T.C. Memo. 2012-351

UNITED STATES TAX COURT

PAULA J. HALATA, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6105-10. Filed December 19, 2012.

Jack W. Naranjo, for petitioner.

David B. Mora, for respondent. 

MEMORANDUM FINDINGS OF FACT AND OPINION

MORRISON, Judge: The respondent (the “IRS”) issued to petitioner Paula

J. Halata a statutory notice of deficiency pursuant to section 62121 showing the

1All references to sections are to sections of the Internal Revenue Code.
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[*2] IRS’s determinations of the following income-tax deficiencies, additions to tax,

and penalty:

Year Deficiency

Addition to tax

sec. 6651(a)(1)

Addition to

tax 

sec.

6651(a)(2)

Penalty

sec.

6662(a)

2007 $6,787.45 $530.10 --- $1,357.49

2008 27,695.00 --- (

1

) ---

1To be computed at a later date.

Various provisions in the stipulation resolve all the noncomputational issues in the

case except for: (1) whether Halata is entitled to a $181,104 theft-loss deduction,

(2) the year of the theft-loss deduction, and (3) the effect of the theft-loss 

deduction, through the operation of net-operating-loss carrybacks, on Halata’s tax

liabilities for the years at issue. The theft-loss deduction Halata claimed relates to

$181,104 she transferred to a Swiss bank account on November 21, 2006. She

contends that this money was lost to a scam. We determine that Halata is entitled 

to a theft-loss deduction. See infra part 2.a. However, the year of Halata’s theftloss deduction is 2009. See infra part 2.b. Furthermore, Halata did not plead her

theory that the theft loss resulted in a net-operating loss for 2009 and that this netoperating loss should be carried back to 2007 or 2008. See infra part 3. She
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[*3] cannot assert the theory now. Therefore the theft-loss deduction does not

affect Halata’s taxable income for 2007 or 2008 or her tax liabilities for these 

years. 

FINDINGS OF FACT

Halata resided in Texas when she filed her petition. During the period

relevant to this case, Halata worked as a chemical-plant operator for ExxonMobil.2

She also owned rental houses.3 She is a high-school graduate with two years of

college coursework. 

In 1999 or 2000, Halata began a romantic relationship with Dominique

Ojeda. In late 2000, Ojeda and her eight-year-old daughter moved in with Halata. 

Two years later, Ojeda lost her job as an optometrist’s assistant. Halata began

paying all the living expenses of Ojeda and her daughter. At some point, Ojeda

worked as an apartment locator over the internet, but this work apparently did not

provide much income. Ojeda also began researching other business opportunities

on the internet. 

2The parties stipulated some of the facts. The stipulation is incorporated by

this reference. 

3By 2006, she owned four rental houses. 
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[*4] In September or October 2006, Ojeda told Halata that she had learned of a

way of making money through bank-guaranty transactions. Ojeda found this

supposed opportunity through a member of the California bar named Dwight

Montgomery. Montgomery persuaded Ojeda to participate in a bank-guaranty

transaction. Because Ojeda did not have any money, Halata supplied the money for

the purported transaction. Halata was given to understand that if she made a

payment of about $180,000, Ojeda would receive $2.5 million; that the first

installment of the $2.5 million would be paid to Ojeda two weeks after the payment

of the $180,000; and that the $180,000 would be returned at any time upon request. 

Halata and Ojeda agreed that Halata would take the risk of loss on the purported

transaction. Halata never personally spoke with Montgomery about the purported

bank-guaranty transaction. 

The trial record contains some documents, including emails, regarding the

purported bank-guaranty transaction. These documents are quoted extensively in

the discussion that follows. Many of the events, terms, persons, and entities

referred to in the documents are not explained by the trial record. 

Montgomery gave Ojeda an invoice from “European Investors Inc.” dated

October 13, 2006. Ojeda gave the invoice to Halata. The invoice requested that

“Mantara Holding” pay 250,000 euro to account No. 0456-981457-12 at Credit
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[*5] Suisse in Lugano, Switzerland, a bank account supposedly owned by

“European Investors Inc.”: 

To:

MANTARA HOLDING

(HIS ADDRESS)[4]

DATE: 13TH OCTOBER 2006

PRO FORMA INVOICE N. 066/2006

Transaction code 032006WTDM

We, European Investors Inc., hereby present our

corporate invoice as set forth in the Agreement dated 9th

October 2006, by his [sic] reference the terms of which

are incorporated herein, it was agreed that the 1st Party

will cover the clearing, settlement and banking expenses

against this invoice. This amount will be refunded by the

2nd Party at the end of the transaction, or can be deducted

by the 1st Party form [sic] the amount of the payment fir

[sic] the first tranche of Bank Guarantys as delivered by

the 2nd Party to the 1st Party. If, in the event the PreAdvice (MT799) is not delivered as provided in the

Agreement, then the Eur 250,000 remitted by the 1st Party

will be refunded by the 2nd Party to the 1st Party within

ten (10) international banking days to the 1st Party’s

banking coordinates provided in the agreement.

