United States Court of Appeals 

for the Federal Circuit ______________________ 

CHARLES P. ADKINS, JANE E. ADKINS,

Plaintiffs-Appellants

v.

UNITED STATES,

Defendant-Appellee

______________________ 

2016-1961

______________________ 

Appeal from the United States Court of Federal 

Claims in No. 1:10-cv-00851-MMS, Judge Margaret M. 

Sweeney. 

______________________ 

Decided: May 8, 2017

______________________ 

JOHN FRANKLIN RODGERS, Redmon, Peyton & Braswell, LLP, Alexandria, VA, argued for plaintiffsappellants.

ANTHONY T. SHEEHAN, Tax Division, United States 

Department of Justice, Washington, DC, argued for 

defendant-appellee. Also represented by RICHARD 

FARBER, CAROLINE D. CIRAOLO. 

______________________ 

Before LOURIE, O’MALLEY, and TARANTO, Circuit Judges.
2 ADKINS v. US

O’MALLEY, Circuit Judge. 

Charles P. Adkins and Jane E. Adkins seek review of 

the February 23, 2016 decision of the Court of Federal 

Claims (the “Claims Court”) dismissing with prejudice

their complaint for an income tax refund. Adkins v. 

United States, 125 Fed. Cl. 304 (2016). For the following 

reasons, we vacate and remand. 

BACKGROUND

This case concerns a federal income tax refund sought 

by the Adkinses, based on financial losses they sustained 

as victims of a fraudulent investment scheme. The main 

facts are not in dispute—the central issue on appeal is 

whether that loss was properly claimed as a deduction in 

the 2004 tax year, as opposed to some other year. For 

context, we reiterate the background facts as found by the 

Claims Court. 

Beginning in 1997, the Adkinses began investing in 

securities via Donald & Company, primarily through its 

employee Mr. Otto Kozak. Unbeknownst to the Adkinses, 

Donald & Co. was operating a “pump-and-dump” 

scheme—(1) purchasing stock in a company; 

(2) encouraging its customers to do the same; (3) selling 

stock in the company at the artificially increased price for 

a profit; and (4) leaving its customers holding stock worth 

significantly less due to the aforementioned sales. At 

their peak in 2000, the Adkinses’ investments with Donald & Co. were valued at $3.6 million. By the end of 2001, 

as a result of the scheme, the value of their investments 

had declined to $9,849. In February 2002, the Adkinses, 

discovering that they had been the victims of fraud, 

submitted a statement of claim to the National Association of Securities Dealers (“NASD”) in support of arbitration against Donald & Co. and three of its principals: 

David Stetson, Slava Volman, and Steven Ingrassia. 
ADKINS v. US 3

In March 2003, the Adkinses requested that their arbitration hearing (then scheduled for April) be postponed

in light of recent information from the Department of 

Justice indicating that indictments would be handed 

down against several Donald & Co. principals and employees in the near future. In particular, the Adkinses’ 

lawyers “suggested that the arbitration claim be left open 

in the event that proceedings in the criminal matter 

revealed pertinent information.” Adkins, 125 Fed. Cl. at 

309. In May 2004, an indictment was returned in the 

United States District Court for the Eastern District of 

New York against Volman, Ingrassia, Kozak, and others, 

charging conspiracy to commit securities fraud, securities 

fraud, and conspiracy to commit money laundering. In 

September and October of 2004, Volman, Ingrassia, and 

Stetson pleaded guilty, receiving sentences including 

imprisonment, supervised release, fines, mandatory 

restitution, and forfeiture. Proceedings against other 

Donald & Co. principals continued from 2005 to 2009.

While the criminal proceedings were pending, in 2006, 

the Adkinses attempted to recoup some of their losses by 

claiming a federal income tax deduction for theft loss 

under 26 U.S.C. § 165. Specifically, the Adkinses claimed 

a loss of $2,118,725 for tax year 2004, with excess refund 

portions carried back over the three previous years, 2001–

2003. On December 12, 2008, the IRS disallowed the 

Adkinses’ refund claims for all tax years but 2002.1 The 

Adkinses protested at the IRS Office of Appeals, but 

thereafter filed suit in the Claims Court before their 

appeal was complete, removing the IRS’s jurisdictional 

1 It appears that the 2002 portion of the claim was 

neither allowed nor formally denied, although no portion 

of the record offers an explanation as to why. Neither 

party, however, suggests that the treatment of the 2002 

portion has any relevance to the issues now on appeal. 

