Court Opinion

ID: 9961451
Source: CourtListenerOpinion
Date Created: 2024-04-18 19:02:05.317751+00
Date Added: 2024-06-11T08:20:46.722318
License: Public Domain

United States Tax Court

                              T.C. Memo. 2024-47

                         MICHAEL C. GIAMBRONE,
                               Petitioner

                                         v.

              COMMISSIONER OF INTERNAL REVENUE,
                          Respondent

    WILLIAM W. GIAMBRONE AND MICHELE L. GIAMBRONE,
                       Petitioners

                                         v.

              COMMISSIONER OF INTERNAL REVENUE,
                          Respondent

                                    __________

Docket Nos. 11109-18, 11153-18.                             Filed April 18, 2024.

                                    __________

Robert E. McKenzie, Kathleen M. Lach, and Thomas A. Laser, for
petitioners.

Elizabeth A. Carlson, Richard L. Wooldridge, Michael T. Shelton, and
William Benjamin McClendon, for respondent.

        MEMORANDUM FINDINGS OF FACT AND OPINION

       URDA, Judge: In 2007 Platinum Bancshares, Inc. (Holding), a
holding company that owned a troubled savings and loan institution
named Platinum Community Bank (Platinum), was in desperate need
of capital. 1 The owners of the controlling interest in Holding, Michael

       1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code or I.R.C.), in effect at all relevant times, regulation

                                Served 04/18/24
                                            2

[*2] and William Giambrone (petitioners, along with William’s wife,
Michele 2), turned to Lee Bentley Farkas, a prominent and highly
regarded businessman in the mortgage industry.            After some
negotiation, Mr. Farkas bought $10 million of newly issued stock in
Holding, which gave one of his companies a controlling 75% stake.

       All that glittered was not gold. Mr. Farkas turned out to have
been involved in a long-running, multibillion-dollar fraud scheme when
he purchased control of Holding. His intrigues came to an end in 2009,
but not before they ensnared Platinum and resulted in its closure and
placement into receivership. Mr. Farkas was indicted in 2010, followed
the next year by a conviction on 14 counts of fraud and an order to pay
restitution of $3.5 billion to 20 specific victims, not including the
Giambrones, Holding, or Platinum.

       The Giambrones claimed theft loss deductions exceeding
$3.8 million on their respective 2012 federal income tax returns, which
they carried forward on their returns for several later years.
Specifically, the Giambrones assert that they suffered a theft by
deception of their control of Holding. They fail to establish, however,
that they suffered any theft in connection with Mr. Farkas’s stock
purchase or that any such theft loss should be recognized for 2012. We
accordingly will sustain the IRS’s notices of deficiency disallowing these
deductions and determining accuracy-related penalties.

                               FINDINGS OF FACT

        These consolidated cases were tried during the Court’s special
trial session in Chicago, Illinois, beginning on March 14, 2022. We base
our factual findings on the stipulations of facts, and the testimony and
other evidence admitted at trial, as well as the parties’ pleadings. The
Giambrones lived in Illinois when they timely filed their petitions in this
Court.

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and Rule references are to the Tax Court Rules of Practice and
Procedure. We round all monetary amounts to the nearest dollar.
       2 In this opinion, we will refer to all three petitioners as the Giambrones, the

brothers acting in concert as the Giambrone brothers or simply the brothers, and the
Giambrones acting individually by their respective first names.
                                        3

[*3] I.        Rise and Fall

        In 1993 the Giambrone brothers started an independent
mortgage business in the Chicago suburbs. The brothers closed their
first loan the next year, and their mortgage finance business prospered
under their stewardship for nearly 30 years, including during the years
relevant to this case.

          A.    Platinum Starts and Struggles

       Having won success in mortgage finance, the brothers set their
sights on banking. In 1998 they decided to start a federally chartered
savings and loan institution (also called a thrift), focusing on real estate
transactions with themselves as primary shareholders. A federally
chartered thrift had the advantage of being exempt from state licensing
requirements although it came with required training and close scrutiny
by the Office of Thrift Supervision (OTS). 3

      Holding was incorporated in Illinois in July 1998 as a domestic
business corporation to serve as the holding company for Platinum, a
subsidiary corporation. Holding raised approximately $6,664,000
through its initial private placement, with the Giambrone brothers each
purchasing $1.8 million worth of common stock shares and Michele
purchasing another $25,000 worth of common stock shares. The
Giambrones did not relinquish their controlling interest in Holding (and
thereby Platinum) until 2008. During that time, the brothers served on
the boards of directors of both companies, with William acting as
chairman and CEO.

        Platinum opened its doors for business on March 1, 1999.
According to OTS, it employed a traditional savings and loan business
model, “gathering deposits from local communities and investing those
funds in single-family mortgage loans from the same local
communities.”      Platinum’s “initial residential mortgage lending
business . . . consisted of purchasing closed loans” from the brothers’
affiliated mortgage bank. In mid-2001 Platinum added a line of
business that involved purchasing residential loans, packaging them,
and selling the packages in the secondary mortgage market.

        3 OTS was a federal agency formed in 1989 as part of the U.S. Department of

the Treasury. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act
disbanded OTS and transferred its functions to other federal agencies. 12 U.S.C.
§ 5413.
                                    4

[*4] As William later observed, Platinum experienced “bumps in the
road throughout.” Management and business strategy proved to be
particular weaknesses. In multiple examination reports OTS critiqued
Platinum for failing, inter alia, to (1) implement proper reporting,
(2) follow a coherent business strategy, and (3) develop adequate asset
classification policies or a loan review process.

