TAX COURT OPINION

Case: Mehdi Taghadoss
Docket Number: 25116-06S
Judge: Dean
Opinion Type: summary
Filed: 04/29/2008
Pages: 5

T .C . Summary Opinion 2 0 08-4 4 PILE S UNITED STATES TAX C 3 URT MEHDI TAGHADOSS, Petiti ner v . COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No . 25116-06S . Fled April 29, 2008 . Mehdi Taghadoss, pro se . Andrew M . Stroot , for respondent . DEAN, Special Trial Judge : This case was heard pursuant to . the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed . Pursuant to section 7463(b) , the decision to be entered is not review le by any other court, case . Unless otherwise indicated, subseq ent section reference s are to the Internal Revenue Code in effec for the year in issue , a and this opinion shall not be treated as recedent for any other SERVED APR 2 9 2008 - 2 - and all Rule references are to the Tax Court Rules of Practice and Procedure . Respondent determined a $25,545 deficiency in petitioner's 2003 Federal income tax . The issue for decision is whether petitioner is entitled to claim a $1,344,863 casualty or theft loss deduction for the loss of value in his WorldCom stock options and stock holdings (securities) . Background Some of the facts have been stipulated and are so found . The stipulation of facts and the exhibits received into evidence are incorporated herein by reference . At the time the petition was filed, petitioner resided in Virginia . Petitioner was employed by the WorldCom Group (WorldCom) for 17 years . During the course of petitioner's employment, he received options to purchase shares of WorldCom stock that he exercised on October 31, 2001, for a "hold" . Petitioner also acquired shares of WorldCom stock on the open market, through WorldCom's section 401(k) retirement plan, and through WorldCom's employee stock purchase plan (ESPP) . Unfortunately for the shareholders of WorldCom, it filed a chapter 11 bankruptcy petition on July 21, 2002 . Fraudulent accounting practices by certain WorldCom officials contributed to WorldCom's bankruptcy filing . Bernard Ebbers, WorldCom's chief executive officer, was convicted of violating the securities laws - 3 - for fraud, conspiracy, and filing false financial statements with the Securities and Exchange Commission SEC) . Two other WorldCom officials pleaded guilty to fraud and c c nspiracy . The bankruptcy filing and the fraud ulent accounting practices caused the value of WorldCom s ecurities t o significantly decline . Because the valu e of petitioner's securities had severely declined, he cla imed a $1,344,86 3 deduction for a casualty or theft loss c n his 2003 Form 1040, U .S . Individual Income Tax Return . Peti tioner's claimed casualty or theft loss consisted of the followinc (1) $144,863 fo r "35,318 shares of WorldCom stock purchaE ed" ; (2) $450,000 for "17 years' worth of max 401(k) contribution with company match all in WorldCom stock" ; and (3) $750,000 for "1 0 years' worth of stock options, fully vested" . Petitioner clai med a $26,853 refund of all tax withheld on account of his clain Led casualty or thef t loss . On October 31, 2003, the bankruptcy court confirme d WorldCom's plan of reorganization, and i t emerged from bankruptcy on April 20, 2004 . The plan of reorgani zation provided for the cancellation of certain junior interest : such as petitioner's , on its "Effective Date" ; i .e ., April 20, 2004 . The bankruptcy court was aware that WorldCom's restates consolidated balance sheets for yearend 2001 showed that Wor] dCom was insolvent for that period . See In re WorldCom, Inc . I o . 02-13533 (Bankr . - 8 - (Va . Ct . App . 2002) (and cases cited thereat), affd . 570 S .E .2d 866 (Va . 2002) . Intent is an essential element of each, and if the theft is accomplished by false pretenses, the false pretenses must have induced the person to part with money or property . See Va . Code Ann . secs . 18 .2-95, -96, -108, -111, -178 ; see also Parker v . Commonwealth , 654 S .E .2d 580, 582 (Va . 2008) . Although certain WorldCom officials caused the publication of fraudulent financial statements and filed the statements with the SEC, the Court finds that petitioner has failed to prove that he suffered a theft under Virginia law . There is no evidence in the record establishing that WorldCom officials wrongfully took petitioner's money or property (i .e ., the value of his securities) with the requisite intent to deprive him permanently thereof . Moreover, petitioner did not purchase his securities from the WorldCom officials ; rather, his acquisitions were conducted through brokers on the open market, through WorldCom's section 401(k) retirement plan, and through WorldCom's ESPP . The WorldCom officials had no direct dealings with petitioner . In this respect the Court finds this case indistinguishable from Paine v . Commissioner , supra , where a theft loss deduction was denied . See also Barry v . Commissioner , T .C . Memo . 1978-215 (denying a theft loss deduction involving similar circumstances) . But see Vietzke v . Commissioner , 37 T .C . 504, 511 (1961) (taxpayer's theft loss deduction was allowed because he showed that he departed with his money in rel i - 9 - material's information, he dealt directly with the directors i n his acquisition of the stock, and the d absconded with the offering proceeds) ; C .B . 126 (taxpayer's theft loss deducti taxpayer lent money to the corporatio n the corporation issued fraudulent finan taxpayer, and he relied on that informa invest) Petitioner testified that he rece i d several memos "in which they told us that everything is fi But petitioner ha s failed to establish that he relied on th misrepresentations i n the memos and the financial statements a related to the misrepresentations . To e tablish a causal connection between the fraudulent repres ntations and petitioner's purchases and his decision( to retain his securities, the representations must ha v been made before petitioner's purchases and his decision( to retain hi s securities . See Paine v . Commissioner , upra at 742 . There is no evidence in the record indicating tha petitioner relied on the fraudulent financial statements or t e memos when h e purchased his securities . Because petit oner did not provide th e memos to respondent or produce them at t ial, petitioner has also failed to establish that he relied on the alleged