 
4 ADKINS v. US

authority to settle the claim. After disposing of certain 

preliminary disputes via summary judgment, the Claims 

Court conducted a trial and concluded that the Adkinses 

were “not entitled to a theft loss deduction for the 2004 

tax year.” Adkins, 125 Fed. Cl. at 305. In particular, the 

Claims Court found that the Adkinses had failed to satisfy the requirements of 26 C.F.R. § 1.165-1(d)(3) (i.e., 

Treas. Reg. § 1.165-1(d)(3)), insofar as they had not shown 

that, in 2004, they could have “ascertained with reasonable certainty that they would not receive reimbursement 

of their losses.” Id. at 317. The Adkinses timely appealed 

to this court. 

DISCUSSION

“The Claims Court’s legal determinations, including 

interpretations of statutes and regulations, are subject to 

de novo review and its factual determinations are reviewed for clear error.” Tinton Falls Lodging Realty, LLC 

v. United States, 800 F.3d 1353, 1357–58 (Fed. Cir. 2015). 

On appeal, the Adkinses make essentially four arguments: (1) the Claims Court failed to correctly apply 

Treas. Reg. § 1.165-1(d)(3)’s test for determining the year 

in which a taxpayer can deduct a theft loss under 26 

U.S.C. § 165; (2) even under the Claims Court’s interpretation of Treas. Reg. § 1.165-1(d)(3), it improperly required abandonment of their arbitration claim; (3) the 

Claims Court failed to apply Revenue Procedure 2009-20 

in this case; and (4) if 2004 was not the correct loss year, 

the Claims Court should have ruled in favor of the Adkinses under the mitigation provisions of Treas. Reg. 

§ 1.1311(c), using 2003 as the loss year instead.2

2 In their opening brief, in a single footnote, the 

Adkinses also mention a Motion to Compel filed below 

that was denied: 

 
ADKINS v. US 5

First, we examine the requirements of Treas. Reg. 

§ 1.165-1(d)(3): 

Any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers the loss (see § 1.165-8, relating to 

theft losses). However, if in the year of discovery 

there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which 

reimbursement may be received is sustained, for 

purposes of section 165, until the taxable year in 

which it can be ascertained with reasonable certainty whether or not such reimbursement will be 

received.

(emphases added). In interpreting and applying this 

regulation, the Claims Court reiterated the conclusion

reached by another Claims Court judge in Johnson v. 

United States, 74 Fed. Cl. 360 (2006). That is, although

[We] were then prejudiced by the fact that the 

Trial Court failed to grant [our] Motion to compel 

discovery as [to] the contents of the Government’s 

copies of the Donald & Company records and the 

investigative files of the Service in the criminal 

investigations and the case should be remanded 

for a new trial. 

Appellants’ Br. at 3 n.a. The Adkinses do not elaborate 

further on this contention or, indeed, provide any relevant 

legal authority or factual background. Because the disposition of a Motion to Compel is a matter “committed to the 

discretion of the trial court,” the Adkinses’ threadbare 

assertions are not a sufficient basis for this court to 

second-guess the Claims Court’s reasoning. Florsheim 

Shoe Co. v. United States, 744 F.2d 787, 797 (Fed. Cir. 

1984). 

 
6 ADKINS v. US

other courts “tend[] to combine the ‘reasonable prospect of 

recovery’ inquiry and the ‘ascertain with reasonable 

certainty’ inquiry,” the “two inquiries are distinct and the 

standards to be applied are different.” Adkins, 125 Fed. 

Cl. at 318 (quoting Johnson, 74 Fed. Cl. at 365). 

Put differently, under Johnson, the “reasonable prospect” language tolerates a greater probability of recovery

than the “reasonable certainty” language. In practice, 

this means that plaintiffs are required to make a stronger 

evidentiary showing when attempting to claim their loss

in any year subsequent to discovery. As the Claims Court

stated in Johnson, for example, an “estimate” made by 

“lawyers and accountants may [be] sufficient to determine 

whether there was a ‘reasonable prospect for recovery’ in 

the year of discovery,” but it would not be “sufficient to 

‘ascertain with reasonable certainty.’” Johnson, 74 Fed. 

Cl. at 366 (emphasis added). Because the Adkinses 

discovered their loss in 2002 and attempted to claim their 

loss in 2004, the Claims Court applied the higher, more 

stringent standard of “reasonable certainty”—and held 

that the Adkinses failed to meet that standard. 

