Freeman Law | The Tax Court in Brief

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Freeman Law | The Tax Court in Brief

The Tax Court in Brief

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

The Week of October 17 – October 23, 2020


Giambrone v. Comm’r, T.C. Memo. 2020-145 | October 19, 2020 | Urda, J. | Dkt. Nos. 11109-18 & 11153-18

Short SummaryMichael Giambrone and his brother, William Giambrone, worked together in the mortgage business.  In 1999, they founded Platinum Community Bank (Platinum).  Platinum’s operations included mortgage, home equity, and consumer and commercial real estate lending.  However, from its inception, Platinum was not profitable.

Accordingly, the Giambrones sought additional investment from various companies owned by Lee Farkas.  Mr. Farkas managed Platinum but ultimately Platinum was required to be placed into receivership by the Federal Deposit Insurance Corporation.  Later, Mr. Farkas was charged and convicted with conspiracy and bank, wire, and securities fraud.

The Giambrones claimed theft loss deductions of 95% of the value of their investments in Platinum on their 2012 federal income tax return.  The bases for their deductions was that they qualified for “an optional safe harbor . . . for taxpayers that experienced losses in certain investment arrangements discovered to be criminally fraudulent.”  See Rev. Proc. 2009-20.  The IRS disallowed the theft loss deductions under the Revenue Procedure and issued notices of deficiency.  The Giambrones filed timely petitions with the United States Tax Court.

Key Issue:  Whether the Giambrones are entitled to theft loss deductions under Rev. Proc. 2009-20.

Primary Holdings

  • The Giambrones are not entitled to the theft loss deductions under Rev. Proc. 2009-20 because: (1) Mr. Farkas was indicated in 2010, which is the discovery year; and (2) thus, the Giambrones were required to claim the safe harbor treatment under Rev. Proc. 2009-20 on that tax year.

Key Points of Law:

  • The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Peach Corp. v. Comm’r, 90 T.C. 678, 681 (1988).  Under Rule 121(b), the Tax Court may grant partial summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law.  See Elec. Arts, Inc. v. Comm’r, 118 T.C. 226, 238 (2002).
  • A taxpayer is entitled to deduct uncompensated losses resulting from theft. 165(a), (c), (e).  To qualify for a theft loss deduction, a taxpayer must prove:  (1) the occurrence of a theft; (2) the amount of the theft loss; and (3) the year in which the taxpayer discovers the theft loss.  Sec. 165(a), (b), (c), (e).  “As used in section 165, the term ‘theft’ is a word of general and broad connation, intended to cover any criminal appropriation of another’s property, including theft by larceny, embezzlement, obtaining money by false pretenses, and any other form of guile.”  Littlejohn v. Comm’r, T.C. Memo. 2020-42; see also Bellis v. Comm’r, 61 T.C. 354, 357 (1973), aff’d, 540 F.2d 448 (9th Cir. 1976); Treas. Reg. § 1.165-8(d).  “Any loss arising from theft shall be treated as sustained during the tax year in which the taxpayer discovers such loss.”  Sec. 165(e); Treas. Reg. § 1.165-1(d)(3).
  • In April 2009, the IRS published Rev. Rul. 2009-9 and Rev. Proc. 2009-20 with respect to the proper treatment of losses from certain investment arrangements later discovered to be fraudulent. The former addresses the tax treatment of losses from Ponzi schemes in the light of section 165 and its accompanying regulations.  The latter provides “an optional safe harbor which qualified investors . . . may treat a loss as a theft loss deduction when certain conditions are met.”  Proc. 2009-20.
  • The safe harbor is made available to a “qualified investor” who experiences a “qualified loss.” Proc. 2009-20.  A qualified loss is defined to include a loss “from a specified fraudulent arrangement in which, as a result of the conduct that caused the loss” the lead figure was charged by indictment or information with the commission of “fraud, embezzlement or a similar crime that, if proven, would meet the definition of theft for purposes of § 165.”  Id.  A qualified investor is defined as one qualified to deduct theft losses under section 165 who “did not have actual knowledge of the fraudulent nature of the investment arrangement prior to it becoming known to the general public.”  Id.
  • The Revenue Procedure permits the deduction of 95% of a qualified investor’s “qualified investment.”   However, Rev. Proc. 2009-20 specifies that the safe harbor “must” be claimed on the “federal income tax return for the discovery year.”  The “discovery year” is defined as “the taxable year of the investor in which the indictment, information, or compliant is filed.  Id.
  • Revenue procedures are not binding on the Tax Court. See, e.g., Raifman v. Comm’r, T.C. Memo. 2018-101; 6611, Ltd. v. Comm’r, T.C. Memo. 2013-49.  Nor do they, as a general matter, confer substantive rights on taxpayers.  See Capitol Fed. Sav. & Loan Ass’n v. Comm’r, 96 T.C. 204, 216-17 (1991).  Courts “have refused to invalidate the Commissioner’s determinations arising of his failure to abide” by revenue procedures.  Capitol Fed. Sav. & Loan Ass’n v. Comm’r, 96 T.C. at 217.
  • Proc. 2009-20 is an exercise of administrative discretion on the part of the IRS, offering beneficial treatment for categories of theft losses meeting certain well-defined conditions. Taxpayers cannot gain the benefit of it without adhering to the conditions imposed by the IRS.  See, e.g., Beech Trucking Co. v. Comm’r, 118 T.C. 428, 444 (2002).

