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Inventor's Conspiracy Theories Can't Support Claim of Patent Infringement Theft Loss.

(Parker Tax Publishing March 11, 2015)

The Tax Court upheld disallowance of theft loss deductions, finding no basis for the taxpayer's conspiracy-fueled theft loss and patent infringement claims. Sheridan v. Comm'r, T.C. Memo 2015-25.


Tim Sheridan, an inventor and an entrepreneur, holds a patent for a "smokeless tobacco vaporizer" filed in 2001, although similar patents predate his. Following a long period of disappointing sales, Sheridan began to suspect that Internet search engines, social media platforms, the U.S. Postal Service, a telecommunications firm, and other entities were actively trying to harm his vaporizer business. According to Sheridan, these perceived wrongs enabled companies to steal his intellectual property and make sales that his business would otherwise have made.

Sheridan contended that he suffered damages from the piracy of his intellectual property ranging from $282 million to $294 million annually. He arrived at these damages using various formulas of his own creation, applying self-derived estimates and randomly assigned multipliers to geographic populations, Internet traffic, total market, competitors' sales, and other items. Based on these calculations Sheridan claimed a deduction of $1 million in losses arising from theft for 2009, 2010, and 2011.

The IRS disallowed the deductions, finding no evidence that patent infringement had occurred or that Sheridan had incurred any actual damages. Sheridan challenged this determination, claiming the deductions were justified as theft losses.


Code Sec. 165(a) permits taxpayers to deduct any loss sustained during the year and not compensated for by insurance or otherwise, including theft, which is broadly defined (Reg. Sec. 1.165-8(d)). To substantiate a theft loss deduction, a taxpayer must prove:

(1) that a theft actually occurred under applicable state law (or under an applicable Federal criminal statute) and

(2) the amount of the loss. Further, a taxpayer must claim a theft loss deduction for the taxable year in which the taxpayer discovers the loss.

The court dismissed Sheridan's assertion that his intellectual property had been stolen, as his claim was based on an unsupported belief that criminal conspiracies were the only possible explanation for his business' lack of success. The court also found Sheridan was unable to substantiate the amount of his supposed loss, noting that his calculation was based on his unsupported estimate of the portion of the worldwide vaporizer market to which he believed he was entitled. Finally, the court found Sheridan failed to show that he discovered the supposed theft in 2009, 2010, or 2011, as opposed to some prior year predating the filing of his patent.

The court surmised that Sheridan was not claiming a loss deduction for "theft" but for alleged damage to his business from supposed anticompetitive behavior and noted that such damages are not deductible as "theft losses" under Code Sec. 165(e). Finding no evidence of patent infringement or actual damages, the Tax Court upheld the disallowance of Sheridan's deductions and concluded he failed to establish a theft loss under Code Sec. 165(e).

For a discussion of casualty and theft losses, see Parker Tax ¶ 84,500. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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