The Adkinses argue that Treas. Reg. § 1.165-1(d)(3), 

properly interpreted, does not set forth two different 

standards. Rather, Treas. Reg. § 1.165-1(d)(3) merely 

describes two sides of the same probabilistic coin: a “reasonable prospect for recovery” is the inverse of “reasonable certainty” that there will be no recovery.3 That is, the 

test in Treas. Reg. § 1.165-1(d)(3) may be simplified as 

3 To put it in more explicit mathematical terms, we 

know that Precovery + Pno recovery = 1. Let a “reasonable 

prospect” for recovery mean that Precovery ≥ x for some

probability xx. The Adkinses argue that “reasonable 

certainty” of no recovery simply means that Pno recovery > 

1 – x, so that Precovery < x. The threshold probability in 

both inquiries is, therefore, identical: xx. 

 
ADKINS v. US 7

follows: the proper year in which to claim a loss is the first 

year in which no reasonable prospect of recovery exists

anymore, starting with the year of discovery.4 Accordingly, the Adkinses suggest, they should not have been held 

to a stricter standard to claim their loss in 2004 than the 

standard to which they are held for 2002. 

We agree with the Adkinses’ interpretation of the 

regulation. Although few of our sister circuits have

addressed this issue explicitly, those few who have appear 

to have reached the same conclusion. See, e.g., Vincentini 

v. Comm’r of Internal Revenue, 429 F. App’x 560, 564 (6th 

Cir. 2011) (describing Treas. Reg. § 1.165-1(d)(3) as setting forth a single test, and describing that test as whether the claimant “demonstrate[d] with reasonable certainty 

that there was no reasonabl[e] prospect of recovery”); 

Jeppsen v. Comm’r of Internal Revenue, 128 F.3d 1410, 

1414–17 (10th Cir. 1997) (using “reasonable prospect” and 

“reasonable certainty” language interchangeably); Rainbow Inn, Inc. v. Comm’r of Internal Revenue, 433 F.2d 

640, 644 (3d Cir. 1970) (describing “the test” under Treas. 

Reg. § 1.165-1(d)(3) as “whether there was a reasonable 

prospect of recovery at the time the deduction was 

claimed”). We find no basis in the language of Treas. Reg. 

§ 1.165-1(d)(3) to deviate from this straightforward and 

sensible approach. 

This interpretation aligns, moreover, with commonsense incentives for victims of theft. Good-faith efforts to 

recover losses—such as lawsuits and arbitration—will 

tend to push the claim year later than the year of discovery by creating a probability of recovery. To the extent 

4 The test could be equivalently simplified as: the 

proper year in which to claim a loss is the first year in 

which it can be ascertained with reasonable certainty that 

there will be no recovery, starting with the year of discovery.

 
8 ADKINS v. US

that it is rendered more difficult to succeed on a loss claim 

in years subsequent to discovery, taxpayers will be dissuaded from those good-faith efforts. Neither the government nor the Claims Court has explained why such a 

result possibly could have been intended by the Treasury 

Department. 

Having addressed the proper application of Treas. 

Reg. § 1.165-1(d)(3), we turn next to the Adkinses’ second 

argument—whether, under either interpretation of 

§ 1.165-1(d)(3), the Claims Court additionally erred by 

treating abandonment of their arbitration claim as a 

prerequisite to a reasonable certainty of no recovery. 

Once again, we find the Adkinses’ argument persuasive, 

and hold that the Claims Court so erred.

In reaching that conclusion, we begin with Treas. Reg. 

§ 1.165-1(d)(2)(i), which provides elaboration on what 

constitutes “reasonable certainty” for purposes of § 1.165-

1(d)(3): 

Whether a reasonable prospect of recovery exists 

with respect to a claim for reimbursement is a 

question of fact to be determined upon an examination of all facts and circumstances. Whether or 

not such reimbursement will be received may be 

ascertained with reasonable certainty, for example, 

by a settlement of the claim, by an adjudication of 

the claim, or by an abandonment of the claim. 

When a taxpayer claims that the taxable year in 

which a loss is sustained is fixed by his abandonment of the claim for reimbursement, he must be 

able to produce objective evidence of his having 

abandoned the claim, such as the execution of a 

release. 

(emphasis added). The Adkinses contend that the Claims 

Court effectively treated the emphasized section above as 

an exhaustive list rather than a mere collection of examples. The Adkinses concede that their arbitration claim 
ADKINS v. US 9

with NASD was still pending in 2004; nevertheless, they 

argue that a holistic examination of the facts and circumstances as of that time demonstrates a reasonable certainty of no recovery. The Adkinses note in particular

that, as of 2004, they had reason to believe that: (1) the 

government intended to seize any documentation concerning the identity and ownership of the defendants’ assets, 

foreclosing independent investigation; (2) the government 

intended to seize all of defendants’ discovered assets; and 

(3) the defendants had no chance of generating future 

assets given their plea agreements and debarments. 

