TAX COURT OPINION

Case: Oscar C. & Aranka M. Hawaii
Docket Number: 12718-08L
Judge: Ruwe
Opinion Type: memo
Filed: 06/15/2011
Pages: 15

peite 1 T.C. Memo. 2011-134 UNITED S ATES TAX COURT | OSCAR C. AND ARANKA M. HAWAII, Petitioners 1. COMMISSIONER OF INTERNA REVÉNUE, Respondent Docket No. 12718-08L. Filed une ]5 201 Alv ro G. Velez, for petitiòner Louis H . 'Hill, f dr respondent . MEMORANDUM FINDIl GS OÑ' FACT AND OPI I Ñ RUWE, Judge: The petition in this case was filed in response to a Notice of Determination Concerning Collection 41511 41'•••' - d:M- Mif.it-'ssli'' •y . lindi 351941=.% e & - -| slim...- Ep JUN 1 5 2011 - 2 - Action (s) Under Section 6320 and/or 6330 (notice of determination) for petitioners' taxable year 2005.1 On September 3, 2007, respondent sent petitioners separate Letters 1058, Final Notice of Intent to Levy and Notice=of Your Right "to a Hearing, regarding their unpaid income tax liability for 2005. In response, petitioners timely mailed a Form 12153, Request for a Collection Due Process or Equivalent Hearing, in which they sought an in-person hearing. At their hearing with the Internal Revenue Service's (IRS) Appeals Office, petitioners submitted a Form 1040X, Amended U.S. Individual Income Tax Return, that indicated -that their total tax should be reduced to $10,612 from the $56,486 reported on their original return." On the basis of the information in the amended return,, petitioners requested a streamlined installment agreement on the adjusted balance due. In their amended return petitioners claimed that they are entitled to a theft loss deduction for the taxable year 2005. Petitioners contended "that this deduction would reduce their tax liability below $25, 000, which would allow them to qualify for a streamlined installment agreement . IUnless otherwise indicated, all section references are to the Internal Revenue Code as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure . 2Petitioners' original 2005 Federal income tax return is not figures used are based part of on petitioners' amended return for 2005. the record before the Court., All - +3 - i VTheappeals sof ficer did not ragree withapetitli'oriers' claim that their 2005 tax liability should be reduced. On April 22, 21)08, respondent isent -to þeti ioners a notice of Edeterminatione sustaining the proposed lèvý action. The notice of determination indicated that respondent rej cted petitioners' request for a streamlined installmenta agree nent because respondent had determined that petitionees' balance due exceeded <the $25, 000 limit for that Eyment option Petitioners never'received a notice of déficiency, nož did they-havena prior administrative or judiciali opporturiity ito chall nge t he -amount -of the deficiency, and reepon¡cient h s acknowledged .that the underlying liability is properly> at' issue . See: sec / 6330 (c )a (2) (B) ; Montgomery v. Conïmissioner, 122 "T.C. 1, 8 ( 004) . The issues Jor decision re: (1) Whether petitioners incurred a theftA loss of $100 000, and (2) whether respondent abused his discretion by not ccepting petitioners' request for an einstallment ac-reement . FIND]NGS OF FACT Some of the "facts have beeri stipulated and a e so found. The stipulation of 'facts the supplemental stipulation of facts and the. attached exhibits are incor];>ofated herein by -this reference. At the time the petition was filed, petitioners resided in Ohio. - 4 - During 2005 Oscar C. Hawaii (petitioner.) owned and operated a small trucking business.- By-earlya2005 petitioner, who was then over 70, had accumulated -retirement savings of approximately $300,000, which he kept in an individual retirement account with Charles Schwab.3 In January 2005 petitioner was approached about making an investment in: ProCore Group,.Inc. .(ProCore),4 by Carol Popp, who was one of ProCore's primary shareholders. Mr. Popp and petitioner attended,the same church, and it was sthere that Mr. Popp initially spoke withepetitioner" about investing with ProCore. Petitioner told Mr. Popp that he ,could not invest in ProCore beçause his money was tied up in his.retirement account. Petitioner also told Mr. Popp that he -was not=knowledgeable a ut investments and-that Charles Schwab handled his tinvestments. Mr. Popp assured petitioner that an investment in ProCore would be advantageous. ..se Mr. Popp invited petitioner to attend a meeting with some of the other officers and shareholders of ProCore so that they could further-discuss -investment opportunities with him. At the meeting petitioner was introduced to George Csatary,, ProCore's chief financial officer. Petitioners was informed that Mr. 3At the time of trial, petitioner no longer received income from tÉe trucking business. 