# In th e United States Court of Federal Cl aims

No. 10-851T (F iled: F ebruary

23, 2016)

************************************* CHARL ES P. ADKI

NS and J A

NE E. * ADKI NS, *

* Trial; I n come Tax Refund; Theft L oss; I RC Plaintiffs, * § 165; 26 C.F .R. §§ 1.165-1, 1.165-8;

* Securities F raud; Pump-and-Dump Scheme;

v. * Reasonable Prospect of Recovery ; Ascertain

* W ith Reasonable Certainty THE UNI TED STATES, *

* Defendant. *

*************************************

J ohn F

. Rodg ers, Alex andria, VA, for plaintiffs.

Mark A. Ry an, United States Department of J ustice, W a shing ton, DC, for defendant.

OP INION AND ORDER

SWEENEY , J udg e

Plaintiffs Charles P. and J ane E. Adkins are victims of a fraudulent investment scheme, and seek a refund of federal income tax es based on the losses they sustained due to the scheme. There is no dispute that plaintiffs sustained a substantial theft loss. Rather, at issue in this case is whether plaintiffs properly claimed the theft loss deduction for the 2004 taxy ear, whether a small portion of the claimed theft loss is deductible, and the proper amount of plaintiffs’ refund, if any

. The court held a trial on all of these issues, after which the parties submitted posttrial briefs. As set forth below, the court concludes that plaintiffs are not entitled to a theft loss deduction for the 2004 tax y e ar. According ly , plaintiffs’ complaint must be dismissed.

I. F A CTS

This section contains the court’s finding s of fact as required by Rule 52(a)(1) of the Rules of the United States Court of F ederal Claims. 1

1 The court derives some of these facts from the parties’ Joint Stipulation of F acts (“J t. Stip.”), alleg ations admitted by defendant (“Compl.” and “Answer”), and pertinent statutes and regulations. The remaining facts are derived from the transcript of testimony elicited at trial (“Tr.”) and the exhibits admitted into evidence during trial (“PX,” “DX,” or “J X”). Citations toDonald & Co. Securities, I nc. (“Donald & Co.”) was a broker-dealer of securities

reg istered with the Securities and Ex chang e Commission (“SEC”) and the National Association of Securities Dealers (“NASD”). J X 1; 2 J X 45. Donald & Co. was directly owned by

a holding company , THCG, I nc., and indirectly owned by

Star Cross, I nc. and Stephen A. B lum. J X 45. One of the brokers employ ed by Donald & Co. was Otto Koz ak. J X 1. Mr. Adkins beg an investing throug h Mr. Otto Koz ak in September 1997, when Mr. Otto Koz ak was employ ed by E.C. Capital, L td., and continued to do so when Mr. Otto Koz ak moved to GKN Securities Corp. in October 1998 and Donald & Co. in March 1999. 3 J X 91. I n vestment accounts were opened at Donald & Co. for Mrs. Adkins individually , and plaintiffs jointly , in late 1999. I d

. Unbeknownst to plaintiffs, Donald & Co. was operating a “pump-and-dump” scheme. 4 J t. Stip. ¶ 1. B roadly

speaking , the pump-and-dump operation was accomplished by Donald & Co. arrang ing to purchase larg e blocks of stock in various companies; encourag ing its customers to purchase these stocks, artificially inflating the stocks’ prices; and then, once the price of a

the trial transcript will be to the pag e number of the transcript and the last name of the testify ing witness.

2 The parties stipulated that the alleg ations in the indictment–J X 1–are “true and accurate.” Jt. Stip. ¶ 11.

3 Mr. Adkins also dealt with Mr. Otto Koz ak’s brother, Robert Koz ak. Tr. 430, 432 (C. Adkins). To avoid confusion, the court refers to the brothers by their full names.

4 As defined by

the SEC:

“Pump-and-dump” schemes involve the touting of a company ’s stock (ty pically small, so-called “microcap” companies) throug hfalse and misleading

statements to the marketplace. These false claims could be made on social media such as F acebook and Twitter, as well as on bulletin boards and chat rooms. Pump-and-dump schemes often occur on the I n ternet where it is common to see messag es posted that urg e readers to buy a stock quickly or to sell before the price g oes down, or a telemarketer will call using the same sort of pitch. Often the promoters will claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks. In reality , they may be company

insiders or paid promoters who stand to g ain by

selling their shares after the stock price is “pumped” up by the buy ing frenz y

they create. Once these fraudsters “dump” their shares and stop hy ping the stock, the price ty pically falls, and investors lose their money

. SEC, Pump and Dump, https://www.investor.g ov/g lossary /g lossary

_ terms/pump-dump (last visited F eb. 23, 2016).

-2-particular stock was sufficiently inflated, selling the stock that it owned, resulting in g ains for the company and, due to the subsequent decline in the stock price to a normal, uninflated level, losses for the company ’ s customers. I d. ¶¶ 4, 12-46. Among the stocks involved in the scheme were five stocks for which Donald & Co. was a market maker; in other words, it held these stocks in its own account to facilitate trading in them. J X 1. These stocks, also referred to as “house stocks,” consisted of Elec Communications Corp. (“Elec”), The Classica Group, I nc. (“Classica”), My

Turn.com, Inc. (“My

Turn”), 5 Great Train Store Co., and Tera Computer Co. J t. Stip. ¶¶ 16, 23, 30, 37, 44; J X 1. Donald & Co. owned much of their house stocks via Ody ssey Capital L L C, a holding company . Tr. 391 (C. Adkins); see also J X 1 (noting the ex istence of a proprietary

trading account funded by Donald & Co. principals in the name of Ody ssey Capital L L C and that Donald & Co. accumulated profits from its fraudulent scheme in Ody ssey Capital L L C accounts at, among

other places, Chase Manhattan B ank). Mr. Adkins learned of this fact in 2003 or 2004. Tr. 392 (C. Adkins).

Plaintiffs accorded Mr. Otto Koz ak a hig h level of discretion to trade in their accounts. J t. Stip. ¶ 8. Some of the trades ex ecuted by Mr. Otto Koz ak for plaintiffs were done on marg in, J X 91; in other words, using borrowed money . Mr. Otto Koz ak also convinced Mr. Adkins to participate in a private placement offering of Vianet Technolog ies, I nc. (“Vianet”) stock. 6 Tr. 122 (C. Adkins). On December 14, 1999, $30,000 was charg e d to Mr. Adkins’s Donald & Co. account to purchase a subscription in the offering . J t. Stip. ¶ 85; J X 91 at 1580. Separately , on December 20, 1999, Mr. Adkins prepared a check for $45,000, made pay a ble to Continental Stock Transfer & Trust Company
, to purchase a subscription in the offering . J X 53 at 823. I t is unclear to whom Mr. Adkins sent the check; at trial he testified:

Isent the $45,000 in only to hear later–and I sent it to the attorney of record where
y ou have to send the money . I t doesn’t g o to the broker. It g oes to the company and–at some point I

g uess it has to g o to the company

. So, ag a in, Isent the check in to Otto [ Koz ak] and he submitted it . . . .

Tr. 122-23 (C. Adkins) (emphasis added). The check cleared plaintiffs’ bank account on J anuary 6, 2000. J X 53 at 822.

At some point, plaintiff was advised that the private placement offering was oversubscribed. J X 69. Thus, in a J anuary 25, 2000 letter prepared by Donald & Co. on its letterhead, Mr. Adkins requested that Vianet transfer the “funds [ h e] submitted as part of [ his] subscription to [ Vianet’s] private placement offering ” to an escrow account for use in Vianet’s new private placement offering . I d. The record contains no evidence indicating whether the

5 My Turn was formerly

known as Compu-Dawn I n c. J t. Stip. ¶ 12.

6 I n his testimony , Mr. Adkins used the term “initial public offering .” Tr. 122 (C. Adkins). However, the documentary evidence in the record reflects that Mr. Adkins was seeking to participate in a private placement offering . See J X 53 at 823; J X 66 at 1195-96; J X 69.

-3-specified funds referred to the $30,000 charg e or the $45,000 check. W ith respect to the latter, the record does reflect that on December 20, 1999, Donald & Co. charg e d Mr. Adkins’s account for $45,000 that it sent, via wire transfer, to plaintiffs’ bank, 7 J X 91 at 1580, and that there was no corresponding

deposit of $45,000 in Mr. Adkins’s account, id. at 1578-83. Ultimately , on March 22, 2000, 19,999 restricted class A shares of Vianet stock were transferred to Mr. Adkins’s account; the total value of these shares at the end of March 2000 was $129,993.50. 8 I d. at 1592. The record lacks any evidence that plaintiffs have disposed of their Vianet stock.

Notwithstanding the issues related to the Vianet private placement offering , the value of plaintiffs’ investments with Donald & Co. rose to approx imately $3.6 million, with their holding s of My Turn stock representing most of that value. I d. at 1659, 1663. B eg inning in F ebruary 2000, however, the value of plaintiffs’ My Turn stock beg an to decline. Compare id. at 1663 (reflecting

a value of $2,936,250 at the end of F ebruary 2000), with id. at 1669 (reflecting a value of $2,131,920 at the end of March 2000), and id. at 1677 (reflecting a value of $1,029,420 in April 2000). As a result, the equity in plaintiffs’ marg in account fell below the required threshold and Donald & Co. beg an to issue marg in calls to plaintiffs. 9 J t. Stip. ¶ 86. Mr. Adkins

7 Althoug h the parties state in their posttrial briefs that Mr. Adkins demanded the return of the $45,000, there is no evidence in the record describing such a demand. See g e nerally Tr. 122-25 (C. Adkins) (containing the testimony from Mr. Adkins reg arding the Vianet stock).

