Oscar C. Hawaii, et ux. v. Commissioner, TC Memo 2011-134 ,
Code Sec(s) 165; 6159; 6330 7122.
OSCAR C. AND ARANKA M. HAWAII, Petitioners v. COMMISSIONER
OF INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s):
165; 6159; 6330 7122
Docket: Docket
No. 12718-08L.
Date Issued:
06/15/2011
Judge: Opinion by
RUWE
HEADNOTE
XX.
Reference(s): Code Sec. 165 ; Code Sec. 6159 ; Code Sec.
6330 Code Sec. 7122
Syllabus
Official Tax Court Syllabus
Counsel
Alvaro G. Velez, for petitioners.
Louis H. Hill, for respondent.
Opinion by RUWE
MEMORANDUM FINDINGS OF FACT AND OPINION
The petition in this case was filed in response to a Notice
of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of
determination) for petitioners' taxable year 2005. 1
On September 3, 2007, respondent sent petitioners separate
Letters 1058, Final Notice of Intent to Levy and Notice of Your Right to a
Hearing, regarding their unpaid income tax liability for 2005. In response,
petitioners timely mailed a Form 12153, Request for a Collection Due Process or
Equivalent Hearing, in which they sought an in-person hearing. At their hearing
with the Internal Revenue Service's (IRS) Appeals Office, petitioners submitted
a Form 1040X, Amended U.S. Individual Income Tax Return, that indicated that
their total tax should be reduced to $10,612 from the $56,486 reported on their
original return. 2 On the basis of the information in the amended return,
petitioners requested a streamlined installment agreement on the adjusted
balance due. In their amended return petitioners claimed that they are entitled
to a theft loss deduction for the taxable year 2005. Petitioners contended that
this deduction would reduce their tax liability below $25,000, which would
allow them to qualify for a streamlined installment agreement.
The Appeals officer did not agree with petitioners' claim
that their 2005 tax liability should be reduced. On April 22, 2008, respondent
sent to petitioners a notice of determination sustaining the proposed levy
action. The notice of determination indicated that respondent rejected
petitioners' request for a streamlined installment agreement because respondent
had determined that petitioners' balance due exceeded the $25,000 limit for
that payment option. Petitioners never received a notice of deficiency, nor did
they have a prior administrative or judicial opportunity to challenge the
amount of the deficiency, and respondent has acknowledged that the underlying
liability is properly at issue. See sec.
6330(c)(2)(B); Montgomery v. Commissioner,
122 T.C. 1, 8 (2004).
The issues for decision are: (1) Whether petitioners
incurred a theft loss of $100,000, and (2) whether respondent abused his
discretion by not accepting petitioners' request for an installment agreement.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
stipulation of facts, the supplemental stipulation of facts, and the attached
exhibits are incorporated herein by this reference.
At the time the petition was filed, petitioners resided in
Ohio.
During 2005 Oscar C. Hawaii (petitioner) owned and operated
a small trucking business. By early 2005 petitioner, who was then over 70, had
accumulated retirement savings of approximately $300,000, which he kept in an
individual retirement account with Charles Schwab. 3
In January 2005 petitioner was approached about making an
investment in ProCore Group, Inc. (ProCore), 4 by Carol Popp, who was one of
ProCore's primary shareholders. Mr. Popp and petitioner attended the same
church, and it was there that Mr. Popp initially spoke with petitioner about
investing with ProCore. Petitioner told Mr. Popp that he could not invest in
ProCore because his money was tied up in his retirement account. Petitioner
also told Mr. Popp that he was not knowledgeable about investments and that
Charles Schwab handled his investments. Mr. Popp assured petitioner that an
investment in ProCore would be advantageous.
Mr. Popp invited petitioner to attend a meeting with some of
the other officers and shareholders of ProCore so that they could further
discuss investment opportunities with him. At the meeting petitioner was
introduced to George Csatary, ProCore's chief financial officer. Petitioner was
informed that Mr. Csatary was a certified public accountant. Messrs. Popp and
Csatary convinced petitioner that ProCore was an exceptional investment that
would allow him to make considerable short-term profits. Petitioner was neither
given a prospectus nor shown any of ProCore's financial documents or Securities
and Exchange Commission (SEC) filings. Petitioner decided to invest $100,000 of
his retirement savings in ProCore. Petitioner made the investment because he
trusted Mr. Popp, since they attended church together.
