Court Opinion

ID: 4635935
Source: CourtListenerOpinion
Date Created: 2020-11-24 21:50:02.874509+00
Date Added: 2024-06-11T07:58:27.542097
License: Public Domain

T.C. Memo. 2020-156

                         UNITED STATES TAX COURT

                    LISA A. BRUNO, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

      Docket No. 15525-18.                          Filed November 16, 2020.

      Thomas E. Crice, for petitioner.

      Carlton W. King and Nina P. Ching, for respondent.

                           MEMORANDUM OPINION

      LAUBER, Judge: With respect to petitioner’s Federal income tax for 2013,

2014, and 2016, the Internal Revenue Service (IRS or respondent) determined de-

ficiencies of $15,438, $20,409, and $12,527, respectively, plus additions to tax for

2013 and 2014. The sole issue remaining for decision concerns petitioner’s claim
                                         -2-

[*2] that she sustained in 2015 a deductible theft loss of approximately $2.5

million. She contends that this loss resulted from her ex-husband’s refusal to

transfer marital property awarded to her in 2008 by order of a Connecticut divorce

court. Petitioner contends that this theft loss generated a net operating loss (NOL)

in 2015, which she seeks to carry forward to 2016 and back to 2013 and 2014.

Petitioner has conceded all other issues, including her liability for late-filing

additions to tax under section 6651(a)(1) on any deficiencies redetermined for

2013 and 2014.1 Finding that petitioner has not established that she sustained a

theft loss in 2015 (or in any other year at issue), we resolve this question in

respondent’s favor.

                                     Background

      The parties have submitted the case for decision without trial under Rule

122. Relevant facts have been stipulated or are otherwise included in the record.

See Rule 122(a). Petitioner resided in Connecticut when she filed her petition.

      1
       Unless otherwise indicated, all statutory references are to the Internal Rev-
enue Code (Code) in effect at all relevant times, and all Rule references are to the
Tax Court Rules of Practice and Procedure. We round all monetary amounts to
the nearest dollar.
                                         -3-

[*3] A.      Connecticut Divorce Proceedings

      Petitioner married Stephen J. Bruno in 1987. Mr. Bruno had a successful

career in the financial sector and by 2005 earned annual income of $2.1 million.

In that year, following petitioner’s discovery that he was having an affair, Mr.

Bruno filed for divorce in Connecticut Superior Court (divorce court). The di-

vorce court dissolved the marriage by a memorandum of decision dated March 17,

2008 (divorce decree).

      The divorce decree directed an equitable distribution of the Brunos’ marital

property. At that time Mr. Bruno apparently possessed most of these assets, and

he was directed to transfer specified property to petitioner. But petitioner also

possessed some marital property, including a bank account titled in her name and

real property at 38 Pumping Station Road, Ridgefield, Connecticut (Pumping Sta-

tion property). The divorce decree directed that the latter assets were to be liqui-

dated and the proceeds split between petitioner and Mr. Bruno.

      On Mr. Bruno’s appeal the Connecticut appellate court remanded several is-

sues but left intact the general contours of the property distribution set forth in the

divorce decree. See Bruno v. Bruno, 31 A.3d 860, 872 (Conn. App. Ct. 2011).

Mr. Bruno transferred no marital property to petitioner following conclusion of the

appellate and remand proceedings. Petitioner contends that Mr. Bruno under the
                                               -4-

[*4] divorce decree owes her the following amounts, which constitute the theft

loss she claims:

                                                        Petitioner’s
                                Claim                     interest
               Charles Schwab joint account             $1,292,609
               Value asset management shares                12,500
               Net earned payments                        207,453
               Charles Schwab IRA                         320,472
               Personal property (electronics)            108,600
               Personal property (furniture)              334,000
               Unpaid shelter expenses                    219,534
                   Total                                 2,495,168

      Petitioner has not received this property because Mr. Bruno has persistently

disregarded the orders of the divorce court, which has repeatedly held him in con-

tempt and ordered him to pay interest on his unpaid obligations.2 In August 2010

the divorce court transferred to petitioner title to one of the marital assets, a resi-

dence at 111 Spring Valley Road, Ridgefield, Connecticut (Spring Valley proper-

      2
        Between 2008 and 2013 petitioner filed 29 motions for contempt against
Mr. Bruno. The divorce court held him in contempt for failure to turn over marital
assets on at least four occasions--in July 2010, December 2010, April 2015, and
October 2015. In December 2010 and March 2011 the divorce court ordered that
interest would accrue on Mr. Bruno’s marital property debt. In March 2011 the
divorce court commented that it “ha[d] never found a party to be more in contempt
of court orders than this plaintiff [Mr. Bruno] has been.”
                                           -5-