8 On October 19, 2000, an additional 598 restricted class A shares of Vianet were transferred to Mr. Adkins’s account. J X 91 at 1602. On December 27, 2000, all 20,597 shares were transferred from Mr. Adkins’s account to Mrs. Adkins’s account. I d. at 1618, 1846. On J anuary 18, 2002, an additional 31,500 shares of restricted Vianet stock were transferred into Mrs. Adkins’s account from an unidentified source. Id. at 1883.

Separately , on F ebruary

7, 2001, 4592 shares of Vianet restricted common stock were transferred into Mr. Adkins’s account. I d. at 1624. An additional 16,803 shares were transferred into Mr. Adkins’s account on April 4, 2001. I d. at 1627. None of these 21,395 shares of stock orig inated from Mrs. Adkins’s account. I d. at 1856-63.

According

to a reg istration statement that Vianet filed with the SEC, as of May 9, 2001, Mr. Adkins owned 52,889 shares of Vianet stock. J X 66 at 1211.

9 The SEC defines “marg in call” in the following manner:

I f y ou buy

on marg in and the value of y o ur securities declines, y

our brokerag e firm can require y

ou to deposit cash or securities to y our account immediately , or sell any of the securities in your account to cover any shortfall, without informing
y ou in advance. The brokerag e firm decides which of y our securities to sell. Even if the brokerag e firm notifies y o u that y ou have a certain number of day s to cover the shortfall, it still may sell y our securities before then. A brokerage firm

-4-instructed Mr. Otto Koz ak to meet the marg in calls by selling some of plaintiffs’ stock holding s, the My Turn stock in particular. I d. ¶ 87. Mr. Otto Koz ak did not follow this instruction; rather, he convinced Mr. Adkins to retain the My Turn stock and meet the marg in calls by transferring additional cash ($1,074,181.11) and securities (valued at $1,261,082.37) to Donald & Co. I d. ¶¶ 87-89.

Some of the securities transferred by plaintiffs to Donald & Co. to meet the marg in calls were Donald & Co. house stocks purchased by plaintiffs throug h other firms, including B ear, Stearns Securities Corp. (“B ear Stearns”); May Davis Group I nc. (“May

Davis”); and H.J

. Mey ers & Co., I nc. (collectively , “third-party brokers”). I d. ¶ 82. Specifically , throug h these brokers, plaintiffs purchased My Turn stock in the amount of $143,617.72, Tera Computer Co. stock in the amount of $26,793.13, and Great Train Store Co. stock in the amount of $40,890.00. I d. ¶ 83. W ith respect to the My Turn stock, plaintiffs purchased 13,200 shares from B ear Stearns, J X 53 at 865-66 (reflecting that 10,000 shares were purchased on May 25, 2000, and 3,200 shares were purchased on Aug ust 17, 2000); and 2,000 shares from May Davis, id. at 868- 69 (reflecting

the purchase of 2000 shares, in four 500-share blocks, on September 13, 2000). One of the May

Davis transaction confirmation slips bore the notation that May Davis was a market maker for My

Turn stock. I d. at 868. And, all of the May Davis transaction confirmation slips indicated that plaintiffs’ request to purchase the My Turn stock was not solicited by May Davis. I d . at 868-69.

B y the beg inning of 2002, the value of plaintiffs’ investments with Donald & Co. had dropped dramatically . Compare J X 91 at 1659 (reflecting a value of $3,589,300.84 at the end of F ebruary 2000), with id. at 1783 (reflecting a value of $9848.62 at the end of December 2001). Mr. Adkins conducted some research and realiz e d that plaintiffs were being defrauded. Tr. 28 (C. Adkins). As a result, on F ebruary 7, 2002, plaintiffs submitted a statement of claim to the NASD in support of their demand for arbitration ag ainst Donald & Co. and three of its principals: David Stetson, Slava Volman, and Steven I ng rassia. 1 0 J t. Stip. ¶ 90; J X 42. I n their

may at any time chang e the threshold at which customers are subject to a marg in call.

SEC, Marg in Call, https://www.investor.g ov/g lossary /g lossary _terms/marg in-call (last visited F eb. 23, 2016).

1 0 Plaintiffs were no strang ers to the NASD arbitration process. On F ebruary 22, 1999, they submitted a statement of claim to the NASD in support of their demand for arbitration ag ainst Philip E. Teseo and Victor M. W ang , who were brokers for Duke & Company , I nc. DX 15 (rebuttal); DX 17 (rebuttal). Plaintiffs alleg ed that Mr. Teseo and Mr. W a ng defrauded them of their investments throug h a pump-and-dump scheme. DX 15 (rebuttal); Tr. 155, 535, 538 (C. Adkins). The NASD arbitration panel conducted a hearing , and on F ebruary 9, 2000, awarded plaintiffs $572,000 plus interest. DX 15 (rebuttal). On J anuary 21, 2001, Mr. W ang was charg ed in federal court with conspiracy to commit securities fraud. DX 19 (rebuttal). He pled g uilty that

-5-claim, plaintiffs g enerally alleg ed that the respondents manipulated the value of the My Turn stock, causing them to incur substantial losses; they made no alleg ations concerning the Vianet stock transactions. J X 42. Mr. Otto Koz ak was not named as a respondent; nor was he mentioned by

name in plaintiffs’ claim. I d. Rather, according to Mr. Adkins, Mr. Otto Koz ak was assisting plaintiffs by providing their arbitration attorney s with information reg arding Donald & Co. See, e.g ., Tr. 57, 327-28 381-82, 435-36 (C. Adkins); accord id. at 372, 392. Donald & Co. ceased operations on July 24, 2002, due to insufficient capital, J t. Stip. ¶ 62; J X 1, and Donald & Co. was ex p elled from the NASD on March 18, 2003, J t. Stip. ¶ 69.

On March 24, 2003, one of plaintiffs’ arbitration attorney s sent a letter to the NASD requestingthat the NASD adjourn the arbitration hearing scheduled for April 1, 2003, on two g rounds:

The broker-dealer Respondent, Donald & Co. Securities, I nc. has not responded fully

to our demands for discovery and is no long er in business. W e have been unsuccessful in our attempts to obtain necessary documents elsewhere. Thus, we would need additional time for discovery in any event.
There is a more important reason for an adjournment. One of the Claimants, Charles Adkins, has been recently contacted by

the Department of J ustice, which is investig ating Donald & Co. and certain persons associated with it. (W e have no information that any individual Respondent is the subject of the Government’s investig ation.) Mr. Adkins has cooperated with the Government. I have also spoken with Cy nthia Monaco, the United States Attorney handling the matter, who has advised me that an indictment will be handed down in the case. W e understand the indictment will be handed down in the near future. At that time, Ms. Monaco will ask that all civil litig ation involving Donald & Co., including arbitrations, be stay ed pendingdisposition of the criminal case. 1 1

same date, and was sentenced on December 13, 2002. I d . As part of his sentence, he was directed to pay

restitution in the amount of $11,129,582, most of which was to be paid to the SEC on behalf of the victims of the fraud. I d . I n the meantime, on J anuary 23, 2001, plaintiffs filed an application to confirm their arbitration award in the United States District Court for the District of Columbia. DX 14 (rebuttal). The district court, in a J u ly 17, 2001 ruling , confirmed and entered judgment on the arbitration award. DX 18 (rebuttal) (Adkins v. Teseo, 180 F . Supp. 2d 15 (D.D.C. 2001)). As of the date of trial, plaintiffs had not collected on the judg ment. Tr. 158, 500 (C. Adkins). Plaintiffs’ inability to collect on the judg ment led Mr. Adkins to believe that the fact of an arbitration award did not mean that compensation would be forthcoming . I d. at 500.

1 1 Parag raph 80 of the J oint Stipulation of F acts provides: “The prosecutor told Plaintiffs[ ’ ] Arbitration attorney that the criminal indictments would stay the arbitration proceeding s in March, 2003.” Althoug h the parties jointly stipulated to this fact, the court

-6-J X 43 (footnote added); see also DX 38 (rebuttal) (reflecting that Special Ag ent Kurt F . Deng ler of the F ederal B ureau of I nvestig ation (“F B I ”) interviewed Mr. Adkins by telephone on F ebruary 28, 2003, reg arding the Donald & Co. stock manipulation scheme). F urther, according to Mr. Adkins, the arbitration attorney s advised plaintiffs that they would be unable to proceed with arbitration without discovery and in lig ht of the pending indictment; however, they sug g ested that the arbitration claim be left open in the event that proceeding s in the criminal matter revealed pertinent information. J t. Stip. ¶¶ 55, 91; accord id. ¶ 76 (indicating that plaintiffs’ arbitration attorney s advised plaintiffs that “the arbitration was trumped” by the indictments). Mr. Adkins did not object to this sug g estion; he testified:

Ionly made two pay

ments to my

attorney s at the beg inning of the case in 2002 . . . . [ T] hey were unsuccessful in g etting any documents, and I

told them I wasn’t g oing to pay

them any more and there’s no real need to pursue it. The attorney s were on a conting ency basis, so Ihad paid my money on the front end, and so . . . it was really

their decision.

Ileft it up to them about continuing and not just dropping the arbitration proceeding , because they had invested in the case and . . . they hoped, I g uess, may be to g et something . . . out of the case at some point in time . . . . So, I did not object when they

just kept postponing the case.

