The taxpayer tried to build his dream house and ended up with a real nightmare. He paid a contractor $18,000 in advance to construct a neat little cottage on Lake Camelot in Wisconsin. The builder took the money and started work. Eight months later, there was a hole in the ground and little else--and no builder. The contractor had gone bankrupt; the buyer eventually got back only $296.76.
At tax time, the taxpayer wrote off the remaining $17,703.24 as a "bad debt" deduction. The Internal Revenue Service disallowed that, on the ground that the contractor's obligation to put up a house did not constitute a "bona fide debt" under the tax law. So the taxpayer tried again, writing off the loss as a "theft" deduction under a provision of the tax law that permits a deduction for casualty losses, including theft. The IRS disallowed that, too, saying that the builder's declaration of bankruptcy didn't amount to theft.
The taxpayer appealed to the Tax Court, but to no avail. The Court agreed with the IRS all the way, and ordered the taxpayer to take his losses--and pay his taxes, with no deduction allowed. (Schneider v. Comm'r.)