## Facts

- Herman Schonhoff, an unmarried Missouri resident, purchased dance lessons in 1957, paying about $8,825 for a contract covering 1,000 hours of instruction.
- He claimed he bought the large block after the studio’s manager implied he could date the female instructors.
- Schonhoff later learned students were not allowed to date instructors but continued taking lessons; by 1959 he had used 221 hours.
- He demanded a refund, retained counsel, and the studio rescinded the contract as to unused lessons and refunded $5,500.
- On his 1959 federal income tax return, Schonhoff claimed a theft-loss deduction under I.R.C. § 165 of about $3,925, computed from the amount paid, the refund received, and related legal fees.
- The Commissioner disallowed the claimed theft-loss deduction and issued a notice of deficiency; Schonhoff petitioned the Tax Court.

## Issues

1. Whether Schonhoff’s loss from the dance-lesson transaction, after rescission and partial refund, qualified as a deductible “theft loss” under I.R.C. § 165 for 1959.
2. Whether the studio’s alleged misrepresentations constituted “theft” (or similar criminal misappropriation) under Missouri law sufficient to support a federal theft-loss deduction, and whether the claimed amount was properly measured and deductible in 1959.

## Decision

- The Tax Court sustained the Commissioner’s determination and disallowed the theft-loss deduction.
- The court found Schonhoff failed to prove conduct amounting to “theft” under applicable Missouri law.
- The court treated the matter as a civil, contractual dispute that resulted in rescission and a refund, not a criminal taking.

## Legal Principles

- Whether a “theft” occurred for purposes of I.R.C. § 165 is determined by the law of the jurisdiction where the loss was sustained.
- Misrepresentation, hard bargaining, or an unfavorable consumer transaction does not establish a theft loss absent proof that the conduct satisfies the elements of a theft-type offense under state law.
- A taxpayer bears the burden to prove a deductible theft loss, including the existence of qualifying criminal conduct and an allowable amount after considering services received and reimbursements or recoveries.
- Amounts paid for personal services and benefits received (here, instruction actually provided) are not transformed into a theft loss merely because the taxpayer later disputes the bargain.

## Conclusion

The Tax Court held that a partially performed dance-lesson contract later rescinded with a substantial refund did not produce a deductible theft loss under § 165 because the taxpayer did not prove theft under Missouri law and the facts reflected a contractual adjustment rather than criminal misappropriation.


Schonhoff v. Commissioner, T.C. Memo. 1963-213 (1963)