NOT RECOMMENDED F OR FUL L -TEXT PUB L I CATI ON File Na me: 11a0474n.06 No. 10-1231 UNITED STAT ES COURT OF AP P EALS F OR THE S IXTH CIRCUIT

DOMI NI CK J . VI

NCENTI NI , Petitioner-Appellant,

v. COMMI SSI ONER OF I

NTERNAL

REVENUE, Respondent-Appe llee. ) ) ) ) ) ) ) ) ) ) ) ) ON APPEALFROM THE U NI TED STATES TAX COURT

Be fore : ROGERS and KETHL EDGE, Circuit Judges; RUSSEL L , Chief District J udg e. * RU SS E L L , Chief District J udg e. Petitioner- A p p e ll a nt D o mi n ic k J. V in c e nti n i ( “ V in c e nti n i” ) ap p eals a final decision issued by the Tax Court which upheld the I nterna l Revenue Service ’s (“I RS”) disallowance of a theft-loss deduction that Vincentini had claimed he could carry back to 1999, and its decision to impose an acc urac y -re lated penalty under 26 U.S.C. § 6662 for the mistakes he made on that y ear ’s re turn. This Court affirms the Tax Court’s decision. I. BACKG ROUND Be g inning sometime in 1997, Vincentini beg an listeni n g to a series of financ ial and investment audioca ssette tapes entitle d “ G a te w a y to F in a ncial Fr eedom” cre ated by Keith Ander son.

The Honora

ble Thomas B. Russell, United States Chief District J udg e for th e W est ern * District of Ke ntucky , sitti ng by desig nation.No. 10-1231, Vincentini v. Comm’ r

Throug h the tapes, Vincentini lear ned about an o rga n i z ation cre ated by Ander son known as Ander son Ark & Associates (“A AA”)

. AAA marke ted itself as an investment company with office s in the United S t at es and Costa Rica. L istening to the tapes motivated Vincentini to attend two international confe renc es wher e the investment opportunities offe re d by AAA wer e pitched to potential investors. I n 1999, following the confe renc es, Vincentini decide d to invest in two of AAA’ s prog rams: the L oan Four Prog ram and the L ook Ba ck Prog ram. Reg arding the former , it wa s marke ted as an investment in fac toring commissions for high- end consumer g oods. Vincentini claims that he was promised annualized returns of 30 to 50 perc ent. All told, he invested $800,000.00 in the L oan Four Prog ram. Wit h the L ook Ba ck Prog ram , Vi ncentini cre ated the joint venture Birdla ne Marke ting Venture (“B irdlane” ) with AAA, wh i ch would allow him to capitalize on an investment-loss deduction. AAA indicated to investors that the partne rship would use the proce eds from a business loan to underw rite the marke ting of books, elec tronic media, and audio tapes. On behalf of Birdla ne, Vincentini executed a promissory note for $950,000.00 from L a Maquina Bla nca, S.A., a purported Costa Rican corpor ation. To eff ectuate the loan, Vincentini was require d to pa y some $76,000.00 in orig ination fee s, while the majority o f t h e l o an wa s paid to Macr o Media Adver tising L L C, an entity operated by AAA. This transac tion g ener ated a net operating loss for Birdla ne in 1999, which, in turn was passed on to Vincentini. I n rea lity , howeve r, t h e loans aff iliated with the L ook Ba ck Prog ram were illus ory ; AAA sim ply used t he fake loans to g ener ate and then s teal fro m investors the “f ees” neede d to obtain the fictional ca pital.

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T o ai d Vincentini in the L ook Ba ck Prog ram, AAA officia ls ref err ed him to Gar

y Kuze l

. Represe nting himself as a C er t i fi ed Public Acc ountant, Kuzel drew up the leg al documents for Birdla ne, ex plained the partne rship fr am ework to Vincentini, and provided him with a number of documents rele vant to his investment. Kuzel also prepa red Vincentini’s 1999 For m 1040, on which he claimed Birdla

ne’s appar ent partne rship loss of $907,470.00, which offse t a $796,629 ear ly distribution from Vincentini’s I RA. Despite his substantial investments in these p rograms, Vincentini claimed at trial that the profits he wa s promised failed to mate rialize. On Fe bruar

y 28, 2001, law enfor ceme nt officia ls from t h e United States and Costa Rica raide d AA A’ s o ff