       Platinum faced a consistent lack of profitability, which had ripple
effects on capital adequacy. Slow earnings had been anticipated as part
of Platinum’s startup phase, but through 2006 it had failed to turn a
profit in any year. OTS identified Platinum’s secondary mortgage
market line of business as the primary culprit, noting that it “ha[d] not
been able to generate profits . . . since its inception, as the revenue
generated from the spread between price paid for the loans and the price
received at their sale could not cover the expenses of the operation.”

       Holding turned to capital raises to cushion Platinum’s losses,
which had consumed 71% of the original capital by 2003. These capital
raises depended in large part on the Giambrone brothers. Each brother
bought $1 million worth of newly issued shares in 2001, and then
another $1.25 million worth of shares in 2002. In 2004 Holding returned
to the well, raising an additional $2.5 million from the brothers through
the issuance of trust-preferred securities.

       The bottom dropped out in 2007. As OTS explained, in February
of that year “a significant change occurred in the secondary mortgage
market which impacted Platinum’s business plan and the overall
direction of the thrift.” The value of the loans that Platinum held for
sale in the secondary market “declined sharply,” which led to substantial
losses and exposure for indemnification and repurchase of certain loans.

       Despite closing the secondary mortgage market business in April
2007 (followed by selling its wholesale loan operation in June 2007),
“Platinum recorded $300,000 in net losses during the months of July
and August 2007.” These operating losses continued a downward trend
from 2006 for the “core thrift [line of business], which had historically
been profitable.” OTS concluded that the “core operation of the thrift
does not appear to be structurally profitable.”
                                     5

[*5]   B.    Out of the Frying Pan

             1.     Platinum on the Market

      Faced with this bleak outlook, William began exploring the sale
of Holding’s stock or assets. To assist, he retained Hovde Financial, Inc.
(Hovde), an investment banking firm, in June 2007. Over the summer
Hovde prepared an offering memorandum, which it distributed in
September to 34 interested parties.

      Hovde was not the only source of potential buyers, however. In
October 2007 William contacted Catherine Kissick, a senior vice
president at Colonial Bank (Colonial), to try to sell some of Platinum’s
mortgage loans. Ms. Kissick, in turn, connected William with Mr.
Farkas, the owner of Taylor, Bean & Whitaker Mortgage Corp. (TBW),
a wholesale mortgage lending firm based in Ocala, Florida. What began
as conversations about purchasing loans soon turned into serious talk
about TBW’s acquiring a controlling interest in Holding.

       By the end of October, Holding had received a variety of offers.
Patrick Theodora, a senior executive vice president at the brothers’
independent mortgage business, executed a nonbinding term sheet
proposing to invest $2 million for 80,000 shares of preferred stock in
Holding. The African American Community Trust made a nonbinding
preliminary offer of $6.9 to $7.1 million to acquire Platinum as a
subsidiary of the trust. An English entity, Global Funding and
Investment Consultancy, tendered a proposal to acquire Platinum in an
all-cash acquisition of $12 million. Crusader Financial Group, Inc., an
international financial services company based in New York, made an
offer to invest between $4 and $7 million to take a 90% controlling
interest in Holding.

       For its part, TBW made a nonbinding offer to purchase
$10 million of newly issued capital stock in Holding, which would give it
a 60% stake in the company. The deal contemplated an immediate
capital infusion of $3 million, with the remainder to be paid at closing.
William saw the TBW offer as the most attractive, considering the other
options as fallbacks to explore if the TBW deal did not go through.

             2.     Increasing Pressure from OTS

      As William was searching for a match, OTS began taking a more
active role, launching a detailed examination in July 2007. On
September 26, 2007, OTS notified Platinum’s board that it was in
                                   6

[*6] “troubled condition” (as defined by 12 C.F.R. § 563.555). This
designation came with a variety of restrictions and requirements from
OTS. Although OTS noted that Platinum remained adequately
capitalized, it cautioned that “this capital designation may not fully
capture the high level of risk and uncertainty associated” with
Platinum’s held-for-sale loan portfolio.

       Another examination that began in late October uncovered an
increase in delinquent and nonperforming loans, which led OTS to
conclude that Platinum had become “significantly undercapitalized.”
OTS accordingly issued a prompt corrective action letter on November 7,
2007, notifying Platinum of the downgrade to its capital status. The
letter (1) required the submission of a capital restoration plan meeting
assorted statutory and regulatory standards and (2) imposed
restrictions set forth in 12 U.S.C. § 1831 and accompanying regulations.

             3.    Consummation of Agreement

      William and Mr. Farkas, along with their respective advisors,
spent the better part of November and December negotiating the terms
of a TBW acquisition of Holding. As the principal regulator, OTS met
Mr. Farkas in November and learned the contours of the deal in the
required capital restoration plan Platinum submitted in December.
William noted that if the TBW deal fell through, he was confident that
he could obtain a capital infusion of $4 million through Mr. Theodora
(and Mr. Theodora’s father).

