* This order and judgment is not binding precedent except under the

doctrines of law of the case, res judicata and collateral estoppel. The court generally disfavors the citation of orders and judg ments; nevertheless, an order and judgment may be cited under the terms and condi tions of 10th Cir. R. 36.3. 

## F I L E D United States Court of Appeals Tenth Circuit 

### FEB 20 1998 

### PATRICK FISHER Clerk UNITED STATES COURT OF APPEALS

TENTH CIRCUIT
ZAHIRUDEEN PREMJI; CAROL M. PREMJI, Petitioners-Appellants,
v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. No. 96-9017 (T.C. No. 8372-94) (United States Tax Court)

CARL JOHN NORBY, Petitioner-Appellant,
v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. No. 96-9018 (T.C. No. 10353-94) (United States Tax Court)

ORDER AND JUDGMENT * Thomas G. Hodel of Doussard Hodel Markman & Wells, P.C., Lakewood, Colorado, for Petitioners-Appellants. Karen D. Utiger (Gilbert S. Rothenberg with her on the brief), Department of Justice, Tax Division, Washington, D.C., for Respon dent-Appellee.** The Honorable Wesley E. Brown, Senior District Ju dge for the District

of Kansas, sitting by designation.
-2- Before BALDOCKandBRORBY , Circuit Judges, and BROWN , Senior District Judge. **

In these consolidated cases, Zahirudeen and Carol P remji, and Carl Norby appeal the Tax Court's decision denying their 1990 theft loss deductions for their investment losses in M&L Business Machine Company, Inc. ("M&L"). The taxpayers contend they are entitled to the deductio ns in 1990 because they discovered their losses in 1990 and had no reasonab le prospect of recovery at the end of that year. ( Id. at 14-15.) We exercise jurisdiction pursuant to I .R.C. § 7482(a)(1) and affirm.

BACKGROUND M&L Business Machine Company, Inc. The facts are largely undisputed. M&L was a closel y held company formed to repair business equipment and office machines. In the 1980's, new owners used the company to operate a Ponzi scheme. As part of its Ponzi scheme, M&L solicited loans from investors by promising excepti onally high interest rates. Investors were told M&L would use their funds to ac quire used business-3-

equipment for resale to foreign entities. However, no equipment was ever purchased. Instead, M&L used the funds to pay inte rest payments to earlier investors, while later investors often received not hing.
On October 1, 1990, M&L filed for bankruptcy. In i ts two sets of bankruptcy schedules filed in 1990, M&L's assets ex ceeded its liabilities. On October 4, 1990, M&L sent a letter to its investors explaining the Resolution Trust Corporation ("RTC") had taken over one of M&L 's lenders, Capitol Federal Savings and Loan Association ("Capitol"), and refus ed to extend Capitol's line of credit to M&L for thirty days when a $15 million lo an commitment to M&L from a European lender would materialize. Without the l oan extension, M&L claimed it had no choice but to file for protection under C hapter 11 of the Bankruptcy Code. In a second letter sent to investors on Octo ber 30, 1990, M&L stated Manns Haggerskjold planned to buy out M&L's obligat ion to RTC, and consequently enable M&L to emerge from bankruptcy.
On December 3, 1990, the Colorado Securities Commissioner filed an ex parte motion to have a trustee appointed over M&L's busi ness and property during bankruptcy. In its motion, the Colorado Sec urities Commissioner alleged: (1) M&L executed security interests in the same ass ets to more than one creditor;-4-