And, in fact, . . . by

2003, there was no real work on the case, other than them responding to the NASDAQ [ sic] board about . . . postponing the case. I g uess in 2003, Ithink there was a plea to g et the arbitrators to compel production, but then that was the last real effort of any kind by any of us.

accords it little weig ht. The letter from plaintiffs’ arbitration attorney indicates that the United States Attorney

intended to request that all civil litig ation be stay ed pendingthe resolution of the criminal proceeding s, not that she advised that all civil litig ation would automatically be stay ed pending resolution of the criminal proceeding s. I n addition, at least one arbitration claim ag ainst Donald & Co. and one of its brokers remained active during the criminal proceeding s. See J X 49 (Auderer v. Donald &

Co., filed on J anuary

21, 2003, decision for claimants on March 16, 2005).

Relatedly , parag raph 70 of the J oint Stipulation of F acts provides: “The arbitration hearing before the NASD was suspended when the criminal defendant employ e es of Donald & Company (including Otto Koz ak, David Stetson, Slava Volman, and Steven I ng r assia) were indicted . . . .” Althoug h the parties jointly stipulated to this fact, the court accords it little weig ht because it is vag

ue. I t is unclear whether the word “when” refers to causation or timing . And, because the stipulated fact is written in passive voice, it is unclear who or what suspended the arbitration hearing

. Moreover, as demonstrated below, the stipulated fact is inaccurate in that it provides that Mr. Stetson was indicted.

-7-. . . . Iknow I paid $2,500 to start the case and another $5,000 in – around the end of 2002, and nothing more because it wasn’t g oing to be productive.

Tr. 70-71 (C. Adkins); accord id. at 231-32; see also id. at 71-72 (containing Mr. Adkins’s testimony that by the end of 2003, he did not think that plaintiffs would g et any money from their arbitration claim); id. at 226-29 (indicating that between 2004 and 2008, plaintiffs’ arbitration attorney s requested, upon reg ular inquiries from the NASD, the continued postponement of the arbitration proceeding s). Thus, plaintiffs did not withdraw their arbitration claim at that time. See J X 44 (indicating that the arbitration claim was not withdrawn until April 29, 2008).

Ultimately , in May 2004, a federal g rand jury in the Eastern District of New York returned an indictment ag ainst several principals and employ ees of Donald & Co.–Mr. I ng rassia, Mr. Volman, Nicholas Antonelli, J effrey B assin, Carl Cunz io, J ohn F lanag an, Mr. Otto Koz ak, Mr. Robert Koz ak, and Patrick McF adden–for conspiracy to commit securities fraud, securities fraud related to the Elec and Classica stocks, and money launderingconspiracy . J X 1; J X 2. Mr. I ng rassia and Mr. Volman were also indicted on money launderingcharg es. J X 1; J X 2. The indictment additionally

contained two criminal forfeiture alleg ations. J X 1. The first, which pertained to the securities fraud charg es, indicated that the g overnment intended, upon the defendants’ convictions, to seek the forfeiture “of any property constituting or derived from proceeds obtained directly or indirectly

as a result of such offenses” pursuant to 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461(c), or, if necessary , the forfeiture of substitute property pursuant to 21 U.S.C. § 853(p). I d . The second, which pertained to the money laundering charg es, indicated that the g overnment intended, upon the defendants’ convictions, to seek the forfeiture of all property involved in the offenses, as well as all property traceable to that property , pursuant to 18 U.S.C. § 982, or, if necessary , the forfeiture of substitute property pursuant to 21 U.S.C. § 853(p). I d . Specifically identified as subject to forfeiture were real property located in B ay shore, New York, and a Carver motorboat, both owned by Mr. I ng rassia. I d.

Mr. Adkins read the indictment in 2004. Tr. 378 (C. Adkins). He interpreted its contents to mean that the g o v ernment intended to seiz e any documentation concerning the identity and ownership of the defendants’ assets, foreclosing plaintiffs’ ability

to prove the ex istence of a theft loss and locate assets that could be used to reimburse plaintiffs for their theft loss. I d. at 29-30, 72. Mr. Adkins further interpreted the indictment to mean that the g o vernment was g oing to seiz e all of the defendants’ assets, preventing plaintiffs from attaching

those assets to recover their theft loss. I d . at 29-30, 72, 223-24; see also id. at 72 (describing the indictment as “the last nail in the coffin” with respect to obtaining any recovery on plaintiffs’ arbitration claim). However, the record lacks any evidence that the g overnment seiz ed any o f the defendants’ documents, records, or assets. 1 2 F urther, the record is bereft of any evidence that plaintiffs or

1 2 As described below, certain defendants did ag ree to the entry

of forfeiture money judg ments ag ainst them. Mr. Adkins testified that when he used the term “seiz ure,” he was referring to “a forced forfeiture of their assets . . . .” Tr. 517 (C. Adkins).

-8-their arbitration attorney s attempted to ascertain the financial condition of any of the defendants. I nstead, rely

ing solely on the contents of the indictment, Mr. Adkins concluded that the g overnment had rendered the defendants judg ment proof. 1 3 DX 34 (rebuttal).

Moreover, when Mr. Adkins saw the indictment and learned that only the Elec and Classica stocks–and not the MyTurn stock–were named in the document, he was upset and called Special Ag ent Deng ler to ex press his dissatisfaction. Tr. 61-63, 289, 292, 304-05 (C. Adkins). According to Mr. Adkins, Special Ag ent Deng ler advised him that the F B Iand the prosecutors were focused on the money launderingaspects of the case, and not the securities fraud. I d. at 293, 296-97, 304-05; accord id. at 292-93, 509 (containing Mr. Adkins’s testimony

that Special Ag ent Deng ler stated that the priority of the F B I

and the prosecutors was to put people in jail, not to recover money

for the securities fraud victims 1 4 ); cf. id. at 62-64 (indicating Mr. Adkins’s belief, based on the contents of the indictment and his discussions with Special Ag e nt Deng ler, that plaintiffs would never g et their money back because (1) the g overnment’s focus was on the money laundering , (2) the g o vernment was g oing to take all of the defendants’ money throug h seiz ures and fines, and (3) the g overnment was g oing to take all of the defendants’ documents that could support plaintiffs’ arbitration claim).

Mr. Stetson, another Donald & Co. principal, was charg ed by information on September 21, 2004. J X 3. He was charg ed with conspiracy to commit securities fraud, securities fraud related to the Classica stock, and money laundering conspiracy . I d.; J X 15. The information also contained two criminal forfeiture alleg ations. J X 15. The first, which pertained to the securities fraud charg es, indicated that the g overnment intended, upon Mr. Stetson’s conviction, to seek the forfeiture “of any

property constituting or derived from proceeds obtained directly or indirectly

as a result of such offense(s)” pursuant to 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461(c) (including , but not limited to, $300,000 in United States currency ), or, if necessary , the forfeiture of substitute property

pursuant to 21 U.S.C. § 853(p). I d. The second, which pertained to the money launderingcharg e, indicated that the g overnment intended, upon Mr. Stetson’s conviction, to seek the forfeiture of all property involved in the offenses, as well as all property traceable to that property , pursuant to 18 U.S.C. § 982 (including , but not limited to, $150,000 in

1 3 I n their opening posttrial brief, plaintiffs represent that they “were not able to ascertain the actual financial assets of the Donald [ & Co.] malfeasors in 2004–the claimed theft loss
y ear–nor were [ they ] able to . . . identify financial accounts that might have been sources of funds for restitution or levy .” Pls.’ Posttrial B r. 12. To the ex tent that plaintiffs are sug g esting that they attempted to ascertain the defendants’ assets but were unsuccessful, they do not provide any citations to the record in support of this proposition.

1 4 Mr. Adkins also testified that neither Special Ag ent Deng ler nor any one from the g overnment advised him, “in so many words,” that “the purpose of federal investig ations is to put the g uy s in jail, not to recover yo ur money [ .] ” Tr. 294 (C. Adkins). This testimony conflicts with his earlier trial testimony , see id. at 292-23, and his deposition testimony , see id. at 294-95. The court therefore discounts it.

-9-United States currency ), or, if necessary
, the forfeiture of substitute property pursuant to 21 U.S.C. § 853(p). I d. Mr. Adkins was made aware of the criminal case ag ainst Mr. Stetson by

his arbitration attorney s and Mr. Otto Koz ak. Tr. 380-82 (C. Adkins).

I n September 2004, Mr. I ng rassia and Mr. Stetson agr eed to plead g u ilty to the securities fraud conspiracy
, securities fraud, and money launderingconspiracy

charg e s. J t. Stip. ¶ 79; J X 2; J X 3. Mr. Volman ag reed to plead g uilty to the same charg es the following month. J t. Stip. ¶ 79; J X 2. I n ag reeing

to plead g uilty , Mr. I ng rassia and Mr. Volman would receive terms of imprisonment and supervised release, and would be subject to fines that could ex ceed $1.75 million, mandatory

restitution in an amount to be determined, and forfeiture. J X 13; J X 14. Althoug h Mr. Stetson’s plea ag reement is not included in the record or available via PACER, 1 5 it appears, based on the judg ment entered in his case, that his plea ag reement mirrored those of Mr. I ng rassia and Mr. Volman. See J X 19. W ith respect to forfeiture, the three defendants ag reed, pursuant to 18 U.S.C. § 981(a)(1)(C), 18 U.S.C. § 982, and/or 21 U.S.C. § 853(p), to the entry of forfeiture money

judg ments ag ainst them in which Mr. I ng rassia would forfeit $100,000 to the United States, 1 6 Mr. Stetson would forfeit $150,000 to the United States, and Mr. Volman would forfeit $300,000 to the United States. J X 13; J X 14; J X 23. The three defendants’ plea ag reements remained under seal until Aug ust 26, 2005. J X 7; J X 9; see also J X 11 (reflecting that the transcript of Mr. Volman’s October 20, 2004 plea hearing was sealed); J X 12 (reflecting that the transcript of Mr. I ng rassia’s September 13, 2004 plea hearing was sealed). Nevertheless, Mr. Adkins learned in 2004 from his arbitration attorney s and Mr. Otto Koz ak that all of the criminal defendants intended to plead g uilty . Tr. 371-72, 380-82 (C. Adkins).

