WELLS, Judge.
This case is before the Court on respondent's motion for summary judgment pursuant to Rule 121.
The facts set forth below are based upon examination of the pleadings, moving papers, responses, and attachments, and they are not in dispute. Petitioners resided in California at the time they filed their petition.
During 2003, petitioners' financial adviser, Joe Ramos of Private Consulting Group, provided them with information about Derivium Capital, LLC (Derivium), a South Carolina entity owned and controlled by Charles Cathcart and Yuri Debevc. Derivium
On August 5, 2003, petitioners signed a Master Loan Agreement and blank schedule A-1 with WITCO, Ltd. (WITCO), an entity that Derivium told petitioners was a foreign lender. WITCO was owned and controlled by Mr. Cathcart and Mr. Debevc. The Master Loan Agreement stated:
During early September 2003, petitioners signed another schedule A-1 that listed information about the collateral, loan amount, and loan term. The schedule A-1 defined the "Loan Term" as three years from the date the loan proceeds are distributed. Additionally, it stated that the estimated value of the collateral was $2,537,600, that the loan amount would be 90% of that value, and that the interest rate would be 11.25%, compounded annually and due at maturity. Petitioners renewed the loan on the maturity date, but if the value of the collateral on that date did not equal or exceed 90% of the payoff amount, petitioners would have to pay additional interest at the time of renewal.
On August 19, 2003, petitioners authorized the transfer of 320,000 shares of ValueClick stock from their account to WITCO's account. WITCO received the shares of ValueClick stock in two installments: 159,000 and 161,000 shares on August 28 and September 22, 2003, respectively. On August 28 and 29, 2003, WITCO sold 159,000 shares of ValueClick stock. The transfer and sale of petitioners' shares of ValueClick stock was conducted through WITCO's account at Wachovia Securities, LLC (Wachovia). On a date not disclosed in the record but before September 22, 2003, WITCO distributed $1,260,410.52 to petitioners. On September 22, 2003, WITCO sold 161,000 shares of ValueClick stock. On September 29, 2003, WITCO distributed $1,362,804.48 to petitioners.
During 2004, petitioners entered into two more 90% Stock Loan transactions with entities related to Derivium. On July 6, 2004, through their wholly owned entity Helicon Investments, Ltd. (Helicon), petitioners signed a Master Loan Agreement with Optech, Ltd. (Optech). The terms of that Master Loan Agreement were identical to the terms of the WITCO Master Loan Agreement in all material respects. The estimated value of the collateral was $3,540,000, the anticipated loan amount was 86% of the value of the collateral,
During November 2004, petitioners, through their wholly owned entity Gekko Holdings, LLC (Gekko), entered into another Master Loan Agreement with Optech. The terms of that Master Loan Agreement are not disclosed in the record,
During the terms of the loans, Optech sent petitioners quarterly and yearly account statements reporting the balance of the loans, the accrued interest, and the current value of the underlying collateral. Petitioners were not obligated to make payments during the term of the loans, and they did not make any payments with respect to either the principal of or the interest on the loans. During the term of each of the loans, the share price of ValueClick stock increased so that the value of petitioners' underlying collateral greatly exceeded the amount of the principal and interest on each loan.
On August 10, 2006, petitioners completed an Optech form electing to renew or refinance their September 29, 2003, loan for another term of three years.
After September 29, 2006 and before the end of the calendar year, petitioners initiated an investigation of Optech, WITCO, Derivium, and Messrs. Cathcart and Debevc. Petitioners discovered that Derivium had been sued by a number of other borrowers and that it had filed for bankruptcy during 2005. Additionally, during the course of their 2006 investigation, petitioners learned that the California Corporations Commission had filed suit against Derivium to enjoin it from engaging in the 90% Stock Loan program. After learning these facts during late 2006, petitioners reported to the Federal Bureau of Investigation that Derivium had stolen their ValueClick stock.
