Taghadoss v. Commissioner of Internal Revenue, T.C. Summary Opinion 2008-44 (U.S.T.C. 4/29/2008)
| Decision Date | 29 April 2008 |
| Docket Number | No. 25116-06S.,25116-06S. |
| Parties | MEHDI TAGHADOSS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year in issue and all Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a $25,545 deficiency in petitioner's 2003 Federal income tax. The issue for decision is whether petitioner is entitled to claim a $1,344,863 casualty or theft loss deduction for the loss of value in his WorldCom stock options and stock holdings (securities).
Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits received into evidence are incorporated herein by reference. At the time the petition was filed, petitioner resided in Virginia.
Petitioner was employed by the WorldCom Group (WorldCom) for 17 years. During the course of petitioner's employment, he received options to purchase shares of WorldCom stock that he exercised on October 31, 2001, for a "hold". Petitioner also acquired shares of WorldCom stock on the open market, through WorldCom's section 401(k) retirement plan, and through WorldCom's employee stock purchase plan (ESPP).
Unfortunately for the shareholders of WorldCom, it filed a chapter 11 bankruptcy petition on July 21, 2002. Fraudulent accounting practices by certain WorldCom officials contributed to WorldCom's bankruptcy filing. Bernard Ebbers, WorldCom's chief executive officer, was convicted of violating the securities laws for fraud, conspiracy, and filing false financial statements with the Securities and Exchange Commission (SEC). Two other WorldCom officials pleaded guilty to fraud and conspiracy.
The bankruptcy filing and the fraudulent accounting practices caused the value of WorldCom securities to significantly decline. Because the value of petitioner's securities had severely declined, he claimed a $1,344,863 deduction for a casualty or theft loss on his 2003 Form 1040, U.S. Individual Income Tax Return. Petitioner's claimed casualty or theft loss consisted of the following: (1) $144,863 for "35,318 shares of WorldCom stock purchased"; (2) $450,000 for "17 years' worth of max 401(k) contribution with company match all in WorldCom stock"; and (3) $750,000 for "10 years' worth of stock options, fully vested". Petitioner claimed a $26,853 refund of all tax withheld on account of his claimed casualty or theft loss.
On October 31, 2003, the bankruptcy court confirmed WorldCom's plan of reorganization, and it emerged from bankruptcy on April 20, 2004. The plan of reorganization provided for the cancellation of certain junior interests, such as petitioner's, on its "Effective Date"; i.e., April 20, 2004. The bankruptcy court was aware that WorldCom's restated consolidated balance sheets for yearend 2001 showed that WorldCom was insolvent for that period. See In re WorldCom, Inc. No. 02-13533 (Bankr S.D.N.Y. Oct. 31, 2003) ().1
After filing his 2003 Form 1040, petitioner received a statement from his broker (account statement) for the period March 1-28, 2004, listing the current price and value for his 31,083 securities as follows:
Quantity Current price Current value
1,086 $.021 $23.67
9,999 .021 217.98
8,900 .021 194.02
9,999 .021 217.98
1,099 .021 23.96
On May 12, 2004, petitioner's broker issued a notification to petitioner that his 31,083 securities were no longer transferrable because WorldCom had closed its transfer books.
Respondent initiated an examination of petitioner's 2003 Form 1040 and disallowed petitioner's $1,344,863 claimed casualty or theft loss deduction, determining a $25,545 deficiency.
The Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer has the burden to prove that the determinations are in error. Rule 142(a); Welch v Helvering, 290 U.S. 111, 115 (1933). But the burden of proof on factual issues that affect a taxpayer's tax liability may be shifted to the Commissioner if the taxpayer introduces credible evidence with respect to the issue. See sec. 7491(a)(1). Petitioner has not alleged or proven that section 7491(a) applies; accordingly, the burden remains on him. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) ().
Section 165(a) allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. With respect to individuals, deductions for losses are limited to losses: (1) Incurred in a trade or business; (2) incurred in a transaction for profit; or (3) of property not connected with a trade or business or a transaction entered into for profit if the losses arise from fire, storm, shipwreck, or other casualty, or from theft. Sec. 165(c). In order for the loss to be deductible, the loss must be evidenced by a closed and completed transaction, fixed by an identifiable event, and actually sustained during the taxable year. Sec. 1.165-1(b), Income Tax Regs.