I n addition to facing criminal penalties for their roles in the securities fraud, the SEC barred Mr. Stetson from acting as a broker or dealer in securities on May 14, 2004, 1 7 J t. Stip. ¶ 78, and barred Mr. I

ng rassia and Mr. Volman from acting as brokers or dealers in securities on

1 5 PACER is an acrony

m for Public Access to Court Electronic Records, which “is an electronic public access service that allows users to obtain case and docket information online from federal appellate, district, and bankruptcy courts, and the PACER Case L ocator.” See Administrative Office of the United States Courts, Public Access to Court Electronic Records, https://www.pacer.g o v (last visited F eb. 19, 2016).

1 6 Althoug h Mr. I n g r assia’s plea ag reement reflected that he had ag reed that a forfeiture money judg ment would be entered ag ainst him by March 1, 2005, a review of the criminal docket indicates that such a judg ment was not entered ag ainst him. See J X 2.

1 7 The SEC also barred Mr. Antonelli from acting as a broker or dealer in securities on May 14, 2004. See Antonelli, Ex c hang e Act Release No. 49702, 2004 W L 1086008 (May

14, 2004). The court takes judicial notice of this fact pursuant to Rule 201(b)(2) of the F ederal Rules of Evidence.

- 10-December 7, 2004, id. ¶ 77. 1 8 Mr. Adkins learned of these SEC orders from his arbitration

attorney s, likely

in 2004. Tr. 75, 326-27, 329-30 (C. Adkins). He believed that one of the consequences of these orders was to reduce the three individuals’ earning p o wer, making the collection of any

judg ment ag ainst them more difficult. I d. at 408.

B y the end of 2004, neither Mr. I ng rassia, Mr. Volman, nor Mr. Otto Koz ak had paid plaintiffs for their losses. J t. Stip. ¶ 47. Nor had the United States District Court for the Eastern District of New York entered a restitution order. I d.

I n Aug u st 2005, another Donald & Co. principal, Marc F reeman, was charg ed by information with conspiracy to commit securities fraud, securities fraud, and money laundering conspiracy . J X 4. That same month, Mr. F reeman ag reed to plead g

uilty to all three charg es. I d. As part of his plea ag

reement, he ag

r eed to forfeit $50,000 to the United States. J X 20 at 452-57. He satisfied the forfeiture money judg ment prior to his J une 2009 sentencing

. J X 4. And, as part of his sentence, Mr. F reeman was directed to pay restitution in the amount of $4,243,858. I d.

Criminal proceeding s ag ainst the other Donald & Co. principals and brokers were ong oing

. F or ex ample, in Aug ust 2005, Mr. Otto Koz ak ag reed to plead g uilty to the securities fraud conspiracy and securities fraud charg es filed ag ainst him. J t. Stip. ¶ 72; J X 2; J X 54. Pursuant to his plea ag reement, he was subject to imprisonment, supervised release, fines that could ex ceed $1.25 million, and mandatory restitution in an amount to be determined. J X 54. Mr. Otto Koz ak was sentenced in J u ly 2006. J X 2. As part of his sentence, he was directed to pay restitution in the amount of $631,482.26. I d. B efore he died in April 2011, J t. Stip. ¶ 56, Mr. Otto Koz ak made restitution pay ments totaling $255, J X 61. Another criminal defendant, Mr. Volman, satisfied the $300,000 forfeiture money judg ment entered ag ainst him in September 2005, and was sentenced in J uly 2012. J X 2. As part of his sentence, Mr. Volman was directed to pay restitution in the amount of $3,590,466.50. I d .; J X 18. Mr. Ing rassia was sentenced in December 2009, and was directed to pay restitution in the amount of $4,243,858.44. J X 2; J X 18. And, Mr. Stetson, sentenced in March 2011, was directed to pay restitution in the amount of $3,590,466.50. J X 3. That same y ear, Mr. Stetson made a $75,000 pay ment in partial satisfaction of the $150,000 forfeiture money judg ment entered ag ainst him. I d. The restitution oblig ations of Mr. Volman, Mr. I ng rassia, Mr. Stetson, and Mr. F r eeman were joint and several. J X 17; J X 18; J X 19; J X 20. As of J anuary 28, 2014, they

had paid a total of at least $7093.27 towards their oblig ations. 1 9 J X 61. Other defendants–Mr. B assin, Mr. McF adden, Mr. Antonelli,

1 8 The SEC did not take action ag ainst the other defendants until May 2006. That month, it barred Mr. Otto Koz ak, Mr. B assin, Mr. Cunz io, and Mr. McF adden from acting as brokers or dealers in securities, J X 92; DX 1; DX 2; DX 3; and instituted proceeding s ag ainst Mr. Robert Koz ak and Mr. F lanag an, J X 93.

1 9 The record lacks any evidence reg arding restitution pay ments made by

Mr. F reeman.

- 11-Mr. Cunz io, and Mr. Robert Koz ak–had paid a total of $44,574.63 in restitution (out of a total

combined oblig ation of $392,223.24). 2 0 I d.; J X 2.

The United States Attorney ’s Office, having identified plaintiffs as victims of the securities fraud perpetuated at Donald & Co., J t. Stip. ¶¶ 57, 93, kept plaintiffs apprised of the ong oing criminal proceeding s, id. ¶ 73. I n an August 12, 2005 letter, the office’s Victim W itness Coordinator advised plaintiffs of the charg es filed ag ainst the Donald & Co. brokers, that they had “[ t] he rig ht to full and timely restitution as provided in law,” and that they could follow the criminal proceeding s throug h the Victim Notification Sy stem. J X 41 at 657-58; accord J t. Stip. ¶ 94. L a ter, in a March 31, 2006 letter reg arding sentencingproceeding s, the United States Attorney ’s Office advised plaintiffs that they mig ht be contacted by

a probation officer to discuss how they were affected by the securities fraud, and requested that plaintiffs complete and return an enclosed “Affidavit of L oss” to the probation officer. J X 41 at 662-64; see also id. at 663 (indicating that if plaintiffs had any questions reg arding the attached affidavit, they could call the probation officer at the specified telephone number). Plaintiffs received the March 31, 2006 letter, as reflected by the fact that they later submitted it–without the associated affidavit–to the I nternal Revenue Service (“I RS”). J X 55; Tr. 109-10 (C. Adkins). However, plaintiffs did not submit the affidavit to the probation officer; indeed, Mr. Adkins does not recall receiving the affidavit. Tr. 215-16, 501-02 (C. Adkins). Mr. Adkins does recall speaking with Special Ag ent Deng ler reg arding whether the g overnment needed information from plaintiffs reg arding their losses on the Elec and Classica stocks; according to Mr. Adkins, Special Ag e nt Deng ler responded that the g overnment had a sufficient number of other victims and that it did not need plaintiffs’ information. 2 1 I d. at 287-88, 298-99, 301, 304, 510-11. F or that reason, and because (1) the indictment did not mention the My Turn stock and (2) Mr. Adkins did not want what he thoug ht would be the accompany ing public ex posure, plaintiffs decided ag ainst officially being identified as victims. I d. at 288-90, 292, 305-06. I t appears that because there was no affidavit submitted on plaintiffs’ behalf, plaintiffs were not included on the victim lists submitted to the federal district court for the purposes of receiving restitution from the convicted Donald & Co. brokers. See, e.g ., J X 17 at 297-361 (containing victim lists that included customers of Mr. I ng rassia, Mr. F reeman, Mr. Antonelli, Mr. F lanag an, Mr. Volman, Mr. Stetson, Mr. Robert Koz ak, Mr. McF a d d en, and Mr. Cunz io, none of which included plaintiffs). Those lists reflect that the identified victims claimed losses related to three stocks: Classica, Elec, and “USHS.” I d.

W h ile the criminal proceeding s were pending , plaintiffs attempted to recoup some of their losses by

claiming a federal income tax deduction. J X 36; J X 37; J X 38; J X 39. Pursuant to section 165 of the Internal Revenue Code (“I RC”) and its implementing regulations, tax pay ers

2 0 The record lacks any evidence reg arding restitution pay ments made by

the remaining defendant, Mr. F lanag an. Mr. F lanag an was directed to pay $330,215.48 in restitution. J X 2.

2 1 Mr. Adkins testified that he discussed this topic with Special Ag ent Deng ler both before and after the indictments were issued. Tr. 299, 301 (C. Adkins).

- 12-are permitted to deduct a theft loss from their income in the y ear that they

sustained the loss. I RC § 165(a), (e) (2000); 26 C.F .R. §§ 1.165-1(a), (d), 1.165-8(a) (2001). According ly , in 2006, 2 2 plaintiffs timely

filed amended federal income tax returns for 2001 throug

h 2004 reflecting a total theft loss of $2,118,725. J t. Stip. ¶¶ 63-66; J X 36; J X 37; J X 38; J X 39. Plaintiffs claimed the theft loss in 2004, carry ing back portions of the loss to the previous three
y ears. J X 36; J X 37; J X 38; J X 39. As a result, plaintiffs soug ht income tax refunds of $115,736 for 2004, J X 36; $24,021 for 2003, J X 37; $71,621 for 2002, J X 38; and $177,707 for 2001, J X 39. Plaintiffs’ tax returns were prepared by Alan A. Gavel of J K Harris 165 Services, LL C. 2 3 J X 36; J X 37; J X 38; J X 39.