       TBW and Holding ultimately entered into a stock purchase
agreement on December 18, 2007, with TBW agreeing to purchase
$10 million in newly issued Holding stock, which would give TBW a 75%
controlling interest. Given the need for an immediate capital infusion
into Platinum, the deal was structured to include a $4 million loan from
TBW to William, which he used to buy newly issued Holding stock
(providing funds that could be injected into Platinum). The parties
agreed that William would transfer that stock to TBW at closing in
satisfaction of the loan and, at the same time, that TBW would purchase
an additional $6 million in newly issued stock in Holding.

      Two days after the signing of the stock purchase agreement, OTS
issued a cease-and-desist order against Platinum. OTS found that
Platinum had “engaged in unsafe and unsound banking practices”
pertaining to real estate lending standards, reevaluation of real estate,
and timely and accurate filing of financial, operational, and regulatory
                                   7

[*7] reports. The order imposed multiple stringent requirements
relating to asset quality and management practices.

       In February 2008 OTS, at Platinum’s behest, lifted the
restrictions and requirements imposed by the prompt corrective action
letter, as Platinum had become adequately capitalized. The same
month, TBW submitted to OTS a change-in-control application and a
proposed business plan for Platinum.

      The business plan contemplated the integration of Holding and
Platinum into the TBW retail mortgage lending operation, transitioning
the business to providing “conventional conforming . . . and jumbo loan
products to qualified borrowers.” The plan explained that Platinum
would “not fund the loan originations, but rather [would] receive fee
income from the transactions” and that “[a]ll loan underwriting, closing,
quality control, and secondary marketing operations [would] be
conducted by TBW.” The plan also anticipated “the establishment of
escrow custodial deposit accounts for the TBW loan servicing operation,”
providing “a level of low-cost core deposits.” The plan contemplated
migrating escrow deposits of $5 million in December 2008 and another
$5 million in June 2009.

       The plan further specified that Platinum would “engage in
secondary market/mortgage banking exclusively through TBW’s
[CommunityBanksOnline] program,” which involved “over 2,200
community banks initiating secondary market/mortgage loans with no
risk to the banks.” The affiliate transaction was meant to “strengthen
and enhance [Platinum’s] performance and risk management profile . . .
within the framework of the affiliate transaction limitations imposed by
[OTS].” This would “allow [Platinum] to offer competitive retail
mortgage loans to its customers while eliminating risks associated with
originating secondary/market mortgage loans.”

      On June 24, 2008, OTS approved TBW’s application to purchase
a controlling interest in Holding, and closing took place in July 2008.
Mr. Farkas became Holding’s majority shareholder and was appointed
chairman of Holding and Platinum, replacing William, who left the
board. With the sale, the Giambrone brothers’ stake in Holding dropped
from 54% to approximately 14%.

      C.     Into the Fire

    Beginning in October 2008 Platinum began to implement the
TBW business plan and address the weaknesses in its previous
                                   8

[*8] incarnation. In an examination that began in late October 2008,
OTS noted that Platinum continued to struggle with earnings and
problem assets but stated that TBW had begun to reverse the losses
through a number of measures that might “generate substantial fee
income.” Among other things, the examination showed that Platinum
had received escrow deposits of $38.7 million by the end of October,
which affected its capital ratio.

       By March 2009 Platinum nonetheless had stabilized to the point
that OTS terminated the cease-and-desist order that had been put in
place at the end of 2007. Platinum also entered into a memorandum of
understanding with OTS as to future operations. TBW also retained a
team of outside advisors to prepare a revised business plan for Platinum,
which listed additional servicing of escrow deposits as a source of
contingency funding and was ultimately approved by Platinum’s board.
As of June 30, 2009, Platinum reported total assets of $148 million and
received approval from the Federal Home Loan Mortgage Corporation
(Freddie Mac) as an escrowee of custodian funds.

      Matters changed rapidly in July. On July 2, 2009, Platinum
purchased $198 million in TBW loans, using escrow deposits transferred
from TBW. These escrow deposits related to mortgage loans owned by
Freddie Mac and serviced by TBW.

       This massive purchase set off alarms at OTS, which launched an
investigation on July 13, 2009. While OTS was ramping up its
investigation, Platinum received $210 million in additional Freddie Mac
escrow deposits in July, which it used to purchase $292 million more in
TBW loans. By the time OTS issued a letter on July 31, 2009, directing
Platinum to “cease all further purchases of TBW loans,” Platinum had
purchased approximately $480 million in TBW loans.

       On August 3, 2009, OTS issued a letter notifying Platinum that
it was in troubled condition, and two days letter OTS transmitted an
examination report downgrading Platinum’s rating “to reflect the high
probability of failure.” Although OTS directed TBW to repurchase the
loans, TBW replied that it lacked the resources to do so.

       It was a complicated time for TBW. Deloitte had suspended a
financial examination after discovering certain irregular transactions
that raised concerns of fraud, and TBW faced both a search warrant and
an SEC subpoena relating to its dealings with Colonial BancGroup,
Colonial’s parent company. Around the same time, the Federal Housing
                                   9

[*9] Association suspended TBW, preventing it from originating and
underwriting new FHA-insured mortgages, and Freddie Mac suspended
TBW as an approved originator of its loans. TBW filed for bankruptcy
on August 24, 2009.