4ProCore Group, Inc. was at all relevant times a Californiar corporation licensed to do business in the State of Florida. - 5 - Csatary was a certified publio accountant & eMessrs . Popp and a Csatary convirice petitioner hat ProCore was an:exceptional e investment that would allow him ato make considerable' short-term profits . Petitioner - was neither given a prospectus nor shown any of ProCore's financial documents or Securitiestand Exchange Commission (SEC) filings. Pe itioner decided to invest $100,000 of his retirement; -savings inèroCore. Petiitioner made the investment because he trusted Mr.aPopp since they attended church together. e e - On January 24, 2005,- Mr. Csatarysarranged for a wire transfer of $100, 000 afrom petitioner"s retirement account to ProCorel 'Petitionerstold Messrs. Popp and Csatary that she needed to receive either stock cežtificates o a'return of- his funds within 60 days in order-to avbid payinéJ tax onethe withdrawals f rom his retirement account . 9 9 e By mid-March 2005'petiitti rier-had nót received either "the retúrn öf his -funds or stock tertificates. Petitionersbecame increasingly concerned that 'his investnient was in jeopardy. This prompted petitioner to hire aícattorney to help him recover the money he shad invested On Maech 17, 2005, petitiõner,athrough his attorney, sent ProCore a letter demandirigothe return-.of his investment . In response to petitioner' s demand letter, ProCore presented petitioner withistook certifidates for 3, 333 333 re stric t ed and unregis tere d share s t in - thë company . " Pe t it ioner - 6 - was told - that the shares had been delivered to him at a price established in a private - placement memorandum previously registered with the SEC. ,Afters receiving the stock certificates3 petitioner gave them to Charles Schwab. Charles Schwab has never informed petitionere or led him to -believe, that the ProCore stock certificates were fraudulent or otherwise defective. In May 2005 petitioners' attorney was instructed to file suit against various individuals involved with ProCore in an effort to recover petitioners' money. Petitioners -paid the attorney $7,500 in.exchange for his representation. The attorney sent a letter to ProCore .dated May 26,r 2005, demanding that petitioners'' funds be returned to them. The attorney also drafted a complaint. alleging that ProCore and its "officers had committed securities fraud and negligence and breached their fiduciary duties. The complaint was, never filed. - At a later date during: 2005 petitioner sinvested an additional $150,000 in Luhan Investment Securities, which was another venture promoted by some of the individuals behind ProCore . The outcome of this later investment is inot eviden,t from- the record. . Petitioner did not contend that this later investment resulted, in any additional deductible losses .during 2005-. In 2008spetitioner filed a complaint with the Ohio - Department of Commerce' s. Division of Securities requesting that ProCore's office:-s be investigated.and criminally -prosecuted for defrauding him. .The Division of Securities declined to pursue petitioner' s complaint . In -2009 pet:.tioner hired and paid $15, 000- to another, attorney to 'fileesui€ ín'Ohio against "ProCore's officers 'and its successor entity On March 10,- 2009, a complaint was filed in the U.S District 'Court for the Northern Districteof TOhio against the surviving entity of, PróCore--Univ'ersal Property aud3 - Developñiênt Acqu:.sition Corp. -as sell as other named defendants alleging that/petitironers swer t he victims of securities fraud, breaáhes of fiduciary duties, negligence,6fraud, and breach of contract. After the filing of the 2009 complaint, - petitioner's coññsel informedehim that mos of the claims tin the complaint werésbarred by the statute öf limitations inAOhio and that he was uncertain -aa to hether petit oner's moneyicould be retrieved even if his case was favorabl adjudicated Sect ion • 6 330 (a) (1) provi les that s no levy 'may be made-on any pröpertlynoetight to"property of any person unless the Secretary has hôtified the person-in writing of his or sher right-tola hearing únder th: s section before the levy is made. The noticea must inelúde in uimple ánd no technicalaterms inter alia, the right of the pereon to request. a hearing to be held by the IRS, Office of Appeals. See sec. 6330 (a) (3) (B) . At the hearing -the person may raise any relevant issue relating to the unpaid tax or the proposed levy, including appropriate spousal defenses, challenges to the appropriateness of collection actions, and offers of- collection alternatives. Sec. 6330 (c) (2) (A) . Section 6330 (c) (2) (B) further provides that the person may also raise at the hearing challenges to the - a existence or amount of the underlying tax liability for any etax period if the person did not receive any statutory notice of - deficiency for the tax liability or did not otherwise have an - opportunity to dispute the tax, liability. Where the validity of the underlying tax liability is at issue in a collection review proceediná, the Court will review that issue de novo. Thornberry v. Commissioner, 136 