TOTAL AMOUNT TO PAY EUR 250,000.00

__________________________________

4The phrase “(HIS ADDRESS)” is in the original.
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[*6] Please pay to this designated bank account

Bank name: CREDIT SUISSE

Address: LUGANO, SUISSE

Swift Code: CRESCHZZ69N

Account Number: 0456-981457-12

Account Holder: EUROPEAN INVESTORS INC.

The invoice bears the following official-looking stamp: 

European Investors Incorporated

International Business Company Act

1996

Domenica

Sometime before November 14, 2006, Montgomery emailed Ojeda:

Dear Dominique,

Thank you for your email and your message. All you need to send is

140,000 euros which is approximately $180,000. I have arranged for

the payment of the additional 110,000 euros from a second party.

Last night (and early early morning) I contacted and spoke with all of

the other parties except for the provider. The buyer is online and ready

to proceed. The settlement bank (Dresdner Bank in Frankfurt

Germany) is also online and ready to proceed.

I have not been able to contact the provider. Once I get confirmation

that the provider is online and ready to proceed, I will then call you

(and the other person) to proceed. I want to make certain that the

Credit Suisse account in Lugano is still where the provider wants the

250,000 euros to be sent. I also want to confirm that ABN AMRO is

ready to cut the BGs for the transaction.
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[*7] I do not want you or the other person to send ANY money until all

has been confirmed. It has taken time so we want to make certain that

everyone is back online to proceed and get this deal finally done.

On a final note, I appreciate and thank you for your hard work and

confidence -- you and Willie will be vindicated on this deal. This deal

will springboard us to other deals and allow us to do our own trading

without the naysayers.

Shoot me a quick email if there are any changes, and I will call you as

soon as I get confirmation from the provider.

Best regards,

Dwight.

On November 14, 2006, Montgomery emailed Ojeda: 

Dear Dominique ... great news ... the provider is online and ready to

proceed ... I have already talked with the other person regarding

sending the 110,000 euros ... I will try to call you either later tonight or

in the morning ... I will be busy this evening on other matters until 11

pm ... that will probably be way too late for you ... I expect that we will

wire the 140,000 euros tomorrow ... please let me know whether that

will be possible ... thanks ... Dwight. 

Sometime between November 14 and 21, 2006, Ojeda emailed Montgomery

with the query: “Any news on the BG?”

On November 21, 2006, Montgomery responded by email:

Dear Dominique,

We are ready to proceed. I have the documentation signed by Pacific

for Dr. Khoo who will send the 110K euros.
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[*8] ALL YOU NEED TO SEND IS THE 140K EUROS (WHICH IS

APPROXIMATELY $180K)

PLEASE EMAIL OR FAX (909-363-8351) A COPY OF THE

PROOF OF REMITTANCE SO THAT I CAN SEND TO DR. KHOO

-- I WILL ALSO SEND YOU A COPY OF HIS PROOF OF

REMITTANCE (REMEMBER THAT HE IS IN SINGAPORE AND

THE BANKS WON’T OPEN UNTIL 4 OR 5 PM CALIFORNIA

TIME)

I HAVE ALSO ATTACHED ANOTHER COPY OF THE INVOICE

WITH THE BANKING

I WILL CALL YOU ...

ALSO, I REVISED YOUR IMPI WITH THE BANKING AND

ALREADY SENT TO DRESDNER TO SIGN ... SHOULD GET

THAT BACK TODAY TOO ...

THANKS !!!

Dwight.

The email listed as an attachment a document titled “wtdm 250K invoice.wpd”. No

attachment was introduced into evidence. 

On the same day, November 21, 2006, Halata signed documents authorizing

her bank, Washington Mutual, to wire $181,104 to Credit Suisse. The documents

stated that the “Beneficiary Name:” was “European Investors Inc.”, that the

“Beneficiary account number:” was 0456-981457-12, and that “Other Beneficiary

Information:” was “TRANSACTION CODE 032006WTDM DOMINIQUE 
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[*9] OJEDA”. On the same day, Washington Mutual confirmed that the wire

transfer had been made. Halata was never given any account statement showing

that the transferred money was being held in an overseas account for her.