       On September 1, 2009, Freddie Mac directed Platinum to transfer
$210 million in escrow deposits to another depository institution within
seven days. Platinum had insufficient liquidity and was unable to sell
the loans that it had purchased from TBW. On September 4, 2009, OTS
closed Platinum and placed it into receivership with the Federal Deposit
Insurance Corporation (FDIC). A report prepared by the Office of
Inspector General of the Department of the Treasury identified
Platinum’s “unsafe and unsound affiliate transactions with [TBW] in
July 2009” as the principal reason for its failure (while also critiquing
OTS for inadequate supervision).

II.   Criminal Proceeding Against Mr. Farkas

       In June 2010 Mr. Farkas was indicted in the U.S. District Court
for the Eastern District of Virginia on 16 counts of conspiracy and bank,
wire, and securities fraud. After the Government withdrew two counts
of wire fraud, a jury convicted Mr. Farkas on the 14 remaining counts,
and he was sentenced to 30 years in prison.

       As explained by the United States in its posttrial restitution
position paper, from 2002 through 2009 Mr. Farkas “orchestrated a
fraud of immense size,” “defraud[ing] banks of more than $3.5 billion
and misl[eading] shareholders of Colonial Bancgroup.” The Government
summarized the long-running fraud as having five basic elements: (1) a
$140 million “sweeping scheme [during 2002 and 2003] to hide
overdrafts in TBW bank accounts held at Colonial[;]” (2) a $250 million
new phase (“Plan B”) in which Mr. Farkas and his co-conspirators
“caused the deficit covered up by the sweeping scheme to be moved” by
means of TBW’s “fake sales of mortgage assets to Colonial[;]” (3) a
variation on Plan B in which “conspirators engaged in fake sales of pools
of loans to Colonial Bank, and in return TBW received over $1.3 billion
from Colonial from mid-2005 through mid-2008[;]” (4) a scheme that
involved defrauding Deutsche Bank and BNP Paribas, which held a
combined $1.7 billion in worthless commercial paper in a TBW
subsidiary whose assets had been “stripped out and used to pay other
TBW expenses[;]” and (5) a variety of fraudulent representations in
connection with an application filed by Colonial BancGroup in 2008 as
part of the Troubled Asset Relief Program. The Government did not
                                       10

[*10] assert (in the indictment, at trial, or in its posttrial papers) that
Mr. Farkas committed fraud on Platinum, Holding, or the Giambrones.

        After Mr. Farkas was convicted, the court proceeded to the issues
of forfeiture and restitution. On June 30, 2011, the district court entered
a preliminary forfeiture order requiring Mr. Farkas to forfeit
$38,541,210, specifying certain properties that would be forfeited as a
substitute for unavailable proceeds of the offenses.

         The United States further argued for restitution exceeding
$3.5 billion, to be directed pro rata to victims including the FDIC,
Deutsche Bank, BNP Paribas, and Colonial Bancgroup shareholders. At
the restitution hearing, the district court observed that “this hearing is
a bit of form over substance, because the reality of it is none of these
defendants will ever be able to come close to paying anything close to
the numbers involved here.” Mr. Farkas’s counsel expressed a similar
view, noting that “considering the sentence imposed upon him and his
age, the probability of him making any significant contribution toward
that payment . . . is practically nil.” The district court later returned to
the theme, stating that “other than what’s obtained through forfeiture
and the financial responsibility program of the Bureau of Prisons, [there
is] little likelihood that much else will be obtained from him.”

       On September 26, 2011, the district court issued a restitution
judgment, ordering Mr. Farkas to pay more than $3.5 billion to 20
specified victims. The Giambrones, Platinum, and Holding were not
named as victims.

III.   The Giambrones’ Theft Loss Deductions and the IRS Examination

       The Giambrones claimed theft loss deductions of 95% of the value
of their investments in Platinum on their timely filed 2012 federal
income tax returns. Michael claimed a deduction of $3,842,926, which
he carried over to his 2013, 2014, and 2015 tax years, and William and
Michele claimed a deduction of $3,866,676, which they carried over to
their 2014 and 2015 tax years. 4 The Giambrones premised their claimed
deductions on Rev. Proc. 2009-20, § 1, 2009-14 I.R.B. 749, 749, which
provides “an optional safe harbor treatment for taxpayers that

       4 The net operating loss adjustment for William and Michele Giambrone’s tax

year 2013 did not result in a deficiency.
                                         11

[*11] experienced losses in certain investment arrangements discovered
to be criminally fraudulent.” 5

      In March 2018 the IRS issued notices of deficiency that disallowed
each of the claimed theft loss deductions on the ground that the
Giambrones had failed to establish their entitlements to the deductions.
Against Michael, the IRS determined deficiencies of $842,554, $80,763,
$204,716, and $385,210 for tax years 2012 through 2015, respectively,
as well as accuracy-related penalties totaling $302,649. Against
William and Michele, the IRS determined deficiencies of $840,499,
$272,304, and $340,205 for tax years 2012, 2014, and 2015, respectively,
as well as accuracy-related penalties totaling $290,602.

                                    OPINION

I.     Burden of Proof

        Generally, the Commissioner’s determinations are presumed
correct, and taxpayers bear the burden of proving the determinations
erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Under section 7491(a), if a taxpayer produces credible evidence with
respect to any factual issue relevant to ascertaining the taxpayer’s
liability and meets other requirements, the burden of proof shifts from
the taxpayer to the Commissioner as to that factual issue. The
Giambrones do not contend, and the evidence does not establish, that
the burden of proof should shift to the Commissioner as to any issue of
fact, and so it remains with them. See I.R.C. § 7491(a)(1).

