Court Opinion

ID: 4537743
Source: CourtListenerOpinion
Date Created: 2020-05-29 16:00:55.617006+00
Date Added: 2024-06-11T12:43:07.534194
License: Public Domain

Case: 19-1356   Document: 37     Page: 1   Filed: 05/29/2020

   United States Court of Appeals
       for the Federal Circuit
                 ______________________

       CHARLES P. ADKINS, JANE E. ADKINS,
               Plaintiffs-Appellants

                            v.

                   UNITED STATES,
                   Defendant-Appellee
                 ______________________

                       2019-1356
                 ______________________

    Appeal from the United States Court of Federal Claims
 in No. 1:10-cv-00851-MMS, Chief Judge Margaret M.
 Sweeney.
                 ______________________

                 Decided: May 29, 2020
                 ______________________

    JOHN FRANKLIN RODGERS, Redmon, Peyton & Braswell,
 LLP, Alexandria, VA, argued for plaintiffs-appellants.

     NORAH BRINGER, Tax Division, United States Depart-
 ment of Justice, Washington, DC, argued for defendant-ap-
 pellee. Also represented by TERESA E. MCLAUGHLIN,
 RICHARD E. ZUCKERMAN.
                  ______________________
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 2                                   ADKINS v. UNITED STATES

 Before NEWMAN, O’MALLEY, and TARANTO, Circuit Judges.
 O’MALLEY, Circuit Judge.
     Charles P. Adkins and Jane E. Adkins (collectively,
 “the Adkinses”) appeal the Court of Federal Claims’ (the
 “Claims Court”) decision dismissing with prejudice their
 claim for an income tax refund. Adkins v. United States,
 140 Fed. Cl. 297 (2018) (“Adkins II”).
     This case has a long history. After receiving a favora-
 ble ruling from the IRS with respect to their refund claim,
 the Adkinses were forced to file suit seeking a refund when
 the IRS was unable to formalize the parties’ settlement be-
 fore the statute of limitations on the refund request was set
 to expire. The Claims Court ruled against the Adkinses on
 their refund request. On appeal, we vacated that decision.
 On remand the Claims Court again ruled against the tax-
 payers. The case now returns to us for a second appeal.
 For the reasons that follow, we now put an end to the Ad-
 kinses’ saga by reversing the Claims Court’s decision.
     In the first appeal, we reviewed the Claims Court’s
 February 16, 2016 Opinion and Order, concluded that the
 court misconstrued the regulation concerning the timing of
 a theft loss deduction, vacated the Claims Court’s opinion
 and order, and remanded the case for further proceedings.
 In that appeal, we concluded that the Claims Court erred
 in two ways: (1) reading Treasury Regulation § 1.165-
 1(d)(3) as imposing a higher burden on taxpayers who at-
 tempt to recover their losses after discovering a fraud than
 on taxpayers who claim the same loss immediately upon
 discovery; and (2) holding that, where a taxpayer has filed
 a claim for reimbursement from those who defrauded her,
 the taxpayer may not claim a loss until that claim is fully
 resolved or abandoned. Adkins v. United States, 856 F.3d
 914, 918–20 (Fed. Cir. 2017) (“Adkins I”). We explained
 that what a taxpayer must prove by reasonable certainty
 is that, as of the time the loss was claimed, there was no
 reasonable “prospect of recovery”; she is not required to
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 ADKINS v. UNITED STATES                                    3

 prove that it was certain no recovery could be had. We also
 explained that, while one could establish the absence of any
 reasonable prospect of recovery by abandonment of a claim,
 abandonment is not a prerequisite to such a showing. In
 short, we explained that the Claims Court had required too
 much from the taxpayers—both with regard to what they
 must prove and with regard to what evidence is needed to
 satisfy that burden of proof.
     The Adkinses now allege that, in addition to errone-
 ously finding that they failed to establish a lack of a rea-
 sonable prospect of recovery in 2004, the Claims Court
 improperly relied on the government’s affirmative de-
 fenses; again misconstrued the relevant legal standard; ig-
 nored regulations governing the effect of a criminal
 indictment; and abused its discretion in denying the Ad-
 kinses’ motion to compel. Because we find that the Claims
 Court once more misconstrued a taxpayer’s legal obliga-
 tions in this tax refund context and thus, required too much
 with respect to the showing required, we reverse the
 Claims Court’s conclusion that the Adkinses failed to show
 that, as of 2004, they lacked a reasonable prospect of recov-
 ery for the losses they incurred by virtue of the substantial
 fraud perpetuated upon them. We do not reach the Ad-
 kinses’ other objections to the Claims Court’s reasoning
 and rulings.
                       I. BACKGROUND
     This appeal involves the Adkinses’ claim for a federal
 income tax refund, based on financial losses they sustained
 as victims of a fraudulent investment scheme. The main
 facts are not in dispute. We reiterate the background facts
 as described by the Claims Court, however, because such
 facts are integral to the court’s ultimate conclusion that a
 reasonable taxpayer “could not have known” in 2004
 whether she had a reasonable prospect of recovery.
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 4                                   ADKINS v. UNITED STATES

            A. The Adkinses and Their Investments
                     with Donald & Co.
     In September 1997, the Adkinses began investing in
 securities with Otto Kozak, who was employed by E.C.
 Capital, Ltd. at the time. Adkins II, 140 Fed. Cl. at 300.
 The Adkinses continued to do so when Otto Kozak moved
 to GKN Securities Corp., and eventually, to Donald & Co.
 Securities, Inc. (“Donald & Co.”), a broker-dealer of securi-
 ties registered with the Securities and Exchange Commis-
 sion (“SEC”) and the National Association of Securities
 Dealers (“NASD”), in March 1999. Id. In late 1999, the
 Adkinses opened investment accounts at Donald & Co. Id.
     Unbeknownst to the Adkinses, Donald & Co. was oper-
 ating a “pump-and-dump” scheme. 1 Id. at 300. Donald &
 Co. would arrange to purchase large blocks of stock in var-
 ious companies and then encourage its clients to purchase
 those stocks. Id. This sudden rush to buy a significant
 number of stocks would inflate the price of that stock. Id.
 Donald & Co. would subsequently sell the stock that it
 owned at this inflated price, resulting in gains for the com-
 pany. But when the stock price would eventually decline
 back to a normal level, the company’s customers would in-
 evitably incur a loss because they had purchased those