[*5] ty). The divorce court directed that the property be sold, with the first

$300,000 of proceeds awarded to petitioner and the remainder to be placed in

escrow. Petitioner sold that property, apparently realizing proceeds of $1,902,890,

but she declined to place proceeds in excess of $300,000 in escrow as the divorce

court had ordered. On April 6, 2015, the divorce court held her in contempt for

that reason.

      In October 2015 Mr. Bruno petitioned for chapter 7 bankruptcy in the U.S.

Bankruptcy Court for the District of New Hampshire (bankruptcy court). He

sought to discharge (among other things) petitioner’s claims against him for her

share of the marital property. Mr. Bruno asserted that he no longer possessed any

of the marital property, alleging that his bankruptcy estate consisted of about

$2,500 in miscellaneous assets and that he held claims against petitioner “per di-

vorce decree” for the following:

                                   Claim                        Amount
               50% of proceeds from Spring Valley property       $951,445
               50% of proceeds from Pumping Station property      119,900
               50% of proceeds of bank account                      6,838
                Total                                           1,078,183
                                         -6-

[*6] B.       Petitioner’s Recovery Efforts

        Petitioner commenced or participated in a variety of actions aimed at recov-

ering the marital property that Mr. Bruno owed her. This litigation was well un-

derway in early 2017, when petitioner filed returns claiming the theft loss at issue

here.

        In February 2016 petitioner filed a complaint in New Hampshire state court

against Christina Bruno (the woman with whom Mr. Bruno had the affair and

whom he later married) and several New Hampshire limited liability companies

(New Hampshire LLCs). The complaint alleged that Mr. Bruno and Christina

Bruno conspired with the New Hampshire LLCs to conceal and convert marital

property owed to petitioner under the divorce decree. The complaint averred that

Mr. Bruno was not named as a defendant because of his bankruptcy filing.

        The complaint alleged (among other things) that Mr. Bruno had withdrawn

most of the funds in the Charles Schwab joint account, in which petitioner claimed

an interest of $1,292,609, and used these funds to purchase (and later sell at a

profit) multiple pieces of real property titled in the name of the New Hampshire

LLCs. When the complaint was filed, one of the New Hampshire LLCs owned a

residence at 64 Drinkwater Road, Hampton Falls, New Hampshire (Drinkwater
                                        -7-

[*7] property). It had allegedly been purchased for $825,000 and was then listed

for sale at $995,000.

      Petitioner alleged that she learned of Mr. Bruno’s fraudulent scheme after

the first meeting of creditors in his bankruptcy case, held in January 2016. See 11

U.S.C. sec. 341(a) (2012). During that meeting Mr. Bruno admitted during ques-

tioning by the bankruptcy trustee that Christina Bruno owned at least some of the

New Hampshire LLCs and that he (Mr. Bruno) had signatory authority over their

bank accounts. After viewing the sales listing for the Drinkwater property, peti-

tioner ascertained that it housed the marital property furniture in which she

claimed an interest of $334,000. In conjunction with her filing of the complaint,

the New Hampshire state court awarded her a judicial lien against the Drinkwater

property.

      On October 26, 2016, petitioner filed a proof of claim in Mr. Bruno’s bank-

ruptcy case, contending that Mr. Bruno owed her $3,588,105 for “Domestic Sup-

port Orders/Alimony,” all of which allegedly constituted a priority claim under 11

U.S.C. sec. 507(a)(1) (2012). (This proof of claim covered roughly $2.5 million of

marital property, plus alimony arrears and interest thereon, less the amount that

petitioner owed to Mr. Bruno under the divorce decree.) She reported that

$200,000 of her claim was secured by a “Court-ordered injunction on funds depos-
                                        -8-

[*8] ited with Schwab,” stating that she had obtained this injunction against Mr.

