The opinion
T.C. Memo. 1996-284
UNITED STATES TAX COURT
TIMOTHY DEMITRI BROWN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2121-95. Filed June 19, 1996.
Timothy Demitri Brown, pro se.
Richard L. Hunn, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, Judge: Respondent determined a deficiency in
petitioner Timothy Demitri Brown’s (Mr. Brown) 1993 Federal
income tax in the amount of $14,156 and an accuracy-related
penalty under section 6662(a)1 in the amount of $1,656.2
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
(continued...)
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After concessions, the issues for decision are: (1) Whether
Mr. Brown is entitled to a loss deduction in the amount of
$30,900 for currency that was seized by Louisiana law enforcement
officials pursuant to a civil forfeiture statute; (2) whether Mr.
Brown is entitled to a Schedule E loss deduction in the amount of
$5,000 for a deposit he made on a townhouse; (3) whether Mr.
Brown is entitled to claim a deduction for a theft loss in the
amount of $22,300; and (4) whether Mr. Brown is liable for self-
employment taxes under the provisions of section 1401.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Mr. Brown resided in
Alexandria, Louisiana, at the time the petition was filed.
On September 28, 1993, Mr. Brown was arrested along with two
other individuals in Lake Charles, Louisiana. At the time of his
arrest, Mr. Brown was carrying $30,900 in currency. Law
enforcement officials confiscated the currency as suspected drug
money. On November 2, 1993, before the State of Louisiana had
instituted formal judicial forfeiture proceedings, Mr. Brown
1
(...continued)
Practice and Procedure.
2
On Mar. 18, 1996, respondent filed a report to the Court
conceding that Mr. Brown was not liable for the accuracy-related
penalty under sec. 6662(a).
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filed a motion with the 14th Judicial District Court of Calcasieu
Parish, Louisiana, for return of the seized property. On January
13, 1994, the State of Louisiana initiated a civil judicial
forfeiture proceeding against the currency. Mr. Brown filed both
an answer to the pending forfeiture and a claim for the return of
the currency in early 1994. The forfeiture proceeding is still
pending.
On September 23, 1993, Mr. Brown entered into a contract to
purchase a townhouse in Houston, Texas. Pursuant to the
contract, Mr. Brown made an earnest money deposit in the amount
of $5,000. The closing was to take place on November 9, 1993.
In the event that the buyer defaulted on the contract, the
contract provided, in pertinent part:
If Buyer fails to comply with this contract, Buyer
shall be in default, and Seller may either (a) enforce
specific performance, seek such other relief as may be
provided by law, or both, or (b) terminate this
contract and receive the Earnest Money as liquidated
damages, thereby releasing both parties from this
contract. * * *
Mr. Brown was unable to close due to the seizure of the
$30,900, which he planned to use to purchase the townhouse. Mr.
Brown reported the $5,000 deposit as a loss on his 1993 Federal
income tax return. In 1994, Mr. Brown recovered the $5,000
deposit and reported it as income on his 1994 Federal income tax
return.
In August 1993, Mr. Brown purchased a 1985 Cadillac DeVille
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from Richard Kellogg for $3,000. Sometime thereafter, Alice Faye
Lotts, who cohabited with Mr. Brown until early December 1993,
filed for a change of title, making it appear as if she purchased
the vehicle from Mr. Kellogg. On or about December 9, 1993, Ms.
Lotts filed a complaint with the police department alleging that
the vehicle had been stolen. Mr. Brown was arrested as a result
of the complaint, and the vehicle was turned over to Ms. Lotts.
On or about December 14, 1993, Ms. Lotts, after having moved out
of Mr. Brown’s residence, returned to the residence and removed
several items of personal property belonging to Mr. Brown. Mr.
Brown valued these items (including the vehicle) at $22,300 and
deducted this amount as a theft loss on his 1993 Federal income
tax return.
On July 29, 1994, Mr. Brown filed a civil lawsuit against
Ms. Lotts seeking the return of his property. Mr. Brown secured
a default judgment against Ms. Lotts on November 14, 1994. Mr.
Brown has made efforts to collect on the judgment, including
filing for a writ of execution in February 1995, and he is still
attempting to recover the property. Mr. Brown did manage to
recover the vehicle in 1995, and he reported $3,000 in income on
his 1995 Federal income tax return as a result of the recovery.
Mr. Brown reported a net profit of $41,600 on Schedule C
(Profit or Loss from Business) of his 1993 Federal income tax
return from his business as a wholesale distributor of audio
equipment. He did not file a Schedule SE or pay self-employment
tax.
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OPINION
Section 165(a) provides a deduction for any loss sustained
during the taxable year and not compensated for by insurance or
otherwise. Section 165(c) limits the deduction in the case of an
individual to losses incurred in a trade or business or any
transaction entered into for profit, casualty losses, and theft
losses.
Before a loss may be claimed as a deduction, however, it
must be evidenced by a closed or completed transaction. United
States v. S.S. White Dental Manufacturing Co., 274 U.S. 398, 401
(1927); Ramsay Scarlett & Co. v. Commissioner, 61 T.C. 795, 807
(1974), affd. 521 F.2d 786 (4th Cir. 1975); sec. 1.165-1(b),
Income Tax Regs. Thus, if there exists a claim for reimbursement
with respect to which there is a reasonable prospect of recovery,
the loss is not deductible until it can be ascertained with
reasonable certainty whether or not such reimbursement will be
received. Estate of Scofield v. Commissioner, 266 F.2d 154, 159
(6th Cir. 1959), affg. in part and revg. in part 25 T.C. 774
(1956); Ramsay Scarlett & Co. v. Commissioner, supra; sec. 1.165-
1(d)(2)(i) and (3), Income Tax Regs. This determination requires
an objective inquiry into the facts and circumstances surrounding
the loss as of the close of the taxable year in which the
deduction is claimed. Boehm v. Commissioner, 326 U.S. 287, 292-
293 (1945); Ramsay Scarlett & Co. v. Commissioner, supra at 811.