     1    A “pump-and-dump” scheme, as defined by the
 SEC, is “touting [] a company’s stock (typically small, so-
 called ‘microcap’ companies) through false and misleading
 statements to the marketplace.” Adkins II, 140 Fed. Cl. at
 300 n. 4. Promoters of the stock may claim to have “inside”
 information about an impending development or to use an
 “infallible” combination of economic and stock market data
 to pick stocks. Id. These promoters sell their shares after
 the stock price is “pumped” up by the sudden rush to pur-
 chase the stock. Id. Once promoters “dump” their shares
 and stop hyping the stock, the price typically falls, and in-
 vestors lose their money. Id.
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 ADKINS v. UNITED STATES                                   5

 stocks at the inflated price. Id. While the Adkinses were
 investing with Donald & Co., the company pumped-and-
 dumped at least five stocks: Elec Communications Corp.
 (“Elec”), The Classica Group, Inc. (“Classica”), My-
 Turn.com, Inc. (“MyTurn”), Great Train Store Co., and
 Tera Computer Co. Id. Many of Donald & Co.’s house
 stocks were owned via Odyssey Capital LLC, a holding
 company. Id.
     By February 2000, the value of the Adkinses’ invest-
 ments with Donald & Co. was approximately $3.6 million.
 Id. at 301. At that time, the Adkinses’ portfolio included a
 number of stocks, with holdings in MyTurn stock repre-
 senting the vast majority of the portfolio’s value. Id. at
 301–02. It was during this month that the value of the My-
 Turn stock began to decline. Id. at 302. The Adkinses’ My-
 Turn stock, which was valued at $2,936,250 in February
 2000, had fallen to $1,029,420 by April 2000. Id. As a re-
 sult, the equity in the Adkinses’ margin account fell below
 the required threshold and Donald & Co. began to issue
 margin calls. 2 Id.
     To meet these margin calls, Mr. Adkins instructed Otto
 Kozak to sell some of the Adkinses’ stock holdings, partic-
 ularly the MyTurn stock. Id. But Kozak did not follow this
 instruction. Instead, he convinced Mr. Adkins to retain the
 MyTurn stock and to meet the margin calls by transferring
 additional cash ($1,074,181.11) and securities (valued at
 $1,261,082.37) to Donald & Co. Id. To meet Donald & Co.’s
 margin calls, the Adkinses transferred certain securities

    2    If a person buys on margin and the value of his se-
 curities declines, his brokerage firm can require him to de-
 posit cash or securities to his account immediately, or sell
 any of the securities in his account to cover any shortfall.
 Adkins II, 140 Fed. Cl. at 302 n.12 (quoting SEC, Margin
 Call, https://www.investor.gov/glossary/glossary_terms/
 margin-call (last visited May 28, 2020)).
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 6                                   ADKINS v. UNITED STATES

 that they purchased through other firms, including Bear
 Stearns, May Davis Group Inc., and H.J. Meyers & Co., Inc.
 (collectively, “third-party brokers”). Through these third-
 party brokers, the Adkinses had purchased MyTurn stock
 in the amount of $143,617.72; Tera Computer Co. stock in
 the amount of $26,793.13; and Great Train Store Co. stock
 in the amount of $40,890.00. Id. All of the Adkinses’ pur-
 chases of MyTurn stock through these third-party brokers
 were made at Otto Kozak’s urging. Id.
      By the beginning of 2002, the value of the Adkinses’
 investments with Donald & Co. had fallen below $10,000.
 Id. (reflecting a value of $9,848.62 at the end of December
 2001). Id. On July 24, 2002, Donald & Co. ceased opera-
 tions due to insufficient capital. Id. at 304. Donald & Co.
 was expelled from the NASD on March 18, 2003. Id. As
 noted below, moreover, indictments relating to this fraud-
 ulent scheme soon followed.
     B. The NASD Arbitrations, Criminal Indictments,
          and Criminal Forfeitures and Penalties
     In 2002, after the value of the Adkinses’ investments
 had fallen below $10,000, Mr. Adkins conducted some re-
 search and realized that he was being defrauded. Id. at
 302. Shortly thereafter, on February 7, 2002, the Adkinses
 submitted a statement of claim to the NASD in support of
 their demand for arbitration against Donald & Co. and Da-
 vid Stetson, Slava Volman, and Steven Ingrassia (collec-
 tively, the “named principals”), three of the four principals
 at Donald & Co. Id. at 303. The Adkinses alleged that the
 respondents manipulated the value of the MyTurn stock,
 causing the Adkinses to incur substantial losses. Id. The
 Adkinses did not include Marc Freeman (the remaining
 principal at Donald & Co.), Robert Kozak (an employee of
 Donald & Co.), or Otto Kozak (collectively, “the Kozaks”) in
 their complaint. Id. The Adkinses represented that they
 did not include Freeman because they did not believe he
 was actively involved in any of their MyTurn stock trades,
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 ADKINS v. UNITED STATES                                   7

 or that he had any substantial role in the fraudulent
 scheme. Indeed, Mr. Adkins testified that he did not know
 who Mr. Freeman was. J.A. 1733 (“[Mr. Adkins]: I didn’t
 know anything about Marc Freeman whatsoever. He
 wasn’t involved in my case. As far as I knew, he wasn’t
 involved in the stocks I dealt with.”). See also Adkins v.
 United States, No. 19-1356, Oral Arg. at 5:35–6:33, availa-
 ble at http://oralarguments.cafc.uscourts.gov/default.aspx
 ?fl=2019-1356.mp3 (“[Freeman’s] name appeared on
 maybe a few trading slips but [Mr. Adkins] never really
 knew who he was . . . [Mr. Adkins] went after [Stetson, Vol-
 man, and Ingrassia] and not the lesser players. His view
 was that Mr. Freeman was not a very important part of the
 scheme.”). Mr. Adkins explained that they decided not to
 add the Kozaks to their arbitration claim because Otto
 Kozak had advised Mr. Adkins and their arbitration attor-
 ney that they “didn’t have any money.” Adkins II, 140 Fed.
 Cl. at 303. Indeed, when Otto Kozak and Robert Kozak
 were eventually brought to court in 2004 in connection with
 the criminal proceedings against them, attorneys were ap-
 pointed for them pursuant to the Criminal Justice Act of
 1964, which provides for the appointment of counsel “for
 any person financially unable to obtain adequate represen-
 tation.” Id. at 303–04; see 18 U.S.C. § 3006A(a) (2000).
     On March 24, 2003, one of the Adkinses’ arbitration at-
 torneys sent a letter to the NASD, requesting that the
 NASD adjourn the arbitration hearing scheduled for April
 1, 2003. Id. at 304. The letter explained that Donald & Co.
 “ha[d] not responded fully to [the Adkinses’] demands for
 discovery and [was] no longer in business.” 3 Id. He ex-
 plained that the Adkinses needed additional time for dis-
 covery in order to proceed with the hearing. The letter

