Step 1: Prove the existence of fraud, swindling, theft, embezzlement or deceit. Determine whether the scheme promoter induced you, the taxpayer, to depart with your property by swindling, false pretenses, or deceit.
The United States Tax Code allows a taxpayer to report a theft loss provided that they are able to sustain their burden of proof that the promoter induced the taxpayer to depart with their property by swindling, false pretenses, embezzlement, or deceit. I.R.C. § 165(c)(3). For federal income tax purposes, “theft” carries a broad and generalized meaning, including any criminal appropriation of another person’s property, such as theft by swindling, false pretenses and any other type of deceit. Edwards v. Bromberg, 232 F.2d 107 (5th Cir. 1956); see also Treas. Reg. § 1.165-8(d) (“theft” includes larceny and embezzlement). A taxpayer claiming a theft loss must prove that the property was illegally taken under the law of the jurisdiction in which the theft occurred and that the property was taken with criminal intent. Rev. Rul. 72-112, 1972-1 C.B. 60. The taxpayer need not show a conviction for theft. Vietzke v. Commissioner, 37 T.C. 504, 510 (1961), acq., 1962-2 C.B.6.
In most jurisdictions, in order to prove theft by false pretenses, the taxpayer must be able to prove five things beyond a reasonable doubt:
1. First, that the defendant made a false statement of fact;
2. Second, that the defendant knew or believed that the statement was false when he made it;
3. Third, that the defendant made the statement with the intent that the person to whom it was made should rely on it as true;
4. Fourth, that such person did in fact rely on the defendant’s statement as true; and
5.Fifth, that such person parted with personal property as a result.
In order to prove that the scheme’s promoter made false statements of fact, we look for facts which meet the following criteria:
1. A person, who obtains property of another thereby, commits theft by deception when, with intent to defraud, the person:
a. Creates or confirms another's false impression of law, value, intention, or other state of mind that the actor does not believe to be true;
b. Fails to correct a false impression that the person previously created or confirmed;
c. Prevents another from acquiring information pertinent to the disposition of the property involved;
d. Sells or otherwise transfers or encumbers property, failing to disclose a lien, adverse claim or other legal impediment to the enjoyment of the property, whether such impediment is or is not valid, or is or is not a matter of official record; or
e. Promises performance that the person does not intend to perform or knows will not be performed.
On the occasion the IRS does not act on a theft loss refund claim after a period of six months, we may file a claim in the United States Court of Federal Claims. We typically choose the U.S. Court of Federal Claims because a favorable precedent exists for the taxpayer who elects to litigate their refund claims in that forum. For purposes of defining a “theft” under I.R.C. § 165(c)(3), the U.S. Court of Federal Claims has adopted the definition under the Model Penal Code. Goeller v. U.S., 109 Fed. Cl. 534, 542–3 (2013). The Model Penal Code § 223.3 defines “theft by deception” as occurring where a person purposely obtains property of another by deception. A person deceives if he purposely:
1. creates or reinforces a false impression, including false impressions as to law, value, intention or other state of mind; but deception as to a person's intention to perform a promise shall not be inferred from the fact alone that he did not subsequently perform the promise; or
2. prevents another from acquiring information which would affect his judgment of a transaction; or
3. fails to correct a false impression which the deceiver previously created or reinforced, or which the deceiver knows to be influencing another to whom he stands in a fiduciary or confidential relationship.