By: Tina Garcia, Esq., Brant Kuehn, Esq., Sabrina Strand, Esq., and L. Alexis Whitley, Esq.
The Native American Tax Credits (“NATCs”) scheme that has been promoted by individuals and companies alleging significant tax reductions for purchasers has resulted in millions lost by the investors. Greenspoon Marder has previously explained recent actions by the Internal Revenue Service (“IRS”) and the Senate Finance Committee related to these fraudulent credits. While the resolution of these fraudulent credits is still underway, investors may be able to use provisions of the Internal Revenue Code (“IRC”) to alleviate the losses they have suffered by investing in NATCs. This article provides an overview of theft losses and IRS guidance explaining how victims of scams can utilize theft losses to mitigate the damage suffered.
IRC § 165(a) provides taxpayers with a deduction for losses actually incurred during the taxable year that are not otherwise compensated. Under IRC § 165(c), individuals are limited to deducting losses which are (1) incurred in a trade or business, (2) incurred in a transaction entered into for profit, regardless of whether connected to a trade or business, and (3) incurred as a result of personal casualties or theft, regardless of whether connected to a trade or business or a transaction entered into for profit. These losses may be deducted in the year in which the transaction is completed, closed and realized, and there is no longer any reasonable prospect of recovery. A reasonable prospect of recovery exists when the taxpayer has any bona fide claim for reimbursement from third parties or other sources, such as insurance, and there is a substantial likelihood that these claims will be resolved in the taxpayer’s favor. Although the taxpayer must evaluate whether recovery is likely using the information available to them at the end of the tax year, the taxpayer does not have to show that recovery is completely impossible.
Pursuant to Revenue Ruling 2009-9, “theft” is defined broadly and includes “any criminal appropriation of another’s property to the use of the taker, including theft by swindling, false pretenses and any other form of guile.” In order to claim a theft loss, taxpayers must establish that the loss resulted from an illegal taking of property with criminal intent and is considered a theft under applicable state law.
For taxable years beginning after 2017, IRC § 165(h)(5) disallows personal casualty losses under IRC § 165(c)(3) except to the extent of personal casualty gains or unless the loss is attributable to a federally declared disaster. This means that a theft loss is not allowed for these taxable years unless such loss stems from a transaction entered into for profit (i.e., an investment loss). Additionally, the amount of the allowable loss deduction is generally limited to the taxpayer’s adjusted basis in the property, and investment losses are allowed only as itemized deductions.
In March 2025, the IRS released Chief Counsel Memorandum 202511015 which addresses the allowance of theft losses for victims of scams. This guidance affirms that taxpayers who are victims of scams may claim a theft loss deduction under IRC § 165, but only if their situation meets certain conditions: first, the loss must result from criminal conduct classified as theft under applicable state law; second, the taxpayer must have no reasonable prospect of recovering the stolen funds; and third, the loss must arise from a transaction entered into for profit. This guidance clarifies that a taxpayer can establish a profit motive not only through a traditional investment scam, but also in situations where a scammer misleads a taxpayer into moving money under the false belief that they are protecting it.
Promoters of the fraudulent NATCs have scammed investors out of millions of dollars, resulting in investors incurring significant losses. Most investors purchased these fraudulent credits with the belief they would result in significant tax savings. Although investors engaged in these transactions with a profit motive, they received nothing but an investment loss. Accordingly, investors should look to IRS guidance on theft losses to address some of these losses. Greenspoon Marder attorneys are well-versed in assisting taxpayers harmed by the fraudulent NATCs and are available to help with understanding and potentially claiming theft losses as well. Contact Tina Garcia at [email protected] or Brant Kuehn at [email protected] for more information.