     3   Mr. Adkins testified that Donald & Co. had not re-
 plied at all to the Adkinses’ discovery requests. Adkins II,
 140 Fed. Cl. at 304 n.16.
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 8                                   ADKINS v. UNITED STATES

 explained, moreover, that Mr. Adkins had been contacted
 by the Department of Justice, which was investigating
 Donald & Co. and certain persons associated with it. Id.
 The Adkinses had been informed that “an indictment
 [would] be handed down in the case” and were told that the
 U.S. Attorney would ask that “all civil litigation involving
 Donald & Co., including arbitrations, be stayed pending
 disposition of the criminal case.” Id.
     Based on the circumstances described in the NASD let-
 ter, the Adkinses’ arbitration attorneys advised their cli-
 ents that their claim likely would be forestalled based on
 the pending indictment and that, without discovery, the ar-
 bitration could not proceed. Id. The attorneys suggested,
 however, that the Adkinses leave their arbitration claim
 open in case the criminal proceedings revealed pertinent
 information that might enhance their arbitration position.
 Id. Mr. Adkins did not object to this suggestion, but in-
 formed his attorneys that, while awaiting the indictments,
 he “wasn’t going to pay them anymore and there’s no real
 need to pursue it.” Id.
      In May 2004, a federal grand jury in the Eastern Dis-
 trict of New York returned the first of the predicted indict-
 ments against several principals and employees of Donald
 & Co, including Ingrassia, Volman, and the Kozaks, for
 “conspiracy to commit securities fraud” and “securities
 fraud related to the Elec and Classica stocks.” Id. at 305.
 There was no charge in the indictment pertaining to fraud
 with respect to the MyTurn stock. Id. Ingrassia and Vol-
 man were also indicted for money laundering. Id. The in-
 dictment contained two criminal forfeiture allegations. Id.
     The first, which pertained to the securities fraud
     charges, indicated that the government intended,
     upon the criminal defendants’ convictions, to seek
     the forfeiture “of any property constituting or de-
     rived from proceeds obtained directly or indirectly
     as a result of such offenses” pursuant to 18 U.S.C.
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 ADKINS v. UNITED STATES                                      9

     § 981(a)(1)(C) and 28 U.S.C. § 2461(c), or if neces-
     sary, the forfeiture of substitute property pursuant
     to 21 U.S.C. § 853(p). The second, which pertained
     to the money laundering charges, indicated that
     the government intended, upon the criminal de-
     fendants’ convictions, to seek the forfeiture of all
     property involved in the offenses, as well as all
     property traceable to that property, pursuant to 18
     U.S.C. § 982, or, if necessary, the forfeiture of sub-
     stitute property pursuant to 21 U.S.C. § 853(p).
 Id. (internal citations omitted). Marc Freeman was not
 named in this indictment.
      After discussing the 2004 indictment with counsel, Mr.
 Adkins concluded that the criminal forfeiture sections re-
 flected the government’s intention to seize “any document
 concerning the identity and ownership of the criminal de-
 fendants’ assets.” Id. Without these documents, the Ad-
 kinses would be unable to prove the existence of a theft loss
 or locate assets that could be used to reimburse the Ad-
 kinses for their theft loss. Id. Mr. Adkins also believed
 that, based on the indictment, the government intended to
 seize “all of the criminal defendants’ assets, preventing
 plaintiffs from attaching those assets to recover their theft
 loss.” Id.
     On September 21, 2004, Stetson was charged with
 “conspiracy to commit securities fraud, securities fraud re-
 lated to the Classica stock, and money laundering conspir-
 acy.” Id. at 306. Like Ingrassia and Volman’s indictment,
 Stetson’s indictment contained the same two criminal for-
 feiture allegations. Id. And, like the prior indictment,
 there was no mention of the MyTurn stock and no charges
 against Freeman. Mr. Adkins was told in 2004 of the crim-
 inal case against Stetson and the fact that it contained for-
 feiture counts, but Mr. Adkins did not see the actual
 charging document until after the 2004 tax year. Id.
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 10                                   ADKINS v. UNITED STATES

     In September 2004, Ingrassia and Stetson agreed to
 plead guilty to securities fraud conspiracy, securities fraud,
 and money laundering conspiracy. Id. The following
 month, Volman agreed to plead guilty to the same charges.
 Id. at 307. Consequently, the named principals received
 terms of imprisonment and supervised release. Id. The
 defendants were subject to fines exceeding $1.75 million
 and mandatory restitution in an amount to be determined
 later by the court after assessment of all losses incurred
 regarding the identified stocks. Id. With respect to forfei-
 ture, the three criminal defendants agreed to entry of for-
 feiture money judgments against them in which Ingrassia
 would forfeit $100,000, Volman would forfeit $300,000, and
 Stetson would forfeit $150,000 to the United States. Id.
 The three criminal defendants’ plea agreements remained
 under seal until August 26, 2005. Id. Mr. Adkins learned
 in 2004 from his arbitration attorneys and Otto Kozak,
 however, that all of the criminal defendants intended to
 plead guilty. Id.
     That same year, the named principals were barred by
 the SEC from acting as brokers or dealers in securities. Id.
 The Adkinses learned about these SEC orders from their
 arbitration attorneys in 2004. Id. Mr. Adkins believed
 that, as a result of these orders, the criminal defendants’
 earning power would be cut off. Id. By the end of 2004,
 Ingrassia, Volman, and Otto Kozak had not paid the Ad-
 kinses anything for their losses, and the district court had
 not entered a restitution order. Id.
      Criminal proceedings for the other Donald & Co. bro-
 kers continued in 2005. In August 2005, the Kozaks agreed
 to plead guilty to the securities fraud conspiracy and secu-
 rities fraud charges filed against them. Id. at 307–08. Otto
 Kozak was sentenced in July 2006 and ordered to pay res-
 titution in the amount of $631,482.26. Id. at 308. Robert
 Kozak was sentenced in August 2006 and ordered to pay
 restitution in the amount of $231,641.80. Id. Like the
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 ADKINS v. UNITED STATES                                   11

 named principals’ indictment, the Kozaks’ indictment did
 not mention MyTurn stock. Id.; J.A. 1410.
      In August 2005, Freeman—the only principal of Don-
 ald & Co. not charged in the 2004 indictments—was
 charged with conspiracy to commit securities fraud, secu-
 rities fraud, and money laundering conspiracy. Adkins II,
 140 Fed. Cl. at 307. Freeman’s indictment did not mention
 MyTurn stock. Id.; J.A. 1410. Freeman agreed to plead
 guilty to all three charges, to forfeit $50,000 to the United
 States, and to pay restitution in the amount of $4,243,858.
 Adkins II, 140 Fed. Cl. at 307. The named principals were
 sentenced a few years later. Ingrassia was sentenced in
 December 2009 and directed to pay restitution in the
 amount of $4,243,858.44. Id. at 308. Stetson was sen-
 tenced in March 2011 and directed to pay restitution in the
 amount of $3,590,466.50. Id. Volman was sentenced in
 July 2012 and directed to pay restitution in the amount of
 $3,590,466.50. Id. Despite these substantial judgments,
 however, the criminal defendants made almost no pay-
 ments toward restitution. By the time Otto Kozak passed
 away in April 2011, he had made restitution payments to-
 taling $255. Id. And as of January 28, 2014, the named
 principals and Freeman had paid a combined total of only
 $7,093.27 toward their obligations. Id.
      In an August 12, 2005 letter to the Adkinses, the Vic-
 tim Witness Coordinator from the United States Attorney’s
 Office (“USAO”) advised them of the charges filed against
 the Donald & Co. brokers and the Adkinses’ “right to full
 and timely restitution as provided in law.” Id. The Ad-
 kinses decided that they did not want to be officially iden-
 tified as victims, however, because (1) the indictment did
 not mention MyTurn stock, which represented the vast
 percentage of their losses; and (2) the Adkinses wanted to
 avoid any accompanying embarrassing public exposure.
 Id. Accordingly, they were not included on the victim lists
 submitted to the federal district court for purposes of
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 12                                    ADKINS v. UNITED STATES