On January 24, 2005, Mr. Csatary arranged for a wire transfer
of $100,000 from petitioner's retirement account to ProCore. Petitioner told
Messrs. Popp and Csatary that he needed to receive either stock certificates or
a return of his funds within 60 days in order to avoid paying tax on the
withdrawal from his retirement account.
By mid-March 2005 petitioner had not received either the
return of his funds or stock certificates. Petitioner became increasingly
concerned that his investment was in jeopardy. This prompted petitioner to hire
an attorney to help him recover the money he had invested. On March 17, 2005,
petitioner, through his attorney, sent ProCore a letter demanding the return of
his investment. In response to petitioner's demand letter, ProCore presented
petitioner with stock certificates for 3,333,333 restricted and unregistered
shares in the company. Petitioner was told that the shares had been delivered
to him at a price established in a private placement memorandum previously
registered with the SEC. After receiving the stock certificates, petitioner
gave them to Charles Schwab. Charles Schwab has never informed petitioner, or
led him to believe, that the ProCore stock certificates were fraudulent or
otherwise defective.
In May 2005 petitioners' attorney was instructed to file
suit against various individuals involved with ProCore in an effort to recover
petitioners' money. Petitioners paid the attorney $7,500 in exchange for his
representation. The attorney sent a letter to ProCore dated May 26, 2005,
demanding that petitioners' funds be returned to them. The attorney also
drafted a complaint alleging that ProCore and its officers had committed
securities fraud and negligence and breached their fiduciary duties. The
complaint was never filed.
At a later date during 2005 petitioner invested an additional
$150,000 in Luhan Investment Securities, which was another venture promoted by
some of the individuals behind ProCore. The outcome of this later investment is
not evident from the record. Petitioner did not contend that this later
investment resulted in any additional deductible losses during 2005.
In 2008 petitioner filed a complaint with the Ohio
Department of Commerce's Division of Securities requesting that ProCore's
officers be investigated and criminally prosecuted for defrauding him. The Division
of Securities declined to pursue petitioner's complaint.
In 2009 petitioner hired and paid $15,000 to another
attorney to file suit in Ohio against ProCore's officers and its successor
entity. On March 10, 2009, a complaint was filed in the U.S. District Court for
the Northern District of Ohio against the surviving entity of ProCore—Universal
Property and Development Acquisition Corp.—as well as other named defendants
alleging that petitioners were the victims of securities fraud, breaches of
fiduciary duties, negligence, fraud, and breach of contract. After the filing
of the 2009 complaint, petitioner's counsel informed him that most of the
claims in the complaint were barred by the statute of limitations in Ohio and
that he was uncertain as to whether petitioner's money could be retrieved even
if his case was favorably adjudicated.
OPINION
Section 6330(a)(1)
provides that no levy may be made on any property or right to property of any
person unless the Secretary has notified the person in writing of his or her
right to a hearing under this section before the levy is made. The notice must
include in simple and nontechnical terms, inter alia, the right of the person
to request a hearing to be held by the IRS Office of Appeals. See sec. 6330(a)(3)(B).
At the hearing the person may raise any relevant issue
relating to the unpaid tax or the proposed levy, including appropriate spousal
defenses, challenges to the appropriateness of collection actions, and offers
of collection alternatives. Sec.
6330(c)(2)(A). Section 6330(c)(2)(B)
further provides that the person may also raise at the hearing challenges to
the existence or amount of the underlying tax liability for any tax period if
the person did not receive any statutory notice of deficiency for the tax
liability or did not otherwise have an opportunity to dispute the tax
liability. Where the validity of the underlying tax liability is at issue in a
collection review proceeding, the Court will review that issue de novo.
Thornberry v. Commissioner, 136 T.C. __, __ (2011) (slip op. at 12); Davis v.
Commissioner, 115 T.C. 35, 39 (2000).
However, we generally review other issues regarding the collection action
determined by the Appeals Office for abuse of discretion. Thornberry v.
Commissioner, supra at __ (slip op. at 12); Goza v. Commissioner, 114 T.C. 176 (2000). Section 6330(d)(1) confers jurisdiction on
the Tax Court to review the determination of the Appeals officer.
It is uncontested that the merits of the underlying income
tax liability are properly at issue. Therefore, we must first decide
petitioners' claim that they are entitled to a loss deduction of $100,000.
Section 165(a)
permits a deduction against ordinary income for “any loss sustained during the
taxable year and not compensated for by insurance or otherwise.” For
individuals, the deduction is limited to: (1) Losses incurred in a trade or
business; (2) losses incurred in any transaction entered into for profit though
not connected to a trade or business; or (3) losses of property not connected
with a trade or business or a transaction entered into for profit, if such
losses arise from “fire, storm, shipwreck, or other casualty, or from theft.”
