Edwin Christman Dawn and June Estelle Dawn v. Commissioner of Internal Revenue

Edwin and June Dawn (taxpayers) claimed a deduction on their 1975 federal income tax return pursuant to I.R.C. § 165 for a loss allegedly sustained when their former landlord took, disposed of, or damaged certain items of personal property. The Commissioner disallowed the deduction and issued a notice of deficiency. Taxpayers petitioned the Tax Court for a redetermination of the assessed deficiency.

During the Tax Court proceedings, Edwin Dawn acknowledged that he had filed suit against his former landlord to recover the value of the lost or damaged property. In light of this admission, the government moved for summary judgment, arguing that taxpayers had not “sustained” a loss in 1975. The Tax Court granted the government’s motion. It reasoned that the taxpayers’ filing of a lawsuit indicated that they had had a reasonable prospect of recovery and, thus, were not entitled to claim the deductions for 1975. We affirm.

A loss is deductible in the year during which it is “sustained.” I.R.C. § 165(a). For the purposes of section 165, a loss is not necessarily sustained in the year in which it actually occurs. See Gale v. Commissioner, 41 T.C. 269, 275 (1963). To be deemed…