 receiving restitution with respect to their Classica and Elec
 stocks. Id. at 308–09.
     As the case stands, “[c]urrently, there are no funds
 available from the convicted Donald & Co. brokers to pay
 restitution to plaintiffs.” Id. at 310. None of the named
 victims of the Donald & Co. pump-and-dump scheme have
 been fully reimbursed for their losses; indeed, none have
 received anything more than de minimis reimbursement
 and there is no evidence that the convicted Donald & Co.
 brokers or principals possess assets sufficient to pay resti-
 tution or any judgment against them. Id. The Adkinses do
 not have “insurance or [any] other vehicle for recovery for
 [their] loss.” Id.
       C. The Adkinses’ Federal Income Tax Returns
     While the criminal proceedings were pending, the Ad-
 kinses attempted to recoup some of their losses by claiming
 a federal income tax deduction. Id. at 309. Pursuant to
 section 165 of the Internal Revenue Code, taxpayers are
 permitted to deduct a theft loss from their income in the
 year     that    they     sustained    the    loss.        Id.;
 26 U.S.C. § 165(a), (e) (2000); Treas. Reg. §§ 1.165-1(a), (d),
 1.165-8(a) (2001). The Adkinses claimed their theft loss for
 the 2004 taxable year, and then carried back portions of
 their loss to the previous three years. Adkins II, 140 Fed.
 Cl. at 309. Accordingly, in 2006, the Adkinses timely filed
 federal income tax returns reflecting a total theft loss of
 $2,118,725. Id. The Adkinses sought income tax refunds
 of $115,736 for 2004; $24,021 for 2003; $71,621 for 2002;
 and $177,707 for 2001. Id.
     On April 5, 2011, an IRS Appeals Officer concluded
 that, pending the final computations of the Tax Computa-
 tion Specialist, the Adkinses had sustained a theft loss, and
 were entitled to a deduction for the 2004 tax year. J.A.
 1343 ¶ 58. The Appeals Officer determined that the Ad-
 kinses had incurred a theft loss of $2,532,996.01 in 2004.
 Id. at ¶ 59. The proposed settlement, however, was never
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 ADKINS v. UNITED STATES                                      13

 finalized. Adkins II, 140 Fed. Cl. at 310. As reflected in
 the IRS Appeals Officer’s memorandum and attached
 transmittal form, the IRS Office of Appeals lacked jurisdic-
 tion to settle the Adkinses’ claim because the Adkinses had
 filed suit in the United States Court of Federal Claims be-
 fore their appeal was complete. Id. The Adkinses ex-
 plained that they were forced to seek reimbursement in
 this new venue because they feared that their IRS claim
 would be precluded due to the statute of limitations if they
 did not move forward. See Adkins v. United States, No. 16-
 1961, Oral Arg. at 31:16–31:40, available at http://
 oralarguments.cafc.uscourts.gov/default.aspx?fl=2016-
 1961.mp3 (“The IRS looked at this, and Mr. Kaplan [the
 Appeals Officer] was ready to grant the refund, but the
 statute of limitations ran out and we had to file in court.”).
       D. The Claims Court’s Second Determination
      As noted above, the Claims Court initially ruled
 against the Adkinses and we vacated that determination
 on appeal. Adkins I, 856 F.3d at 916. On remand, the par-
 ties filed a joint status report indicating that no further tes-
 timony or evidence was required and proposed a schedule
 for supplemental briefing. Adkins II, 140 Fed. Cl. at 311.
 On October 26, 2018, the Claims Court issued an opinion,
 again concluding that the Adkinses are not entitled to a
 theft loss deduction for the 2004 tax year. Id. at 300.
     The Claims Court assessed the evidence to determine
 whether the Adkinses had any reasonable probability of re-
 covery in 2004. Two related legal principles guided this
 inquiry. First, the Claims Court concluded that, if a rea-
 sonable prospect of recovery was “unknowable” as of the
 year in which the loss was claimed, the taxpayer can never
 bear her burden of establishing that there was no reasona-
 ble prospect of recovery in that tax year. Second, the
 Claims Court assumed that, for a taxpayer to establish the
 absence of a reasonable prospect of recovery, she must af-
 firmatively establish, for each potential avenue of recovery
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 14                                  ADKINS v. UNITED STATES

 placed in issue, that it presented no reasonable probability
 of recovering any amount of her losses, no matter how dif-
 ficult the avenue nor how small the potential recovery. See
 Adkins v. United States, No. 19-1356, Oral Arg. at 26:18–
 27:25. It is through these lenses that the Claims Court as-
 sessed the record before it.
      The Claims Court said there were three ways the Ad-
 kinses, “or any reasonable taxpayer with plaintiffs’
 knowledge,” could have attempted to recover their losses:
 (1) the arbitration claim they filed against Donald & Co.
 and Messrs. Stetson, Volman, and Ingrassia in 2002;
 (2) possible claims against Freeman, Otto Kozak, and Rob-
 ert Kozak; and (3) restitution in conjunction with the crim-
 inal proceedings initiated in 2004 against Donald & Co.’s
 principals and employees regarding the Elec and Classica
 stock fraud. Id. at 316.
     With respect to the Adkinses’ arbitration claim, the
 Claims Court explained that there was no evidence in the
 record that the respondents’ failure to fully respond to dis-
 covery requests foreclosed the Adkinses from proceeding
 with their claim and obtaining an award. Id. at 317. “In
 addition, there [was] no evidence in the record that [the
 Adkinses] sought to determine whether Donald & Co. or
 Messrs. Stetson, Volman, and Ingrassia had any assets
 that could be used to satisfy an arbitration award.” Id.
 And, although a U.S. Attorney had advised Mr. Adkins that
 any arbitration proceedings would be stayed pending reso-
 lution of the criminal proceedings, the Claims Court
 pointed out that there was no evidence of a formal request
 to stay. Id.
      The Claims Court rejected the Adkinses’ argument
 that, once Volman and Ingrassia were indicted for securi-
 ties fraud and money laundering, it was clear that the gov-
 ernment would seize all of the criminal defendants’ assets
 and any relevant documentation, which would foreclose fu-
 ture recovery from them. Id. at 317–18. The Claims Court
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 ADKINS v. UNITED STATES                                     15