Montgomery sent Ojeda the first page of a seven-page document entitled

“IRREVOCABLE MASTER PAYMENT INSTRUCTIONS”, which had an

“Effective Date” of December 5, 2006. This page purported to relate to an

obligation by Pacific Union Investment Corp. to provide an

indemnity guarantee with full responsibility and authority under penalty

of perjury to provide indemnity to pay protection to the respective

payees set forth on the signature pages (“Payee”) that percentage set

forth for such payee on such signature page of the face value of each

tranche, payable to Payee within eight (8) to twenty-four (24)

international banking hours after receipt of the funds confirmed by the

conditional SWIFT MT103 for each tranche pursuant to the

Agreement.

The “Agreement” was defined as a “certain Agreement” with “Transaction Code”

032006WTDM. The document stated that the “Contract Amount” was 5 billion

euro and that the “Transaction” was the “Purchase of Fresh Cut-Slightly Seasoned

Bank Guarantee(s)”. Even though the document described above has an “Effective

Date” of December 5, 2006, it was given to Halata before the November 21, 2006

wire transfer.
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[*10] Two weeks after the wire transfer, Halata had not received any money from

the purported bank-guaranty transaction. Ojeda contacted Montgomery. Ojeda told

Halata that Montgomery had given her some flimsy excuses for why there was no

payment.

On July 24, 2007, Montgomery sent an email to Ojeda with a copy to

someone named “Willie”. Ojeda showed the email to Halata. The email stated: 

Dominique and Willie,

As you know, Tommasi was a “no-show” ... person we met “stated”

that he has seen him, but did not know where he was when we were

there ... they are having a “runner” look out for him ...

As for Thomas ... he and I talked yesterday and we may get the signed

contract this week ...

As for Maria ... her buyers are still looking at the contracts (i.e., trying

to put the funding in place ...

Working on two other buyers on the “collateral first” procedures ...

should hear from them this week ...

Also working on another avenue to get your 140K ... will know later

this week ...

Regards

Dwight.
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[*11] On August 11, 2007, Ojeda emailed Montgomery: “Once again Dwight, I

have called left you messages and sent email asking you what is goin [sic] on and

not had any response?”

On August 13, 2007, Montgomery emailed Ojeda:

Dear Dominique ... have been working 24/7 for past week on the

buyers for Thomas and Bob ... procedures have been agreed to and am

awaiting signed contracts to forward to provider ... these are the paper

first deals and the stickiest issue was verification of buyer’s funds for

the paper ... but that is now agreed and we should be mvoing [sic]

forward with the tranching this week ... the other deal (where I am

trying to get some funds for Mantara re the 140,000 euros) is also

proceeding ... I am working on that in case these other deals stall and

Mantara can get you some funds ... not ignoring you at all -- just

juggling a million balls on all fronts ... regards ... Dwight.

This email was given by Ojeda to Halata. 

On August 20, 2007, Montgomery sent Ojeda another email with the Subject

line “updates ...” The email said:

Dear Dominique,

Still have not gotten the signed contract from Thomas ... got an email

that I should expect something within the next 12 to 24 hours ... no

idea on what the delay is all about, but trying to understand and remain

positive ... on a more positive note, my friend in HK has agreed to

“loan” 150,000 euros when their deal goes through ... will have them

send it to you and will coordinate with you at that time on each month 

thereafter up to a maximum of 1%, so he is willing to wait for us to get 

our deal(s) through ... he told me that he is at the MT760 stage, so 

assuming it goes out this week, the unconditional MT103 should be 
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[*12] sent by the end of the week ... made it clear to Willie

that there is no “walking around” money for him or anyone ...

this is only a stopgap favor (this friend also knows Tommasi

and is aware of the prior deal) ... let’s see what happens in the

next 24 hours on both fronts ...

regards ... D.

This email was given to Halata by Ojeda. As Halata testified: “[This email] is

talking about getting a loan. And Dominique [Ojeda] had told me that they were

offering to loan her the money to pay me back.” 

On September 11, 2007, Montgomery sent Ojeda and “Willie” the following

email:

Dominique and Willie ... as I said, there are two “contracts” that are

being processed:

Contract #1: I am not involved with this contract (i.e., there is NO

spread for any of us). This is the contract where KKP has agreed to

loan Mantara money which Mantara will have wired to Dominique in

connection with the Hua Sheng deal. The MT760 under this contract is

supposed to be sent this Thursday, September 13, 2007. Attached is

the redacted window letter which I received. After the MT760 is sent

and verified, the buyer sends the MT103 and then the funds are wired. 

Assuming it proceeds on Thursday, then KKP should be able to wire

the money to Mantara by Tuesday or Wednesday of next week.