In determining whether a taxpayer had a reasonable prospect for
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reimbursement, the fact that the taxpayer filed a lawsuit to
recover the deducted loss gives rise to an inference that he or
she had such a prospect. Estate of Scofield v. Commissioner,
supra; Ramsay Scarlett & Co. v. Commissioner, supra at 812-813.
The first issue is whether Mr. Brown is entitled to a loss
deduction with respect to the $30,900 currency that was seized by
Louisiana law enforcement officials pursuant to a civil
forfeiture statute. Mr. Brown filed a motion to recover the
currency in 1993, and formal civil forfeiture proceedings, which
are still pending, were instituted in early 1994. We find that
the fact that Mr. Brown took legal action in late 1993 and early
1994 indicates that he had a reasonable prospect of recovery at
the end of 1993.
Furthermore, even if Mr. Brown had lost the forfeiture case
and was required to forfeit the currency, he would be prohibited
by public policy from claiming a loss deduction. There is a
strong public policy against drug trafficking, and case law has
established that any deduction for property forfeited under the
forfeiture laws is precluded. Wood v. United States, 863 F.2d
417, 421 (5th Cir. 1989); Holmes Enters., Inc. v. Commissioner,
69 T.C. 114, 117 (1977); Holt v. Commissioner, 69 T.C. 75, 79-80
(1977), affd. 611 F.2d 1160 (5th Cir. 1980). Accordingly, we
sustain respondent’s disallowance of the $30,900 loss deduction.
The next issue is whether Mr. Brown is entitled to a loss
deduction with respect to the $5,000 deposit on the townhouse.
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Mr. Brown argues that because he was unable to close on the
townhouse, he forfeited the deposit under the terms of the
contract and, therefore, was entitled to claim a loss deduction.
However, this assumption is not supported by the terms of
the contract. The contract provided that upon the buyer’s
default, the seller may either seek specific performance or any
other relief provided by law or terminate the contract and keep
the earnest money deposit as liquidated damages. Mr. Brown has
not shown that the seller elected to keep the deposit as
liquidated damages or even that the seller intended to enforce
its contract claim against Mr. Brown. Indeed, Mr. Brown
admittedly received the $5,000 back from the seller during the
next taxable year. Accordingly, we find that Mr. Brown’s breach
of contract, in itself, was not a closed and completed
transaction giving rise to a deductible loss.3 See Lucas v.
American Code Co., 280 U.S. 445, 450 (1930).
Next, we must determine whether Mr. Brown is entitled to
claim a deduction for a theft loss in the amount of $22,300 for
the property taken from him by Ms. Lotts. Mr. Brown filed a
civil suit against Ms. Lotts in 1994, obtained a default
judgment, and has pursued collection since then. Mr. Brown did,
in fact, recover the vehicle from Ms. Lotts. We find that the
3
We note, however, that because Mr. Brown reported the
recovery of the $5,000 deposit as income in 1994, he overreported
his taxable income in 1994 and may be entitled to a refund for
that year.
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fact that Mr. Brown undertook to litigate his claim against Ms.
Lotts indicates that he had a reasonable prospect of recovery as
of the end of 1993. The fact that the lawsuit was not actually
filed until 1994 does not negate the inference that there was a
recoverable claim for reimbursement during 1993. Dawn v.
Commissioner, 675 F.2d 1077, 1078 (9th Cir. 1982), affg. T.C.
Memo. 1979-479; see National Home Prods., Inc. v. Commissioner,
71 T.C. 501, 525-526 (1979).
Moreover, even if Mr. Brown established that there was a
closed and completed transaction giving rise to a deductible
theft loss, he has failed to establish the fair market value of
the property stolen. The amount of a theft loss is equal to the
lesser of (1) the fair market value, or (2) the adjusted cost
basis of the property stolen. Sec. 1.165-7(b), 8(c), Income Tax
Regs. The regulations further require that the fair market value
be ascertained by competent appraisal. Sec. 1.165-7(a)(2),
Income Tax Regs. Therefore, we sustain respondent’s disallowance
of Mr. Brown’s claimed theft loss.4
Finally, we must determine whether Mr. Brown is liable for
the self-employment tax under section 1401. Section 1401(a)
imposes a tax on the self-employment income of every individual.
4
Similar to Mr. Brown’s recovery of his deposit in 1994, Mr.
Brown reported the recovery of his vehicle in the amount of
$3,000 in 1995. Thus, we note that Mr. Brown overreported his
taxable income in 1995 and may be entitled to a refund for that
year.
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Self-employment income generally consists of the gross income
derived by an individual from any trade or business, less
allowable deductions. Sec. 1402(a) and (b). Mr. Brown bears the
burden of proving that he is not liable for the self-employment
tax. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Mr. Brown reported net taxable income from his business in 1993
and offered no proof that such income is not subject to the self-
employment tax. We, therefore, sustain respondent’s
determination that Mr. Brown is liable for the self-employment
tax for the taxable year 1993.
Decision will be entered
for respondent with respect to
the deficiency.
Decision will be entered
for petitioner with respect to
the accuracy-related penalty.