(Emphasis added.) See sec. 165(c);
Lockett v. Commissioner, T.C. Memo.
2008-5 [TC Memo 2008-5], affd. 306 Fed.
Appx. 464 [103 AFTR 2d 2009-301] (11th Cir. 2009). A taxpayer may deduct a
theft loss in the year the loss is sustained.
Sec. 165(a). Generally, a theft loss is treated as sustained during the
taxable year in which the taxpayer discovers it. , Sec. 165(a), (e). However, even after a
theft loss is discovered, if a claim for reimbursement exists during the year
of the loss with respect to which there is a reasonable prospect of recovery,
then a theft loss is treated as “sustained” only when it can be ascertained
with reasonable certainty whether such reimbursement for the loss will be
obtained. Jeppsen v. Commissioner, 128
F.3d 1410, 1414 [80 AFTR 2d 97-7710] (10th Cir. 1997), affg. T.C. Memo. 1995-342 [1995 RIA TC Memo
¶95,342]; , Secs. 1.165-1(d)(2)(i),
(3), 1.165-8(a)(2), Income Tax Regs.
Stated differently, a reasonable prospect of recovery will postpone the theft
loss deduction until such time as the prospect no longer exists. Petitioners
have the burden of proving they have sustained a theft loss. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111 [12 AFTR 1456] (1933).
I. Theft The term “theft” under section 165 is a word of general and broad
meaning that includes any criminal appropriation of another's property,
including theft by swindling, false Edwards v. Bromberg, 232 pretenses, and
other forms of guile. F.2d 107, 110 (5th Cir. 1956); sec. 1.165-8(d), Income Tax Regs. The exact
nature of a theft, whether it be larceny, embezzlement, obtaining money by
false pretenses, or other wrongful misappropriation of property of another, is
of little importance provided it constitutes a theft. See Edwards v. Bromberg,
supra; Grothues v. Commissioner, T.C.
Memo. 2002-287 [TC Memo 2002-287]; see also
sec. 1.165-8(d), Income Tax Regs. Whether a theft loss has been
established depends upon the law of the State where the alleged theft occurred.
Bellis v. Commissioner, 540 F.2d 448,
449 [38 AFTR 2d 76-5546] (9th Cir. 1976), affg.
61 T.C. 354 (1973); Luman v. Commissioner, 79 T.C. 846, 860 (1982); Paine v.
Commissioner, 63 T.C. 736, 740 (1975),
affd. without published opinion 523 F.2d 1053 (5th Cir. 1975). A criminal
conviction is not necessary in order for a taxpayer to demonstrate a theft
loss. See Monteleone v. Commissioner, 34
T.C. 688, 692-694 (1960). Instead, a taxpayer must prove a theft occurred under
applicable State law by only a preponderance of the evidence and not beyond a
reasonable doubt. See Allen v. Commissioner,
16 T.C. 163, 166 (1951) (”If the reasonable inferences from the evidence
point to theft, the proponent is entitled to prevail. If the contrary be true
and reasonable inferences point to another conclusion, the proponent must
fail.”).
Petitioners resided in Ohio when the transaction at issue
occurred, and the solicitation of petitioner's investment was initiated within
Ohio. Therefore, we will decide whether the evidence presented allows for us to
reasonably infer that a theft occurred under Ohio law. Ohio Rev. Code Ann. sec.
2913.02 (LexisNexis 2010) provides:
(A) No person, with purpose to deprive the owner of property
or services, shall knowingly obtain or exert control over either the property
or services in any of the following ways:
(1) Without the consent of the owner or person authorized to
give consent;
(2) Beyond the scope of the express or implied consent of
the owner or person authorized to give consent;
(3) By deception;
(4) By threat;
(5) By intimidation. (B)(1) Whoever violates this section is
guilty of theft.
From the evidence and testimony before us, we are unable to
conclude that the transaction in issue resulted in a theft. Petitioners have
failed to satisfy their burden of proving that the transaction was a theft
rather than merely a poor investment decision.
At trial petitioner implied throughout his testimony that
his investment was stolen but provided no specific evidence in support of that
conclusion. The record indicates that petitioners made a $100,000 payment for
an investment in ProCore, in exchange for which they received 3,333,333 shares
of stock in the company. 5 There is no evidence that the 3,333,333 shares of
stock ProCore issued are not valid and legitimate shares of stock. Petitioner
testified that the shares had been accepted by Charles Schwab and that he was
never notified that the shares were in any way irregular or deficient.