Petitioners did not report the Derivium transactions or the funds received from Derivium on their 2003 or 2004 return. Petitioners filed an amended tax return for their 2006 tax year, claiming a theft loss of $7,593,956 from "the illegal sale of 820,000 shares of ValueClick stock sold without their knowledge or permission". That amount was equal to their basis in the shares of ValueClick stock, the fair market value of which, at the time the alleged theft was allegedly discovered during late 2006, petitioners reported to be $17,716,000. Because their claimed theft loss was so large, petitioners also filed an amended tax return for their 2003 tax year, claiming a theft loss carryback of $5,386,786.
During September 2007, petitioners filed an arbitration demand against their financial advisers, Joe Ramos and Private Consulting Group, for breach of contract, breach of fiduciary duty, professional negligence, and constructive fraud in connection with the 90% Stock Loan. However, petitioners recovered from their financial advisers only what they characterized as a "paltry sum", the amount of which is not disclosed in the record. Petitioners also attempted to recover from Wachovia and one of Wachovia's financial advisers. On July 19, 2010, petitioners filed a Financial Industry Regulatory Authority arbitration claim against Wachovia, asserting: (1) fraud, concealment, and conspiracy to commit fraud; (2) breach of fiduciary duty; (3) breach of contract; (4) aiding and abetting fraud and breach of fiduciary duty; (5) violation of the California Securities Act; (6) violation of National Association of Securities Dealers and New York Stock Exchange rules; and (7) conversion.
Respondent examined petitioners' 2003 tax return and disallowed certain business expense deductions related to a horse breeding business. Petitioners entered a closing agreement with respondent during February 2009 with respect to their 2003 tax liability. Additionally, petitioners consented to the assessment and collection of their 2003 tax liability.
On August 3, 2009, respondent issued petitioners a notice of intent to levy with respect to their 2003 tax liability. On August 12, 2009, petitioners submitted a Form 12153, Request for a Collection Due Process (Levy) Hearing. On October 1, 2009, respondent mailed to petitioners a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320. On October 30, 2009, petitioners submitted a Form 12153, Request for a Collection Due Process (Lien) Hearing. The explanation on the Form 12153 with respect to the levy action stated that the "2003 liability will be eliminated by a carryback", and the explanation on the Form 12153 with respect to the lien stated: "The 2003 tax liability will be extinguished by an NOL".
On October 22, 2010, petitioners received a letter from Theresa Amper with respondent's Appeals Office. Before the hearing, petitioners' counsel Emily J. Kingston provided Ms. Amper with copies of petitioners' amended 2003 and 2006 tax returns showing the claimed theft loss. On November 16, 2010, Ms. Amper conducted the hearing with Ms. Kingston and determined that the matter should be assigned to another settlement officer to determine whether to allow the theft loss deduction claimed on petitioners' amended 2006 return and the corresponding carryback on their amended 2003 return.
After that settlement officer returned the matter to Ms. Amper, she conducted another hearing with Ms. Kingston on February 11, 2011. During the hearing, Ms. Kingston contended that Ms. Amper should suspend the collection actions while respondent considered the theft loss deduction claimed on petitioners' amended 2006 return. However, Ms. Amper declined to consider the theft loss carryback and determined that it was appropriate to sustain the lien and levy; and on April 19, 2011, respondent's Appeals Office mailed petitioners a Notice of Determination Concerning Collection Action(s) Under Section 6320 and a Notice of Determination Concerning Collection Action(s) Under Section 6330.
Respondent concedes that petitioners' carryback with respect to their claimed theft loss during 2006 was within the scope of the Appeals hearing and should have been considered by Ms. Amper. However, respondent's motion indicates that respondent does not intend to seek remand of petitioners' case to the Appeals Office for consideration of the issue.
Rule 121(a) provides that either party may move for summary judgment upon all or any part of the legal issues in controversy. Full or partial summary judgment may be granted only if no genuine issue exists as to any material fact and the issues presented by the motion may be decided as a matter of law.
