United States Tax Court

United States Tax Court

T.C. Memo. 2026-66

ALADAR DEUTSCH AND SYLVIA G. DEUTSCH,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 27113-14.

Filed August 12, 2026.

—————

Mel E. Myers, Stuart H. Clements, Charles J. Muller III, and Jaime

Vasquez, for petitioners.

Sheila R. Pattison and Roberta L. Shumway, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

ASHFORD, Judge: By statutory Notice of Deficiency dated

August 27, 2014, the Internal Revenue Service (IRS or respondent)

determined a deficiency in petitioners’ federal income tax of $107,913

and an accuracy-related penalty pursuant to section 6662(a) 1 of $21,583

for the 2010 taxable year. After certain concessions by the parties, 2 the

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the

Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and

Rule references are to the Tax Court Rules of Practice and Procedure.

2 As relevant here, pursuant to the Notice of Deficiency the IRS disallowed

$100,000 of petitioners’ claimed miscellaneous itemized deduction for investment

expenses of $448,942 and asserted various grounds for the imposition of the accuracyrelated penalty.

Petitioners now concede that they are not entitled to the

miscellaneous itemized deduction for investment expenses in an amount greater than

what the IRS allowed in the Notice of Deficiency, and respondent now concedes that

Served 08/12/26

2

[*2] issues remaining for decision are whether petitioners 3 (1) are

entitled to a deduction for a theft loss claimed on their 2010 Schedule A,

Itemized Deductions, of $1,377,005 and (2) are liable for the accuracyrelated penalty for a substantial understatement of income tax. We

resolve the first issue partly in petitioners’ favor and the second issue in

petitioners’ favor.

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. Petitioners resided in Texas when their Petition was

timely filed with the Court.

I.

Background

Mr. Deutsch is a self-employed businessman and has worked in

his family’s retail jewelry business since 1990. Before joining the family

business, Mr. Deutsch worked for four years in international

development at Laredo National Bank. Before that, he worked for two

years as a stockbroker after he graduated in 1982 from Trinity

University, where he studied business.

In 1987 or 1988 Mr. Deutsch met and became close friends with

Alton Ray Lamberth, who, in turn, was close friends with Paul Visel. 4

Mr. Deutsch met Mr. Visel around 1995 through Mr. Deutsch’s family’s

jewelry business. Mr. Visel became a frequent and trusted customer of

Mr. Deutsch. Mr. Deutsch would regularly lend Mr. Visel several pieces

of jewelry at a time, and Mr. Visel would return to pay for what he

wanted and give back those pieces that he did not want. Eventually,

Mr. Deutsch and Mr. Visel became social friends through their mutual

relationship with Mr. Lamberth.

The three men went on hunting trips at the ranch Mr. Visel

managed where they discussed different business deals. Before the

transactions at issue, Mr. Deutsch entered into deals with Mr. Visel,

none of which were successful. The first such unsuccessful deal occurred

he seeks to impose on petitioners only an accuracy-related penalty for a substantial

understatement of income tax.

3 Mrs. Deutsch did not appear at trial, but the Court’s decision will be binding

upon both spouses.

4 Mr. Visel is the godfather to Mr. Lamberth’s eldest son. In addition to their

close friendship, the two have engaged in successful business deals together.

3

[*3] in 2001 when Mr. Deutsch invested $50,000 in a publicly traded

company, Treasury International, after Mr. Visel told him he was a

shareholder in the company and explained its business to him. After

another hunting trip in 2004, Mr. Deutsch invested an additional

$100,000 in Treasury International and $200,000 in a different publicly

traded company, Information Architects, on the basis of Mr. Visel’s

suggestions. Mr. Deutsch never received a return on these investments.

Eventually, he wrote those investments off as long-term capital losses

on his federal income tax returns.

II.

The “$70 Million” Deal

A.