Petitioners provided no evidence, other than petitioner's
testimony, to establish that the 3,333,333 shares of ProCore stock were
valueless in 2005 or that they ever became valueless. In fact, in 2009
petitioner paid an attorney $15,000 to file suit against ProCore's successor
and other individuals in an attempt to recover their investment. 6
In sum, the record before us is insufficient to determine
that petitioners were the victims of theft. As a result, we hold that
petitioners have failed to meet their burden of proving that a theft occurred
during 2005.
II. Installment Agreement We review respondent's Appeals
Office determination with respect to collection alternatives for abuse of
discretion. See McCall v. Commissioner,
T.C. Memo. 2009-75 [TC Memo 2009-75]. In reviewing for abuse of
discretion, we do not conduct an independent review of whether any collection
alternative proposed by a taxpayer was acceptable or substitute our judgment
for that of the Appeals Office. Id. Rather, we must uphold the Appeals Office
determination unless it is arbitrary, capricious, or without sound basis in
fact or law. See id.; see also Murphy v. Commissioner, 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 [98 AFTR 2d 2006-7853] (1st Cir.
2006). In making a determination following a collection due process hearing,
the Appeals officer must consider: (1) Whether the requirements of any
applicable law or administrative procedure have been met; (2) any relevant
issues raised by the taxpayer; and (3) whether the proposed collection action
balances the need for efficient collection with legitimate concerns that the
collection action be no more intrusive than necessary. Sec. 6330(c)(3). The Appeals officer
considered those factors, and there is no evidence to indicate that he abused
his discretion in making his determination.
During their face-to-face conference with the Appeals
officer, petitioners requested that they be granted a streamlined installment
agreement to satisfy the balance due on their account. Respondent denied
petitioners' request because their liability exceeded $25,000.
Section 6159(a)
authorizes the Secretary to enter into written agreements with any taxpayer
under which the taxpayer is allowed to make payment on any tax in installment
payments if the Secretary determines that an agreement will facilitate full or
partial collection of the liability. The Commissioner has the discretion to
accept or reject an installment agreement proposed by a taxpayer. See sec. 301.6159-1(b)(1)(i), Proced. &
Admin. Regs. A streamlined installment agreement is an installment agreement
that may be processed quickly and without financial analysis or managerial
approval and is available for taxpayers whose aggregate unpaid balance of
assessments is $25,000 or less. Internal Revenue Manual (IRM) pt. 5.14.5.1(1)
(Mar. 30, 2002); IRM pt. 5.14.5.2(1) (July 12, 2005). Because petitioners'
outstanding liability exceeded $25,000, they were not eligible to enter into a
streamlined installment agreement. See Shaw v. Commissioner, T.C. Memo. 2010-210 [TC Memo 2010-210];
McCall v. Commissioner, supra; see also IRM pt. 5.14.1.2(4), 5.14.5.2(1) (Sept.
26, 2008). Respondent's Appeals Office verified that “the requirements of any
applicable law or administrative procedure have been met” as required by section 6330(c)(1) and balanced the need for
the efficient collection of taxes with petitioners' concern that the collection
action be no more intrusive than necessary as required by section 6330(c)(3)(C). Therefore, we have no
basis upon which to find that respondent abused his discretion in rejecting
petitioners' request for a streamlined installment agreement.
To reflect the foregoing, Decision will be entered for
respondent.
1
Unless otherwise
indicated, all section references are to the Internal Revenue Code as amended,
and all Rule references are to the Tax Court Rules of Practice and Procedure.
2
Petitioners'
original 2005 Federal income tax return is not part of the record before the
Court. All figures used are based on petitioners' amended return for 2005.
3
At the time of
trial, petitioner no longer received income from the trucking business.
4
ProCore Group, Inc.
was at all relevant times a California corporation licensed to do business in
the State of Florida.
5
Petitioner testified
that after his investment in ProCore, at some later point during 2005, he
decided to invest an additional $150,000 in Luhan Investment Securities,
another venture backed by the same individuals who had introduced him to
ProCore.
6
Paying
an attorney $15,000 in 2009 to institute a lawsuit to recover his investment
raises an inference that petitioner believed as recently as 2009 that there was
a reasonwww.irstaxattorney.com 888-712-7690
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