(2) M&L supplied its bookkeeper with false check in formation, which when compared to actual checks, revealed M&L principals had siphoned off millions of dollars from M&L; (3) M&L misrepresented its financ ial statements had been prepared by a certified public accountant, Jonathon Williams; and (4) M&L misrepresented to its investors it had obtained a $ 15 million loan commitment and a bridge loan from Manns Haggerskjold. On December10, 1990, the RTC joined the ex parte motion, also alleging fraud and gross mismanagement by M&L's principals.
As a result of the motions, the bankruptcy court ap pointed Ms. Christine J. Jobin, an experienced bankruptcy attorney, as trust ee of M&L on December 18, 1990. In December 1990, after conducting her own i nvestigation, Ms. Jobin concluded M&L was operating a check-kiting scheme. Despite the information gathered in her December 1990 investigation, includ ing information that verified the Colorado Securities Commissioner's and RTC's al legations, Ms. Jobin was "hopeful" at the end of 1990 she would be able to r eorganize M&L and provide a recovery for unsecured creditors.
However, on February 2, 1991, Ms. Jobin opened a bo x that was supposed to contain computer equipment, but contained only p aving bricks covered with3 Ms. Jobin was unable to file suit earlier because M&L's records had been

removed from its offices, and were made available t o her only after a search warrant was executed.
-5- hardened foam. She then concluded M&L operated a P onzi scheme and had no inventory assets from which creditors' claims couldbe satisfied. On February 4, 1991, Ms. Jobin shut down the corporate offices. S he shut down M&L's repair business in March 1991 after it became apparent the business was unprofitable.
After her discovery, Ms. Jobin considered lawsuits based on theories of preferential transfers and fraudulent conveyances t o recover funds for M&L's creditors. In late 1992, 3 she sued the RTC, Bank of Boulder, and investors t o recover payments made by M&L just prior to filing b ankruptcy. By June 1995, Ms. Jobin recovered approximately $8.5 million for the bankruptcy estate and anticipated collecting a total of approximately $14 million. She was hopeful creditors would recover thirty per cent on their cl aims.
The Taxpayers The Premjis invested a total of $58,000 in M&L in J uly, August, and September 1990. Mr. Norby invested $50,000 in M&L in September 1990 and $10,000 in early October 1990. Their investments w ere unsecured.-6-

Mr. Norby testified he believed his investment was lost in 1990 after he learned of M&L's bankruptcy. He also testified he felt M&L representatives were lying to him and M&L's 1990 letters to its investor s were suspicious. However, he contacted an M&L representative on an average of once a week, for the remainder of 1990, to confirm M&L had a valid bankr uptcy filing and whether it was going to "make things right." On December 27, 1990, Mr. Norby reviewed M&L's bankruptcy file. From his review, Mr. Norby became aware of the RTC's and Colorado Securities Commissioner's allegations of gross mismanagement. Mr. Norby did not consult Ms. Jobin or another bankruptcy attorney in 1990 before determining his investment was lost.
Similar to Mr. Norby, Mr. Premji began to believe h is investment was lost after he heard M&L filed for bankruptcy. He attend ed the first meeting of M&L's creditors in late November 1990 but was unable to r eview the file in 1990 as it had been checked out. Subsequent to the meeting an d his discussion with another investor, Mr. Premji felt information that M&L prov ided him was inaccurate. Mr. Premji did not consult a bankruptcy attorney with r espect to M&L in 1990. In February 1991, he met with an attorney, Andy Littma n, to discuss the possibility of a lawsuit against the Bank of Boulder and other alternatives for recovery of his investment. He retained Mr. Littman's law firm in March 1991, and filed the4Plaintiffs in the Amazing Enterprises lawsuit all eged improper conduct

by the Bank of Boulder in dealing with M&L's invest ors and in handling M&L's checks.
-7- "Amazing Enterprises" 4 lawsuit in July 1991. As a result of the lawsuit, Mr. Premji recovered a portion of his investment in 199 4.
On April 15, 1991, the Premjis filed a joint 1990 f ederal individual income tax return in which they claimed a $58,000 theft lo ss deduction related to their M&L investment. Mr. Norby claimed a $60,000 theft loss deduction for his M&L investment in his 1990 federal individual income ta x return.
In 1994, the Premjis and Mr. Norby ("the taxpayers" ) received notices of deficiency disallowing their M&L theft losses becau se they had not established they sustained the losses in 1990. The taxpayers t imely petitioned to the United States Tax Court to challenge the notices of defici ency.
After consolidating their cases for a bench trial, the Tax Court denied the taxpayers' 1990 theft losses because it found the t axpayers failed to prove they had no reasonable prospect of recovering their inve stment losses at the end of 1990. The taxpayers appeal.5 Unless otherwise stated, all Internal Revenue Cod e references are to the