First Advance Payment and Promissory Note

Mr. Deutsch first learned of the deal at issue from Mr. Lamberth

in June 2008 when the latter told him that Mr. Visel was working with

investors from Dubai (Dubai Group 5) to secure a $70 million investment

to commercially develop a ranch Mr. Visel owned in Mexico. Mr.

Lamberth had previously traveled to this ranch at least three times on

family vacations with Mr. Visel.

Mr. Visel explained to Mr. Deutsch that he needed a $350,000

short-term loan as a deposit to open a UBS bank account in Geneva,

Switzerland, in order for the Dubai Group to transfer the $70 million to

Mr. Visel. Mr. Visel asked that Mr. Lamberth and Mr. Deutsch each

lend him $175,000. Mr. Visel told Mr. Deutsch and Mr. Lamberth that

he expected to repay them in less than one month.

On June 19, 2008, Mr. Visel signed a notarized promissory note,

naming Mr. Lamberth and Mr. Deutsch the lenders of a principal sum

of $350,000 at a 10% annual interest rate to be repaid by him in two

months. The note granted the following security interests to Mr.

Lamberth and Mr. Deutsch: (1) all of the rights to and possession of Las

Casitas #1 in Akumal, Mexico, that Paul Visel was granted by Dr. Wiley

Lee Campbell; (2) a “2nd lend” on Rancho Manuel and Buenos Aires

Ranch in Yucatan, Mexico; and (3) a “1st lend” on an undivided 50%

interest in three lots in Akumal, Mexico, held by a Delaware corporation,

Arter Caribe, Inc.

5 We note that the Dubai Group was sometimes referred to by trial witnesses

as the “Dubai Investment Authority” and in a few Exhibits in the record as the “Dubai

International Financial Center.” For convenience, we will use “Dubai Group”

throughout this Opinion.

4

[*4] On June 23, 2008, Mr. Deutsch borrowed $175,000 from the

International Bank of Commerce and wrote a check to an account named

“ESPANICA DBA CPHV VISION INC” (Espanica) that Mr. Visel said

he controlled and was using for the deal. For his part, Mr. Lamberth

could come up with only $150,000 and lent this amount to Mr. Visel

rather than his entire half of the $350,000.

After the promissory note’s two-month deadline passed, Mr. Visel

still had not repaid the loan. Mr. Visel told Mr. Deutsch and Mr.

Lamberth that a wide variety of issues was delaying him from securing

the $70 million investment. Mr. Visel blamed multiple individuals that

Mr. Deutsch was not familiar with for the delays and indicated a myriad

of problems (i.e., certain documents were not signed, other documents

were still being prepared, and one of the bank accounts was not properly

set up). Mr. Deutsch and Mr. Lamberth did not attempt to enforce the

promissory note because Mr. Visel assured them that these delays were

temporary and the deal was on the verge of closing.

B.

Living Expenses

Mr. Visel told Mr. Deutsch and Mr. Lamberth that he was

traveling between London, Geneva, and Dubai while he attempted to

resolve the alleged bank issues. Mr. Visel said it was necessary for him

to stay abroad because if he returned to the United States the deal would

be “dead” and they would never recoup their investment. At this point,

Mr. Visel did not have money to cover his living expenses himself. At

first, Mr. Lamberth lent him money to pay these expenses, but soon Mr.

Lamberth had financial difficulties of his own. On July 30, 2008, Mr.

Deutsch started lending money to Mr. Visel to pay his expenses and

continued to do so until March 17, 2010. During this 19-month period

Mr. Deutsch sent Mr. Visel $291,200 via 53 separate bank transfers in

increments ranging from $400 to $25,000 and $4,400 via Western Union

to pay his expenses, which included hotel bills, air fares, and other

personal living expenses.

C.

Dubai Group Investors

While the deal floundered, Mr. Deutsch learned about the people

Mr. Visel was working with from the Dubai Group. According to Mr.

Visel, his direct contact with the Dubai Group was an individual named

Paul Davidson. Mr. Davidson claimed to represent Mohammed Aziz

Mohammed and Omar Bin Sulaiman of the Dubai Group. Mr. Davidson

was the central figure who provided information and directions to Mr.