In its opinion, the Claims Court acknowledges at the 

outset that the list in the emphasized section above is 

“expressly designated as ‘example[s],’” such that “a taxpayer is not precluded from ascertaining the viability of 

his claim in another manner.” Adkins, 125 Fed. Cl. at 

319. Because the Adkinses had a live arbitration claim, 

however, the Claims Court appeared to hold that abandonment of that claim became the only acceptable manner

to ascertain viability: 

Although plaintiffs do not say so explicitly, the 

court—based on the facts adduced at trial, plaintiffs’ arguments, and the relevant regulations—

infers that it is plaintiffs’ position that in 2004, 

they ascertained with reasonable certainty that 

they would not recover anything on their arbitration claim. The facts further reflect that plaintiffs 

did not arrive at this conclusion because they settled or litigated the claim, but instead came to believe that the claim was no longer viable because 

they would not be able to collect on it, and therefore stopped actively pursuing it. In other words, 

notwithstanding their protestations otherwise, 

plaintiffs must be contending that they abandoned 

their arbitration claim. 

. . . . 
10 ADKINS v. US

[Thus,] the objective evidence in the record supports two other abandonment dates: (1) 2003, 

when plaintiffs’ arbitration attorneys requested 

that the NASD adjourn the scheduled hearing and 

when plaintiffs stopped paying their arbitration 

attorneys, or (2) 2008, when plaintiffs formally 

withdrew their arbitration claim. Accordingly, 

plaintiffs have not met their burden of establishing 

that they sustained their theft loss in 2004.

Id. at 320–21 (emphases added). That holding cannot 

stand. 

We read Treas. Reg. § 1.165-1(d)(2)(i) as setting forth 

a general totality-of-the-circumstances standard, followed 

by an alternative method for a plaintiff to demonstrate 

that no reasonable prospect of recovery existed as of a 

certain date. That is, rather than make their case under 

the general “all facts and circumstances” standard, a 

plaintiff may rely on the date that their arbitration or 

lawsuit for the loss was settled, abandoned, or adjudicated. In the case of abandonment, because no dated court 

order or settlement agreement exists, the plaintiff must 

be able to provide some other form of “objective evidence”

as to when abandonment occurred. But even in cases 

where the plaintiff does have a related arbitration or 

lawsuit, we do not read Treas. Reg. § 1.165-1(d)(2)(i) as 

precluding them from making their case under the more 

general standard, should they so choose. 

This court recognizes that the existence of a live 

arbitration or lawsuit typically is at least probative evidence of the potential for recovery. A plaintiff’s decision

to incur the costs associated with maintaining such a 

proceeding reveals something about their subjective 

beliefs regarding the potential for recovery therein. But 

the court must take into account what those costs actually 

are. In this case, for example, the Claims Court noted 

that “plaintiffs’ arbitration attorneys took no action” after 
ADKINS v. US 11

2004 other than “requests for further postponements.” 

Adkins, 125 Fed. Cl. at 320. The Adkinses, for their part,

allege that they were no longer even paying their attorneys at this point. Where, as appears to be the case here, 

the associated maintenance costs are almost zero, the 

plaintiff’s decision to keep the proceeding open tells the 

court exceedingly little about their beliefs as to the chances for recovery. No matter the odds, even a perfectly 

rational actor doesn’t turn down a free lottery ticket. 

Accordingly, unless the plaintiff has chosen abandonment (or settlement or adjudication) as the factual 

predicate for their loss date, the existence of an ongoing 

lawsuit or arbitration is only one factor to be considered 

among many—all facts and circumstances. Because the 

Adkinses did not so choose, we direct the Claims Court on 

remand to engage in this more holistic analysis, including 

additional factfinding as necessary. 

Because we agree with the Adkinses that the Claims 

Court both misinterpreted Treas. Reg. § 1.165-1(d)(3) and 

improperly required abandonment of their arbitration 

claim, we need not reach their alternative arguments 

regarding Revenue Procedure 2009-20 and Treas. Reg. 

§ 1.1311(c). 

CONCLUSION

For these reasons, the Claims Court’s opinion and order dismissing the Adkinses’ complaint with prejudice is 

vacated, and the case is remanded for further proceedings

consistent with this opinion. 

VACATED AND REMANDED

COSTS

Costs to appellants.