II.    Analysis

       A.      Theft Loss

      The Code allows taxpayers to deduct losses arising from theft that
are sustained during the taxable year and not compensated by insurance
or otherwise. See I.R.C. § 165(a), (c)(3). To establish a theft loss, a
taxpayer must first prove the occurrence of a theft under the law of the
relevant jurisdiction. See, e.g., Monteleone v. Commissioner, 34 T.C. 688,
692 (1960) (“For tax purposes, whether a theft loss has been sustained
depends upon the law of the jurisdiction wherein the particular loss

       5 We previously granted summary judgment to the Commissioner on this point,

concluding that the Giabmrones did not fit within this safe harbor. Our ruling did not
reach the question of whether the Giambrones are entitled to the claimed theft loss
deductions, which we now answer.
                                    12

[*12] occurred.”); Torres v. Commissioner, T.C. Memo. 2021-66, at *6.
“The taxpayer must then establish the amount of the loss and the year
in which the loss was sustained.” Bruno v. Commissioner, T.C. Memo.
2020-156, at *15; see also Treas. Reg. § 1.165-1(c)(1), (d)(1). “Normally,
a loss will be regarded as arising from theft only if there is a criminal
element to the appropriation of the taxpayer’s property.” Vennes v.
Commissioner, T.C. Memo. 2021-93, at *29 (citing Edwards v.
Bromberg, 232 F.2d 107, 110 (5th Cir. 1956)); see also Littlejohn v.
Commissioner, T.C. Memo. 2020-42, at *26 (“As used in section 165, the
term ‘theft’ is a word of general and broad connotation, intended to cover
any criminal appropriation of another’s property . . . .”).

             1.     Occurrence of a “Theft”

       A taxpayer must prove by a preponderance of the evidence that
an actual theft occurred. See, e.g., Bruno, T.C. Memo. 2020-156, at *15–
16; Enis v. Commissioner, T.C. Memo. 2017-222, at *18. The parties
agree that we look to Illinois state law to make this determination. The
Giambrones assert that they suffered a theft of their controlling interest
in Holding under 720 Ill. Comp. Stat. Ann. 5/16-1(a)(2) (West 2006).

       The relevant Illinois statute provides that a “person commits
theft when he knowingly . . . [o]btains by deception control over property
of the owner.” Id. The term “deception” is defined to mean, inter alia,
“knowingly to: (a) [c]reate or confirm another’s impression which is false
and which the offender does not believe to be true; or (b) [f]ail to correct
a false impression which the offender previously has created or
confirmed.” Id. 5/15-4(a) and (b) (West 1962). Theft by deception
requires the State to prove four elements: (1) the victim was induced to
part with property; (2) the transfer of the property was based on
deception; (3) the accused intended to permanently deprive the victim of
the property; and (4) the accused acted with specific intent to defraud
the victim. See, e.g., People v. Kotlarz, 738 N.E.2d 906, 919 (Ill. 2000).

       In these cases, TBW acquired a controlling interest in Holding by
purchasing $10 million worth of newly issued shares. Relying on
Illinois’ expansive definition of property as “anything of value,” 720 Ill.
Comp. Stat. Ann. 5/15-1 (West 1994), the Giambrones assert that they
suffered a theft by deception of their controlling interest in Holding
based on various representations by (or about) Mr. Farkas.

      We begin by questioning whether the Giambrones are the proper
parties to claim any deduction. To put it simply, the Giambrones did
                                           13

[*13] not sell anything to Mr. Farkas. Rather, Holding sold shares to
TBW as part of a negotiated transaction according to which it received
$10 million in compensation. 6 To the extent that there was any sort of
fraudulent inducement in the 2008 transaction, it would seem directed
at Holding, not the Giambrones, and any theft loss deduction would
belong to it. See Grothues v. Commissioner, T.C. Memo. 2002-287, 2002
WL 31662269, at *6–8 (disallowing theft loss deduction claimed by sole
shareholder for embezzlement suffered by corporation); see also Malik v.
Commissioner, T.C. Memo. 1995-204, 1995 WL 273982, at *3
(disallowing theft loss deduction for certain funds lent to club that
subsequently suffered embezzlement).

       The Giambrones try to sidestep this issue by asserting that they
suffered a loss of their controlling interest in Holding. We have
significant reservations about the underlying premise that a controlling
interest in a company is itself property independent of the shares that
give such control. We begin mindful of the admonition that federal
courts have “limited discretion . . . with respect to untested legal theories
brought under the rubric of state law.” A.W. Huss Co. v. Cont’l Cas. Co.,
735 F.2d 246, 253 (7th Cir. 1984).