Bruno’s mother. This injunction was issued by the Connecticut divorce court in

July 2010, when petitioner moved to join Christina Bruno and Mr. Bruno’s mother

as parties to the divorce proceedings. The divorce court joined both of them as

parties in March 2011.

      On October 18, 2017, the bankruptcy trustee commenced an adversary pro-

ceeding against Mr. Bruno, Christina Bruno, Mr. Bruno’s mother, the New Hamp-

shire LLCs, and other persons and entities (collectively, adversary proceeding de-

fendants). The complaint alleged fraudulent transfers and preferential transfers

and sought to pierce the corporate veil. See 11 U.S.C. secs. 544, 547, 548 (2012).

That case was settled in early 2019; petitioner signed the settlement agreement in

her individual capacity on January 29, 2019.

      The settlement of the adversary proceeding entitled petitioner to receive

most of the proceeds from the sale of the Drinkwater property in exchange for re-

leasing her lien against that property and her claims against all adversary proceed-

ing defendants except Mr. Bruno. Petitioner thus agreed to dismiss with prejudice

her New Hampshire state court action and to dismiss her claims in the Connecticut

divorce proceeding against Christina Bruno and Mr. Bruno’s mother. The settle-

ment agreement expressly stated that the releases executed by petitioner should
                                        -9-

[*9] not be construed in any way to “release, discharge or relieve the Debtor,

Stephen Bruno from any and all claims held by * * * [petitioner] against him

and/or his assets.” On July 13, 2018, the bankruptcy court issued a notice of

waiver of discharge, indicating that Mr. Bruno had waived his right to discharge of

his liabilities in the bankruptcy case. See 11 U.S.C. sec. 727(a)(10) (2012).

      In April 2019 the bankruptcy court issued a final judgment in the adversary

proceeding, which incorporated by reference the settlement agreement. In June

2020 the bankruptcy trustee reported to the bankruptcy court that the Drinkwater

property had been sold for $765,000. The trustee subsequently mailed petitioner a

check for $450,000, representing her share of the sale proceeds.

C.    Petitioner’s Tax Reporting

      Beginning with her return for 2008, petitioner has claimed (and the IRS has

disallowed) an array of theft loss deductions (and related NOL carryforward de-

ductions) connected with Mr. Bruno. On her 2008 return she claimed, and the IRS

disallowed, total theft losses of roughly $12 million. One loss of approximately

$10 million allegedly arose from a “conspiracy surrounding [Mr.] Bruno’s 2006

termination from his then employer.” The other, of more than $2 million, alleged-

ly related to a conspiracy between Mr. Bruno and a homebuilder he had engaged

to construct the Spring Valley property.
                                        - 10 -

[*10] On her returns for 2013 and 2014 petitioner claimed and the IRS disallowed

NOL carryforward deductions of $12,622,635 and $12,543,221, respectively.

These carryforwards included an alleged 2012 loss attributable to an asserted

“illegal transfer, conveyance and fraudulent concealment of * * * [Mr. Bruno’s]

LLC business interests.” Petitioner concedes that she is not entitled to a theft loss

on the theories asserted in her original returns for 2013 and 2014.

      Petitioner first claimed a theft loss stemming from Mr. Bruno’s failure to

transfer marital property on Form 1040X, Amended U.S. Individual Income Tax

Return, for 2015, which she filed in March 2017. The property allegedly stolen

consisted of roughly $2.5 million of marital property that Mr. Bruno had not trans-

ferred to her. See supra pp. 3-4. She explained this theft loss as follows:

“[U]nder the facts and circumstances of * * * [petitioner’s] case, in which Mr.

Bruno has declared bankruptcy (a fixed and identifiable event) and claims to have

no assets including taxpayer’s property there was not a reasonable prospect of

recovery at the end of 2015 and this loss is allowable in 2015.” The IRS

processed petitioner’s 2015 Form 1040X as a claim for a refund, which it denied.

      On her return for 2016 petitioner claimed an NOL carryforward deduction

of $21,185,374. This sum included the roughly $2.5 million theft loss reported on

her 2015 Form 1040X at issue here. In a notice of deficiency dated May 14, 2018,
                                        - 11 -

[*11] the IRS determined (among other things) that petitioner was not entitled to

any NOL carryforward or carryback deduction for 2013, 2014, or 2016. Petitioner

timely petitioned for redetermination. The sole issue remaining for decision is

whether petitioner suffered in 2015 (or in any other year at issue) a theft loss of

$2,495,168, representing the value of marital property that Mr. Bruno has not

transferred to her.