In Furer v. Commissioner, T.C. Memo. 1993-165, affd. without published opinion 33 F.3d 58 (9th Cir. 1994), the taxpayers claimed a casualty loss on account of their securities' decline in value that was attributable to a stock market crash. The Court disallowed the loss stating: "In order for a loss to qualify as a casualty loss it ordinarily must be the result of physical damage to the taxpayer's property." Id.
Similar to Furer, there is no physical damage to petitioner's securities. Rather, petitioner's losses arise from the misconduct of certain WorldCom officials, WorldCom's bankruptcy filings, and the liquidation of his securities pursuant to WorldCom's plan of reorganization. Therefore, petitioner did not sustain a casualty loss within the meaning of section 165(c)(3). See Matheson v. Commissioner, 54 F.2d 537, 539 (2d Cir. 1931), affg. 18 B.T.A. 674 (1930) (); Coleman v. Commissioner, 76 T.C. 580, 589 (1981) (). Accordingly, respondent's determination denying petitioner's $1,344,863 casualty loss is sustained.
A loss arising from theft is treated as sustained "during the taxable year in which the taxpayer discovers such loss." Sec. 165(e); secs. 1.165-1(d)(3), 1.165-8(a)(2), Income Tax Regs. The term "theft" includes larceny, embezzlement, and robbery. Sec. 1.165-8(d), Income Tax Regs. Whether the fraudulent acts of corporate officials constitute a theft is determined by the law of the State where the loss was sustained, which the Court assumes occurred within petitioner's State of residence. Compare Wanchek v. Commissioner, T.C. Memo. 2007-366, with Viehweg v. Commissioner, 90 T.C. 1248 (1988), Paine v. Commissioner, 63 T.C. 736, 740 (1975), affd. without published opinion 523 F.2d 1053 (5th Cir. 1975), Knowles v. Commissioner, T.C. Memo. 1991-57, and McCullough v. Commissioner, T.C. Memo. 1990-653.
Under Virginia law, the term "larceny" is defined as "'the wrongful or fraudulent taking of personal goods of some intrinsic value, belonging to another, without his assent, and with the intention to deprive the owner thereof permanently.'" Foster v. Commonwealth, 606 S.E.2d 518, 519 (Va. Ct. App. 2004) (quoting Dunlavey v. Commonwealth, 35 S.E.2d 763, 764 (Va. 1945)), affd. 623 S.E.2d 902 (Va. 2006). The term also includes embezzlement, false pretenses, and receiving stolen property knowing it to be stolen. See Va. Code Ann. secs. 18.2-95, -96, -108, -111, -178 (2008); see also Bruhn v. Commonwealth 559 S.E.2d 880, 883 n.2 (Va. Ct. App. 2002) (), affd. 570 S.E.2d 866 (Va. 2002). Intent is an essential element of each, and if the theft is accomplished by false pretenses, the false pretenses must have induced the person to part with money or property. See Va. Code Ann. secs. 18.2-95, -96, -108, -111, -178; see also Parker v. Commonwealth, 654 S.E.2d 580, 582 (Va. 2008).
Although certain WorldCom officials caused the publication of fraudulent financial statements and filed the statements with the SEC, the Court finds that petitioner has failed to prove that he suffered a theft under Virginia law. There is no evidence in the record establishing that WorldCom officials wrongfully took petitioner's money or property (i.e., the value of his securities) with the requisite intent to deprive him permanently thereof. Moreover, petitioner did not purchase his securities from the WorldCom officials; rather, his acquisitions were conducted through brokers on the open market, through WorldCom's section 401(k) retirement plan, and through WorldCom's ESPP. The WorldCom officials had no direct dealings with petitioner. In this respect the Court finds this case indistinguishable from Paine v. Commissioner, supra, where a theft loss deduction was denied. See also Barry v. Commissioner, T.C. Memo. 1978-215 (). But see ...
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