       This is one such theory. Although control is certainly valuable,
the Giambrones have failed to point us to any Illinois law (and we have
not found any) suggesting that a controlling interest in a company can
be considered property in a vacuum, divorced from the shares
undergirding it. To the contrary, control stems from assembling enough
shares to direct a company’s affairs, and the value of a controlling
interest, i.e., the control premium, 7 is impounded into the value of
shares sufficient to obtain such an interest. See, e.g., Philip Morris Inc.
& Consol. Subs. v. Commissioner, 96 T.C. 606, 628, 630 (1991) (finding
that a control premium was “a substantial portion of the [share] price”
and that a shareholder’s “voting power” is “inherent in each share”
through a control premium”), aff’d, 970 F.2d 897 (2d Cir. 1992)
(unpublished table decision); Nestle Holdings, Inc. v. Commissioner,
T.C. Memo. 1995-441, 1995 WL 544886, at *61 (finding that a control

        6 The Giambrones do not argue that we should attach any significance to the

structure of the transaction, i.e., the loan to William of $4 million for the purchase of
newly issued shares, which were ultimately turned over to TBW in satisfaction of that
loan as part of the 2008 closing.
        7 “A control premium represents the additional value associated with the

shareholder’s ability to control the corporation by dictating its policies, procedures, or
operations.” Estate of Mitchell v. Commissioner, T.C. Memo. 2002-98, 2002 WL
531148, at *7.
                                    14

[*14] premium was “inherent” in the share price), aff’d in part, rev’d in
part on another issue, 152 F.3d 83 (2d Cir. 1998). Control qua control is
not property separate from the shares that confer such authority.

       The Giambrones nonetheless urge us to conclude that a
controlling interest is a thing of value according to the Illinois Supreme
Court’s decision in People v. Perry, 864 N.E.2d 196, 207 (Ill. 2007), which
held that “use of a hotel room” was a thing of value that could be the
subject of theft by deception. In reaching its conclusion, the Illinois
Supreme Court emphasized that the “hospitality industry provides
lodging to the public for profit” and the “market for hotel and motel
rooms is vast.” Id. Control over a hotel room for a night is markedly
different from a controlling interest in a company in that there is a direct
market for the former and an indirect one in the latter, conducted
through the buying and selling of shares. We see no indication that the
Illinois Supreme Court meant for its ruling regarding hotel rooms to
upend corporate law.

       Moreover, we are not persuaded that the transfer of the
controlling interest in Holding was based on deception by Mr. Farkas.
With respect to this point, the Illinois Supreme Court has explained that
“reliance by the victim on the defendant’s deceptive conduct must be
proved.” People v. Davis, 491 N.E.2d 1153, 1155 (Ill. 1986); see also
People v. Kaye, 507 N.E.2d 12, 18 (Ill. App. Ct. 1987). The Giambrones
essentially argue that Mr. Farkas knowingly created and confirmed in
their minds the false impression that he was a legitimate businessman
and that, but for that false impression, they would not have sold their
controlling interest to him. Taking for granted that Mr. Farkas fostered
a false impression of himself as a respectable member of the business
community, the evidence before us nonetheless shows that the deal
occurred because of Platinum’s rapidly deteriorating financial situation,
the attractive terms offered by TBW, and OTS pressure. Although the
image that Mr. Farkas promoted might have been the cherry-on-top
from the Giambrones’ perspective, it did not cause the transfer of the
controlling interest in Holding.

       Finally, the Giambrones have not shown that Mr. Farkas acted
with a specific intent to defraud them. Although Mr. Farkas was in the
midst of a historic fraud when he obtained the controlling interest in
Holding, he cheated Colonial, Deutsche Bank, BNP Paribas, and
assorted governmental entities, not the Giambrones. The United States
never identified the Giambrones, Holding, or Platinum as victims of Mr.
Farkas’s nefarious plots, and we see no indication that they were. TBW
                                          15

[*15] paid $10 million to acquire a 75% controlling stake in Holding and
spent millions more to resurrect Platinum. Although Mr. Farkas no
doubt was a fraudster, the Giambrones have not established that he
knowingly intended to defraud them when he used TBW to purchase a
controlling interest in Holding. 8

                2.     Year in Which Sustained

        Even if a theft occurred under Illinois law, the Giambrones did
not prove that they claimed the deductions for the correct tax year, a
fatal flaw. See, e.g., Premji v. Commissioner, T.C. Memo. 1996-304, 1996
WL 370999, at *7, aff’d, 139 F.3d 912 (10th Cir. 1998) (unpublished table
decision); see also Treas. Reg. § 1.165-1(d)(1). Generally, a theft loss is
“sustained during the taxable year in which the taxpayer discovers such
loss.” I.R.C. § 165(e).

       A deductible loss must be actual and sustained in fact, and thus
a theft loss “must be evidenced by a closed and completed transaction.”
Premji v. Commissioner, 1996 WL 370999, at *8; see also Treas. Reg.
§ 1.165-1(d)(1). “If in the year of discovery, the taxpayer has a
‘reasonable prospect of recovery’ on a claim for reimbursement, the loss
will not be sustained until ‘the taxable year in which it can be
ascertained with reasonable certainty whether or not such
reimbursement will be received.’” Torres, T.C. Memo. 2021-66, at *9
(quoting Treas. Reg. § 1.165-1(d)(3)).