InsightThe Giambrone decision shows that taxpayers who seek to fall within a Revenue Procedure must strictly comply within the requirements of that revenue procedure.

Coleman v. Comm’r, T.C. Memo. 2020-146 | October 22, 2020 | Lauber, J. | Dkt. No. 19540-17

Short SummaryMr. Coleman was a compulsive gambler.  In 2014, he received $350,241 of gambling winnings, reported to him on 160 separate Forms W-2G, Certain Gambling Winnings. Mr. Coleman did not file a federal income tax return for 2014.  Accordingly, the IRS prepared a substitute for return and issued him a notice of deficiency.

Key Issue:  Whether Mr. Coleman:  (1) has substantiated gambling losses in excess of $350,241, the amount of his gambling winnings as reported to the IRS; and (2) is entitled to a deduction on Schedule C, Profit or Loss from Business, for the purchase of a laptop computer.

Primary Holdings

  • Coleman has substantiated gambling losses in excess of his gambling winnings because: (1) his financial records support his contention that he did not have gambling winnings during 2014; (2) he maintained a modest lifestyle (apart from gambling) and, in fact, his family suffered some financial hardships in 2014; and (3) his expert supports his contention that he suffered gambling winnings.  However, Mr. Coleman has not met the heightened substantiation requirements of section 274(d) for deducting the cost of his computer.

Key Points of Law:

  • Gross income includes all income from whatever source derived, including gambling winnings. 61(a); Bauman v. Comm’r, T.C. Memo. 1993-112.  For a taxpayer who does not engage in gambling as a trade or business, losses from wagering transactions are allowable as an itemized deduction, but “only to the extent of the gains from such transactions.”  Sec. 165(d).
  • Deductions are a matter of legislative grace, and taxpayers must prove entitlement to all deductions claimed. Rule 142(a); INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992).  Taxpayers are required to identify each deduction, show that they have meet all relevant requirements, and keep books or records to substantiate their expenses.   6001; Roberts v. Comm’r, 62 T.C. 834, 836-37 (1974); Treas. Reg. § 1.6001-1(a).
  • In some circumstances, when a taxpayer establishes that he paid or incurred a deductible expense but does not establish its precise amount, the Tax Court may estimate the amount allowable. See Cohan v. Comm’r, 39 F.2d 540 (2d Cir. 1930).  In order for the Court to do this, it must have some basis upon which an estimate can be made.  See Williams v. U.S., 245 F.2d 559, 560 (5th 1957); Vanicek v. Comm’r, 85 T.C. 731, 743 (1985).
  • In past cases taxpayers have substantiated gambling losses with such evidence as “casino ATM receipts, canceled checks made payable to casinos, . . . and credit card statements stating that cash was advanced at the casinos.” Jackson v. Comm’r, T.C. Memo. 2007-373.  The Tax Court has also considered transactions appearing on a taxpayer’s bank statements, the taxpayer’s lifestyle (modest or luxurious), and his overall financial position.  See Gagliardi, 95 T.C.M. (CCH) at 1050; Doffin v. Comm’r, T.C. Memo. 1991-114.  In Gagliardi, 95 T.C.M. (CCH) at 1052, the Tax Court considered expert testimony regarding the taxpayer’s likelihood of having net gambling winnings given the frequency of his gambling.
  • Section 162(a) allows a deduction for ordinary and necessary expenses paid or incurred in a trade or business. The taxpayer bears the burden of proving his entitlement to a deduction.  6001; INDOPCO, 503 U.S. at 84.
  • Section 274(d) imposes relatively strict substantiation requirements for deductions claimed for (among other things) “listed property.” As in effect during 2014, “listed property” included “any computer.”  280F(d)(4)(A)(iv).  These heightened substantiation requirements did not apply, however, if the computer was used exclusively at a regular business establishment.  See sec. 280F(d)(4)(B); Treas. Reg. § 1.280F-6(b)(5).  A regular business establishment could include “a portion of the dwelling unit which is exclusively used on a regular basis . . . as the [taxpayer’s] principal place of business.”  Sec. 280A(c)(1)(A).
  • No deduction is allowed under section 274(d) unless the taxpayer substantiates, by adequate records or by sufficient evidence corroborating his own statements, the amount, time and place, and business purpose for each expenditure. Treas. Reg. § 1.274-5T(a), (b) and (c).  A taxpayer’s uncorroborated testimony is insufficient to meet the substantiation requirements of section 274(d).  See Haskins v. Comm’r, T.C. Memo. 2019-87, aff’d 820 F. App’x 994 (11th Cir. 2020).

InsightThe Coleman decision is a great reminder to taxpayers  on the rules regarding the deduction of gambling losses.  In these cases, taxpayers should ensure that they are able to show through convincing evidence that their losses exceeded their gambling winnings for the year.

Representation in Tax Audits & Appeals

If you need assistance in managing the audit process, Freeman Law can help taxpayers navigate state tax laws.  We offer value-driven services and provide practical solutions to complex tax issues. Schedule a consultation or call (214) 984-3410 to discuss our tax representation services.