On April 29, 2008, approx imately two y e ars after they

filed their amended federal income
tax returns, plaintiffs withdrew their arbitration claim ag a inst Donald & Co. and its brokers. J t. Stip. ¶ 92. The record contains no evidence that the United States Attorney requested that plaintiffs’ arbitration proceeding be stay e d pending resolution of the criminal proceeding s ag ainst the Donald & Co. brokers. See also Tr. 230 (C. Adkins) (reflecting Mr. Adkins’s testimony

that he did not know whether the United States Attorney stay ed all civil proceeding s ag ainst the criminal defendants). I

ndeed, at least one arbitration claim ag ainst Donald & Co. and one of its brokers resulted in an award for the claimants while the criminal proceeding s were pending

. 2 4 See J X 49 (Auderer v. Donald & Co., filed on J anuary

21, 2003, decision for claimants on March 16, 2005).

Subsequently , on December 12, 2008, the I RS disallowed plaintiffs’ refund claims for 2001, 2003, and 2004 in the total amount of $317,458. 2 5 Compl. ¶ 22; Answer ¶ 22. Plaintiffs

2 2 The amended tax returns were sig ned by plaintiffs in March 2006 (the amended 2004
tax return) and May

2006 (the amended 2001, 2002, and 2003 taxreturns). J X 36; J X 37; J X 38; J X 39. However, the official records maintained by the I RS reflect that the amended taxreturns were filed in May

2006 (2004) and J uly

2006 (2001, 2002, and 2003). J X 25; J X 26; J X 27; J X 28.

2 3 Plaintiffs had previously utiliz ed the services of this company to prepare amended tax returns to claim a theft loss deduction related to the losses they sustained as a result of the actions of Mr. Teseo and Mr. W ang . Tr. 535, 537, 539-40 (C. Adkins). The I RS did not contest the theft loss deduction claimed on those amended returns. I d. at 537.

2 4 Other arbitration claims ag ainst Donald & Co. and its brokers were resolved prior to the institution of criminal proceeding s. See J X 46 (Olesz e k v. Donald & Co., filed on November 5, 2001, decision for claimants on F ebruary 28, 2003); J X 47 (Dobin v. Donald & Co., filed on December 18, 2001, decision for claimants on April 14, 2003); J X 48 (Sandburgv. Donald & Co., filed on May

14, 2002, decision for claimants on March 28, 2003).

2 5 Plaintiffs’ refund claims for those three y e ars actually totaled $317,464. The orig in of the $6 discrepancy

in the amounts is unclear.

- 13-protested the disallowance at the I RS Office of Appeals. J t. Stip. ¶ 58. I n their appeal, plaintiffs claimed a total theft loss, as calculated by their accountant Charles A. B ish, of $2,575,958.19. I d. ¶ 60. Most of that loss derived from the Donald & Co. pump-and-dump scheme; $2,336,895.58 of the loss was attributable to stock purchases made throug hDonald & Co. and $194,062.61 of the loss was attributable to stock purchases made via the third-party brokers. 2 6 I d. ¶ 84; Tr. 122- 23 (C. Adkins). The remaining $45,000 of the claimed loss related to plaintiffs’ investment in the Vianet private placement offering . J t. Stip. ¶ 84; Tr. 122-23 (C. Adkins).

I n an April 5, 2011 “Appeals Case Memorandum,” an I RS Appeals Officer, David Kaplon, concluded, pending the final computations of the Tax Computation Specialist, that plaintiffs had sustained a theft loss of $2,532,996.01–plaintiffs’ claimed theft loss minus the portion of the loss attributable to the Great Train Store Co. and Tera Computer Co. stock purchases throughthird-party brokers–in 2004, and were therefore entitled to the corresponding refunds. J t. Stip. ¶¶ 58-59; PX 10. M r. Kaplon described his conclusion as a “proposed settlement . . . .” PX 10 at 6. However, the proposed settlement was never finaliz ed. Tr. 465 (Kaplon). As reflected in Mr. Kaplon’s memorandum and attached transmittal form, the I RS Office of Appeals lacked jurisdiction to settle plaintiffs’ claim because plaintiffs had filed suit in the United States Court of F ederal Claims. PX 10. Indeed, plaintiffs filed suit in this court on December 10, 2010, seeking a federal income tax

refund in the total amount of $317,458.

Currently , there are no funds available from the convicted Donald & Co. brokers to pay restitution to plaintiffs. J t. Stip. ¶ 48. I n fact, none of the named victims of the Donald & Co. stock manipulation scheme has been fully reimbursed for their losses. I d. ¶ 49. F urther, there is no evidence that the convicted Donald & Co. brokers–aside from Mr. F r eeman–possess assets sufficient to pay

restitution or any judg ment ag ainst them. 2 7 I d. ¶ 68. And, plaintiffs do not have “insurance or other vehicle for recovery for [ their] loss.” I d. ¶ 74.

II. P ROCEDURAL HISTORY

As previously

noted, plaintiffs filed their complaint on December 10, 2010, seeking a federal income taxrefund in the total amount of $317,458. After the close of discovery , the parties each moved for summary judg ment. I nitially , the issues presented by the parties in those motions included whether plaintiffs’ investment losses constituted a theft loss pursuant to I RC § 165; if so, whether 2004 was the correct y ear to allow the theft loss deduction; and, if plaintiffs sustained a theft loss in 2004, what was the proper amount of the tax deduction and associated

2 6 The court derives the $194,062.61 fig ure by subtracting from plaintiffs’ total claimed theft loss the $2,336,895.58 attributable to the Donald & Co. pump-and-dump scheme, J t. Stip. ¶ 95, and the $45,000 attributable to the alleg ed theft related to the Vianet private placement offering
, id.; Tr. 122-23 (C. Adkins).

2 7 The parties’ fact stipulation does not apply to Mr. F reeman, and the record contains no evidence reg arding Mr. F reeman’s assets.

- 14-refunds. During supplemental briefing , defendant conceded that most of plaintiffs’ investment losses–those attributable to stock purchases made throug h Donald & Co.–constituted a theft loss. Thus, the issues remaining f or the court’s resolution were (1) whether the $239,062.61 in losses attributable to stock purchases throug h the third-party brokers and to the Vianet private placement offering

constituted theft losses under I RC § 165; (2) whether 2004 was the correct
y ear to allow the theft loss deduction; and (3) if a refund was proper, what was the amount of that refund.

I n a December 11, 2013 Opinion and Order, the court first addressed the theft losses suffered by

plaintiffs that were attributable to stock purchases throug h the third-party

brokers. Adkins v. United States, 113 F ed. Cl. 797, 804-06 (2013). I t held that any losses attributable to plaintiffs’ purchases of Tera Computer Co. and Great Train Store Co. stock could not constitute theft losses under I RC § 165. I d. at 805-06. However, with respect to any losses attributable to plaintiffs’ purchases of My Turn stock throug h the third-party brokers, the court held that g enuine issues of material fact precluded the entry of summary judg ment. I d. at 805. Similarly , the court declined to enter summary judg ment with respect to the alleg e d loss attributable to the Vianet private placement offering due to the ex istence of g e nuine issues of material fact. I d. at 806. And, g enuine issues of material fact prevented the court from entering summary judg ment as to whether plaintiffs properly claimed their theft loss in 2004. 2 8 I d. at 806-09.

Trial was held in W ashing ton, DC on the remaining issues from November 12 to 14, 2014. During trial, the court heard testimony from both plaintiffs, Mr. Kaplon, Mr. B ish, and Special Ag ent Deng ler, and received documentary evidence. The parties submitted posttrial briefs, and the court deems further arg ument unnecessary

.

III. DISCUSSION

A. Legal Standard

The court beg ins its analy sis by determining whether 2004 was the proper y ear for plaintiffs to claim their theft loss deduction. As a g eneral matter, a theft loss is allowed as a deduction in the y ear in which it is sustained, I RC § 165(a), and tax pay ers are considered to have sustained a theft loss in the y ear in which they discover it, id. § 165(e). However, tax pay ers cannot deduct a theft loss for which they have been compensated by insurance or otherwise. I d. § 165(a). More particularly :
[ I ] f in the y ear of discovery there ex ists 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 . . . until the tax able

2 8 B ecause the proper y

ear for the theft loss deduction remained in dispute, the court was not required to address the final issue: the amount of the refund due plaintiffs. See Adkins, 113 F ed. Cl. at 809.

- 15-y ear in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received.

26 C.F .R. § 1.165-1(d)(3), cited in id. § 1.165-8(a)(2); accord id. § 1.165-1(d)(2)(i). Tax pay ers bear the burden of establishing their entitlement to a theft loss deduction. B oehm v. Comm’r, 326 U.S. 287, 294 (1945); accord J e ppsen v. Comm’r, 128 F .3d 1410, 1418 (10th Cir. 1997) (noting that the tax p ay er had a “hig h” burden of proving

“that it could have been ascertained with reasonable certainty

as of [ the end of the relevant tax y ear] that [ his] loss would never be recovered”); Parmelee Transp. Co. v. United States, 351 F .2d 619, 628 (Ct. Cl. 1965) (indicating that the tax pay er had the burden of proving a reasonable prospect of recovering its loss in the
y ear that the loss was discovered); Premji v. Comm’r, 72 T.C.M. (CCH) 16, 21 (1996) (“Petitioners have the burden of proving that . . . a deductible loss occurred in the y ear claimed”), aff’d, 139 F .3d 912 (10th Cir. 1998) (unpublished table decision). However, if “a tax p ay er introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the tax pay er,” the g overnment “shall have the burden of proof with respect to such issue.” 2 9 I RC § 7491(a)(1). Althoug h “credible evidence” is not defined in the statute, the statute’s leg islative history

contains the following definition, relied upon by several courts: 3 0 “Credible evidence is the quality

of evidence which, after critical analy sis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without reg ard to the judicial presumption of I RS correctness).” H.R. Rep. No. 105-599, at 240-41 (1998) (Conf. Rep.).

