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Corporate Theft, Fraudulent Financial Statements, and Ordinary Investment Losses  


Author:  Edward J. Schnee.; W. Eugene Seago.


Source: Volume 26, Number 02, Winter 2009 , pp.49-61(13)




Journal of Taxation of Investments

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Abstract: 

In a recent Tax Court summary opinion, Taghadoss, the taxpayer argued that fraudulent financial statements led him to invest in WorldCom common stock and as a result he suffered an economic loss of over $1.3 million. His allegation appeared true. However, if he could prove his allegations, he would face the more difficult task of collecting from a bankrupt corporation or from the perpetrators in separate civil actions. The tax law then rubs salt into the taxpayer’s wounds by, in effect, denying him the right to deduct the amounts he had previously included in income that was used to purchase the stock. Mr. Taghadoss simply made a bad investment, so the Tax Court concluded.

Keywords: Bad debt vs. theft loss

Affiliations:  1: University of Alabama; 2: Virginia Polytechnic and State Univ.

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