Contract #2: This is the deal where a copy of the contract was sent to

Dominique. IT IS NOT EXPIRED. Buyer wants to send an MT799

requesting readiness of KKP’s bank to receive the conditional 

MT103. They have been jerking around with the verbiage and, as 

you can see, I typed the verbiage for them and sent it to them. Once 

the bank agrees, then they will send the MT799, KKP’s bank will 
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[*13] acknowledge, they will send the conditional MT103, KKP will 

send the MT760, they will release the funds by wire transfer. Below 

is the email and attachment. Compare the codes in the attachment 

with the codes you have in the contract. This one might take a week 

or so to get moving now that they want to first send the MT799.

Joe and I will be happy to meet with you when you come to California. 

Just let me know when and where. But all I can do now is simply wait

for these people to continue with their processing of the deals. Once

something is actually moving forward, you will be one of the first to

know.

This September 11, 2007 email, which was given by Ojeda to Halata, was

connected to a forwarded email from “Dwight Montgomery” to “cywong” dated

September 10, 2007. This forwarded email states:

I see you too stay up late ... I took the liberty of drafting sample

verbiage for the MT799 to ensure that there are no problems ... it is

okay if you reference the Agreement and the codes pursuant to which

the conditional MT103-23 will be sent ... it is not okay to reference

receiving a BG or the like ... REMEMBER THAT THIS IS THE

SETTLEMENT BANK TO ASSIST EVERYONE GETTING

The forwarded “cywong” email appears to be a fragment. The heading of the

September 11, 2007 email stated that it was attached to two other documents: 

“FORM OF MT799 VERBIAGE.doc” and “redacted KKP Update Letter 9-

10.pdf”. Neither attachment was introduced into evidence.

On December 5, 2007, Ojeda emailed Montgomery:
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[*14] You either need to send $2000 beginning today every month or send 

the whole $200k by Friday. I will be at your office or house on Monday.

I have held you in high regard and trusted your word. You need to

honor your word and make this right with me today. I will need a call

from you today.

On December 5, 2007, Montgomery responded:

Dear Dominique:

I only made two promises to you:

(1) if Mantara or I have a buyer that completes a deal, then you and

Willie will be included in the profit distribution; and

(2) if I am included in the profits on a deal that KKP completes, then I

will share my profits with you and Willie.

I also informed you that KKP agreed to remit 150K euros if KKP

completes a deal.

That is the only “word” I gave to you and Willie, and I will honor that

“word” irrespective. I made no other promises to either you or Willie.

I too am very frustrated and angry that not one of the deals has

completed. And while I remain confident that a deal will complete, I

also remain frustrated and angry at these nonperforming buyers and

delays.

All I can do is keep pressing on trying to get a deal done for the three

of us. Meanwhile, if you or the FBI come calling, then Joe and I are 

more than willing to meet with you and I will give all of the emails and 

other documentation for the FBI to look at. I can not do anything more and 

do not need to do anything more.
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[*15] At the end of the day, all I can and will do is honor the aforementioned 

promises to you and Willie. That is the only seed I sowed, and I remain 

optimistic that I -- and you and Willie -- will grow and blossom.

Best Regards,

Dwight.

This email was given to Halata by Ojeda. 

As part of Ojeda’s attempts to recover the transferred money, she contacted a

state prosecutor in California. She also contacted the SEC. Ojeda did not recover

the lost money. In the aftermath of the purported bank-guaranty transaction, her

relationship with Halata dissolved. 

The parties have stipulated that Halata filed an income-tax return for 2007. 

The return was a Form 1040, U.S. Individual Income Tax Return. On the return

Halata did not report a theft loss.

Halata did not file an income-tax return for 2008.

In 2009 the IRS conducted an examination relating to Halata’s 2007 and 

2008 tax years. Halata hired a tax attorney, John Polk, to represent her before the

IRS. Polk’s firm assigned a nontax lawyer, Scott Lisman, to investigate Halata’s

legal remedies regarding the loss of the $181,104. Lisman contacted both Ojeda

and Montgomery. Ojeda told Lisman that she had originally thought that the
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[*16] purported bank-guaranty transaction was legitimate and felt bad for how

things turned out. Montgomery still insisted that the purported bank-guaranty

transaction was a legitimate business transaction. He also claimed that he was

merely a facilitator of bank-guaranty transactions and that he received no money

from them. He said he had no information about how the purported bank-guaranty

transaction worked or the identities and roles of the parties to the purported

transaction. He said he did not know where Halata’s money went. Lisman

contacted the SEC and a California state prosecutor. He received no cooperation

from them. After his investigation, Lisman reported back to Halata that it would be

cost prohibitive for her to file a civil suit against Montgomery. Lisman explained

that Montgomery did not have any recoverable assets, that the costs of suing

Montgomery would be $30,000-$40,000, and that it was “risky” whether Halata

could prove Montgomery received the $181,104.5

On December 8, 2009, the IRS issued the notice of deficiency. The tax

liabilities calculated in the notice of deficiency did not reflect any deductions 

related to theft losses. Halata filed a timely petition. The case was tried in

 Houston, Texas. 

