Tax Court doesn’t believe that the ex-wife stole the money

In William West, the Tax Court addresses the tax consequences of two familiar themes:  disputes between ex-spouses, and theft losses.  West v. Commissioner, TC Memo 2014-2 (Jan 8, 2014).

In 2006, William West had fallen on hard times — financially, physically and emotionally.  He had lost his job, had divorced his first wife to whom he had been married for twenty-five years, was about to divorce his second wife, and was entering an alcohol abuse treatment center.

After his ex-wife helped him get into rehab, she transferred $120,000 from his account to her own, which was then transferred to accounts set up for their children.  She would later testify that he had authorized her to do so.

Two years later, as West’s financial situation deteriorated further, he claimed that the funds should have been transferred into revocable trusts, rather than into accounts for the children.  He sued his ex-wife, but the case settled, and the settlement agreement acknowledged that the funds belonged to the children.  Just before filing the lawsuit, he filed an amended tax return, claiming a theft loss on the grounds that the $120,000 had been stolen from him by his ex-wife.

Although the Tax Court acknowledged that former spouses do  not always make the most objective of witnesses, it found her testimony, that he had authorized her to transfer the funds to accounts that had been set up to provide for the children’s education, more reliable than West’s testimony that the transfer was against his wishes.  Based on all of the evidence before it, the Tax Court chose to believe the testimony of the ex-wife, and deny the deduction for a theft loss.