 concluded that knowing of an intent to plead guilty is not
 the same as knowing the contents of the plea agreement,
 which remained under seal until August 2005. Id. at 318.
 The court further suggested that the Adkinses could have
 pursued recovery through Odyssey Capital LLC, the hold-
 ing company for Donald & Co.’s house stocks, despite the
 indictments. Id. (“Donald & Co. principals executed trades
 through Odyssey Capital LLC; Donald & Co. accumulated
 profits in bank accounts owed by Odyssey Capital LLC.”).
     With respect to the Adkinses’ potential claims against
 the Kozaks and Freeman, the Claims Court concluded that
 a reasonable taxpayer could have concluded that he had no
 prospect of recovery against the Kozaks but could not have
 come to that same conclusion with respect to Freeman. Id.
 at 319. The court noted that Freeman was a principal of
 Donald & Co., served as an account representative for sev-
 eral of the plaintiffs’ accounts for at least one year, and was
 not charged with any crimes until August 2005. Id. Ac-
 cordingly, the court concluded that the Adkinses’ decision
 to not name Freeman as a respondent in the arbitration
 proceedings was inexcusable. Id. “A reasonable taxpayer
 in plaintiffs’ position would have pursued a claim against
 Freeman in 2002 or thereafter[] and would not have had
 any reason to suspect in 2004 that he would not be able to
 recover at least some of his losses through that claim.” Id.
 at 319–20.
     Finally, the Claims Court faulted the Adkinses for fail-
 ing to pursue restitution awards through the criminal pro-
 ceedings.     Based on the record, the Claims Court
 determined that the Adkinses did not know in 2004 the
 charges to which the criminal defendants would be plead-
 ing guilty or any details regarding the expected restitution
 awards relating to the Elec and Classica stock frauds. Id.
 at 320. The court then found that, with the exception of
 the Kozaks, the Adkinses did not know whether the crimi-
 nal defendants had the wherewithal to satisfy their resti-
 tution obligations. Id. at 321. The court found insufficient
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 16                                   ADKINS v. UNITED STATES

 evidence that the Adkinses attempted to ascertain the fi-
 nancial condition of any of the criminal defendants, or that
 the government seized any of the criminal defendants’ as-
 sets prior to September 2005 “such that the assets would
 be unavailable for restitution.” Id.
      Based on these three possible avenues of recovery, the
 Claims Court concluded that the Adkinses failed to meet
 their burden of proving that they were entitled to claim a
 theft loss deduction because “a reasonable taxpayer in
 plaintiffs’ position could not have known, in 2004, whether
 he had a reasonable prospect of recovering at least some of
 his losses.” Id. at 316 (emphasis added). See also id. at 318
 (“A reasonable taxpayer . . . could not have known in 2004
 whether he had a reasonable prospect of recovery.”); id. at
 320 (“[The Adkinses’] reasonable prospect of recovery from
 Mr. Freeman was simply unknowable in 2004.”); id. at 321
 (“[P]laintiffs’ reasonable prospect of recovering their losses
 was simply unknowable by the end of 2004.”).
     The Adkinses timely appealed the Claims Court’s deci-
 sion.
                        II. DISCUSSION
     “The Claims Court’s legal determinations, including in-
 terpretations of statutes and regulations, are subject to de
 novo review,” and “its factual determinations are reviewed
 for clear error.” Tinton Falls Lodging Realty, LLC v.
 United States, 800 F.3d 1353, 1357–58 (Fed. Cir. 2015).
      The Adkinses allege that the Claims Court (1) erred in
 its finding that the Adkinses failed to establish that they
 lacked a reasonable prospect of recovery; (2) misconstrued
 the appropriate standard for 26 U.S.C. § 165(e), 26 C.F.R.
 § 1.165-1(d)(3), and 26 C.F.R. § 1.165-1(d)(2)(i); (3) improp-
 erly relied on the government’s affirmative defenses;
 (4) improperly ignored Rev. Proc. 2009-20 regarding the ef-
 fect of the criminal indictment; and (5) abused its discre-
 tion when it denied the Adkinses’ motion to compel.
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 ADKINS v. UNITED STATES                                   17

     For the reasons described below, we agree with the Ad-
 kinses that the Claims Court misconstrued the relevant le-
 gal standard and, accordingly, erred in its finding that the
 Adkinses failed to establish they lacked a reasonable pro-
 spect of recovery in 2004.
            A. The Claims Court Misconstrued
        26 U.S.C. § 165(e) and 26 C.F.R. § 1.165-1(d)
     The Adkinses argue that the Claims Court miscon-
 strued 26 U.S.C. § 165(e) and 26 C.F.R. §§ 1.165-1(d)(2)(i)
 and (d)(3) because it allegedly ruled that “abandonment of
 a claim must be shown with reasonable certainty even
 when there was no reasonable likelihood of success.” Ap-
 pellant Br. 1. Though it had required that showing before
 the first appeal, the Claims Court did not treat abandon-
 ment as the factual predicate for the Adkinses’ loss date on
 remand. See Adkins II, 140 Fed. Cl. at 318–21. Despite
 their mischaracterization, however, we agree with the Ad-
 kinses that the Claims Court misconstrued the relevant le-
 gal standard when it premised its holding on the erroneous
 assumptions that a taxpayer cannot establish lack of a
 “reasonable prospect of recovery” if (1) the prospect of re-
 covery is “unknowable”; and (2) the taxpayer has not ex-
 hausted all avenues of recovery, at least those identified by
 the government as potential avenues, regardless of the
 likelihood of success or cost associated with pursuit of the
 potential avenues. See id. at 316.
       i. Treasury Regulation § 1.165-1(d)(2)(i) Does
          Not Require a Showing of “Knowability”
     The Claims Court concluded that the Adkinses could
 not establish lack of a “reasonable prospect of recovery”—
 not because it affirmatively found evidence of a prospect
 but because any such prospect of recovery was “unknowa-
 ble” in 2004. See also id. at 318 (“A reasonable tax-
 payer . . . could not have known in 2004 whether he had a
 reasonable prospect of recovery.”), 320 (“[The Adkinses’]
 reasonable prospect of recovery from Freeman was simply
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 18                                   ADKINS v. UNITED STATES

 unknowable in 2004.”), 321 (“[P]laintiffs’ reasonable pro-
 spect of recovering their losses was simply unknowable by
 the end of 2004.”). The Claims Court’s reliance on this “un-
 knowable” standard was legally erroneous.
      This “unknowable” language comes from Jeppsen v.
 Commissioner, 128 F.3d 1410 (10th Cir. 1997). 4 In
 Jeppsen, a Tenth Circuit panel majority affirmed a Tax
 Court ruling that the taxpayer was not entitled to claim a
 deduction on his 1987 federal income tax return for the loss
 of money stolen by his stockbroker Barker. 128 F.3d at
 1411. Having noted that Jeppsen actually ended up recov-
 ering his losses in full in 1995, after seven years of litiga-
 tion against Barker and others, including Barker’s
 successive employers (E.F. Hutton and PJ & H), the major-
 ity laid out the bases on which the Tax Court had found
 that, in 1987, Jeppsen had a reasonable prospect of recov-
 ery:
      [B]y the end of 1987:(1) Barker had engaged in con-
      duct that was both illegal and actionable; (2)
      Jeppsen knew what Barker had done; (3) Jeppsen
      began shopping for lawyers immediately and never
      at any time ceased attempting to recover his
      money; (4) Barker’s former employers PJ & H and
      E.F. Hutton were proper co-defendants, both of
      whom had more than sufficient assets available to
      satisfy any judgment awards against them; and (5)
      Jeppsen filed suit in March, 1988, several months
      before he filed his 1987 tax return.
 Id. at 1419.