5Lisman also considered the possibility that Halata could sue Ojeda, but

informed Halata that such a suit would not result in recovery of the money.
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[*17] OPINION

1. Positions of the parties

Halata’s petition claimed that she is entitled to a theft-loss deduction “in 2007

and 2008” related to the purported bank-guaranty transaction. 

Halata’s pretrial memorandum asserted that she is “entitled to claim net

operating loss deductions arising from a theft loss she suffered, and which offset her

income for 2007 and 2008.”

In her closing argument Halata contended that she discovered that she had

lost the $181,104 on account of theft in 2007, that she had no reasonable prospect

of recovering the $181,104 that year, and therefore that there was a theft-loss

deduction of $181,104 for 2007.

In her posttrial brief, however, Halata contended that the theft loss was

sustained (1) in 2008, which, according to her brief, was the year she realized that

the purported bank-guaranty transaction was a fraudulent scheme, or 

“alternatively” (2) in 2009, when Lisman advised her that it was too costly to take

legal action against Montgomery. She also contended that her “net operating 

losses resulting from her theft loss can be carried back and applied in 2007 and

2008 under section 172(b)(1)(F) of the Internal Revenue Code.” The posttrial 
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[*18] brief was the first time that Halata plainly asserted that a net-operating loss

should be carried back from 2009.

The IRS contended that no theft occurred because Halata did not prove that

any person appropriated the $181,104 with the intent to deprive her of the money

using deception. The IRS asserted that Halata’s payment of the $181,104 was

“part of a bona fide transaction” and that “this was just a bad investment or the

funds are still available to the petitioner.” The IRS pointed out that there is no

evidence that Lisman attempted to contact European Investors Inc. or Mantara

Holdings to verify that the transaction was fraudulent. It also pointed out that there

is no evidence that criminal charges were filed against Montgomery. 

The IRS claimed that a theft-loss deduction is barred for either the 2008 or

2009 tax year because Halata contended in closing argument that the theft-loss

deduction should be allowed for the 2007 tax year.

Furthermore, the IRS contended that Halata has failed to demonstrate that

there was no reasonable prospect of recovering the $181,104 in 2007, 2008, or

2009.

The IRS also claimed that Halata is barred from claiming a net-operating-loss

carryback from 2009. The IRS reasons as follows:
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[*19] [T]he petitioner’s claim of a net operating loss carryback from

the taxable year 2009 is a new issue not raised in the petition filed in

this case, or in the petitioner’s pretrial memorandum, or during the trial

in this case. Additionally, the petitioner had not amended her petition

in this case to properly raise the issue of a carryback from the taxable

year 2009. Respondent has not had an opportunity to examine the

petitioner’s individual income tax return for the taxable year 2009. 

Therefore, petitioner’s attempt to raise the claim that there exists a

carryback from the taxable year 2009 to the taxable years in issue in

this case is a new issue the untimely raising of which constitutes a

surprise, and would be unfairly prejudicial to the respondent, and

consequently should not be considered by the Court. See

Mwangachuchu v. Commissioner, T.C. Memo. 2012-86.

2. The theft-loss deduction

Section 165(a) permits a deduction against ordinary income for “any loss

sustained during the taxable year and not compensated for by insurance or

otherwise.” For individuals, the deduction is limited to: (1) losses incurred in a

trade or business; (2) losses incurred in any transaction entered into for profit 

though not connected to a trade or business; or (3) losses of property not 

connected with a trade or business or a transaction entered into for profit if such

losses arise from “fire, storm, shipwreck, or other casualty, or from theft.” See

sec. 165(c). The deduction is allowed for the year the loss is sustained. Sec.

165(a). Generally, a theft loss is treated as sustained during the taxable year in

which the taxpayer discovers it. Sec. 165(a), (e). However, even after a theft loss

is discovered, if a claim for reimbursement exists during the year of the loss with 
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[*20] respect to which there is a reasonable prospect of recovery, then a theft loss is

treated as “sustained” only when it can be ascertained with reasonable certainty

whether such reimbursement for the loss will be obtained. Jeppsen v.

