Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-90-09006/USCOURTS-ca10-90-09006-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
Arthur H. Hardy
Appellant
Jeannine C. Hardy
Appellant

Document Text:

• . FILED 

Uruted State, U>tm of Appeals 

Tenth Cir:?1it 

OCT 2 9 1990 

UNITED STATES COURT OF APPEALS »Q 

'-' BERT L HOEri,y.. FOR THE TENTH CIRCUIT Cl~rk ~R 

ARTHUR H. HARDY and 

JEANNINE C. HARDY, 

Petitioners-Appellants, 

v. 

COMMISSIONER OF INTERNAL 

REVENUE, 

Respondent-Appellee. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

No. 90-9006 

(Tax Court #7856-86) 

ORDER AND JUDGMENT* 

Submitted on the Briefs: 

Before McKAY, MOORE, and BRORBY, Circuit Judges. 

This is a prose appeal from an order of the tax court 

sustaining the conunissioner's disallowance of a deduction. We 

remand for additional proceedings. 

Mr. and Mrs. Hardy, the taxpayers, responded to an ad in a 

Salt Lake City newspaper which offered to broker large loans. 

*This order and judgment has no precedential value and shall not 

be cited, or used by any court within the Tenth Circuit, except 

for purposes of establishing the doctrines of the law of the case, 

res judicata, or collateral estoppal. 10th Cir. R. 36.3. 

Appellate Case: 90-9006 Document: 010110064924 Date Filed: 10/29/1990 Page: 1 
\., This response put the Hardys in contact with Charles Tisdale, a 

self-professed loan broker who claimed to represent Bancor, Inc., 

a purported California mortgage company. Mr. Tisdale told Mr. 

Hardy that Bancor would loan the Hardys $20 million if they could 

provide a sufficient number of borrowers whose capitalization 

would meet Bancor's requirements. In addition, the borrowers 

would have to pay a "loan fee" to begin the loan process. 

The Hardys managed to assemble a collection of borrowers, but 

for reasons neither clear from the record nor germane to this 

appeal, the Hardys paid the "loan fee" by themselves. Short of 

cash, they placed a second mortgage on their home to generate the 

$8,750 they delivered to either Mr. Tisdale or Bancor. 1 

Ultimately, after many delays and promises, the loan was not 

funded. Mr. Hardy's efforts to determine what happened to his 

"loan fee" and the loan itself were fruitless when he discovered 

Mr. Tisdale was incarcerated in a penitentiary in Idaho and the 

telephone listed to Bancor was disconnected. 2 Mr. Hardy attempted 

to bring these facts to the attention of the FBI but did not 

succeed in his efforts. Nonetheless, the Hardys attempted to 

deduct the loss of the $8,750 from their income in 1982, the year 

the "loan fee" was paid. 

The commissioner disallowed the 

disallowance was approved by the tax court. 

deduction, and this 

Finding that the 

Hardys intended to use the loan proceeds to buy hotels and motels, 

1The transcript of the hearing in the tax court is less than 

illuminating, and this fact, as well as many others, is unc~ear. 

2Mr. Hardy also learned Mr. Tisdale had been free on bond at the 

time of their negotiations. 

-2-

Appellate Case: 90-9006 Document: 010110064924 Date Filed: 10/29/1990 Page: 2 
\ • the court further found that the taxpayers intended to embark on a 

new venture; therefore, the court held that the "loan fee" was not 

a business expense under section 162(a) because it was a start-up 

cost. The new venture finding is not clearly erroneous, and we 

agree with the court's legal conclusion. 

The tax court further found that the "loan fee" was not an 

ordinary and necessary expense for the production of income; 

therefore, the taxpayers were not entitled to a deduction under 

section 212. Following a line of circuit court authority, 

including Medco Products Co. v. Commissioner, 523 F.2d 137, 138 

(10th Cir. 1975), the court reasoned start-up costs are not 

ordinary expenses but, rather, capital expenditures. Once again, 

we agree with that analysis. 

Having expressed our agreement with the express rulings of 

the tax court, we turn to the troublesome aspect of this case 

which has, thus far, gone unaddressed. Our examination of the 

record leaves us with the clear impression Mr. Hardy was 

distinctly disadvantaged at the hearing. He seemed incapable of a 

clear expression of the facts or his position on the law. More 

importantly, however, a glaring fact was laid before the tax 

court, and it resounds in the record with astounding force. 

Mr. Hardy knew he had been duped, if not by Bancor, then by 

Mr. Tisdale. Indeed, he twice testified what had happened to him 

was "a scam." All the evidence before the tax court points to 

this conclusion, and the commissioner made no effort to introduce 

any evidence to the contrary. It is equally apparent, however, 

-3-

Appellate Case: 90-9006 Document: 010110064924 Date Filed: 10/29/1990 Page: 3 
' Mr. Hardy did not, and from the taxpayers' brief in this court, 

still does not understand the concept of a theft loss. 

To its credit, the tax court also recognized the substance of 

what took place and Mr. Hardy's ignorance of the tax laws as well. 

At the conclusion of the testimony, the following colloquy took 

place: 

THE COURT: Well, I think the taxpayer -- are 

you arguing a theft loss as well? 

MR. HARDY: You've lost me. 

THE COURT: Are you claiming that the expenses 

are deductible as a theft loss as well? 

MR. HARDY: No, no, no. Well, I mean, 

theoretically that happened, or actually, I guess, it 

was a theft, but I'm just saying --I-- My intent was 

to make money and that's the only reason I did it. I 

thought it was my chance to make big money. 

THE COURT: 

the question is, 

deduction. Is 

claiming the tax 

MR. HARDY: 

• Okay, But now you've lost it, and 

on what basis are you claiming the tax 

the theft loss one of the bases for 

deduction? 

( No response. ) 

THE COURT: Okay. He apparently is. So, Mr. 

Gardner [Respondent's counsel] as an alternative theory, 

so [sic] if there are some cases dealing with this type 

of a tax situation in the theft loss context, you 

probably ought to point those out as well. [In the 

Respondent's post trial brief.] 

Upon the record before us, we have no indication that the issue of 

the theft loss was addressed. Certainly, the tax court did not 

address it in the dispositional order. Whether the commissioner 

dealt with the question in his post trial brief is problematical 

because the brief, although filed, is not part of the record. 

We believe the tax court's recognition of the issue is 

commendable. Indeed, in keeping with the highest standards of 

-4-

Appellate Case: 90-9006 Document: 010110064924 Date Filed: 10/29/1990 Page: 4 
justice, the court sought to protect a seemingly justifiable claim 

in the taxpayers' interest. Yet, having placed the taxpayers' 

right to claim a theft loss in issue, the court then failed to 

resolve it. We believe the question must not be left unanswered. 

Accordingly, the case is REMANDED for further proceedings to 

determine whether the taxpayers are entitled to claim a theft loss 

for tax year 1982. Mandate shall issue forthwith. 

Entered for the Court 

John P. Moore 

Circuit Judge 

-5-

Appellate Case: 90-9006 Document: 010110064924 Date Filed: 10/29/1990 Page: 5