In Uncategorized on 08/07/2012 at 17:21

That’s the claim of Gregory Raifman and Susan Raifman in T. C. Memo. 2012-228, filed 8/7/12, and Judge Wells is prepared to listen, even though IRS wants Greg and Sue tossed on summary judgment.

See my blogpost “It Might Be a Rip-Off But It Isn’t a Theft”, 6/16/11. There, Oscar Hawaii couldn’t show that anyone made away with his stock or that his stock was worthless, so no theft loss. But here, it’s a different story.

Greg’s and Sue’s financial whiz Joltin’ Joe Ramos hooked them up with the improbably-named but larcenously-inclined Yuri Debevc Derivium. Derivium, through his eponymous financial corporation, claimed to convert big capital gains on appreciated stock into non-taxable loan proceeds.

In a manner reminiscent of Mid-Coast Financial (see my blogpost “Game Ends In No Score”, 5/30/12), Derivium lends Greg and Sue 90% of millions’ worth of the stock they pledge to Derivium, which gets the stock registered in the name of Derivium; loan terms are  principal to be repaid in three years with interest accruing. Derivium supposedly is going engage in hedging transactions via its overseas siblings and subsidiaries, so they can return the stock untouched by human hands when Greg and Sue repay the loan with interest.

Of course, it’s the classic ring-a-ring-rosie. Derivium hedges nothing, sells the stock, sends the 90% to Greg and Sue, keeps the 10% for itself, using part thereof to play Ponzi with other suckers. Finally, Greg and Sue demand back their stock, which has increased in value, at loan maturity, but by that time Derivium is over the hill and far away.

Greg and Sue sue all and sundry, but get only “a paltry sum” from Joltin’ Joe, and a soldier’s farewell from Wachovia Securities, that cleared the stock sale.

When Greg and Sue get a deficiency from IRS for a year subsequent to the Derivium swindle,  they claim they’d have a loss carryforward to offset the deficiency, if the Derivium deal was in fact theft.

Now we remember from poor ol’ Oscar Hawaii that State law decides whether there’s been a theft loss. Greg and Sue are Californians, and the Bear Republic has a unitary theft statute, combining all the good old law school criminal law 101, everything from classic robbery to embezzlement to larceny by trick or device.

The case comes up on a CDP, and even though IRS concedes that the AO should have considered the carryforward but didn’t, IRS doesn’t want to send the case back to Appeals, and asks for Rule 121 summary judgment.

IRS doesn’t get it.

First, de novo review of liability, as Greg and Sue never got the chance to dispute their tax liability with respect to one of their deals with Derivium.

Second, the question of loan vs. sale. Judge Wells finds a basketful of cases holding that the Derivium deals were sales, not loans. Title to the stock passed to Derivium under the documents; Derivium could do what it wanted with the stock, ostensibly in aid of its hedging operations (nudge-nudge, wink-wink) and it did; it dumped the stock, took its cut, sent the suckers some money, and jumped the hedge, leaving the suckers to whistle for their stock.

Every other Derivium customer who tried to claim “loan” got told that they had sold their shares, with a call option to cause Derivium to sell the shares back to them for the “principal and interest”. If they could find Derivium.

But Greg and Sue take a different tack. “Petitioners contend that the. . . Loan was neither a loan nor a sale but rather a theft. Section 165(a) allows a taxpayer to deduct any loss sustained during the taxable year that is not compensated for by insurance or otherwise. Section 165(c) limits the deduction for individuals to losses incurred in a trade or business, losses incurred in a transaction engaged in for profit, and casualty and theft losses. Under section 165(e), ‘any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss.’ A taxpayer is not entitled to deduct a loss if he has a claim for reimbursement and there is a reasonable prospect of recovery. Sec. 1.165-1(d)(2)(i), (3), Income Tax Regs. A reasonable prospect of recovery exists when the taxpayer has a bona fide claim for recoupment from third parties or otherwise and there is a substantial possibility that such claims will be decided in the taxpayer’s favor. The amount of a casualty or theft loss is generally limited to the lesser of the property’s reduction in fair market value or the property’s adjusted tax basis. Secs. 1.165-7(b)(1), 1.165-8(c), Income Tax Regs. Taxpayers bear the burden of proving both the occurrence of a theft within the meaning of section 165 and the amount of the loss.” T. C. Memo. 2012-228, at pp. 16-17.

Bringing California law into play, Judge Wells finds that, because Greg and Sue tried to get their stock back at the stated maturity of the “loan”, rather than just walking away, or rolling the “loan” over, or trying to get their stock back before maturity, Greg and Sue have spelled out a case of theft. Now all they have to do is prove it.

“From the beginning, according to Mr. Raifman’s affidavit, Derivium misrepresented the nature of the transaction into which petitioners entered. As far as we can tell, Derivium never engaged in a plausible hedging strategy. Instead, its alleged actions appear to be tantamount to a massive bet that the price of all of its clients’ stocks would fall, ‘hedged’ only by a Ponzi scheme. Mr. Raifman also states in his affidavit that petitioners relied on Derivium’s misrepresentations when they chose to enter into the . . . Loan program and that they were defrauded. Indeed, it appears that the failure of Derivium to honor petitioners’ options to repurchase their ValueClick stock cost petitioners millions of dollars. On the basis of the statements in Mr. Raifman’s affidavit, we conclude that the instant case is distinguishable from . . . the other prior Derivium cases. Accordingly, we conclude that there remains a dispute over genuine issues of material fact concerning the existence of a theft loss under California law.” T.C. Memo. 2012-228, at pp. 22-23. (Footnote and citation omitted.)

Now this case was decided on summary judgment, that is, on the papers and not after a trial with witnesses. A party can only get summary judgment if there are no material questions of fact for a trial; and the party opposing summary judgment gets the benefit of the doubt if they can show a disputed fact other than just a denial.

So Greg and Sue will get a trial, where they can try to prove the exact extent of their loss, and that, when they claimed the loss on their 1040, they had no reasonable prospect of recovery from Derivium, Joltin’ Joe or Wachovia.

And Judge Wells delivers a semi-rebuke to IRS, by way of a farewell footnote: “We are puzzled by respondent’s choice not to seek remand of petitioners’ case to the Appeals Office, despite respondent’s concession that the Appeals Office erred by failing to consider whether petitioners’ carryback with respect to their claimed theft loss during 2006 was within the scope of the Appeals hearing. Accordingly, we will order respondent to wait until he has concluded the examination of petitioners’ amended 2006 return before proceeding with the instant case in this Court. In that regard, we will also order the parties to submit a status report advising the Court when the examination of petitioners’ 2006 return has been concluded.” T. C. Memo. 2012-228, footnote 10, at p.24.

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