Under the applicable reg

ulations, “there can be no deduction if there ex ists a reasonable prospect of recovery

” in the y e ar that the theft loss was discovered. Parmelee Transp. Co., 351 F .2d at 627. “W hether a reasonable prospect of recovery ex ists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an ex amination of all facts and circumstances.” 26 C.F .R. § 1.165-1(d)(2)(i). The court may c onsider both objective and subjective factors during

its assessment, but must be mindful that a subjective factor, such as a
tax pay e r’s “reasonable and honest belief,” cannot be “the controlling or sole criterion.” B oehm, 326 U.S. at 292; see also id. at 293 (“The standard for determining the y ear for deduction of a loss is . . . a flex ible, practical one, vary ing according

to the circumstances of each case.”). Relevant objective factors include the ex istence of a claim or pending litig ation, see Parmelee Transp. Co., 351 F .2d at 628 (remarking that a court must ex amine the “probability of recovery

”

2 9 The burden of proof shifts to the g overnment only if the tax pay e r establishes that he has met the requirements of I RC § 7491(a)(2). I

n their posttrial briefs, plaintiffs do not address these requirements, and defendant does not contend that plaintiffs have not met the requirements.

3 0 See, e.g ., Thompson v. United States, 523 F . Supp. 2d 1291, 1296-97 (N.D. Ala. 2007); Okerlund v. United States, 53 F ed. Cl. 341, 356 & n.23 (2002), aff’d, 365 F .3d 1044 (F ed. Cir. 2004); Davis v. Comm’r, 89 T.C.M. (CCH) 1518, 1522 (2005). B ut see Heg er v. United States, 103 F ed. Cl. 261, 266 n.4 (2012) (“The definition was not included in the statute itself, so the court considers it to be merely informative rather than authoritative.”).

- 16-from the claim or litig a tion, with a “40 to 50 percent or better chance of recovery ” being considered sufficient to constitute a reasonable prospect of recovery ), and the availability

of civil and criminal restitution, see Vincentini v. Comm’r, 96 T.C.M. (CCH) 400, 405 (2008) (holding that it was reasonable to anticipate that a federal district court mig ht order “defendants, if convicted, to pay

restitution to their victims . . . and to forfeit property that could be used to satisfy the restitution order”). The court’s ultimate inquiry is to determine what a reasonable
tax pay e r would have concluded about his prospects of recovery in the y e ar that he discovered the loss. Parmelee Transp. Co., 351 F .2d at 628; accord J eppsen, 128 F .3d at 1416 (“[ D] e termination of a reasonable prospect of recovery is a question of foresig ht.”). I f the “prospect of recovery

was simply

unknowable” in the ye ar of discovery , a tax pay er is “not entitled to take the theft loss deduction” in that year. J eppsen, 128 F .3d at 1418. However, a
tax pay e r need not establish “that there is no possibility of an eventual recoupment” to claim the deduction. United States v. S.S. W hite Dental Mfg . Co. of Pa., 274 U.S. 398, 402-03 (1927).

I f a tax pay er has a reasonable prospect for recovery in the y ear that he discovers his loss, then he cannot claim the theft loss deduction until the y ear “in which it can be ascertained with reasonable certainty

whether or not such reimbursement will be received.” 26 C.F .R. § 1.165- 1(d)(3); accord id. § 1.165-1(d)(2)(i). “W hether or not such reimbursement will be received may be ascertained with reasonable certainty
, for ex ample, by

a settlement of the claim, by an adjudication of the claim, or by an abandonment of the claim.” I d. § 1.165-1(d)(2)(i). And, when a tax pay er claims that the y ear he sustained his loss “is fix ed by h is abandonment of the claim for reimbursement, he must be able to produce objective evidence of his having abandoned the claim, such as the ex ecution of a release.” I d.; see also Alioto v. Comm’r, 699 F .3d 948, 954 (6th Cir. 2012) (holding that a tax pay er’s testimony reg arding his “subjective understanding that he would not be paid back” did not “meet the requirement of ‘objective evidence’ to prove abandonment”); Montg omery Coca-Cola B ottling Co. v. United States, 615 F .2d 1318, 1327 (Ct. Cl. 1980) (“The subjective intent testimony of the [ tax pay e r] can only be seriously

considered to the ex tent it is consistent with the objective evidence.”).

B. P laintif

f s Discovered the Thef

tLoss in 2002 and Had a Reasonable P rospect of Recovery in That Year

There is no dispute that plaintiffs discovered the theft loss in 2002. 3 1 And, neither plaintiffs nor defendant disputes that in 2002, there ex isted “a claim for reimbursement with respect to which there [ was] a reasonable prospect of recovery . . . .” 26 C.F

. R. § 1.165-1(d)(3). Plaintiffs filed their arbitration claim ag ainst Donald & Co., Mr. Stetson, Mr. Volman, and Mr. I ng rassia in F ebruary

2002, and by

the end of that y ear, they had neither soug h t to adjourn the

3 1 I ndeed, althoug h the parties did not stipulate to this fact prior to trial, they affirmatively

state in their posttrial briefs that plaintiffs discovered the theft loss in 2002.

- 17-proceeding s nor withdrawn their claim. 3 2 According ly , in lig ht of the ong o ing arbitration

proceeding s, plaintiffs could not claim a theft loss deduction in 2002. Instead, they were required to delay their deduction until the “y ear in which it [ could] be ascertained with reasonable certainty whether or not” they

would receive reimbursement of their losses from their arbitration claim. I d. Plaintiffs determined that the proper y ear to claim their theft loss was 2004, and filed amended federal income tax returns reflecting the deduction. The I RS disallowed plaintiffs’ refund claim, and takes the position in this litig ation that 2004 was not the proper y ear for plaintiffs to claim their theft loss deduction. Thus, the court’s task is to determine whether plaintiffs could have, in 2004, ascertained with reasonable certainty that they would not receive reimbursement of their losses from their arbitration claim.

C . P laintif

f s Have Not Established That They Sustained the Thef t Loss in 2004

1. The P roper Analytical F ram ew ork

B e fore determining

whether plaintiffs could have, in 2004, ascertained with reasonable certainty that they would not receive reimbursement of their losses from their arbitration claim, the court must address plaintiffs’ contention that the “ascertain[ ] with reasonable certainty ” analy sis is not applicable in this case. Specifically
, plaintiffs assert that they are not claiming

that the y ear they sustained their loss was fix ed by their abandonment of the arbitration claim. Rather, plaintiffs contend that they are “looking

at the test in the first part of the reg ulation, that no reasonable prospect for recovery ex isted after 2004.” Pls.’ Posttrial B r. 25. Plaintiffs’ interpretation of the applicable reg ulations lacks merit.

As described above, the relevant reg ulations describe a two-stag e analy sis. F irst, a court must determine whether the tax pay er has a reasonable prospect of recovery on a claim for reimbursement in the y ear that he discovered the loss. I f the tax p ay er does not have a reasonable prospect of recovery, then the y e ar of discovery is the y ear that he sustained the loss. 26 C.F .R.

3 2 Defendant sug g ests that plaintiffs had additional viable claims for reimbursement in 2002 ag ainst Mr. Otto Koz ak, Mr. Robert Koz ak, Mr. F reeman, and Ody ssey Capital L L C, as well as ag ainst Donald & Co.’s owners, THCG, I nc., Star Cross, I n c., and Mr. B lum. However, because the court concludes below that plaintiffs failed to establish that they ascertained with reasonable certainty

in 2004 that they

could not recover on the arbitration claim that they did file, it need not decide whether plaintiffs had ascertained with reasonable certainty in 2004 that they could not recover on any

claims that they

did not file.

Aside from the claims sug g ested by defendant, the record lacks any evidence that plaintiffs had any

other viable claim for reimbursement in 2002. Of particular note, althoug h plaintiffs became aware of the criminal investig ation and criminal proceeding s in 2003, the record contains no indication that they knew, or should have known, by the end of 2002 that Donald & Co. principals and employ ees would face criminal charg e s that mig ht result in a separate claim for reimbursement (i.e., restitution).

- 18-§ 1.165-1(d)(3). I f, however, the tax pay er has a reasonable prospect of recovery in the y ear that he discovers the loss, then the court advances to the second step: determining whether, in the
y ear the loss was claimed, the tax pay er was able to ascertain with reasonable certainty whether he would receive reimbursement from his claim. I d. I n short, the “reasonable prospect of recovery ” and “ascertain[ ] with reasonable certainty ” inquiries are distinct. 3 3

The distinctiveness of the two inquiries was specifically addressed in J ohnson v. United States, 74 F ed. Cl. 360, 365 (2006). In that case, the tax pay ers discovered in 1997 that they had been the victims of fraud, losing approx imately

$78 million. I d. at 361. The tax p ay ers filed suit ag ainst the perpetrator of the fraud in F lorida state court in 1998. I d. That same y ear, they became involved in other litig ation to recover their loss. I d. The tax pay ers claimed that by the end of 1998, they

only had a reasonable prospect of recovering approx imately

$20 million of their loss, and were reasonably certain that they

would not recover the remainder. Id. at 361-62. They therefore claimed a theft loss deduction of approx imately $58 million on their amended 1998 federal income taxreturn. I d. at 361.