Commissioner, 128 F.3d 1410, 1414 (10th Cir. 1997), aff’g T.C. Memo. 1995-342;

26 C.F.R. secs. 1.165-1(d)(2)(i), (3), 1.165-8(a)(2) (2012). Stated differently, a

reasonable prospect of recovery will postpone the theft-loss deduction until such

time as the prospect no longer exists. Halata has the burden of proving she has

sustained a theft loss. See Tax Ct. R. Pract. & Proc. 142(a).6

The term “theft” under section 165 is a word of general and broad meaning

that includes any criminal appropriation of another’s property, including theft by

swindling, false pretenses, and other forms of guile. Edwards v. Bromberg, 232

F.2d 107, 110 (5th Cir. 1956); 26 C.F.R. sec. 1.165-8(d) (2012). Whether a theft

loss has been established depends upon the law of the state where the alleged theft

occurred. Bellis v. Commissioner, 540 F.2d 448, 449 (9th Cir. 1976), aff’g 61 

T.C. 354 (1973); Luman v. Commissioner, 79 T.C. 846, 860 (1982); Paine v.

Commissioner, 63 T.C. 736, 740 (1975), aff’d without published opinion, 523 

6The burden of proof shifts to the IRS if the taxpayer is an individual who

introduces credible evidence with respect to any factual issue relevant to federal

income-tax liability and complied with the substantiation and recordkeeping

requirements of the Internal Revenue Code. See sec. 7491(a)(2)(A) and (B). Halata

does not assert that the IRS bears the burden of proof.
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[*21] F.2d 1053 (5th Cir. 1975). A taxpayer must prove a theft occurred under

applicable state law by only a preponderance of the evidence and not beyond a

reasonable doubt. See Allen v. Commissioner, 16 T.C. 163, 166 (1951) (“If the

reasonable inferences from the evidence point to theft, the proponent is entitled to

prevail. If the contrary be true and reasonable inferences point to another

conclusion, the proponent must fail.”). A criminal conviction is not necessary in

order for a taxpayer to demonstrate a theft loss. See Monteleone v. Commissioner,

34 T.C. 688, 694 (1960).

a. Halata sustained a loss attributable to a theft.

Halata resided in Texas when the purported transaction occurred. Therefore,

we will decide whether the evidence presented allows for us to determine that a

theft occurred under Texas law.

Theft is prohibited by Tex. Penal Code Ann. sec. 31.03(a) (West 2011 &

Supp. 2012):

THEFT. (a) A person commits an offense if he unlawfully

appropriates property with intent to deprive the owner of property.

Tex. Penal Code Ann. sec. 31.03(b) provides that “[a]ppropriation of property is

unlawful if: (1) it is without the owner’s effective consent”. Tex. Penal Code 
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[*22] Ann. sec. 31.01(3) provides that consent is not effective if it is induced by

deception. 

Under Texas law, a theft of Halata’s $181,104 took place if someone

appropriated the money by deceiving Halata and intended to deprive Halata of the

money. Id. In evaluating whether there was a theft, we must resolve a predicate

factual dispute between the parties regarding the nature of the purported bankguaranty transaction. Halata contends that the transaction was fictitious; the IRS

contends it was not fictitious. The question of whether the transaction was fictitious

is relevant to whether Halata’s money was “appropriated”, whether there was a

deception, and whether someone intended to deprive Halata of her money.

The IRS posits several alternative ways to reach the conclusion that the

purported bank-guaranty transaction was not fictitious. It states: 

From respondent’s [the IRS’s] view based on the record this could be

one of several possible transactions. First, the petitioner [Halata] could

have been investing in a heretofore undeterminable credit investment in

Europe based on negotiations between her friend Dominique Ojeda and

Dwight Montgomery. Second, the petitioner may have loaned money

to Ojeda to invest in the undeterminable credit investment in Europe

and would be paid back by monies received by Ojeda. Third, the

petitioner may have transferred money to an investment account in

Europe and the money may, or may not be there. There is no way to

determine what occurred from the record.
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[*23] We take each possibility in turn. We do not think that the $181,104 wire

transfer was a “credit investment in Europe”. First, there were the documents that

Montgomery gave Ojeda that supposedly memorialize the transaction. These 

documents--the October 13, 2006 “invoice” from “European Investors Inc.” and the

December 5, 2006 “Irrevocable Master Payment Instructions”--look phony to us. 

Second, there were the supposed terms of the transaction. A $2.5 million return on

$181,104 is too good to be true; a purported return that high is an indicator of a

fraudulent scheme.

We also reject the possibility that the $181,104 was a loan from Halata to

Ojeda. It appears to us that Ojeda did not agree to repay Halata out of her personal

funds in the event of the loss of the $181,104. Rather, Halata bore 100% of the risk

of loss from the purported transaction. We therefore do not agree that the transfer

of $181,104 was a loan from Halata to Ojeda.