      Whether a reasonable prospect of recovery exists “is a question of
fact to be determined upon an examination of all facts and
circumstances.” Treas. Reg. § 1.165-1(d)(2)(i); see also McNely v.
Commissioner, T.C. Memo. 2019-39, at *8. “A reasonable prospect of
recovery exists when the taxpayer has bona fide claims for recoupment
from third parties or otherwise, and when there is a substantial
possibility that such claims will be decided in his favor.” Ramsay

        8 The Giambrones seek to bolster their contention that they were victims of Mr.

Farkas’s fraud by pointing to the July 2009 escrow transactions involving Holding. In
the Giambrones’ view, they lost their controlling interest in Holding through a theft by
deception in 2008, but it was not until 2009 that Mr. Farkas took purportedly
unauthorized actions involving the purchase of TBW loans using escrow deposits
Platinum received. The Giambrones relinquished their controlling interest in Holding
in 2008, however, and the fact that they did not authorize actions taken afterwards is
neither here nor there. Even if we were to entertain the Giambrones’ argument, we
return to the principle that only the state-law owner of the stolen property would be
entitled to the theft loss deduction, which would be Holding, not the Giambrones. See
Malik v. Commissioner, 1995 WL 273982, at *3.
                                     16

[*16] Scarlett & Co. v. Commissioner, 61 T.C. 795, 811 (1974), aff’d, 521
F.2d 786 (4th Cir. 1975). “The situation is not to be viewed through the
eyes of the ‘incorrigible optimist,’” id., and thus the “loss deduction need
not be postponed if the potential for success of a claim is remote or
nebulous,” Vennes, T.C. Memo. 2021-93, at *33. “[W]here the financial
condition of the person against whom a claim is filed is such that no
actual recovery could realistically be expected, the loss deduction need
not be postponed.” Jeppsen v. Commissioner, T.C. Memo. 1995-342,
1995 WL 440435, at *4, aff’d, 128 F.3d 1410 (10th Cir. 1997).

       “The determination as to whether there is a reasonable prospect
of recovery is based primarily on objective factors; the taxpayer’s
subjective belief may also be considered, but it is not the sole or
controlling criterion.” Vennes, T.C. Memo. 2021-93, at *34; see also
Ramsay Scarlett, 61 T.C. at 811. Some of the objective factors we consult
include (1) the probability of recovery, (2) the status of the claim, and
(3) the availability of civil or criminal restitution. See, e.g., Vennes, T.C.
Memo. 2021-93, at *34; Torres, T.C. Memo. 2021-66, at *9 (“A reasonable
prospect of recovery exists when the taxpayer has bona fide claims for
recoupment from third parties or otherwise, and when there is a
substantial possibility that such claims will be decided in his favor.”
(quoting Ramsay Scarlett, 61 T.C. at 811)); Urtis v. Commissioner, T.C.
Memo. 2013-66, at *16. As part of this inquiry, “courts may consider
claims not actually filed or pursued by a taxpayer.” Vennes, T.C. Memo.
2021-93, at *34; see also Urtis, T.C. Memo. 2013-66, at *16.

      The Giambrones assert that they correctly reported the theft loss
for 2012 because, until that year they had a reasonable prospect of
recovery either from Mr. Farkas or from the assets of Holding and
Platinum that were subject to FDIC receivership.

       We first conclude that the Giambrones had no reasonable
prospect of recovery from Mr. Farkas after 2011. On September 26,
2011, the U.S. District Court for the Eastern District of Virginia entered
a restitution judgment of $3.5 billion against Mr. Farkas in favor of 20
identified victims. This judgment followed on the heels of an order
directing Mr. Farkas to forfeit $38,541,210 in property (as a stand-in for
the proceeds of the offense). The Giambrones were not named as
victims, and they filed no claims as part of these proceedings. Given
these staggering amounts (which far exceeded Mr. Farkas’s net worth),
there was no reasonable possibility of recovery from Mr. Farkas after
2011, a point underscored by both the district court and Mr. Farkas’s
counsel during the 2011 restitution hearing.             See Jeppsen v.
                                          17

[*17] Commissioner, 1995 WL 440435, at *4 (concluding that the
deduction “need not be postponed” where financial obligations of the
person against whom the claim is made outstrip his ability to pay).

       Nor are we persuaded that the Giambrones had a reasonable
prospect of recovery from the assets of Platinum and Holding that were
subject to the FDIC receivership. William testified that he believed that
he might recover, based on his shares in Holding, until 2012, when he
began discussions with the FDIC about the settlement of claims related
to loans from 2004.

       The Giambrones fail to establish the claim or theory that would
entitle them to recoup the value of their controlling interest allegedly
stolen by Mr. Farkas from the assets remaining to Platinum and
Holding. Furthermore, the Giambrones do not explain why settlement
discussions with the FDIC regarding 2004 loans would lead them to
believe they no longer had a reasonable prospect of recovery. The
Giambrones have shown, at best, a nebulous and speculative hope that
they could obtain some of the assets of Platinum and Holding in
compensation for the theft they believed that they had suffered. This
vague and subjective belief falls far short of establishing that they had
a reasonable prospect of recovery from the assets of Platinum or Holding
at any point.

