TAX COURT OPINION

Case: Samra & Shah Adel
Docket Number: 21982-05S
Judge: Goldberg
Opinion Type: summary
Filed: 06/10/2008
Pages: 10

SERVICE CAL . STAT . S .T . .. JUDGE T .C . Summary, . Opinion 2008-6 5 UNITED STATES TAX COUR T SAMRA AND SHAH ADEL, Petitioners v . COMMISSIONER OF INTERNAL . REVENUE,'" Responden t "Docket No .' 21982-05S . Samra and . Shah Adel, pro :sese . Michael T .- Sargent , or respondent': GOLDBERG, Special Trial Judge : This case,was-heard pursuan t the provisions "of section 7463'of--theInterrial iRevenue .Code i n effect at the time the petition was filed . Pursuant'to section .7463(b) .,'-the,-decision to be,entered is not re .viewableiby any . other court, and this opinion shall not be treated asprecedent' for any other case . Unless otherwise indicated, subsequen t section referencesare .to the Internal Revenue Code. in effect fo r SERVED JUN 10''2008 the year in issue, and all Rule references are to the Tax Court 6 B Rules'of Practice and Procedure . =Respondent determined a $3,034 deficiency in petitioners ' Federal income tax for 2002 . The sole issue for decision i s .whether petitioners are entitled to a theft .loss deduction fo r _the'taxable year at issue . Background Some of the facts have been stipulated and are so found . The stipulation of facts and the attached exhibits are incorporated herein by this reference .. Petitioners resided in Virginia when they .filed their petition . Petitioners were born and raised in Afghanistan, where the y met and were married . In 1980 in the midst of,the Soviet-Afgha n War, petitioners fled Afghanistan for Pakistan . Needing cash fo r their journey but unable to sell their greatest assets (a-house and a Mercedes-Benz automobile) because of government-imposed restrictions on the sale of such assets," petitioners arranged t o sell their car to an uncle for $25,000 . The uncle had some cas h on hand to complete the=transaction-but not to paythe full price of the car ., $25,1000 . Petitioners and the uncle agreed that . the difference would be satisfied by the transfer of a gold an d Transactions between unrelated parties were prohibited, heavily monitored, or both . 'emerald jewelry set .that the uncle-had inhis possession as a result of abequest from his grandmothe r Before embarking .upon their journey to,'Pakistan, petitioners took then jewelry=rset,. (compr sing .,,af necklace,- ring, earr'ings,, ;and a bracelet) to an Afghani j .ewelry ..appraiser . The , appraiser., : who was both appraising the-pieces and setting a price incas e t petitioners . wished to,sell him-the set, ..valued',the,jewelry a t "11,300 U .S . dollars : Because of .the :unstable'political environment'' causing many .similarly situated~familie.s .to .:attempt,, to'sell such jewelry,sets petitioners .decided :to retain the se t .in the hope ..of attaining a higher -price for . it in either Pakista n or another country . After 1 year in Pakistan petitioners emigrated to Canada , (cid:127) where they lived .,from 1981, ;;-through 1998 . Whine they lived . in Canada, petitioners kept the jewelry ina :safe deposit box at ..their bank ._ :They did not have any further appraisal done on th e set while, living in,Canada : In 1998 .petitioner husband (Mr . . Shah) -was , .offered a position with the "U .S . Trade Office" and later as a .-military consultan t and translator . Petitioners moved ,to-Virginia sometime in 1998 and have lived there since in a three-story, : single-family,home . Petitioners have family in Canada- .and Afghanistan :and . ;,- occasionally travel to-both places to-visit their ., relatives : - 4 - In late February 2002 petitioner wife traveled to visit her ailing mother in Canada . At or-about .'this same time, .Mr . Shah had oral surgery . While Mr . Shah was recuperating, . he stayed'in a bedroom on the top floor of their three-story home . Sometime between February 24 and February 26, 2002,' petitioners' home was . burglarized . The burglary occurred in the basement of .the home. while Mr . Shah was on- .the-top floor convalescing . On February 26, 2002, petitioners= filed a police report with . the Prince William .County Police Department'in Manassas, Virginia, wherein they detailed the items stolen as