                                     Discussion

A.    Threshold Matters

      Our jurisdiction in a deficiency case is generally confined to the years for

which deficiencies have been determined in the notice of deficiency. See sec.

6214(a). With respect to certain items, such as NOL carryforward and carryback

deductions, we may need to consider evidence from other tax years. See, e.g.,

Keith v. Commissioner, 115 T.C. 605, 621 (2000); Lee v. Commissioner, T.C.

Memo. 2006-70, 91 T.C.M. (CCH) 999, 1001 (holding that a prior year return was

insufficient by itself to establish an NOL in that prior year). As a rule, however,

we have no power to determine an overpayment or underpayment of tax for a year

not in issue. See sec. 6214(b); see also Lone Manor Farms, Inc. v. Commissioner,

61 T.C. 436, 440 (1974), aff’d, 510 F.2d 970 (3d Cir. 1975).
                                         - 12 -

[*12] In a joint stipulation of facts filed in August 2019 petitioner made several

concessions. Among other things, “[t]he parties agree[d] that the sole item at issue

in this case is petitioner’s claimed theft loss * * * and resulting net operating loss-

es * * * relating to certain property which petitioner claims should have been paid

or delivered to her by [Mr.] Bruno as a result of the divorce.” In her opening brief

petitioner likewise agreed that “the issue before this Court is whether the Commis-

sioner wrongly disallowed [her] 2015 theft loss deduction and the resulting net op-

erating loss.”

      After the parties filed their answering briefs, we directed them to file sup-

plemental briefs addressing certain of the litigation matters discussed above. In

her supplemental brief petitioner raised two new contentions. First, she urged that

the $450,000 payment she received from the bankruptcy trustee in 2020 should be

taxable for 2020 (and no sooner). Second, she urged that she is entitled to deduct,

as expenses of generating that income, the costs she incurred in prosecuting the

New Hampshire state court case and the adversary proceeding.

      We will not entertain these contentions. Neither party argues that the

$450,000 payment from the trustee is taxable to petitioner for 2013, 2014, or 2016

--the years at issue in this case--and we have no jurisdiction over 2020, a year for

which petitioner has not yet filed a return. Petitioner does not contend that the liti-
                                        - 13 -

[*13] gation expenses to which she refers were deductible for 2013, 2014, or

2016. And even if she had advanced such a contention, we would not consider it

because it is inconsistent with her prior stipulations and has been raised too late.3

B.    Burden of Proof

      The IRS’ determinations in a notice of deficiency are generally presumed

correct, and the taxpayer bears the burden of proving them erroneous. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The submission of this

case under Rule 122 does not change or otherwise lessen petitioner’s burden of

proof. See Rule 122(b); Weaver v. Commissioner, 121 T.C. 273, 275 (2003).

      Section 7491(a)(1) provides that, if “a taxpayer introduces credible evidence

with respect to any factual issue relevant to ascertaining the liability of the taxpay-

er * * * , the Secretary shall have the burden of proof with respect to such issue.”

“Credible evidence is the quality of evidence which, after critical analysis, the

court would find sufficient upon which to base a decision on the issue if no con-

trary evidence were submitted[.]” Higbee v. Commissioner, 116 T.C. 438, 442

      3
         See Rules 91(e), 151(e); Levert v. Commissioner, T.C. Memo. 1989-333,
57 T.C.M. (CCH) 910, 917-918 (deeming an issue conceded when party did not
raise it in his opening brief), aff’d without published opinion, 956 F.2d 264 (5th
Cir. 1992); cf. Thomas v. Roach, 165 F.3d 137, 145-146 (2d Cir. 1999) (holding
argument first raised in reply brief waived); Sinicropi v. Milone, 915 F.2d 66, 69
(2d Cir. 1990) (“A party to a stipulation is not entitled to withdraw from the
agreement unilaterally[.]”).
                                         - 14 -

[*14] (2001) (quoting H.R. Conf. Rept. No. 105-599, at 240-241 (1998), 1998-3

C.B. 747, 994).