sections in effect for 1990.
-8- DISCUSSION Internal Revenue Code § 165(a) 5 allows a deduction for "any loss sustained during the taxable year and not compensated for by insurance or otherwise." A theft loss "shall be treated as sustained during th e taxable year in which the taxpayer discovers such loss." I.R.C. § 165(e); Tr eas. Reg. §§ 1.165-1(d)(3), 1.165-8(a)(2). To be deductible under I.R.C. § 165 , a "loss must be evidenced by closed and completed transactions, [and] fixed by i dentifiable events." Treas. Reg. § 1.165-1(b) and (d)(1). Therefore, if in the year of discovery there exists a claim for reimbursement that has a reasonable prosp ect of recovery, then the loss is not treated as sustained "until the taxable yearin which it can be ascertained with reasonable certainty whether or not such reimb ursement [of the loss] will be received." Treas. Reg. § 1.165-1(d)(3); Jeppsen v. Commissioner , 128 F.3d 1410, 1414 (10th Cir. 1997).
"'A reasonable prospect of recovery exists when the taxpayer has bona fide claims for recoupment from third parties or otherwi se, and when there is a substantial possibility that such claims will be decided in his favor.'" Jeppsen,-9-

128 F.3d at 1418 (quoting Ramsay Scarlett & Co., Inc. v. Commissioner , 61 T.C. 795, 811 (1974), aff'd , 521 F.2d 786 (4th Cir. 1975)). The taxpayer is n ot required to be an "incorrigible optimist," and clai ms with only remote or nebulous potential will not postpone the deduction. United States v. S.S. White Dental Mfg. Co. , 274 U.S. 398, 402-03 (1927); Jeppsen , 128 F.3d at 1418. Whether a reasonable prospect of recovery exists is determine d by reviewing all facts and circumstances. Treas. Reg. § 1.165-1(d)(2). The s tandard is primarily an objective one, Jeppsen 128 F.3d at 1418-19, under which we must determine what was a "reasonable expectation" at the close of the taxable year in which the deduction is claimed. Id. at 1415. A taxpayer's subjective beliefs at the c lose of the taxable year are not to be ignored, but are notdeterminative in the court's determination. Id. at 1418. We apply the standard with foresight, the refore, we do not look at "facts not reasonably foreseeable as of the close of the pertinent tax year." Id. at 1416. We do not allow a later settlement or re covery on a claim to control our determination if at the end of the clos e of the taxable year in which the loss was discovered, no reasonable prospect of recovery existed. Id. at 1415- 16 (ruling the ultimate disposition of a lawsuit may be noted but may not be considered relevant to the court's final decision). The taxpayer carries the burden of proving that a theft loss has in fact been susta ined. Tax Court Rule 142(a); Jeppsen, 128 F.3d at 1418.6The parties agreed the Premjis and Mr. Norby sust ained theft losses, and

such losses were incurred from transactions enteredinto for a profit.
-10- The taxpayers appeal the Tax Court's decision on th e grounds they discovered their theft loss in 1990, and they did n ot have a claim for reimbursement for which there was a reasonable prospect of recovery in 1990. 6 We review Tax Court decisions "in the same manner a nd to the same extent as decisions of the district courts in civil actions t ried without a jury." I.R.C. § 7482(a)(1). Whether a taxpayer has a reasonable prospect of recovery in a given year for income tax purposes is a question of fact we review under the "clearly erroneous" standard. Jeppsen , 128 F.3d at 1417. "A finding is 'clearly erroneous' when although there is evidence to suppo rt it, the reviewing court on the entire evidence is left with the definite and f irm conviction that a mistake has been committed." United States v. United States Gypsum Co. , 333 U.S. 364, 395 (1948); Jeppsen , 128 F.3d at 1417 n.5. Since we conclude the Tax Court's finding the taxpayers failed to prove they had no reasonabl e prospect of recovery is not clearly erroneous, we do not address the discovery issue.
The Tax Court properly viewed the objective and subjective evidence existing at the end of 1990 in concluding the taxpayers failed to prove they had no reasonable prospect of recovery. These factual fin dings were amply supported by7Although the taxpayers contend Ms. Jobin testifie d she was "skeptical"