We also do not agree that Halata has an ownership interest in an 

“investment account in Europe”. Halata transferred money to a mysterious Swiss

bank account. She received no contract documents in exchange evidencing her legal

rights. This is more consistent with a scam than with an investment account of some

kind.
-24-

[*24] Having determined that the purported bank-guaranty transaction was

fictitious, we find that the evidence is consistent with the proposition that there was

a theft of Halata’s $181,104. First, Halata’s money was “appropriate[d]” by

someone. It was transferred to someone’s Swiss bank account in exchange for

nothing of value. Second, it is apparent from the evidence described above that

Halata was deceived by someone into transferring the money. That makes the

appropriation unlawful. Third, someone intended to deprive Halata of the money. 

That is the only plausible explanation that is consistent with the phony documents. 

As the IRS points out, however, the evidence does not definitively resolve the

identity of the person who (1) appropriated Halata’s money, (2) deceived Halata,

and (3) intended to deprive Halata of her money. In other words, the evidence does

not definitively resolve the identity of the thief.

If we had to determine the identity of the thief, we would name 

Montgomery. Much of the evidence supports the proposition that Montgomery

intended to deprive Halata of her money. Montgomery claimed that he was the

central point of contact among multiple parties: a “buyer”, a “provider”, a

“settlement bank”, ABN Amro, Credit Suisse, and “Mantara Holding”. These

parties either were nonexistent or were not involved in any bank-guaranty

transaction with Montgomery. His assertions that he was the central point of 
-25-

[*25] contact among parties that did not actually exist or that had nothing to do 

with his transaction indicate that he intended to deprive Halata of money (through

Ojeda). An additional indication of Montgomery’s knavery is that he told Lisman

that the bank-guaranty transaction was a legitimate transaction. By the time of

Lisman’s investigation, Montgomery would have known that the transaction was

not legitimate. His claim otherwise is suspect. The major stumbling block to the

conclusion that Montgomery was the thief is the lack of direct evidence that he

received the $181,104. Even without direct evidence, it is reasonable to surmise

(and we do find) that: (1) Montgomery would not have orchestrated the fraud

unless he thought he would ultimately receive the wire transfer and (2) he did

actually receive the $181,104 wire transfer. In the alternative, even if 

Montgomery was merely an unwitting facilitator of the purported bank-guaranty

transaction and therefore had no intent to deceive Halata, and even if he did not

receive the $181,104 wire transfer and therefore did not appropriate Halata’s

money, Halata still suffered a theft at the hands of whoever orchestrated the 

scheme. See Jensen v. Commissioner, T.C. Memo. 1993-393 (the taxpayers were

entitled to a theft-loss deduction even though they had contact only with their

insurance broker, who invested their money in a Ponzi scheme, and who was not 
-26-

[*26] alleged to have been part of the scheme), aff’d without published opinion, 72

F.3d 135 (9th Cir. 1995).

We conclude that her $181,104 was lost on account of theft. Therefore,

Halata is entitled to a theft-loss deduction.

b. Halata’s theft loss was sustained in 2009. 

Generally a theft loss is considered sustained in the year in which the

taxpayer discovers it. Sec. 165(a), (e). Thus, we must determine the year in which 

Halata discovered the loss. Halata convincingly testified that on or before

December 5, 2007, she realized that she had been scammed. We therefore conclude

that 2007 was the year that Halata discovered the theft.

The theft loss is not considered to be sustained in 2007 if Halata had a claim

for reimbursement with respect to which there was a reasonable prospect of

recovery. See 26 C.F.R. sec. 1.165-1(d)(2)(i) (2012). In 2007, Halata had a

respectable legal claim against Montgomery. Montgomery passed on deceptive

information to Ojeda, thus inducing Halata to transfer the money. Halata did not

know then that Montgomery had no assets from which she could recover. Therefore

we conclude that in 2007 Halata had a claim for reimbursement with respect to

which there was a reasonable prospect of recovery.
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[*27] If in the year of discovery there exists a claim for reimbursement with respect

to which there is a reasonable prospect of recovery, a theft loss is considered to

have been “sustained” only when “it can be ascertained with reasonable certainty

whether or not such reimbursement [for the loss] will be received.” 26 C.F.R. sec.

1.165-1(d)(2)(i) (2012); see also 26 C.F.R. secs. 1.165-1(d)(3), 1.165-8(a)(2)

(2012). Thus, we must determine the year in which it could be ascertained with

reasonable certainty that reimbursement for the $181,104 loss would not be

obtained.