ices on the suspicion that the investment prog rams wer e in fac t elabor ate Ponz i scheme s. Four of the principals for AAA, Keith Ander son, Way ne Ander son, Richard Marks, and Kar oly n Grosnickle, wer e arr ested and indicted. By 2002, a number of them had been convicted on fede ral criminal char g es i n the Unit ed S tates Dist rict C ourt for the Easter n District o f C al i fornia. See United States v. Anderson , 391 F.3d 970 (9t h C i r. 2 0 0 4). That same y ear , these criminal defe ndants, along with two other AAA employ ees (collec tively “AAA Def end an t s ”) , wer e also indicted on a varie ty of fede ral criminal char g es in the district court for the Western District of Washington. This case ended in convictions as well in 2004. The Washington district court order ed the AAA Def

endants to pay restitution to their victims and to forf eit a substantial amount of persona l and re al prope rty , proce eds fr om their ill-gotten g ains. Vincentini say s that he lear ned of the raids on AAA’ s office s over the radio a few day s afte r they occur

red. In the months following , as the fra udulent scheme unrave led in the courts, he claims that he and other investors spoke with repr esentatives from AAA, including Keith Ander son, on -3-No. 10-1231, Vincentini v. Comm’ r

presc heduled teleconf

ere nces. The repr esentatives worke d to assuage t h e o bvious conce rns of Vincen t i ni, telling him that his investment was safe and that the fede ral investigation was only a temporar y setbac k. By May of 2001, AAA’ s confe renc es had stopped and Vincentini was actively trying to withdraw his investment from the L oan Four Prog ram. There wer e also phone confe renc es b et we en the investors and Costa Rican attorney s exploring whether to beg in leg al proce edings ag ainst the principals of AAA. Although Vincentini states that he participated in at least one of these confe renc es, he ultimately chose not to reta in leg al counsel to pursue his money beca use he thought such eff orts to be in vain. Vincentini further say s he tried, unsucce ssfully , to withd ra w his investment from AAA by submitt ing sever al “dire ctives” to K uzel a nd other princ ipals reque sting the re lease of his funds. On Marc h 6, 2003, the I RS sent a statutory notice of defic iency to Vincentini stating that the partne rship-loss deduction he took in 1999 for Birdla ne was inappropriate. The notice also assessed aga i n s t him an acc urac y -re lated penalty under 26 U.S.C. § 6662 for the err ors in his return. Vi n ce ntini initially filed a petition with the Tax Court objecting to this deter mination, b u t h e eventua lly conce ded that the deduction was improper, as the AAA Def endants had reve aled during their trials that the loans for the L ook Ba ck Prog ram had never exis ted. On April 13, 2003, during t he pendenc y of the matter befor e the Tax Court, Vincentini filed an amende d return for 1 9 9 9 o n For m 1040X. There , Vincentini claimed a theft-loss deduction of $835,000.00 (purpor tedly car ried back from 2001 or 2002); this fig ure howeve r was eventua lly adjusted downwar d to $511,500.00. On May 23, 2007, a trial was held by the Tax Court to consider the new theft-loss argument and the penalty imposed under section 6662. After considering the evidenc e befor e it, the Tax Court -4-No. 10-1231, Vincentini v. Comm’ r

conclude d that Vincentini had not met his burden of proof in showing that there was no rea sonable prospec t of rec overy for his theft loss from the AAA Def endants

. S p ec ifically , the Tax Court’s opinion set out the following ba sis for this conclusion: The only evidenc e offe red by petitioner reg arding his analy sis of his p ro s pect of rec overy in 2001 was petitioner' s uncorr oborate d testimony that he made some attempts to rec over his money . Petitioner did not offe r in evidenc e the forms that he suppo s ed l y fi lled out and subm itted to [AAA]. Petitioner did not call as a witness at trial any one who could testify as to his participation in the confe renc e calls or any other attempts to rec over his money . More importantly , petitioner did not testify that he believe d at the end of 2001 that he had no r easona ble prospec t of rec overinghis money . Vincentini v. Comm’r , 96 T.C.M. (CCH) 400, No. 7166–03, 2008 WL 5137345, at *8 (T.C. Dec

. 8, 2008). The Tax Court also upheld the penalty under section 6662, finding that since Vincentini knew of Kuzel’s aff

iliation with AAA, any relianc e upon him was misplaced and unrea sonable. Id

. at *10. Although Vincentini rea sserted his objections in a motion to rec onsider, the Tax Court reje cted his

new arg uments as well. See Vincentini v. Comm’r , 98 T.C.M. (CCH) 427, No. 7166–03, 2009 WL 3739461 (T.C. Nov. 9, 2009). This appe al has followe d. II. ANALYSIS A. Standard of