Prior to determining whether the tax pay ers were entitled to claim their theft loss deduction in 1998, the court addressed the parties’ competing interpretation of the applicable regulations. I d. at 364-66. I t commented that in several of the decisions relied upon by the
tax pay e rs, the courts “tended to combine the ‘reasonable prospect of recovery ’ inquiry and the ‘ascertain with reasonable certainty ’ inquiry
, ” even thoug h those “two inquiries are distinct and the standards to be applied are different.” I d. at 365; see also J ohnson v. United States, 80 F ed. Cl. 96, 117 (2008) (“[ T] he ‘reasonable prospect of discovery ’ standard is only applicable in the
y ear a taxpay er discovers a theft loss.”), appeal dismissed, 453 F . App’x 959 (F ed. Cir. 2010). I t

3 3 The court did not find it necessary to address the distinction in its December 11, 2013 Opinion and Order when it declined to enter summary judg ment for either party on the issue of whether 2004 was the proper y ear for plaintiffs to deduct their theft loss because of the existence of g enuine issues of material fact. However, in a posttrial order, dated November 18, 2014, the court specifically

requested that the parties address, in their posttrial briefs, “whether plaintiffs, in 2004, could have ascertained with reasonable certainty that they would not receive reimbursement on their arbitration claim.” B o th parties addressed this issue. See, e.g ., Pls.’ Posttrial B r. 22-27; Def.’s Posttrial B r. 24-26; Pls.’ Posttrial Resp. B r. 8-9. Thus, the court applies the two-stag e analy sis prescribed by the pertinent reg

ulations in ruling on plaintiffs’ tax refund claim. See Tex tainer Equip. Mg mt. L td. v. United States, 105 F ed. Cl. 69, 72 (2012) (concludingthat when a court does not decide an issue in deny ing a motion for summary judg ment, the party

who bears the burden of proof is not relieved of that burden); McGowan v. Sec’y of HHS, 31 F ed. Cl. 734, 737 (1994) (“The law of the case doctrine does not affect the power of a court to reconsider its interlocutory decisions. The court may chang e any interlocutory

decision up until the entry of final [ judg ment] .”); cf. Ay

cock Eng ’g , I n c. v. Airflite, I nc., 560 F .3d 1350, 1356 (F ed. Cir. 2009) (citingB ethlehem Steel Ex p. Corp. v. Redondo Constr. Corp., 140 F .3d 319, 321 (1st Cir. 1998)) (indicatingthat a denial of summary judg ment does not establish law of the case).

- 19-further noted that those decisions could be disting u ished on their facts. See 74 F ed. Cl. at 365 (“[ T] he cases cited by

the plaintiffs involve theft loss deductions taken in the year that the theft was discovered, and turn on whether the tax pay er properly

determined that there was a ‘reasonable prospect for recovery .’ . . . This case, in contrast, turns on whether, after having elected to pursue a claim for reimbursement for which there was a reasonable prospect of recovery [ in 1997] , the plaintiffs ‘ascertained with reasonable certainty ’ in 1998 whether or not reimbursement would be received.” (footnote omitted)). I ndeed, the court ex

plained:

To date, the decisions that have contemplated the proper interpretation of I RC § 165(e) with reg ard to the appropriate timing of a theft loss deduction have considered two different scenarios. F irst, courts have evaluated whether a
tax pay er who took a theft loss deduction in the y ear of discovery
, and whose deduction in that y e ar was challeng ed by the I RS, had a reasonable prospect of recovering

all or a portion of the loss in the y ear of discovery . Alternately , courts have considered whether a tax pay er whose decision to wait to take a theft loss deduction until recovery

efforts were complete was challeng ed by the I RS was appropriate in postponingthe theft loss deduction when the tax pay er did not have any real prospect of recovering the loss.

No court has considered whether a tax p a y er was appropriate in postponing a theft loss deduction until after the y ear of discovery

(in which the tax pay er had a reasonable prospect of recovery ), but when recovery

efforts were not y

et completed or abandoned, which is at issue here.

I d. at 365 n.5 (citations omitted). According ly , when analy z ing the tax pay ers’ contentions, the court followed the plain lang uag e of the reg

ulation: I t first found that the tax pay ers had a reasonable prospect of recovering their loss in 1997, the y ear of discovery . I d . at 363-64. I t then concluded that the tax pay ers could not have ascertained with reasonable certainty in 1998 that they would not have recovered approx imately $58 million of their loss because the $58 million fig ure was an estimate made by their attorney s and accountants before any of their pending claims had been fully

resolved. I d. at 364-66.

Plaintiffs characteriz e the decision in J ohnson as “outside of the mainstream,” but only cite one decision–an unpublished order–in which a court analy z ed whether a reasonable prospect of recovery

ex isted after the year in which the theft loss discovered. Pls.’ Posttrial B r . 25 (citing W isnewski v. United States, No. CA3-78-0513-F , 1979 W L 1415 (N.D. Tex . May 21, 1979)). In that case, the tax pay e rs discovered the loss in 1968 and filed suit to recover the loss that same
y ear. W isnewski, 1979 W L 1415, at *1. A consent judg ment in that suit was entered in 1972. I d. On their 1972 federal income tax return the tax pay ers claimed a casualty or theft loss. I d. The court concluded that “1971 was the last possible y e ar in which the Plaintiffs had a reasonable ex

pectation of recovery

. ” I d.; accord id. at *2 (“Plaintiffs did not have a reasonable possibility

of recovering

their alleg ed losses of 1968 in 1972, and 1971 was the last y ear in which a reasonable possibility

of recovery

ex isted . . . .”).

- 20-Plaintiffs’ reliance on W isnewski is misplaced. As an initial matter, this court is not

bound by the holding s of federal district courts. See AI NS, I nc. v. United States, 365 F .3d 1333, 1336 n.1 (F ed. Cir. 2004) (noting that the holding s of federal district courts “are instructive but not precedential”). Moreover, the analy sis in W isnewski is contrary to the plain lang u ag e of the applicable reg

ulations. Therefore, the court declines to follow the reasoning in W isnewski. Rather, it concludes that the plain lang uag e of the relevant reg

ulations requires, as set forth in J ohnson, a two-stag e analy sis when a tax pay er claims a deduction after the y ear in which he discovers his loss. Thus, in this case, the court must, as noted above, determine whether plaintiffs could have, in 2004, ascertained with reasonable certainty that they would not receive reimbursement of their losses from their arbitration claim.

2. P laintif

f s Could Not Have Ascertained With Reasonable Certainty Whether They Would Receive Reim bursem ent f or Their Losses in 2004

There are at least three way s in which a tax pay er can ascertain with reasonable certainty whether he will receive reimbursement for his loss from a claim: settling the claim, adjudicating the claim, and abandoning the claim. 26 C.F .R. § 1.165-1(d)(2)(i). B ecause these methods are

ex p ressly desig nated as “ex ample[ s] ” in the applicable reg ulation, id., a tax p ay er is not precluded from ascertaining

the viability of his claim in another manner, see J ohnson, 74 F ed. Cl. at 365-66 (holding that a tax pay er is required to demonstrate the resolution of the claim with an “objectively

verifiable amount” of recovery ). I f, however, a tax

pay er relies on the abandonment of his claim to establish the y ear that he can deduct the loss, he must produce “objective evidence” of abandonment. 26 C.F .R. § 1.165-1(d)(2)(i).

As noted above, plaintiffs assert that they are not rely

ing on the abandonment of their arbitration claim to fix the proper ye ar for their theft loss deduction. However, under the relevant regulations, the disposition of plaintiffs’ arbitration claim is key to determining when plaintiffs can claim a theft loss deduction. I n 2002, the y ear in which plaintiffs discovered their loss, plaintiffs had at least one claim for reimbursement for which there was a reasonable prospect of recovery

– their arbitration claim. Th erefore, plaintiffs were not entitled to claim a theft loss deduction until they

could ascertain with reasonable certainty whether they would recover on their arbitration claim. Consequently , the court ex amines the events related to plaintiffs’ pursuit of that claim.

Plaintiffs filed their arbitration claim ag ainst Donald & Co., Mr. Stetson, Mr. Volman, and Mr. In g rassia in 2002. That y ear, they made two pay

ments to their arbitration attorney s. I n addition, plaintiffs learned that Donald & Co. had ceased operations.

I n 2003, Donald & Co. was ex pelled from the NASD. That same y ear, plaintiffs’ arbitration attorney s unsuccessfully attempted to compel document production from Donald & Co. and the individual respondents. Ultimately
, one of the attorney s sent a letter to the NASD requestingthat the hearing scheduled for April 1, 2003, be adjourned for two g roups of related reasons: (1) Donald & Co. had not fully responded to plaintiffs’ discovery requests, plaintiffs’

- 21-attorney s had not been successful in securing the necessary documents elsewhere, and plaintiffs’ attorney s would need more time for discovery ; and (2) plaintiffs learned of the ex istence of a criminal investig ation of Donald & Co. and associated individuals, plaintiffs’ attorney s were advised by

the United States Attorney that an indictment would soon be issued, and plaintiffs’ attorney s were further advised that the United States Attorney would request that all civil litig ation, including arbitration proceeding s, be stay ed pendingthe resolution of the criminal proceeding s. The arbitration attorney s sug g ested to plaintiffs that they allow the arbitration claim to remain open in the event that the criminal proceeding s revealed useful information. Plaintiffs did not object to this sug g estion; the arbitration proceeding s remained open, but inactive. However, Mr. Adkins did not believe that plaintiffs would g e t any money from their arbitration claim. I ndeed, plaintiffs did not make any further pay

ments to their arbitration attorney s in 2003 or bey ond.

