable year in which the disaster actually occurred, see section 165(h) and § 1.165-11.

(2)(i) If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, 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, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. 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.

(ii) 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. For example, if property having an adjusted basis of $10,000 is completely destroyed by fire in 1961, and if the taxpayer's only claim for reimbursement consists of an insurance claim for $8,000 which is settled in 1962, the taxpayer sustains a loss of $2,000 in 1961. However, if the taxpayer's automobile is completely destroyed in 1961 as a result of the negligence of another person and there exists a reasonable prospect of recovery on a claim for the full value of the automobile against such person, the taxpayer does not sustain any loss until the taxable year in which the claim is adjudicated or otherwise settled. If the automobile had an adjusted basis of $5,000 and the taxpayer secures a judgment of $4,000 in 1962, $1,000 is deductible for the taxable year 1962. If in 1963 it becomes reasonably certain that only $3,500 can ever be collected on such judgment, $500 is deductible for the taxable year 1963.

(iii) If the taxpayer deducted a loss in accordance with the provisions of this paragraph and in a subsequent taxable year receives reimbursement for such loss, he does not recompute the tax for the taxable year in which the deduction was taken but includes the amount of such reimbursement in his gross income for the taxable year in which received, subject to the provisions of section 111, relating to recovery of amounts previously deducted.

(3) Any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers the loss (see § 1.165-8, relating to theft losses). However, if in the year of discovery 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, for purposes of section 165, until the taxable year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received.

(4) The rules of this paragraph are applicable with respect to a casualty or other event which may result in a loss and which occurs after January 16, 1960. If the casualty or other event occurs on or before such date, a taxpayer may treat any loss resulting therefrom in accordance with the rules then applicable, or, if he so desires, in accordance with the provisions of this paragraph; but no provision of this paragraph shall be construed to permit a deduction of the same loss or any part thereof in more than one taxable year or to extend the period of limitations within which a claim for credit or refund may be filed under section 6511.

(e) Limitation on losses of individuals. In the case of an individual, the deduction for losses granted by section 165(a) shall, subject to the provisions of section 165(c) and paragraph (a) of this section, be limited to:

(1) Losses incurred in a trade or business;

(2) Losses incurred in any transaction entered into for profit, though not connected with a trade or business; and

(3) Losses of property not connected with a trade or business and not incurred in any transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other causalty, or from theft, and if the loss involved has not been allowed for estate tax purposes in the estate tax return. For additional provisions pertaining to the allowance of casualty and theft losses, see §§ 1.165-7 and 1.165-8, respectively.

For special rules relating to an election by a taxpayer to deduct disaster losses in the taxable year immediately preceding the taxable year in which the disaster occurred, see section 165(h) and § 1.165-11. [T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6735, 29 FR 6493, May 19, 1964; T.D. 6996, 34 FR 835, Jan. 18, 1969; T.D. 7301, 39 FR 963, Jan. 4, 1974; T.D. 7522, 42 FR 63411, Dec. 16, 1977]
Notes of Decisions
Cited in 416 cases (4 in the last 5 years), 1960–2026 · leading case: Gale v. Comm'r, 41 T.C. 269 (Tax Ct. 1963).
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Gale v. Comm'r, 41 T.C. 269 (Tax Ct. 1963). · cites it 18× “The insurance companies denied liability in 1959, whereupon petitioners brought suits against them, obtaining judgments therein in 1961. On their 1959 return petitioners claimed a casualty loss in the amount of their damage not claimed on the 1958 return.”
Norwest Corp. v. Comm'r, 111 T.C. 105 (Tax Ct. 1998). · cites it 12× “HELD, FURTHER, P has failed to establish a loss equal to the cost of constructing the Atrium pursuant to sec.”
Ramsay Scarlett & Co. v. Comm'r, 61 T.C. 795 (Tax Ct. 1974). · cites it 12× “On their respective 1965 returns, petitioners claimed theft losses for the full amounts of the embezzlements discovered in 1965 less insurance proceeds received that year.”
Axelrod v. Comm'r, 56 T.C. 248 (Tax Ct. 1971). · cites it 12× “" These two statements are of the same import and both refer to the loss being "made good" or "compensated" by insurance.”
Hudock v. Comm'r, 65 T.C. 351 (Tax Ct. 1975). · cites it 10× “Here the partial condemnation award was received by petitioners in 1969 with no strings attached so it is necessary to determine whether that payment resulted in a gain or loss recognizable in 1969.”
Lakewood Assocs. v. Comm'r, 1995 T.C. Memo. 552 (Tax Ct. 1995). · cites it 12× “Section 165(a) states the general rule that a deduction may be reported for any loss sustained during the taxable year and not compensated for by insurance or otherwise.”
Proesel v. Comm'r, 77 T.C. 992 (Tax Ct. 1981). · cites it 10× “A partner's adjusted basis in his interest in a partnership, to the extent such interest was acquired by contributions, is generally the amount of money and the adjusted basis of property contributed by the partner to the partnership, increased by his share of taxable income and…”
Zinn v. United States, 885 F. Supp. 2d 866 (N.D. Ohio 2012). · cites it 4× “” See also 26 C.F.R. § 1.165-1 (d)(3). However, “if in the year of discovery 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, for…”
Freytag v. Comm'r, 89 T.C. 849 (Tax Ct. 1987). · cites it 2× “" The regulations provide that "To be allowable as a deduction * * *, a loss must be evidenced by a closed and completed transaction * * *.”
Am. Air Filter Co. v. Comm'r, 81 T.C. 709 (Tax Ct. 1983). · cites it 4× “The Commissioner contends that Intfin did not realize such a loss in 1974 because the SFE loan transaction remained open with prospects of ultimate gain.”
Premji v. Comm'r, 1996 T.C. Memo. 304 (Tax Ct. 1996). · cites it 12× “A theft loss is sustained during the taxable year in which the taxpayer discovers the loss.”
Cobb v. Comm'r, 77 T.C. 1096 (Tax Ct. 1981). · cites it 4× “The next issue we consider is whether the petitioners are entitled to deductions for Mr. Cobb's business use of his personal automobile in excess of the amounts allowed by the Commissioner.”
Show all 416 citing cases →
— 26 C.F.R. § 1.165-1(b) — 1 case
Glenn David Cuthbertson a.k.a. David Cuthbertson & Pamela Cuthbertson v. Comm'r, 2020 T.C. Memo. 9 (Tax Ct. 2020).
— 26 C.F.R. § 1.165-1(d)(1) — 1 case
Leroy Frantz, Jr. & Sheila Frantz v. Comm'r of Internal Revenue, 784 F.2d 119 (2d Cir. 1986).
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