T.C. , (2011) (slip op. at 12) ; Davis v. Commissioner,.115 T.C. 35, 39 (2000) . -However, swe generally review other issues regarding the collection action determined by the Appeals Office for abuse .of discretion. Thornberry v. Commissioner, supra at _ (slip op. "at 12) ; Goza v. Commissioner, 114 T.C. 176 (2000) . Section 6330 (d) (1) confers jurisdiction on the Tax Court to review the determination of the Appeals officer. It is.uncontested that the merits of the underlying income tax liability are properly at issue.e Therefore, we must first decide petitioners' claim that they sare entitled to a loss deduction of $100, 000 . a e Section 165 a) permits a deduction'against ordinary income for "any loss suutairied durinc the taxables year and not compensated for by insurance r otherwise.". T.For individuals, the deductiion is lim:.ted to: (1) Losses incurred in a trade or - business; (2) losses incurred in any transaction entered into for profit though not connected to at trade or business; or (3)- losses of property not tonnected wit a trade or business or a transaction entered into for þrofit, rif sudh losses arise frome "fire, storm, sh:.pwreck, o~r -oaher casualty, or from .theft." (Emphas is -added ; ';" See asec . 155 (c ) ; Lockett V . Commissioner, T . C. Memo. 2008-5, affd. 3064 Fed. Appx2464 (11th Cir. 2009) . o A táxpayer-may deduct a thef t lbss in the fyear the ldss is sustained. SecE. 165(a) . Generally, a theft loss is treated as sustained durincj the taiable árear in which the taxpayer discovers it . Séc .- 165 (a) (e) : HowevŠr, even af t er a thef t' loss is discovered;* if a claimafor reimbursement exists during» the year of the loss with respect to w ich thére 'issa sreasonabler prospect of recoiéry, then a theft loss'is treated as "sustained" only when it cán be ascertained with reasonable òertainty whether such reiinbursement for the loss wil.1 be obtàined. - Jeppsen v. Commiss ioner, 3120 FI. 3d *1410 , 14141 (10 th Cir . 19 97 ) af f g . T . C . Memo. 1995-342 Secs 1.'l-65-1 (d) (2) (i) , 4 (3-) ; 1.316528 (a) (2) , Income Tax Regs. Stated differently, a reasönablé prospect of recovéry -will postpone the "thef t loss y deduction until such time - 10 - as ther prospect no longer sexists. Petitioners have the burden of proving they have sustained a theft loss. See Rule 142(a); Welch v. Helvering; 290 U.S. 111-(1933). I. Theft -- The term "theft" under section 165 is, a word of general and broad meaning :that includes any criminal appropriation of - e another's property, including theft by swindling, false pretenses, and other forms .of guile. Edwards v. Bromberg, 232 F . 2d 107, -110 (5th Cir . 1956) ; sec . 1.165 -8 (d) , Income Tax Regse The exact- nature of a theft, whether it be larceny,, embezzlement obtaining money by false pretenses,, or other wrongful misappropriation of property of another, is of little importance provided .it constitutese a thef t . See Edwards v. Bromberg, supra; Grothues v. Commissioner, T.C. Memo.22002-287; see also sec. 1.165-8(d), Income Tax Regs., Whether-a theft loss has beeñ- established depends upon the ;law of the State where the alleged theft occurred. Bellis v. Commissioner, 540 Fe2d 448, 449 :(9th Cir. 1976), affg.- 61 T..C., 354 (1973); Luman v. Commissioner, 79 T.C. '846, 860 .(1982) ; Paine v.s Commissioner,- 63 T.C., 736, 740 (1975), affd. without published opinion 523 F.2d 1053 (5th Cir 1975) . A criminal iconviction is not necessary in orde for a taxpayer -to demonstrate a theft loss. See Monteleone v. Commissioner,e 34 T.C. .688, 692-694 (1960) . Instead, a taxpayer must prove a theft soccurred under applicable State law by only a 11 - preponderance of the evidence and,not beyond a reasonable doubt . See Allen v. Commissioner, 16 T.C. 163, 166 (1951) ("If the reasonable infer nces from the evidence point to theft, the propon,ent is entitled to prevail., If the contrary be true and reasonable inferences point to. another conclusion the proponent must fail. " ) . Petitioners resided in O io when the transaction at issue 1 occurred, and the solicitatio of petitioner's investment was , initiated within Ohio. Therefore, we will decide whether the evidence presented allows .for us to reasonably infer that a theft occurred under Ohio law. Ohi Rev. Code Ann. Sec. 2913.02 (LexisNexis 2010} provides: (A) No -person, with pu pose to deprive the owner, of property or services, sh 11 knowingly obtain or exert control .over reither the property or services -in any of the followirg ways: (1) Without the consent of -the ,owner or, person authorized to give consent; (2) Beyon the scope of the express or implied consent of consent; the owner or erson authorized to give (3) By deception; (4) By threat; (5) By intimidation. (B) (1) Wh ever violate this section is guilty of theft. From the evidence and teštimony before us we are unable to conclude that the transaction in issuerresulted in a theft. i Petitioners have failed to sat