        Any shift in the burden of proof under section 7491(a)(1) is subject to the

limitations set forth in section 7491(a)(2). Among these limitations is that the tax-

payer must have “maintained all records required under this title and ha[ve] coop-

erated with reasonable requests by the Secretary for witnesses, information, docu-

ments, meetings, and interviews.” Sec. 7491(a)(2)(B); see Rolfs v. Commissioner,

135 T.C. 471, 483 (2010), aff’d, 668 F.3d 888 (7th Cir. 2012). The taxpayer bears

the burden of proving that she has met these requirements. See Rolfs, 135 T.C. at

483; Richardson v. Commissioner, T.C. Memo. 2005-143, 89 T.C.M. (CCH) 1446,

1448.

        Petitioner makes brief references to section 7491(a) and urges that she “has

introduced credible evidence before this Court with respect to a theft loss deduc-

tion.” But she has not pleaded or argued that she satisfied all of the requirements

set forth in section 7491(a)(2) as conditions for shifting the burden of proof. In

any event, as we explain more fully below, we do not believe that petitioner has

introduced “credible evidence” that she incurred a deductible theft loss in 2015.
                                        - 15 -

[*15] C.     Analysis

      The Code allows individual taxpayers to deduct losses arising from theft

that are sustained during the taxable year and not compensated by insurance or

otherwise. Sec. 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

Monteleone v. Commissioner, 34 T.C. 688, 692 (1960) (“For tax purposes, wheth-

er a theft loss has been sustained depends upon the law of the jurisdiction wherein

the particular loss occurred.”); Giunta v. Commissioner, T.C. Memo. 2018-180,

116 T.C.M. (CCH) 446, 450; Enis v. Commissioner, T.C. Memo. 2017-222, 114

T.C.M. (CCH) 552, 557 (“[T]he taxpayer must prove * * * that a theft actually oc-

curred under the law of the relevant State * * * [or] under an applicable Federal

criminal statute.”). The taxpayer must then establish the amount of the loss and

the year in which the loss was sustained. See sec. 1.165-1(c) and (d)(1), Income

Tax Regs. A loss arising from theft is generally treated “as sustained during the

taxable year in which the taxpayer discovers such loss.” Sec. 165(e); see 1.165-

1(d)(3), Income Tax Regs.

      1.     Existence of a “Theft”

      To establish a theft a taxpayer need not demonstrate a criminal conviction.

See Monteleone, 34 T.C. at 694. But she must prove by a preponderance of the
                                        - 16 -

[*16] evidence that an actual theft occurred. See, e.g., Enis,114 T.C.M. (CCH) at

557 (citing Allen v. Commissioner, 16 T.C. 163, 166 (1951)). Petitioner contends

that Mr. Bruno’s actions constitute felony embezzlement under Connecticut law.

See Conn. Gen. Stat. sec. 53a-119(1) (2016). Respondent agrees that Connecticut

law controls and that embezzlement constitutes a “theft.” See sec. 1.165-8(d),

Income Tax Regs. (defining “theft” to include “embezzlement”). But respondent

disputes that Mr. Bruno’s actions amounted to felony embezzlement under

Connecticut law. We share respondent’s concern.

      Embezzlement was not a punishable offense at common law, and Connecti-

cut courts recognize it as a crime “only as and to the extent that the Legislature has

by statute provided.” State v. Parker, 151 A. 325, 328 (Conn. 1930). Under Con-

necticut law, “[a] person commits embezzlement when he wrongfully appropriates

to himself or to another property of another in his care or custody.” Conn. Gen.

Stat. sec. 53a-119(1).

      Petitioner contends that she became the owner of her share of the marital

property on March 17, 2008--the date on which the divorce court issued the di-

vorce decree. But petitioner does not address when or how Mr. Bruno “appropri-

ate[d]” this property. She instead suggests that a theft occurred when the property

was “dissipated” by Mr. Bruno or when Mr. Bruno evinced a “willful (and suc-
                                        - 17 -

[*17] cessful) attempt to deprive Petitioner of her property.” According to

petitioner, this willful attempt was manifested when the divorce court “repeatedly

sanctioned Mr. Bruno and held him in contempt.”