follows :' (1) A Sony .Playstation,, .2 video game console, :, game controllers,' and a memory card ($850 value) ; (2) a stereo ($110 value) ; (3) a camcorder-($500 value) ; .and (4) an emerald and gold jewelry set . The values reported for-the articles in the set were as follows-, (1) Necklace--$12,000 ; (2) earrings--$7',000 ; (3) ring--$5,000 ; and (4) bracelet- $8,000 . The total value on the police report for all items reported stolen was $33,460 . None of the items stolen were :ever recovered,_and .petitioners' homeowners insurance covered-only the value of the nonjewelry items taken in the . burglary and the damage done'to petitioners' home . During the year in issue, petitioners filed . ajoint'Form 1040, U .S . Individual Income Tax Return, which was prepared by a paid tax return preparer . Petitioners-reported adjusted gross income of $47,870 . 'Petitioners attached a Form 4684, Casualties and Thefts, to their :2002 return . Petitioners' Form 4684 listed their cost basis in the items stolen as °$33,"7672 less an insurance reimbursement of $3,985 . After subtracting the $100 limitation . imposed on theft losses under section 165(h)(1), and the adjusted-gross income limitation under section .165(h)(2), petitioners computed the amount of their total theft-loss on Form 4684 to be $24,895 and claimed a casualty and theft loss deduction for the same amount on Schedule A, Itemized Deductions . On October,13, 2005, respondent sent petitioners a statutory notice°'of deficiency . wherein respondent determined a deficiency of $3,034resulting from the disallowance of petitioners, claimed deduction for theft loss for lack of substantiation . Discussion In general the Commissioner's determination in a notice of deficiency is presumed correct, and the burden of proof, is on the taxpayer to prove otherwise . Rule 142(a)(1) ; Welch v : Helvering , 290 U .S . 111, 1~15 (1933) . Tax deductions are a matter of legislative grace, and the taxpayer bears the-burden of proving entitlement to deductions claimed on a return . Rule 142(a)(1) ; INDOPCO, Inc . v . Commissioner, 503 U .S . .79, 84 (1992) . Under certain circumstances, the burden of proof with respect to relevant factual issues may shift to the' Commissione r 1 The record is silent as to the discrepancy between the total loss figure contained in the police report ($33,460) and the figure listed on Form 4684 ($33,767) . under section 7491(a) . Petitioners have not alleged that section 7491(a) applies, and therefore, the burden : of proof°has not shifted to respondent . Respondent's position is that petitioners have failed to . . . . substantiate either their bases in .or the fair, market .values immediately before the theft .of the items stolen for which they claimed a theft loss deduction on their 2002 return . Petitioners have presented evidence only with respect-to the jewelry set, and it is petitioners' .contention thatthe car sale price, the Afghani jeweler's appraisal . of the set,and their own estimate . of the appreciated value of the(cid:127)set over the course of 22, years, adequately substantiate their,basi .s in, and-the fair market value of, the set . Section 16.5(a) allows a deduction for any .loss sustained during the taxable year and not compensated, for by,insurance or_ otherwise . For individuals, section 165(c)(3) allows- .a taxpaye r to deduct a=loss from theft ., The deduction is only allowed t the extent that the loss exceeds $100 . and to the extent that the net loss exceeds 10 percent of adjusted . gross . income . Sec . 165(h)(1) and (2) . The amount allowed as a deduction is the lesser of : (1) The difference betweenthe fair market value of the property immediately before ; and, after . the theft, and (2) the adjusted basis in the property . Helvering v . Owens , 305 U .S . .468 . (1939) ; secs . 1 .165-7(b), 1 .165=8 (c) , Income Tax Regs . - 7 - applying section 1 .165-7(b), Income Tax .Regs . ., :, .the fair market value of the property immediately after=the theft is zero . Sec . 1 .165-8(c), Income TaxRegs . Inherent in . section 165 are several requirements= First , the. taxpayer must have been the owner of the property .at the . time, . of the loss . ' Draper v . Commissioner , -15 T .C . 