      4   This language is echoed in one other case, Vincen-
 tini v. Comm’r, 429 F. App’x 560 (6th Cir. 2011), but the
 court did not rely on a finding of “unknowable” prospects
 when concluding that the taxpayer failed to establish that
 there was no reasonable prospect of recovery.
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 ADKINS v. UNITED STATES                                    19

     The majority upheld the Tax Court’s determination,
 even while recognizing that “several countervailing facts
 indicate that Jeppsen’s prospects of recovery were never,
 until he prevailed, 100 percent.” Id. For example, the par-
 ties Jeppsen sued consistently disclaimed any liability, no
 lawyer would take Jeppsen’s case on a contingency basis,
 and several lawyers—including the firm he eventually re-
 tained—informed Jeppsen that the case would be lengthy
 and expensive, with no guarantee of winning. Id. Notwith-
 standing those facts, the majority explained, Jeppsen ac-
 tively pursued his suit for years (until success), the suit
 was not based on a meritless legal theory (it ultimately suc-
 ceeded), and his ultimate recovery did not depend on the
 outcome of some unforeseeable intervening event. Id.
 There were, moreover, no criminal charges or forfeiture
 counts brought against the defendants in Jeppsen’s civil
 suit. Id. The Tenth Circuit’s ruling, therefore, was based
 on a multiplicity of facts quite different from those in this
 case.
     Before reviewing the finding of a reasonable prospect
 of recovery, the majority discussed the governing legal
 standards. In the course of that discussion, the majority
 stated that “if Jeppsen’s prospect of recovery was simply
 unknowable as of December 31, 1987, then Jeppsen would
 not be entitled to take the theft loss deduction in 1987.” Id.
 at 1418. That statement, phrased as a conditional, appears
 to be dictum, i.e., not necessary to the judgment. In up-
 holding the Tax Court’s finding that “as of Dec. 31, 1987,
 Jeppsen had a reasonable prospect of recovering” his loss,
 id. at 1417, the majority did not rely on the quoted state-
 ment, or declare that the prospects in Jeppsen’s case were
 “unknowable” in 1987 but instead set forth the multiple
 facts, recited above, providing substantial enough indica-
 tions of reasonable recovery prospects as of 1987, id. at
 1419.
     The Jeppsen dissent, besides disagreeing with the re-
 sult, took issue with the “simply unknowable” language.
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 20                                  ADKINS v. UNITED STATES

 The dissent interpreted the majority’s statement that an
 “unknowable” prospect of recovery will always doom a loss
 claim as an implicit requirement of affirmative proof that
 the loss will never be recovered, and it characterized that
 as placing an “insurmountable barrier on the taxpayer.”
 Id. at 1419–20 (Kelly, J., dissenting). The dissent reasoned
 that the fact that Jeppsen ultimately recovered his losses
 did not mean he had a reasonable prospect of recovery in
 the years leading up to his civil victory. Id.
     We agree with the Jeppsen dissent as to the inappro-
 priateness of an unknowability standard. The governing
 statute and regulations do not require affirmative proof
 that a taxpayer’s loss will never be recovered. The regula-
 tion is clear: a taxpayer must only demonstrate that he had
 no reasonable prospect of recovery at the time. Treas.
 Reg. §§ 1.165-1(d)(2)(i), (d)(3). A conclusion that the pro-
 spect of recovery was “unknowable” replaces that inquiry
 with a term that is at best confusingly unhelpful and at
 worst incorrect. It is confusingly unhelpful because on its
 face it leaves wholly undefined the crucial questions of
 what it means to “know” the prospect of recovery (to what
 degree of certainty?) and what it means for the prospect to
 be unknowable (understanding that pursuit of possibilities
 of recovery vary in cost and likelihood of bearing fruit).
 And the “unknowable” standard is a departure from the
 “reasonable prospect” regulation if the recovery prospect
 will always be deemed “unknowable” when the court can
 identify uncertainties in the information available as of the
 tax year at issue.
     Although it is possible that the Jeppsen majority did
 not intend to require a taxpayer to prove that “the loss
 would never be recovered,” the Claims Court’s application
 of this language had that effect here. The Claims Court
 never concluded that there was a reasonable prospect of re-
 covery in 2004, or in 2003 or 2005 for that matter. Rather,
 the Claims Court repeatedly stated that a reasonable tax-
 payer “could not have known in 2004 whether he had a
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 ADKINS v. UNITED STATES                                   21

 reasonable prospect of recovery” because such a prospect
 “would have been simply unknowable.” Adkins II, 140 Fed.
 Cl. at 318–22. In fact, the Claims Court doubled down on
 this rule when it found that any reasonable taxpayer “could
 not have known at the end of 2004 the impact that the plea
 agreements and SEC orders would have on the financial
 resources of Messrs. Stetson, Volman, and Ingrassia.” Id.
 at 318.
      The Claims Court’s reliance on this “unknowable”
 standard as a basis for its conclusion was erroneous be-
 cause the correct inquiry focuses on a “reasonable prospect
 of recovery.” The taxpayer does bear the burden of proving
 his entitlement to a theft loss deduction, Interstate Transit
 Lines v. Comm’r, 319 U.S. 590, 593 (1943), and the question
 as to whether there was a reasonable prospect of recovery
 for a particular tax year requires a binary answer: yes or
 no. 5 But this new standard employed by the Claims
 Court—whether the prospect of recovering a taxpayer’s
 losses is unknowable—ignores the plain language of the
 regulation, heightens the evidentiary burden on the tax-
 payer, and punishes the victim for any factual ambiguity.
     We also reject the government’s argument that the
 Claims Court simply applied our holding in Adkins I.

     5    Consistent with the general applicability of a pre-
 ponderance standard of proof in civil matters, Herman &
 MacLean v. Huddleston, 459 U.S. 375, 390 (1983); United
 States v. Regan, 232 U.S. 37, 49 (1914), the taxpayer must
 make that showing only by a preponderance of the evi-
 dence, see Louisville Store of Liberty, Ky., Inc. v. United
 States, 376 F.2d 314, 318 (Ct. Cl. 1967); Dargie v. United
 States, 742 F.3d 243, 245 (6th Cir. 2014). Under that
 standard, the taxpayer must show simply that it was more
 likely than not that there was no reasonable prospect of re-
 covery. See Herman & MacLean, 459 U.S. at 390 (prepon-
 derance means more likely than not).
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 22                                   ADKINS v. UNITED STATES

 Adkins v. United States, No. 19-1356, Oral Arg. at 16:25–
 18:25. The Claims Court’s opinion did not find that the
 taxpayers failed to demonstrate no reasonable prospect of
 recovery in 2004. Rather, the Claims Court held that the
 presence of uncertainty will always foreclose a showing of
 “no reasonable prospect of recovery.” Such a holding is at
 odds with providing “common-sense incentives for victims
 of theft” to try to recover their losses from the perpetrators
 of the fraud before asking for tax relief. Adkins I, 856 F.3d
 at 918. Taxpayers would be incentivized to abandon ave-
 nues of recovery at the first sign of difficulty, rather than
 make good-faith efforts to recover losses. Id. (“To the ex-
 tent that it is rendered more difficult to succeed on a loss
 claim in years subsequent to discovery [because they fear
 whether recovery is knowable], taxpayers will be dissuaded
 from these good-faith efforts.”). 6