Review The statute t h at gra n ts this Court the jurisdiction to hear appea ls from the Tax Court also provides that the revie w of these decisions shall be in the “ same manne r and to the sa me extent as decisions of the district courts in civil actions tried without a jury .” 26 U.S .C. § 7482(a) (1). There fore , t h e T ax C o u rt’s finding s of fac t are revie wed under the clea rly err oneous standard, Kearns v. Comm’r , 979 F.2d 1176, 1178 (6th Cir. 1992) , and the Tax Court’s application of law is

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subject to de novo revie w. Id

. Fa ctual issues include whether a taxpay ers has a rea sonable prospec t of rec overy of a loss. Trea s. Reg

. § 1.165-1(d) (2)( i). Penalties under section 6662 for a substantial understate ment of income taxes are revie wed de novo by this Court, while the fac tual foundation for the understate ment is revie wed for clea r err or. Estate of

Kluener v. Comm’r , 154 F.3d 630, 637 (6th C i r. 1998). “[F]actual deter minations are not clea

rly err oneous unless [t his Court is] left with a definite a nd firm conviction that a mistake has bee n made.” Kearns , 979 F.2d at 1178. B. Th eft-Loss Deduction The tax code provides a deduction for losses that are “sustained during the taxable y ear and not co m p en s ated for by insurance or otherwise.” 26 U.S.C. § 165(a)

. I ndividuals attempting to claim s uch a deduction ar e restricted to losses incurre d while operating a trade or business, losses arising from prof

it-seekingtransac tions, and, subject to cer tain limit ations, proper

ty losses cause d by fire, storm, shipwrec k, or theft. Id

. § 165(c) (1)- (3). Theft losses qualify as net operating losses and may be ca rried ba ck up to three taxable y ear s. Id . § 172(a) , (b)( 1)(F )(ii)(I ). The ge nesis for the theft-loss ana ly sis is t he taxable y ear in which the taxpay er discovere d the loss. Id

. § 165(e)

. I t is the taxpay er’ s burden to show that the loss was suffe red and in what y ear it oc curr ed. Boehm v. Comm’r , 326 U.S. 287, 294 (1945); Ginsberg v. Comm’r , 4 F.3d 993, at * 4 (6th Cir. 1993) (table)

. Speculation and conjec ture will not support a taxpay er deduction under this p ro v i s i o n ; instead “a loss must be evidenc ed by closed and completed transac tions, fix ed by i d enti fiable events.” Trea s. Reg

. § 1.165-1(b) (as amende d in 1977). I n descr ibing t h e y ea r a taxpay er may claim a loss deduction, t re as u ry regulations provide instructions on the impact of

rec overingthat loss: -6-No. 10-1231, Vincentini v. Comm’ r

I f a casua lty or other event occur s which may result in a loss and, in the y ear of such casua lty or event, there exis ts a claim for reimburse ment with respe ct to which there is a rea sonable prospec t of rec overy , n o portion of the loss with respe ct to which reimburse ment may be rec eived is sustained, for purposes of section 165, until it can be asce rtained with rea sonable cer tainty whether or not such reimburse ment will be rec eived. Whether

a re asonable prospec t of rec overy exis ts with respec t to a claim for reimburse ment of a loss is a question of fac t t o be deter mined upon an examination of all facts a nd circ umstances. Id

. § 1.165-1(d) (2)( i). This rea sonable-pr ospect require ment direc tly impacts theft losses and when such a de duction may

be take n by

a taxpay er. See id . § 1.165-1(d) (3). Both parties conce de that Vincentini discovere d by 2001 that he had been the victim of AAA’ s fra

udulent scheme

. Given the three -y ear car ry -bac k provision, the only rema ining query is whether th e T ax Court clea rly err ed in deter

mining that Vincentini failed to demonstrate with

rea sonable cer

tainty that there was no rea sonably p ro s p ec t o f rec overy in 2001 or 2002. “A

rea sonable prospec t of rec overy exis ts when the taxpay er has bona fide claims for rec oupment from third parties or otherwise, and when there is a substantial possibili ty that such claims will be decide d in his favor .” Ramsay Scarlett & Co. v. Comm’r , 61 T.C. 795, 811 (1974) (citations omitted) aff’d 521 F.2d 786 (4th Cir. 1975); see Jeppse n v. Comm’r , 128 F.3d 1410, 1418 (10th Cir. 1997); Miller

v. Comm’r , 733 F.2d 399, 407 (6th Cir. 1984) (Contie, J

. dissenting)