During 2007, Ojeda conducted her own investigation of the purported bankguaranty transaction on behalf of Halata. She contacted the authorities about

Montgomery. She demanded reimbursement from him. We conclude that these

efforts did not produce reasonable certainty as to whether Halata could obtain

reimbursement from Montgomery. Ojeda was not a lawyer. She could not initiate

civil litigation against Montgomery on Halata’s behalf nor was she trained to

evaluate whether litigation was a reasonable method of collecting money from

Montgomery. Ojeda likely feared that she could end up a potential defendant

herself; this fear would have impaired her ability to objectively evaluate Halata’s

rights against Montgomery. By contrast, Lisman’s 2009 investigation appropriately

evaluated the advisability of filing suit against Montgomery.
-28-

[*28] Lisman determined that a lawsuit was impractical given the cost of the

lawsuit, Montgomery’s lack of recoverable assets, and Montgomery’s possible

defenses.

The IRS faults Lisman for his apparent failure to contact “European Investors

Inc.” and “Mantara Holding” to investigate the recovery of Halata’s money. 

However, these entities were either (1) fictitious or front entities or (2) actual

entities that were uninvolved in any transaction involving Montgomery. Efforts to

pursue these entities would have been futile. We conclude that Lisman’s

investigation was sufficient to determine with reasonable certainty that Halata could

not obtain reimbursement for her $181,104 loss. Lisman’s investigation was

conducted in 2009. Therefore, Halata’s theft loss was sustained in 2009.7

3. The effect of the theft-loss deduction for 2009 on Halata’s tax liabilities for

2007 and 2008

The next issue to resolve is whether Halata’s theft loss in 2009 creates a netoperating loss for 2009 that should be carried back and deducted against her 2007

or 2008 income. The difference between gross income and deductions is a netoperating loss. See sec. 172(c). A net-operating loss for 2009 exists if Halata’s

7

It appears that there is still time for Halata to file an amended return for tax

year 2009 claiming a theft-loss deduction. See sec. 6511(a).
-29-

[*29] deductions for 2009, including the theft-loss deduction, exceed her gross

income for 2009. The general rule for carrying back net-operating losses is that a 

net-operating loss is first deducted from income in the tax year that is two years

before the year of the net-operating loss. See sec. 172(b)(1)(A)(i).8 The year of 

the net-operating loss that would result from Halata’s theft loss is 2009, and,

therefore, under the general rule, the first year of the carryback period would be

2007. The year 2007 is before us jurisdictionally. The problem is that Halata 

never filed a pleading asserting her theory that there was a net-operating loss for

2009 that should be carried back to prior years. See Tax Ct. R. Pract. & Proc.

34(b)(4) (petition is required to “assign[]”, i.e., state, every error alleged to have

been made by the IRS in the determination of the deficiency). The Court and the

IRS were not advised of her theory until after trial. See Tax Ct. R. Pract. & Proc.

31(a) (purpose of pleadings is to give parties and Court fair notice of matters in

controversy). Therefore she is barred from asserting it. See Tax Ct. R. Pract. &

8One or more special rules affecting the carryback period apply to the portion

of any 2009 net-operating loss attributable to Halata’s theft-loss deduction. See sec.

172(b)(1)(F) (three years before the year of loss is the first year of the carryback

period for the portion of the net-operating loss that is an “eligible loss”, including a

theft loss); sec. 172(b)(1)(H) (allowing a taxpayer to elect whether the first

carryback year is three, four, or five years before the year of net-operating loss if the

year of loss is 2008 or 2009). We need not determine the length of the carryback

period because, as we explain, Halata failed to assert in her petition that any 2009

net-operating loss should be carried back to any prior year.
-30-

[*30] Proc. 34(b)(4) (any issue not raised in assignments of error in petition is

deemed conceded). Also, Halata would have had the burden of proof regarding the

net-operating loss. She adduced no evidence regarding her gross income for 2009

and her deductions for 2009 (other than the $181,104 theft-loss deduction). Without

this information, her net-operating loss cannot be calculated.9 She would not have

met her burden of proof. See Paulson v. Commissioner, T.C. Memo. 1991-508, 62

T.C.M. (CCH) 968, 974 (1991).

4. Conclusion

In summary, Halata was the victim of a theft and she sustained a $181,104

theft loss in the taxable year 2009. However, she has not properly raised the issue

that the theft loss should affect her taxable income for 2007 and 2008 by virtue

of/via a net-operating loss carryback from 2009 and in any event has not

substantiated any such net-operating loss carryback. Her deficiencies for these two

years are therefore unaffected by the theft loss.

To reflect the foregoing and concessions,

Decision will be entered

under Rule 155.

9Alternatively, if Halata were entitled to carry back “eligible loss[es]” from

2009, see sec. 172(b)(1)(F), such eligible losses cannot be calculated either.