Hawaii v. Comm'r

T.C. Memo. 2011-134

UNITED STATES TAX COURT

OSCAR C. AND ARANKA M. HAWAII, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12718-08L. Filed June 15, 2011.

Alvaro G. Velez, for petitioners.

Louis H. Hill, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: The petition in this case was filed in

response to a Notice of Determination Concerning Collection
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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.

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.
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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.
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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.

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.
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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
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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
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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).
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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.
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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, affd. 306 Fed. Appx. 464 (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 (10th Cir. 1997), affg. T.C.

Memo. 1995-342; 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
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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 (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

pretenses, and other forms of guile. Edwards v. Bromberg, 232

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; 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 (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
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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.
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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

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 reasonable prospect
of recovery.
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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. 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 (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.
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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; 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
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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.