. This is an objective standard, wher e the Court must examine a taxpay er’ s rea sonable expectations at the close of the taxable y ear in w hich the deduction was c laimed. Ramsay Sc arlett & Co. , 61 T.C. at 811. Taxpay ers need not ref rain from taking a loss deduction simply beca use there exis ts a remote or nebulous possibili ty of

rec overy . See United States v. S.S. W hite Dental Mfg. Co. of

Pa. , 274 U.S. 398, 402-03 (1927) (the tax code does “not require the taxpay er to be an incorrig i b l e o p t i m ist”); Rudiger v. Comm’r , 22

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B.T.A

. 204, 206 (1931) ( taxpay er doe s not have to postpone a loss deduc tion when there is only a “bar e hope” of rec oupment); see also , 7 J

. Mertens, L aw of Fe dera l I ncome Taxation § 28:33 (2011). Stil l, in a y ear wher e the prospec t of recover y i s s i mply unknowable, a t heft-loss deduction under section 165 is inappropriate. Jeppse n , 128 F.3d at 1418. I n examining the objective evidenc e, the Tax Court could proper ly conclude that Vincentini did not meet his burden. At trial he declined to offe r any thing more than his own testimony to show that at the end of 2002 there was no rea sonable prospec t of rec overy . E v en t h o u g h Vincentini testified t hat he had both sent written requests t o o ff icials from AAA demanding the return of hi s money and participated in confe renc e calls with Costa Rican at torney s, such statements wer e

uncorr oborate d and self serving

. That Vincentini did not say that he subjectively believed that there

was no rea sonable prospec t of rec overy further supports the Tax Court’s ultimate conclusion. The Tax Court also found that portions of Vincentini’s testimony wer e not cre dible. This Court has “long gi v en considera

ble defe renc e to the Tax Court’s

. . . first-hand assessment of the cre dibilit y of witnesses befor e them.” Kosinski v. Comm’r , 541 F.3d 671, 680 (6th Cir. 2008) (citations omitted). Vincentini has not provided g ood rea son to revisit this deter mination. Wit h a scar ce and unreliable evidentiar y foundation, a revie w o f t h e Tax Court’s decision does not g ive way to a “definite and firm conviction that a mistake has bee n made.” Kearns , 979 F.2d at 1178. On appeal, Vincentini insists that t h e T ax Court overlooke d two important fac ts that wer e proper ly befor e it when it made its decision: that by 2002 convictions ag ainst the AAA Def endants had been handed down by the district court in California and that during this criminal trial they wer e repr esente d by court-a

ppointed counsel pursuant to 18 U.S.C. § 3006A. Vincentini aver s that these -8-No. 10-1231, Vincentini v. Comm’ r

two piece s of evidenc e conclusively demonstrate that there was no rea sonable prospec t for rec overy

as they indicate that the AAA Def endants wer e fac ing substantial terms of imprisonment and could not aff ord attorney s. Although this evidenc e is somewhat suppo r tive of Vincentini’s position, it does not persua de thi s Court that the Tax Court’s decision was c lear ly err oneous. Notwithstandingthe convictions, in 2002 the trial courts in California and Washington had not decide d whether the AAA Def endants would be subject to proper ty forf eitures or re s t i t u t ion order s. Recove ry from these parties could have been obtained throug h these avenue s or throug h the civil suit alre ady contemplated by som e i n v est ors. There fore , the i mpact of the convictions was altoge ther unclear to Vincentini in 2002. Reg arding the use of court-a ppointed counsel for the criminal trial, Vincentini declined to inve stigate the AAA Def endants’ solvency

prior to his own trial and thus the re was no evidenc e on the issue prese nted to the Tax Court prior to its decision. Whil e the use of courtappointed counsel is probative of whether the AAA Def endants could satisfy a judgme nt ag ainst them, this Court agr ees w ith the Tax C ourt’s implicit finding that it is not dispos itive. The Tax Court car efully confr onted Vincentini’s arguments an d conclude d that the evidentiar y g aps at trial wer e too grea t for him to meet his burden of persua sion. This Court is in no better position to find otherwise. C. Acc uracy-R elate d Pe nalty The Tax Cou rt al s o up h eld the I RS’s decision that Vincentini was liable for an acc urac y related penalty under section 6662. The tax code levies a 20 perc ent penalty for a “substantial understate ment” of a taxpay er’ s income tax liability