      We question petitioner’s interpretation of Connecticut law. Connecticut ap-

pears to treat the unpaid amount of a marital property settlement as a debt of the

delinquent spouse. An order of the divorce court directing one party to pay the

other a sum certain is considered a “money judgment.” Conn. Gen. Stat. sec. 52-

350a(13) (2016); Profetto v. Lombardi, 137 A.3d 922, 924 (Conn. App. Ct. 2016);

Niles v. Niles, 546 A.2d 329, 330 (Conn. App. Ct. 1988). Accordingly, Connecti-

cut courts order interest on the unpaid amount of a judgment in a domestic action,

as the divorce court here did at petitioner’s request, as a sanction against the de-

faulting spouse. See Dowd v. Dowd, 899 A.2d 76, 84 (Conn. App. Ct. 2006)

(“When a former spouse is not justified in failing to pay sums due * * * , the

award of interest is proper.” (quoting LaBow v. LaBow, 537 A.2d 157, 169 (Conn.

App. Ct. 1988))); see also Sosin v. Sosin, 14 A.3d 307, 331 (Conn. 2011) (affirm-

ing award of post-judgment interest where husband withheld a portion of a lump-

sum payment due as part of divorce judgment).

      Failure to transfer marital property is not an uncommon occurrence. Peti-

tioner points to no caselaw or other Connecticut authority establishing that an ex-
                                          - 18 -

[*18] spouse commits embezzlement when he is held in civil contempt for failing

to pay a marital property debt. Indeed, petitioner was herself held in contempt by

the divorce court for her refusal to place in escrow Mr. Bruno’s $951,445 share of

the proceeds from sale of the Spring Valley property. See supra p. 5. We doubt

petitioner believes that she embezzled those funds, and it is not obvious that civil

contempt orders directed against her ex-husband should produce a different result.

      Moreover, petitioner’s theory of embezzlement would make it difficult to

ascertain the year in which the loss was sustained. As petitioner emphasizes, the

divorce court held Mr. Bruno in contempt on numerous occasions over the course

of several years. On petitioner’s theory we would have to decide which of those

orders, alone or in combination, sufficed to establish that Mr. Bruno had commit-

ted “embezzlement.” And many of those orders were issued before 2015, the year

of the alleged theft. See supra note 2.

      2.     Year in Which Sustained

      We need not decide in this case the outer limits of Connecticut criminal law.

Assuming without deciding that Mr. Bruno committed a theft of marital property,

we find that petitioner is not entitled to a deduction unless she can establish the

amount of the loss and the year in which it was sustained. See sec. 1.165-1(c)
                                        - 19 -

[*19] and (d)(1), Income Tax Regs. Petitioner has not established that she

sustained a theft loss for 2015 (or any other year at issue).

      A theft loss is generally treated as sustained in the year “in which the tax-

payer discovers such loss.” Sec. 165(e); sec. 1.165-1(d)(3), Income Tax Regs.

“However, if in the year of discovery there exists 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

taxable year in which it can be ascertained with reasonable certainty whether or

not such reimbursement will be received.” Sec. 1.165-1(d)(3), Income Tax Regs.;

see also id. sec. 1.165-8(a)(2).

      “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 sub-

stantial possibility that such claims will be decided in his favor.” Ramsay Scarlett

& Co. v. Commissioner, 61 T.C. 795, 811 (1974), aff’d, 521 F.2d 786 (4th Cir.

1975). This evaluation should not be made “through the eyes of the ‘incorrigible

optimist.’” Ibid. (quoting United States v. S.S. White Dental Mfg. Co. of Pa., 274

U.S. 398, 403 (1927)). Thus, “[t]he mere possibility or the bare hope of a future

development permitting recovery does not bar the deduction of a loss clearly sus-

tained.” Gottlieb Realty Co. v. Commissioner, 28 B.T.A. 418, 420 (1933).
                                         - 20 -

[*20] Whether a taxpayer had a reasonable prospect of recovery at the end of a

particular year “is a question of fact to be determined upon an examination of all

facts and circumstances.” Sec. 1.165-1(d)(2)(i), Income Tax Regs.; see Ramsay

Scarlett, 61 T.C. at 811. While “[t]he taxpayer’s attitude and conduct are not to be

ignored,” Boehm v. Commissioner, 326 U.S. 287, 293 (1945), the standard to be

applied is primarily an objective one, see Ramsay Scarlett, 61 T.C. at 811-812.

