In Uncategorized on 10/19/2020 at 15:58

Michael Giambrone, 2020 T. C. Memo. 145, filed 10/19/20, was robbed; so was his brother Will. The perp, one Farkas, was sentenced to thirty years for conspiracy and bank, wire, and securities fraud. 2020 T. C. Memo. 145, at p. 4. Farkas plundered the impounds at Mike’s and Will’s mortgage company.

Mike and Will claim Rev. Proc. 2009-20, 2009-14 I.R.B. (4/6/09) provides them a safe harbor to take heavy-duty Section 165 theft losses; IRS says no.

Judge Patrick J. (“Scholar Pat”) Urda sides with IRS. No facts disputed. They wuz robbed. And Section 165 takes in everything from Criminal Law 101: larceny, robbery, embezzlement, trick or device, criminal fraud, and statutory crimes.

But Mike and Will can’t marry Rev. Proc. 2009-20 to Section 165.

“As a preliminary matter, we note that revenue procedures are not binding on this Court. Nor do they, as a general matter, confer substantive rights on taxpayers. Courts ‘have refused to invalidate the Commissioner’s determinations arising out of his failure to abide’ by revenue procedures. Thus, even if the Giambrones were to establish that the IRS had erred in its application of Rev. Proc. 2009-20, supra, we would not be required to conclude that they are entitled to the claimed theft loss deductions.” 2020 T. C. Memo. 145, at p. 9. (Citations omitted).

Of course, if IRS induces reliance on a Rev. Proc. and then reneges, that’s abuse of discretion (see 2020 T. C. Memo. 145, at p. 11, footnote 7); but that didn’t happen here.

To get to the Rev. Proc. 2009-20 safe harbor, one must report the “qualified loss” in the tax return “for the discovery year”, which is defined as the year in which an indictment, information, or criminal complaint is filed against the lead figure. 2020 T. C. Memo. 145, at p. 10. Mike and Will didn’t. The reported two, three, and four years after Farkas was indicted.

“The Giambrones do not dispute that they failed to request safe harbor treatment on their 2010 Federal tax returns. They assert, however, that the definition of discovery year set forth in Rev. Proc. 2009-20, supra, is incompatible with section 165(e) and section 1.165-1(d)(3), Income Tax Regs., and that they qualify for the safe harbor under the broader terms of the Code and the accompanying regulation.” 2020 T. C. Memo. 145, at p. 10.

See above. The Rev. Proc. don’t need no Section 165 comportment.

“The Giambrones are laboring under a fundamental misconception: Rev. Proc. 2009-20, supra, is not required to comport with the terms of section 165 (or the accompanying regulation). It 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. The Giambrones cannot gain the benefit of it without adhering to its conditions the IRS imposed.” 2020 T. C. Memo. 145, at p 11.

But all is not lost. Judge Scholar Pat only rules that Rev. Proc. 2009-20 doesn’t apply. “We leave all other questions, including whether the Giambrones qualify for the section 165 theft loss deductions, to be decided by further proceedings in these cases.” 2020 T. C. Memo. 145, at p. 11.

Readers with exceptionally long memories may remember Greg and Sue Raifman tried a variation on Rev. Proc. 2009-20 when they got gazumphed in the ClassicStar horseshow. See my blogpost “Too True to Be Good,” 7/3/18.

The real aim of Rev. Proc. 2009-20 was to throw a lifeline to the victims of Ponzis and Madoffs.

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