isfy their burden of proving that - the transaction -was a theft rather than merely a poor investment decision. - 12 - At trial petitioner impli'ed throughout his testimony that his investment was stolen but provided no specific evidence in support of- that conclusion. The record indicates that petitioners made a $100, 000 payment foe an investment in ProCore, in exchange for which they received 3, 333, 333 shares of stock in the company." There is no evidence that the 3, 333, 333 shãî-es oft stock ProCore issued are not valid and legitimate sliares oft stock. Petitioner testified that the shares had been "acceþtöd by Charles Schwab and that he was never notified that the sharen were in any way ïrregular or deficient. Petlitioners provided no evidence, other than petitioner' s testimony, to establish that the~3, 333', 333 shares of ProCo e a stock were valueless in' 2005 or0that they ever became valueless. In fact, in 2009 petitioner paid an attorney $15, 000 to fil'e suit against ProCore' s successor and other individuals in an attempt to recover their ainvestment . In sum, the record before us is insufficient to determine that petitioners were the victims of theft. As a result, we hold sPetitioner testified that after his investment in ProCore, at some later point during 2005, he decided to invest an additional $150, 000 in Luhan Investment Securities, another venture backed by the same individuals who had introduced him to ProCore . 'Paying an attorney $15,000'in 2009 to institute a lawsuit to recover his investment raises an inference that petitioner believed as recently as 2009 that there was a reasonable-prosþect of recovery. that petitioners have failed to meet their bu den of proving that - .13 - a theft occurred during 2005. II. Installment Actreement c We review espondent ' s ppeals Of f ice determination ,with respect to colle tion alterna ives for abusenof discretion. Seer McCall v. Commis ioner, T.C. Memo. 2009-75. In reviewing for abuse of discretion, we do -not- conduct an independent review of whether any collection alternative proposeds by a taxpayer was acceptable or substitute our udgment for that of the Appeals Office. Yd. Ratiher, we 'must upKold the Apýeals Office determination uñ]ess 'it is arbitrary, capricious, or without sound basis in f ct or law. ee M...; see also -Murphy v Commissiore 12 T.C. 301, 3 0 (2005), affd. 469 F.3d/27 (1st. Cir. 2006) . In naking a détermination following- a collection due process hearing, the 'Appeals officer must consider.it (1) -Whether tilie requikements of anyañpplibable law or administrative- a procedure have been met; (2) ny Irelevant fissues raised by the taxpayer; ånd (3) whether the p oposêd collection action balances the neêd for efficienty collec i'on with legitimatie concerns that a the collection aËtion be no mÖre intrusi½e than anecessary Sec . 6330 (c) (3) The Appeáls, offi er oonsidered those factors, andan there is no evidénce to indioîte that he -abused his discretion in making his detern ination - .14 - During their face-to-face conference with the Appeals officer, petitioners requested that they be granted a streamlined installment agreement to satisfy the balance due on their account. : Respondent denied petitioners' request because their liability exceeded $25,000. Section 6159(a) authorizes the Secretary to enter nto written agreements with any taxpayer under which the taxpayer is allowed to make; payment on any tax in installment payments,if the Secretary determines that an agreement will facilitate full or partial collection of the -liability. The Commissioner has the discretion to accept or reject an installment agreement proposed by a taxpayer. See sec. 301.6159-1(b) (1) (i), Proced. & Admin. Regs. A streamlinedsinstallment agreement is-an installment agreement that may be processed quickly and without financial analysis or managerial approval-and is available for taxpayers whose aggregate unpaid balance of assessments is $25,000 or less. Internal Revenue Manual (IRM) pt. 5.14.5.1(1) (Mar. 30 2002); IRM pt. 5.14.5.2(1), (July 12, 2005) . Because petitioners' outstanding liability exceeded $25,000; they were snot eligible to enter into a:streamlined -installment agreement.« See Shaw ar. Commissioner, =T.C. -Memo. 2010-210; McCall v. Commissionere supra; see also IRM pt. 5.14.1.2(4), 5.14.5.2(1) (Sept. 26,, 2008). e Respondent's Appeals Office vetified that "the requirements of any applicable law or administrative procedure have been met" as - 15 - required by section 6330 (c) (1) and balanced the need for the efficient collection of taxes with petitioners' concern that the collection actior be no more ntrusive than necessary as required by section 6330 ( ) (3) (C) . Th refore, we have no basis upon which to find that res ondent abuse his discretion in rejecting petitioners' req est for a st eamlined installment agreement. To reflect the, foregoin< Decision will be entered for respondent . I I I