Section 6321(a) provides that if any person liable to pay any tax neglects or refuses to pay after demand, the Commissioner may collect such tax by placing a lien on the person's property or rights to property. Section 6331(a) provides that, if any person liable to pay any tax neglects or refuses to do so within 10 days after notice and demand, the Commissioner may collect such tax by levy upon property belonging to such person. However, the Commissioner is required to give written notice of his intent to file a lien or to levy and must inform the taxpayer of the right to request a hearing before the Commissioner's Appeals Office. Secs. 6320(a), 6330(a). A hearing under section 6320 is conducted in accordance with the procedural requirements of section 6330. Sec. 6320(c). At the hearing, the taxpayer may raise any relevant issues including appropriate spousal defenses, challenges to the appropriateness of collection actions, and collection alternatives. Sec. 6330(c)(2)(A). Further, a taxpayer may dispute the underlying tax liability for any tax period if the taxpayer did not receive a notice of deficiency or otherwise have an opportunity to dispute the tax liability. Sec. 6330(c)(2)(B). Following a hearing, the Appeals Office must make a determination whether the proposed lien or levy action may proceed. In addition to considering issues raised by the taxpayer under section 6330(c)(2), the Appeals Office must also verify that the requirements of any applicable law or administrative procedure have been met, and whether the proposed collection action appropriately balances the need for efficient collection of taxes with the taxpayer's concerns regarding the intrusiveness of the proposed collection action. Sec. 6330(c)(1), (3).
Where the validity of the underlying tax liability is properly in issue, the Court will review the determination of the Appeals Office de novo.
In the instant case, we have jurisdiction to consider petitioners' claimed theft loss deduction on their amended 2006 return because the carryback of that loss would reduce or eliminate the amount of unpaid tax with respect to petitioners' 2003 tax year.
We have decided a number of other cases involving the 90% Stock Loan marketed by Derivium and its affiliates. In
Petitioners contend that the 90% Stock 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.
For tax purposes, whether a theft loss has been sustained depends upon the law of the jurisdiction in which the loss occurred.
Because the alleged theft took place in California, we will apply California law. In California, all larcenous crimes have been consolidated into the single crime of theft,
Petitioners attempt to distinguish the facts of their case from those of
We are not convinced by petitioners' "Loan Term" argument. The loan agreements in the prior Derivium cases we have considered are nearly identical to the loan agreements in the instant case. For instance, in
However, the instant case is distinguishable from the prior Derivium cases we have considered for a different reason. In none of the prior Derivium cases we have considered did the taxpayers attempt to exercise their rights to a return of their collateral after the maturity dates. Rather, in the prior Derivium cases we have considered: (1) the value of the supposed collateral had declined so that the taxpayers either (a) walked away from the loan,
Loan Agreement, Derivium was obligated to return petitioners' collateral to them at the end of the Loan Term, after deducting the amount of interest and principal petitioners owed. However, petitioners' stock was not returned, which, as noted above, led to their investigation of Optech, WITCO, Derivium, and Messrs. Cathcart and Debevc.
As we stated in
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 90% Stock 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,
Additional genuine issues of material fact appear to us to remain in dispute with respect to petitioners' claim of a theft loss. At trial, we expect that petitioners will need to introduce, inter alia, evidence proving the amount of their loss, which will likely require valuation of the options to repurchase the ValueClick stock. Additionally, we expect that petitioners will need to introduce evidence showing that, at the time they claimed the theft loss deduction for 2006, they had no reasonable prospect of recovery, including no possibility of recovery on their claims against their investment advisers or Wachovia.
On the basis of the foregoing, we will grant respondent's motion for summary judgment insofar as we conclude that petitioners' transfers of stock to Derivium under the 90% Stock Loan were sales and not loans, but we will deny respondent's motion for summary judgment insofar as we conclude that genuine issues of material fact remain as to whether petitioners may be entitled to a deduction for a theft loss in the amount of the value of the options they purchased from Derivium that may be carried back from petitioners' 2006 tax year to petitioners' 2003 tax year.
In reaching these holdings, we have considered all the parties' arguments, and, to the extent not addressed herein, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,