anything would be recovered for investors, Ms. Jobi n also stated twice during her testimony that she was hopeful she would recover so me funds.

8As long as facts exist at the end of the year the loss is claimed and provide a reasonable prospect of recovery, it is ir relevant if the taxpayer had not uncovered the facts to prosecute legal action or ch ose to delay legal action. See Qureshi v. Commissioner , 53 T.C.M. (CCH) 414 (1098), aff'd
. without published opinion , 843 F.2d 1388 (4th Cir.), and cert. denied, 488 U.S. 852 (1988); Florman v. Commissioner , 38 T.C.M. (CCH) 1018 (1979).
-11- evidence in the record. Since we are convinced no mistake has been committed by the Tax Cout, its findings are not clearly erron eous. As the Tax Court found, Ms. Jobin was hopeful 7at the end of 1990 that she would continue to oper ate M&L and restructure its operations to recover asset s for M&L's unsecured creditors. In 1990, M&L's bankruptcy schedules ref lected its assets exceeded its liabilities. In addition, the facts ( e.g. , transfers made in 1990) which supported Ms. Jobin's lawsuits based on fraudulent conveyance s and preferential transfers, existed at the end of 1990. 8 The law surrounding Ms. Jobin's lawsuits was not so uncertain as to conclude the prospects of recovery were remote or nebulous.
Despite Mr. Norby's subjective belief his investment was lost in 1990, the Tax Court found he never contacted Ms. Jobin or ano ther bankruptcy attorney by the end of 1990 to ascertain his chances of recovery. We also note, contrary to Mr. Norby's beliefs, he contacted an M&L representative once a week through the-12-

end of 1990 to see if M&L's bankruptcy filing was v alid, and if M&L planned to "make things right." Consequently, we agree with t he Tax Court, the record, viewed as a whole, does not support Mr. Norby's cla im that as of 1990, he had no reasonable prospects of recovery.
As to Mr. Premji, he also did not consult a bankrup tcy attorney in 1990 to determine his chances for recovery. Furthermore, a lthough his lawsuit was filed in 1991, the Tax Court found the facts underlying t he basis of the lawsuit existed in 1990. The Tax Court also considered the facts t hat Mr. Premji consulted Mr. Littman in February 1991, retained Mr. Littman's law firm in March and filed suit in July 1991. While these facts do not necessarily indicate Mr. Premji contemplated filing suit in 1990, the record nevert heless adequately supports the Tax Court's conclusion that Mr. Premji failed to me et his burden of proving he had no reasonable prospect of recovery in 1990. See Jeppsen , 128 F.3d at 1419 (allowing the court to consider the fact a taxpayercontemplates filing suit in the same tax year he discovers his loss in its determin ation whether a reasonable prospect of recovery existed). As we are convincedno mistake has been made, we conclude the Tax Court's finding is not clearly erroneous.
The taxpayers also claim the Tax Court erred by hol ding the taxpayers are-13-

not entitled to any of their theft losses in 1990 after it held they h ad a reasonable prospect of recovering of some of their losses. However, since the taxpayers rai se this issue for the first time on appeal, we do not consider it. TeleCommunications, Inc. v. Commissioner , 12 F.3d 1005, 1007 (10th Cir. 1993).
Accordingly, we AFFIRM the Tax Court's judgment denying the taxpayers' 1990 theft loss deductions.

Entered for the Court
WADE BRORBY United States Circuit Judge