. 26 U.S.C. § 6662(a) , (b)( 2). This takes place “for any taxable y ear if the amount of the understate ment for the taxable y ear exceeds the g reater of -9-No. 10-1231, Vincentini v. Comm’ r

10 perc ent of the tax require d to be shown on the return for the taxable y ear , o r $ 5 , 0 0 0.” Id

. § 6662(d)( 1)(A) (for

matting a ltered) . “The term under statement mea ns the ex cess of the amount of the tax require d to be shown on the return for the taxable y ear , over the amount of the tax imposed which is shown on the return.” Id

. § 6662(d)( 2)(A) (for mat t i n g al t ered). The fac tual finding s underlying a

penalty are revie wed f

or cle ar e rror . Estate of Kluener , 154 F.3d a t 637. The tax code also provides taxpay ers a defe nse to penalties under section 6662. I t say s that “[n] o penalty shall b e i m p o s ed u nder section 6662

. . . with respe ct to any portion of an underpa y ment if it is shown that there was a rea sonable cause for such portion and that the taxpay er acte d in g ood faith wit h respe ct t o such portion.” 26 U.S.C. § 6664(c) (1). “The deter mi nation of whether a taxpay er a cted with re asonable cause and in g ood faith is ma de on a c ase- by -ca se basis, taking into acc ount all pertinent fac ts and circ umstances.” Mortensen v. Comm’r , 440 F.3d 375, 387 (6th Cir. 2006) (quoting Trea s. Reg

. § 1.6664-4(b) (1))

. Good faith relianc e on a tax profe ssional will neg ate a taxpay er’ s liability for penalties under section 6662. United States v. Boyle , 469 U.S. 241, 250-51 (1985). Taxpay ers may not, howeve r, blindly acc ept the advice of just any tax profe ssional; only rea sonable relianc e on “a competent and in d ep en d en t advisor unburdene d with a conflict of interest” w ill ins ulate them fr om section 6662' s provisions. Mortensen , 440 F.3d at 387. Vincentini does not contest that there was a substantial understate ment of his tax liability on the 1999 return. Rather, he appea ls the Tax Court’s reje ction of his argument that he relied in g ood faith on Kuzel’s advice

. On revie w, t he Tax Court did not clea rly err in this finding

. Vincentini conducte d no rese arc h on Kuzel’s profe ssional backg round or the extent of his ties with AAA. Nor did he sol icit aid from another financ ial profe ssio n al t o cre ate the Birdla ne partnership or prepa

re -10-No. 10-1231, Vincentini v. Comm’ r

his taxes for 1999, despite Kuzel’s open aff iliation with AAA. Claims by Vincentini at trial that he consulted his persona l investment advisor wer e unsubstantiated and there fore proper ly discarde d by the Tax Court. Finally , the impositi on of an acc urac y penalty under the se circ umstances is in line with this Court’s previous decisions. See e.g. , Mortensen , 440 F.3d at 387 (a taxpay er’ s relianc e on

a promoter of cattle bree ding partne rships was insuffi ci en t to establish the g ood faith defe nse); Pasternack v. Comm’r , 990 F.2d 893, 903 (6th Cir. 1993) (investor could not rea sonabl y rely on advice from financ ial advisors wher e “the purported experts w ere either the promoters themselves or ag ents of the pr omoters”)

. Much like Mortensen and Pasternak , Vi n ce n tini put his faith in a biased profe ssional, aff iliated with the orga

nization promoting the investments. That he d i d not question Kuzel about his profe ssional backg round indicates that Vincentini either err antly omitted important investigatory steps or chose to ignor e the telltale signs of an investment that was too g ood to be true. Either way , he did not act in g ood faith to deter mine his tax liability

. III. CONCLUSION I n closing , the Court must aff ord the Tax Court broad discretion under the clea rly err oneous standard for eac h of these issues. J udg ing the evidenc e prese nted at trial throug h this lens, it cannot be said with firm conviction that a mistake has been made. For these rea sons, the Tax Court’s decision is AFF I RMED.

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