When a taxpayer undertakes the trouble and expense of seeking to recover an al-

leged loss through litigation, courts have often inferred that he or she had a rea-

sonable prospect of recovery. See, e.g., Dawn v. Commissioner, 675 F.2d 1077,

1078-1079 (9th Cir. 1982) (noting that litigation created an inference of recovery

not negated by the fact that the litigation was unsuccessful), aff’g T.C. Memo.

1979-479; Jeppsen v. Commissioner, T.C. Memo. 1995-342, 70 T.C.M. (CCH)

199, 201, aff’d, 128 F.3d 1410 (10th Cir. 1997).

      As of year-end 2015 petitioner already had in her possession $1,078,183 of

marital property that she owed Mr. Bruno. She concedes that she has “a reason-

able prospect of recovering * * * [that sum] as an offset to the total theft loss at

issue.” She had commenced litigation against Christina Bruno and Mr. Bruno’s

mother in March 2011 by joining them as parties in the divorce proceeding, which

was on-going at year-end 2015. She had obtained against Mr. Bruno’s mother in
                                        - 21 -

[*21] the divorce action an injunction that secured her claim to an additional

$200,000 of marital property. At year-end 2015, therefore, petitioner had

effectively recovered $1,278,183 of marital property and had commenced

litigation against Mr. Bruno, Christina Bruno, and Mr. Bruno’s mother to recover

the balance.

      Mr. Bruno filed for bankruptcy in October 2015, and petitioner relies heavi-

ly on the assertion in his bankruptcy petition that he then had (apart from his

claims against her) assets of only $2,500. We do not think that a reasonable per-

son in petitioner’s position would have believed that assertion. Mr. Bruno was a

successful financial professional whose annual income exceeded $2.1 million be-

fore the divorce. At the time of the divorce he held assets of at least $5 million,

corresponding to his and petitioner’s share of the marital property. Given Mr.

Bruno’s profile as someone who repeatedly ignored judicial orders, the assertion

that he had essentially no assets in October 2015 was objectively implausible.

And it is obvious that petitioner did not believe that assertion, because she pro-

ceeded to file a proof of claim against him in bankruptcy court, to file additional

claims against Christina Bruno in New Hampshire state court, and to participate in

the bankruptcy trustee’s adversary proceeding against Mr. Bruno, Christina Bruno,

and Mr. Bruno’s mother.
                                        - 22 -

[*22] Petitioner notes that she did not discover where Mr. Bruno may have hidden

his assets until January 2016, after the first meeting of his bankruptcy creditors.

But she had already commenced litigation against two of his plausible accom-

plices--Christina Bruno and Mr. Bruno’s mother--by joining them as parties to the

divorce case in 2011. The fact that petitioner did not know in December 2015 ex-

actly where Mr. Bruno had hidden his assets does not negate the fact that she had,

at that time, “a reasonable prospect of recovery,” from a variety of sources, on her

existing claims for recoupment. See sec. 1.165-1(d)(3), Income Tax Regs.

       Within a few months after the close of 2015, petitioner secured a lien on the

Drinkwater property, which was then listed for sale at $995,000. It appears that

petitioner ultimately recovered, in 2020, only $450,000 as a result of her litigation

against Christina Bruno and Mr. Bruno’s mother. But we do not think petitioner

could reasonably have anticipated, at year-end 2015, this lesser recovery against

those parties. And she retained at that date all of her claims against Mr. Bruno in

the divorce case and against his estate in the bankruptcy case, both of which re-

mained ongoing for several years.

      In sum, we conclude that petitioner in December 2015 had “bona fide

claims for recoupment” from Mr. Bruno and his co-defendants and that there was

“a substantial possibility that such claims w[ould] be decided in * * * [her] favor.”
                                        - 23 -

[*23] Ramsay Scarlett, 61 T.C. at 811. Because petitioner had “a claim for

reimbursement with respect to which there [wa]s a reasonable prospect of

recovery,” no portion of her alleged loss is deemed sustained “until the taxable

year in which it can be ascertained with reasonable certainty whether or not such

reimbursement will be received.” See sec. 1.165-1(d)(3), Income Tax Regs.; see

also id. sec. 1.165-8(a)(2). Reasonable certainty on that point could not exist until

some time after December 31, 2016, the end of the last taxable year at issue here.

      To implement the foregoing,

                                                 Decision will be entered for

                                       respondent.