135 (1=950) The parties agree that . .petitioners owned the . jewelry set at~the time, of the theft ., In .addition to the ownership requirement, either the taxpayer's ..basis,in .the ;stolen property or'the fair market value of the property immediately, before the theft must .be ascertained . Secs . 1 .165-7(b) ,(cid:127)- 1 .165-8 (c) , 'Income Tax Regs . Where'a taxpayer fails to credibly establish either the basis or the fair market value of the property immediately preceding the . theft,. we are unable to determine the amount .of=loss deductible . See id . On the basis of . petitioners' account of the sale of their car in 1980,,we are unclear as to-how,much"of the $25,000 purchase price was satisfied by . petitioners', uncle through the transfer of his grandmother's jewelry set . While we,believe that petitioners did sell the car to their uncle for $25,000 ; we also believe that .:their uncle gave them cash for at,least one-half of the stated value of the car,,°$25,000 . .Therefore, on the basis of this analysis, we find that-petitioners, basis-in the jewelry set could be=.no more than,$12,50 .0, although petitioners themselves 8 - provided,.no documentation or credible testimony to establish the amount of cash their uncle gave them for the_car : Accordingly,_ ; we find that petitioners have failed to adequately substantiate their basis in the jewelry set for purposes of determining the deductible amount of-,theft loss . See .id . . Petitioners next argue that the,Afghani ;jeweler's 1980 appraisal, coupled with their estimate of the,appreciation of the jewelry set over the course of 22 years,' should suffice as credible substantiation of the fair market value of the jewelry set for purposes of their claiming-a $24,895"theft loss deduction . For the followingreasons,~we disagree . % First, petitioners claimed a'$24,895 deduction for the loss . of four pieces of gold and emerald jewelry . . This amount reflects petitioners' estimate-of the replacement cost of those items and- therefore is not the appropriate standard . See Jenny v . Commissioner , T .C . Memo-1977-142 . With respect'to-the $24 :,895 figure claimed on their return,-petitionerspresented no'ewidence to establish the fair market value mof'1the jewelry immediately before the theft . The only credible evidence .presented was a translated copy of the Afghani jeweler's 1980'appr-aisal . While we find the-appraisal to be credible, we have serious doubts as to petitioners' estimate of the fair market value of the jewelry before the theft : We acknowledge 'g6nerally,'thdt'the prices of gold and gemstones-have risen markedly over the past 22 years, 4 9 and we are confident that that amount would be greater than even the highest basis we' .have already presumed that petitioners-could have had in the jewelry ($12,500 ) . However, because the amount allowed as a deduction is limited to the lesser of either the fair market value of the property immediately preceding the theft or the taxpayer's basis, the amount of the allowable deduction would be'limited to petitioners' basis in .the jewelry set . Se e sec . .1 .165-8(c), Income Tax Regs . As previously discussed , we lack credible evidence to specifically determine petitioners' basis in the,jewelry set . the absence of such evidence, we will apply our best judgment to approximate this amount . See Cohan v . Commissioner - 39 F .2d 540 (2d Cir . 1930) . Bearing heavily against the taxpayer "whos e inexactitude is of his own making", id . at 544, we find that petitioners' basis in the jewelry set before the theft was $5,000 . Because petitioners did not receive any insurance reimbursement for the jewelry,, no amount for such reimbursement must be deducted . The amount of theft loss deduction to whic h petitioners are entitled is, however, limited : petitioners must first deduct $100 from the total amount of allowable loss under section 165(h)(1) . Second, under section 165(h)(2), petitioners are allowed a deduction only to the extent that the amoun t allowable exceeds 10 percent of the petitioners' adjusted gross 10 - income . The allowable amount is .$4,900 . After applying section 165(h)(2), the total theft loss amount allowable is $113 . Decision will be entere d under Rule 155 .