The arbitration proceeding s remained open but inactive in 2004; plaintiffs’ arbitration attorney s took no action ex cept to respond to NASD inquiries with requests for further postponements. I n May

2004, Mr. Volman and Mr. I ng rassia were indicted; both were charged with securities fraud related to the Elec and Classica stocks. I n September 2004, Mr. Stetson was charg ed by

information with, among other thing s, securities fraud related to the Classica stock. The indictment and the information both contained criminal forfeiture alleg ations. Mr. Adkins saw the indictment, and became aware of the charg es ag ainst Mr. Stetson, in 2004. He was advised by

his arbitration attorney s that the arbitration proceeding s were “trumped” by the indictment. Mr. Adkins further believed that as part of the criminal proceeding s, the g overnment would seiz e all of the criminal defendants’ assets, as well as any documentation reg arding their assets, foreclosing

plaintiffs’ ability to collect an arbitration award. There is no evidence, however, that plaintiffs or their arbitration attorney s attempted to ascertain the indicted individuals’ assets in 2004.

Also in 2004, the SEC barred Mr. Stetson, Mr. Ing rassia, and Mr. Volman from acting as brokers or dealers in securities. Mr. Adkins likely became aware of the SEC orders in 2004, and understood that the three individuals would, as a result of being barred from their reg ular occupation, have less income that could be used to satisfy any judg ments ag a inst them.

Plaintiffs’ arbitration proceeding s remained open but inactive from 2005 throug h 2007 at the request of plaintiffs’ arbitration attorney s; plaintiffs’ attorney s took no action ex c ept to respond to NASD inquiries with requests for further postponements. There is no evidence that the United States Attorney requested that the arbitration proceeding s be stay ed pendingthe resolution of the criminal proceeding s. Plaintiffs did not formally withdraw their arbitration claim until 2008.

Althoug h plaintiffs do not say so ex p licitly , the court–based on the facts adduced at trial, plaintiffs’ arg

uments, and the relevant reg ulations–infers that it is plaintiffs’ position that in 2004, they

ascertained with reasonable certainty that they would not recover any

thing on their arbitration claim. The facts further reflect that plaintiffs did not arrive at this conclusion because

- 22-they

settled or litig ated the claim, but instead came to believe that the claim was no long er viable because they would not be able to collect on it, and therefore stopped actively pursuing it. I n other words, notwithstanding their protestations otherwise, plaintiffs must be contending that they abandoned their arbitration claim. See The American Heritag e Colleg e Dictionary

1 (4th ed. 2004) (defining

“abandon” as (1) “[ t] o surrender one’s claim to, rig ht to, or interest in; g ive up entirely ” and (2) “[ t] o cease try ing to continue; desist from”).

There can be no dispute that a tax pay er who relies on the abandonment of a claim to fix the y ear that a theft loss was sustained “must be able to produce objective evidence of his having abandoned the claim, such as the ex ecution of a release.” 26 C.F .R. § 1.165-1(d)(2)(i). Subjective evidence alone is insufficient. Alioto, 699 F .3d at 954. Here, the only objective evidence offered by

plaintiffs is that their arbitration attorney s requested in 2003 that the arbitration hearing be adjourned, that their arbitration attorney s responded to reg

ular NASD inquiries with requests to keep the arbitration proceeding s open but inactive, and that the proceeding s remained open, but inactive, until 2008, when they formally withdrew their claim. I n other words, althoug h plaintiffs may have believed that recovery on their arbitration claim was unattainable in 2004 due to the institution of criminal proceeding s, the likely g uilty pleas, and the issuance of the orders by

the SEC barring Mr. Stetson, Mr. I n g rassia, and Mr. Volman from acting as brokers or dealers in securities and therefore earning a living , they

have supplied no objective evidence that they abandoned their claim in 2004. 3 4 Plaintiffs did not produce evidence reflecting that they formally withdrew or renounced their claim in 2004. Nor did they produce evidence establishing

that the g o vernment actually seiz ed all of the assets possessed by Mr. Stetson, Mr. I ng rassia, and Mr. Volman in 2004; 3 5 indeed, they did not produce evidence demonstrating that either they or their arbitration attorney s attempted, in 2004, to ascertain with reasonable certainty

whether Mr. Stetson, Mr. I ng rassia, or Mr. Volman possessed assets that could be used to satisfy

an arbitration award. 3 6 Rather, the objective evidence in the record

3 4 Much of what plaintiffs deem to be objective evidence, see Pls.’ Posttrial Resp. B r. 12- 19, is actually

subjective evidence.

3 5 All that plaintiffs could have objectively known in 2004 with respect to the g overnment’s intentions reg a rding the criminal defendants’ assets was that the g overnment intended to seek, upon the defendants’ convictions, the forfeiture of property constituting or derived from the criminal activity or the forfeiture of substitute property . B ecause the plea ag reements of Mr. Stetson, Mr. I ng rassia, and Mr. Volman were filed under seal and were not unsealed until Aug ust 2005, plaintiffs could not have known in 2004 whether such forfeitures would actually

occur and the amounts, if any , that would be forfeited.

3 6 That there is no evidence that Mr. Stetson, Mr. I ng rassia, or Mr. Volman possesses assets sufficient to pay

a judg ment ag ainst them–a fact stipulated by the parties–does not mean that plaintiffs had knowledg e of this fact in 2004. F urther, plaintiffs were, or should have been, aware in 2004 that Mr. Stetson, Mr. I ng rassia, and Mr. Volman, as Donald &Co. principals, made money

from the pump-and-dump scheme, that Donald & Co. had funds at Ody ssey Capital

- 23-supports two other abandonment dates: (1) 2003, when plaintiffs’ arbitration attorney s requested that the NASD adjourn the scheduled hearing and when plaintiffs stopped pay ing their arbitration attorney s, 3 7 or (2) 2008, when plaintiffs formally withdrew their arbitration claim. According ly
, plaintiffs have not met their burden of establishing that they sustained their theft loss in 2004. 3 8

IV. CONCLUSION

Unquestionably , plaintiffs are the victims of a theft and have not subsequently recovered their loss. W hat remains in dispute is whether plaintiffs claimed the theft loss deduction in the

L L C and Chase Manhattan B ank, and that Mr. I ng rassia owned a boat and real estate. And, plaintiffs’ arbitration attorney s’ inaction on the arbitration claim does not establis h that the attorney s searched for, but could not locate, any assets owned by Mr. Stetson, Mr. I ng rassia, or Mr. Volman. Althoug hthe attorney s’ inaction may reflect that they believed the three individuals lacked any assets, it does not reflect that the basis for that belief was the result of an asset search.

3 7 Moreover, Mr. Adkins testified that by the end of 2003, he did not believe that plaintiffs would recover any of their losses from their arbitration claim. This subjective evidence reinforces the objective evidence supporting a 2003 abandonment date. See Patterson v. United States, 459 F .2d 487, 493 (Ct. Cl. 1972) (noting that subjective testimony “should not be ig nored when consistent with other objective facts”). And, notably , plaintiffs assert in their opening posttrial brief that they

“did not dismiss their arbitration until 2008, but had abandoned it by 2003.” Pls.’ Posttrial B r. 21; accord Pls.’ Posttrial Resp. B r. 6 (“Plaintiffs abandoned their arbitration in 2003 ag ainst the B rokers with no recoverable assets . . . .”), 14 (“Plaintiffs abandoned their arbitration in 2003 . . . .”). I n fact, plaintiffs assert that they would “not object if the Court finds that they are entitled to recog niz e the theft loss in tax y e ar 2003.” The court declines plaintiffs’ invitation. The only issue before the court reg a rding the timing of plaintiffs’ theft loss deduction is whether 2004 is the proper y ear for plaintiffs to claim it. There is no evidence in the record that plaintiffs filed a claim for an income tax refund with the I RS based on a contention that they

sustained a theft loss in 2003–the prerequisite for pursuing such a claim in this court.

3 8 B ecause plaintiffs have not demonstrated that they sustained their theft loss in 2004, the court need not resolve whether plaintiffs could recover their losses resulting from their purchase of My

Turn stock throug h the third-party brokers or their alleg e d $45,000 loss related to the Vianet private placement offering . These claimed losses were part of plaintiffs’ 2004 theft loss deduction. Moreover, even if the alleg ed loss related to the Vianet private placement offering should be treated separately because it was not mentioned in plaintiffs’ arbitration claim, plaintiffs presented no evidence reg arding whether they had a reasonable prospect of recovering on a claim for reimbursement of the alleg ed loss in the y ear that they discovered the loss and, if so, when they

could ascertain with reasonable certainty whether they

would be able to recover on that claim.

- 24-proper y e ar, in other words, the y ear that they

sustained the loss. Plaintiffs claim that they sustained the loss in 2004 because by the end of that y ear, they had no reasonable prospect of recovering

on their arbitration claim. However, under the factual circumstances presented in this case, the test is not whether plaintiffs had a reasonable prospect of recovering on their arbitration claim in 2004, but is instead whether, in 2004, plaintiffs could have ascertained with reasonable certainty that they would not recover on their arbitration claim. To satisfy their burden under the latter test, plaintiffs were required to produce objective evidence that they abandoned their arbitration claim in 2004. They failed to do so. In the absence of such evidence, plaintiffs are not entitled to a theft loss deduction for the 2004 tax y ear. According ly , the court DISMISSES plaintiffs’ complaint WITH P REJUDICE . No costs. The clerk is directed to enter judg ment according ly

.

IT IS SO ORDERED.

s/ Marg aret M. Sweeney MARGARET M. SW EENEY J udg e

- 25-