                3.      Conclusion

       In summary, the Giambrones have not shown the existence of a
theft, and even if they had, they have failed to establish that they
deducted the loss resulting from any such theft for the proper year. They
are therefore not entitled to the theft loss deductions claimed on their
respective 2012 returns. 9

        B.      Accuracy-Related Penalties

      In each of the notices of deficiency, the Commissioner determined
a 20% accuracy-related penalty against the Giambrones, premised on an
underpayment attributable to negligence and a substantial
understatement of income tax. See I.R.C. § 6662(a) and (b)(1) and (2).
Section 7491(c) generally provides that “the Secretary shall have the

        9 Because we have determined that the Giambrones have not established their

entitlement to theft loss deductions without the need of the parties’ respective experts,
we will deny as moot the Commissioner’s motion in limine to strike portions and limit
the use of the rebuttal report of Mark S. Gottlieb.
                                          18

[*18] burden of production in any court proceeding with respect to the
liability of any individual for any penalty.” This burden requires the
Commissioner to come forward with sufficient evidence indicating that
the imposition of the penalty is appropriate. See Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Once he meets his burden of
production, the burden of proof is on the taxpayer to “come forward with
evidence sufficient to persuade a Court that the Commissioner’s
determination is incorrect.” Id. at 447. 10

       The Code imposes a 20% penalty on the portion of the
underpayment of tax attributable to a substantial understatement of
income tax. 11 See I.R.C. § 6662(a), (b)(2). An understatement of income
tax is substantial if it exceeds the greater of $5,000 or “10 percent of the
tax required to be shown on the return.” I.R.C. § 6662(d)(1)(A). The
Commissioner has met his prima facie burden, as each of the
understatements at issue plainly exceeds $5,000 and is greater than
10% of the tax required to be shown on the relevant returns as follows:

     Petitioner(s)        Year     Reported Tax      Corrected Tax   Understatement
                                     Liability         Liability

 Michael Giambrone        2012                 -0-        $842,554           $842,554

 Michael Giambrone        2013             $3,330           84,093              80,763

 Michael Giambrone        2014              6,577          211,293            204,716

 Michael Giambrone        2015            468,419          853,629            385,210

 William and Michele      2012                 -0-         836,499           840,499 12
 Giambrone

        10 The parties have stipulated that the Commissioner complied with the
written supervisory approval requirement of section 6751(b)(1) with respect to all
penalties.
         11 “Only one accuracy-related penalty may be applied with respect to any given

portion of an underpayment, even if that portion is subject to the penalty on more than
one of the grounds set forth in section 6662(b).” Sampson v. Commissioner, T.C. Memo.
2013-212, at *7–8 (citing New Phx. Sunrise Corp. v. Commissioner, 132 T.C. 161, 187
(2009), aff’d, 408 F. App’x 908 (6th Cir. 2010)). Consequently, we will not determine
whether the Giambrones are liable for penalties for negligence.
        12 According to William and Michele’s notice of deficiency, the total corrected

tax liability for 2012 included a decrease in the additional child tax credit of $4,000.
                                          19

 [*19] William and        2014              3,598         272,244           272,304 13
 Michele Giambrone

 William and Michele      2015           504,152          844,357            340,205
 Giambrone

        Accuracy-related penalties do not apply to any part of an
underpayment of tax if it is shown that the taxpayer acted with
reasonable cause and in good faith with respect to that portion. I.R.C.
§ 6664(c)(1); Rogers v. Commissioner, T.C. Memo. 2019-61, at *31, aff’d,
9 F.4th 576 (7th Cir. 2021). Although the Giambrones signaled in their
petitions their intent to argue reasonable cause, they failed to do so in
the opening briefs and thus have conceded the issue. See, e.g., Ashkouri
v. Commissioner, T.C. Memo. 2019-95, at *24 n.9 (“Having conceded an
issue by failing to advance a meaningful argument on that issue in their
opening brief, [the taxpayers] could not withdraw that concession by
belatedly including a cognizable argument in their reply brief.”); see also
Campos v. Cook County, 932 F.3d 972, 976 n.2 (7th Cir. 2019) (“Parties
waive arguments which they develop for the first time in a reply
brief.”). 14

        13 According to William and Michele’s notice of deficiency, the total corrected

tax liability for 2014 included a decrease in the additional tax credit of $3,658.
       14 Even if we were to ignore the Giambrones’ concession, they failed to show

that they qualified for the reasonable cause exception embodied in section 6664(c)(1).
In their reply brief, the Giambrones assert that they relied on advice provided by
Kenneth Kolnicki, William’s accountant, in claiming the theft loss deduction. If a
taxpayer alleges reliance on the advice of an accountant, return preparer, or other tax
professional, the taxpayer must show that he “actually relied in good faith on the
professional’s advice.” Schweizer v. Commissioner, T.C. Memo. 2022-102, at *7
(quoting Crimi v. Commissioner, T.C. Memo. 2013-51, at *99); see also Neonatology
Assocs., P.A. v. Commissioner, 115 T.C. 43, 98–99 (2000), aff’d, 299 F.3d 221 (3d Cir.
2002); Treas. Reg. § 1.6664-4(c)(1) (requiring that the taxpayer must have “reasonably
relied in good faith on [the] advice”). For these purposes, advice includes any
communication setting forth an analysis or conclusion provided to or for the benefit of
the taxpayer. Schweizer, T.C. Memo. 2022-102, at *8. Simply preparing a return based
on data provided by a taxpayer does not count as advice. Id. The testimony at trial
(both from William and Mr. Kolnicki) does not establish that Mr. Kolnicki provided
any analysis or conclusions regarding the theft loss deduction, and the Giambrones
thus have not shown reasonable reliance.
                                   20

[*20] III.   Conclusion

       We uphold the determinations in the notices of deficiency to
disallow the theft loss deductions the Giambrones claimed on their
respective 2012 tax returns. We also conclude the Giambrones are liable
for penalties under section 6662(a).

       To reflect the foregoing,

       Decisions will be entered for respondent.