      6   The government erroneously characterizes our
 holding in Adkins I as espousing “two alternate formula-
 tions:” one pertaining to a reasonable prospect of recovery,
 and another pertaining to a reasonable certainty that there
 will be no recovery. Adkins v. United States, No. 19-1356,
 Oral Arg. at 16:58–17:45 (“This court gave two alternate
 formulations.”). As we explained in the prior appeal,
 Treasury Regulation § 1.165-1(d)(3) does not set forth two
 different standards. Adkins I, 856 F.3d at 917–18. It sets
 forth a single test: the proper year in which to claim a loss
 is the first year in which no reasonable prospect of recovery
 exists anymore, starting with the year of discovery. Id. at
 917. When we explained, in a footnote, that this single test
 could be “equivalently simplified” to mean “the first year in
 which it can be ascertained with reasonable certainty that
 there will be no recovery,” we were not creating an “alter-
 nate” test. The government’s attempts to rely on this
 “equivalent” language to avoid the legal standard clearly
 set forth in Adkins I are unpersuasive.
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 ADKINS v. UNITED STATES                                   23

     Accordingly, we conclude that the Claims Court mis-
 construed the governing statute and regulation when it
 concluded that the Adkinses could not establish a reasona-
 ble prospect of recovery because that prospect was “un-
 knowable.”
       ii. A Taxpayer Need Not Exhaust All Avenues
            of Recovery, Regardless of Relevance
                  or Likelihood of Success
     The Claims Court also suggested that, for a taxpayer
 to prove that there is “no reasonable prospect of recovery”
 for a particular tax year, he must pursue every conceivable
 avenue of recovery, no matter the cost to the victim or the
 likelihood of success. In this case, the Claims Court sug-
 gested that the Adkinses should have pursued possible ar-
 bitration claims against Freeman, and restitution claims
 arising from the criminal proceedings against Ingrassia,
 Volman, and Stetson. Id. at 319–20. According to the
 Claims Court, the fact that certain Donald & Co. principals
 realized “significant profits from the pump-and-dump
 scheme” and owned attached assets superseded any weight
 afforded to the Adkinses’ knowledge that all of the criminal
 defendants intended to enter guilty pleas to the public in-
 dictments. Id. at 318–20. We disagree.
     A taxpayer need not exhaust every possible avenue of
 recovery in order to prove “no reasonable prospect of recov-
 ery.” Outside of the criminal defendants, the taxpayer
 likely has the greatest knowledge about the facts of his case
 and is the person best-equipped to decide, with the advice
 of counsel, which claims are worth pursuing. Notably, the
 Claims Court pointed to possible avenues of recovery but
 did not calculate either the cost of pursuing that recovery
 or attempt to balance those costs against the likelihood of
 victory. While a taxpayer is not free to put her head in the
 sand and ignore meaningful avenues of recovery, it would
 be a tremendous waste of resources and time for the tax-
 payer to pursue every option, regardless of the likelihood of
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 24                                   ADKINS v. UNITED STATES

 success or degree of difficulty. As the Supreme Court ex-
 plained in United States v. S.S. White Dental Manufactur-
 ing Co., “a loss may become complete enough for deduction
 without the taxpayer’s establishing that there is no possi-
 bility of an eventual recoupment . . . . The Taxing Act does
 not require the taxpayer to be an incorrigible optimist.”
 274 U.S. 398, 402–03 (1927).           Treasury Regulation
 § 1.165-1(d)(2)(i) acknowledges this reality. It makes clear
 that we may ascertain whether a reasonable prospect of re-
 covery exists based on an abandonment of a claim for reim-
 bursement. Treas. Reg. § 1.165-1(d)(2)(i). If the IRS
 believed, as the Claims Court clearly did, that a taxpayer
 must follow through on every possible road to recovery, it
 would not have propagated a regulation that allows for
 abandonment. 7
          B. The Adkinses Had No Reasonable Prospect
      of Recovering Any Portion of Their Theft Loss in 2004
      The determination of a reasonable prospect of recovery
 is a question of foresight and of fact, to be determined upon
 an examination of all facts and circumstances. Treas. Reg.
 § 1.165-1(d)(2)(i). A reasonable prospect of recovery may
 exist “when the taxpayer has bona fide claims for recoup-
 ment from third parties or otherwise, and when there is a
 substantial possibility that such claims will be decided in
 his favor.” Ramsay Scarlett & Co. v. Comm’r, 61 T.C. 795,
 807 (1974), aff’d, 521 F.2d 786 (4th Cir. 1975). What it
 means for something to be decided in a taxpayer’s “favor”
 necessarily must take into consideration what the tax-
 payer’s net recovery might be, considering the costs in-
 volved in pursuit of any potential avenue for possible
 recovery. A taxpayer’s reasonable prospects of recovery
 may be ascertained “by a settlement of the claim, by an

       7 As we explained in Adkins I, however, a taxpayer
 need not “abandon” a claim to establish “no reasonable pro-
 spect of recovery.” Adkins I, 856 F.3d at 918.
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 ADKINS v. UNITED STATES                                    25

 adjudication of the claim, or by an abandonment of the
 claim.” Treas. Reg. § 1.165-1(d)(2)(i). But as we explained
 in the prior appeal, the question of whether a “reasonable
 prospect of recovery” exists in a particular taxable year is
 a “holistic” inquiry. Adkins I, 856 F.3d at 919. “[T]he ex-
 istence of an ongoing lawsuit or arbitration is only one fac-
 tor to be considered among many.” Id. at 919–20. Upon a
 review of the record, we conclude that the trial court’s find-
 ings on remand are clearly erroneous. United States v. U.S.
 Gypsum Co., 333 U.S. 364, 395 (1948).
     The record demonstrates that, in 2004, the Adkinses
 had no reasonable prospect of recovery. By the end of 2004,
 the Adkinses’ pending arbitration proceeding against Stet-
 son, Volman, and Ingrassia was stagnant. The Adkinses
 had yet to receive a response to their discovery requests,
 were informed by a U.S. Attorney that all pending civil lit-
 igation would be stayed until disposition of the criminal
 cases, and had been advised by their arbitration attorneys
 that they “could not go forward [with the arbitration] given
 the lack of discovery documents and pending criminal in-
 dictment against Donald [& Co.] brokers.” J.A. 1345; Ad-
 kins II, 140 Fed. Cl. at 304.
      Even if there were a positive arbitration outcome for
 the Adkinses, the evidence as of 2004 suggested that the
 respondents would not have had the ability to pay for the
 Adkinses’ losses. In May 2004, a federal grand jury in the
 Eastern District of New York returned an indictment
 against several principals and employees of Donald & Co.,
 including Ingrassia, Volman, and the Kozaks, for conspir-
 acy to commit securities fraud, securities fraud, and money
 laundering. Adkins II, 140 Fed. Cl. at 305. Only a few
 months later, Stetson was also charged with conspiracy to
 commit securities fraud and money laundering conspiracy.
 Id. at 306. The criminal indictments were public and con-
 tained two criminal forfeiture allegations, which stated
 that the government intended to seek forfeiture of any
 (1) assets “constituting or derived from proceeds obtained
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 26                                   ADKINS v. UNITED STATES

 directly or indirectly as a result of such offenses”; and
 (2) property involved in the offenses Id. at 305–06. And, in
 addition to the plain text of the indictments, the Adkinses
 had been informed by their arbitration attorneys and Otto
 Kozak that the criminal defendants intended to plead
 guilty. Adkins II, 140 Fed. Cl. at 307.
     There was also little chance that the respondents
 would have secured additional employment capable of pay-
 ing this theoretical arbitration award. In 2004, the SEC
 banned Volman, Ingrassia, and Stetson from acting as bro-
 kers or dealers in securities. Id. In effect, by 2004, the
 Adkinses were left with an arbitration that was unlikely to
 result in any outcome, and a hypothetical outcome that was
 unlikely to result in any relief. As noted above, the state of
 affairs prompted the Adkinses to tell their attorneys that
 they did not want to incur any more out-of-pocket costs in
 pursuit of such an unlikely benefit. Id. at 304.
     Despite this overwhelming evidence, the Claims Court
 maintained that a reasonable taxpayer “could not have
 known in 2004 whether he had a reasonable prospect of re-
 covery” because there was no evidence that the U.S. Attor-
 ney had actually requested the arbitration proceedings be
 stayed, or that, by the end of 2004, the government had ac-
 tually seized any of the criminal defendants’ assets and
 documents. Id. at 318. The court also criticized the Ad-
 kinses for not “attempt[ing] to ascertain the financial con-
 dition of any of the criminal defendants,” id. at 318–19,
 321, noting that the Donald & Co. principals and employ-
 ees accumulated profits in bank accounts owned by Odys-
 sey Capital LLC. To the Claims Court, it was not enough
 that the criminal defendants’ indictments indicated that
 the government would seek forfeiture of “any property con-
 stituting or derived from proceeds obtained directly, or in-
 directly as a result of such offenses,” and that all
 defendants intended to plead guilty. Id. at 306. The court
 suggested that the Adkinses should have independently
 verified the financial circumstances of each criminal
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 ADKINS v. UNITED STATES                                   27

 defendant, in order to confirm that there was no “reasona-
 ble prospect of recovery.” Id.
     The Claims Court required too much. There is no evi-
 dence, from the Adkinses or the government, that the arbi-
 tration proceedings would have gone forward. In 2003, the
 Adkinses’ arbitration attorneys explained that “they could
 not go forward . . . given the lack of discovery documents
 and pending criminal indictment against Donald [& Co.]
 brokers”—an explanation which the NASD panel accepted.
 J.A. 589–90; J.A. 1345. And, as Donald & Co. had yet to
 reply to a single discovery request and was no longer in
 business, acquiring the necessary documents to proceed to
 an arbitration hearing seemed unlikely. J.A. 589. Indeed,
 the government admitted as much. Adkins v. United
 States, No. 19-1356, Oral Arg. at 26:17–17:02 (“[The
 Court]: [The Adkinses] couldn’t do any civil discovery to get
 information relating to the criminal defendants because
 the FBI wouldn’t have allowed it. [The government]: Well
 during the—that very well may be true, your Honor . . . . ”).
 We reject the Claims Court’s suggestion that the Adkinses
 needed to embark on a fishing expedition for confirmation
 of the respondents’ assets. The question of whether the
 named principals had the assets to cover the Adkinses’
 losses was answered by the forfeiture penalties discussed
 in the public indictments, the Adkinses’ knowledge that all
 the Donald & Co. defendants intended to plead guilty, and
 the knowledge that the SEC had taken away their liveli-
 hoods. On the off chance that any of the respondents had
 any available assets squirreled away in their Odyssey Cap-
 ital LLC accounts—as the Claims Court implied—there
 was no reason for the taxpayers to believe that those funds
 would have been untouched by the criminal forfeiture pen-
 alties. The government had declared an intent to seize not
 only all financial assets related to the defendants’ securi-
 ties fraud but also those related to the money laundering
 conspiracy implicating Ingrassia, Volman, and Stetson. In-
 deed, the government itself admitted in a joint stipulation
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 28                                   ADKINS v. UNITED STATES

 that there was “no evidence that any of the criminal defend-
 ants . . . have substantial assets of the magnitude to pay
 restitution or to pay any judgment against them.” J.A.
 1343 (emphasis added).
     The Adkinses’ failure to name Freeman in their arbi-
 tration claim also does not suggest that they still had a rea-
 sonable prospect of recovery in 2004. As explained above,
 a defrauded taxpayer need not exhaust every avenue of re-
 covery. Possible avenues of recovery have varying likeli-
 hoods of success and financial burdens. In this case, the
 Adkinses had the opportunity to name Freeman in their
 arbitration claim but did not believe they had a good faith
 basis to pursue a claim against him. The Adkinses ex-
 plained that they did not believe he had a substantial role
 in the MyTurn fraudulent scheme or recoverable assets.
 See Adkins v. United States, No. 19-1356, Oral Arg. at
 5:35–6:33. The 2004 indictments, which charged the
 named principals but did not include Freeman, supported
 the Adkinses’ assumption that Freeman was not a signifi-
 cant player in the fraud. Adkins II, 140 Fed. Cl. at 305.
 We reject the Claims Court’s reasoning that the Adkinses’
 exercise of this discretion precludes a showing of “no rea-
 sonable prospect of recovery.”
     Nor were the Adkinses required to pursue an unlikely
 restitution claim for their losses in the Elec and Classica
 stocks to establish no reasonable prospect of recovery.
 There is no dispute that the Adkinses could have filled out
 an “Affidavit of Loss” in hopes that they might receive some
 compensation for their smaller losses in the Elec and Clas-
 sica stocks. But the Adkinses chose not to do so, not only
 because the indictment did not mention MyTurn stock (the
 vast majority of their losses), but also because they did not
 believe there would be any restitution available after the
 defendants forfeited their assets in accordance with their
 guilty pleas. Even if the Adkinses might have recovered
 some of their losses via restitution—in the unlikely event
 that the government reneged on its declared intent to seize
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 ADKINS v. UNITED STATES                                   29

 all the defendants’ assets or the criminal defendants ob-
 tained other funds that might satisfy a restitution order—
 we see no basis for deeming the prospect of such a recovery
 a reasonable one. A “remote possibility” of recovery is not
 enough; there must be “a reasonable prospect of recovery
 at the time the deduction was claimed . . . .” Rainbow Inn,
 Inc. v. Comm’r, 433 F.2d 640, 644 (3d Cir. 1970).
     For these reasons, we conclude that the Claims Court
 clearly erred when it determined that the Adkinses failed
 to demonstrate that they lacked a “reasonable prospect of
 recovery” in 2004.
      Because we agree with the Adkinses that the Claims
 Court (1) misconstrued the governing statute and regula-
 tion; and (2) erred when it concluded that the Adkinses
 failed to establish a lack of a reasonable prospect of recov-
 ery in 2004, we need not reach their alternative arguments
 regarding the government’s affirmative defenses, Revenue
 Procedure 2009-20, and their motion to compel.
                      III. CONCLUSION
     For these reasons, the Claims Court’s opinion and or-
 der dismissing the Adkinses’ complaint with prejudice is
 reversed. We remand for a calculation of the Adkinses’ re-
 funds for the tax years implicated by the 2004 loss claim.
                REVERSED AND REMANDED
                            COSTS
     Costs to appellants.