5

[*5] Visel, including when and where to send bank transfers. Mr. Visel

also told Mr. Deutsch that a former auditor at UBS named Peter was

helping him to clear up bank issues.

D.

Consecutive $200,000 Transfers

In October 2009 Mr. Visel told Mr. Deutsch that the $70

million was in a UBS account and ready to be transferred, but a special

type of account at Lloyds Bank in London needed to be opened with a

balance of $2 million to receive such a large transfer. However, he said

Mr. Davidson and Peter knew people at Lloyds Bank that could arrange

for an account to be opened there with a minimum balance of $200,000.

Mr. Visel asked Mr. Deutsch if he would pay this sum, but Mr. Deutsch

replied he would not invest more without meeting the individuals

involved in the deal.

On October 19, 2009, Mr. Deutsch and Mr. Lamberth traveled to

London to meet with Mr. Visel and Mr. Davidson. Mr. Visel told Mr.

Deutsch that he was working as a consultant with the Dubai Group

setting up deals in Mexico, Panama, and Argentina, and he showed Mr.

Deutsch a contract that would provide him a line of credit up to $300

million after the $70 million deal was completed.

On the afternoon of October 19, 2009, Mr. Deutsch spoke directly

via telephone with Mr. Davidson, who assured him that (1) the

$70 million was ready to be transferred but the $200,000 would need to

be transferred that evening and (2) Mr. Davidson would meet them the

following day to withdraw the $70 million. Mr. Visel gave Mr. Deutsch

the details of an account at Lloyds Bank in the name of a company called

Winilov Enterprises Ltd. (Winilov), which he claimed was his, and Mr.

Deutsch arranged for the $200,000 transfer.

However, after Mr. Deutsch transferred the $200,000 to the

Winilov account, Mr. Visel and Mr. Deutsch called Mr. Davidson, and

Mr. Deutsch heard Mr. Davidson call Mr. Visel “an idiot” as it was the

wrong account and he needed to send it to a different one. After the call,

Mr. Visel assured Mr. Deutsch that the Winilov account was his, he had

signature authority over it, and he would transfer the money back to

him the following day. In the interest of time, Mr. Deutsch agreed to

send another $200,000 on October 20, 2009, to an account in the name

of JM Property Services, also at Lloyds Bank.

Mr. Deutsch contacted his bank to have the initial $200,000

returned from the Winilov account. Ultimately, Lloyds Bank indicated

6

[*6] that they could not return the $200,000 because they could not

locate the beneficiary of the account. At this point, Mr. Visel explained

that he no longer held signature authority over the account. Mr. Visel

said he was working with those in control of the account to return the

funds to him but ultimately it never occurred.

Upset over what was happening, Mr. Deutsch told Mr. Visel that

he would instruct lawyers to start proceedings to recover the funds. In

response, Mr. Visel said it would be dangerous to “rock the boat” when

the banks were so close to releasing the $70 million and, at worst, he

would repay him the $200,000 out of his share of the $70 million. Mr.

Deutsch did not initiate proceedings at that time because of Mr. Visel’s

representations.

E.

“Misprinted” Check

After Mr. Deutsch sent the second $200,000 transfer, Mr. Visel

told him and Mr. Lamberth that he had a meeting with Mr. Davidson

and other members of the Dubai Group at Lloyds Bank on October 21,

2009. After the meeting, Mr. Visel returned to the hotel where Mr.

Deutsch and Mr. Lamberth were staying and told them that he had been

handed a check for $70 million but the Dubai Group printed his name

on it as “Paul SVisel” rather than “Paul S Visel.” As a result, they took

it back, and Mr. Davidson told Mr. Visel he would give him a corrected

one the next day. Because of other business commitments, Mr. Deutsch

left London the next day.

Mr. Visel, however, never received a new check. Mr. Visel told

Mr. Deutsch that when they went back to the bank to get the second

check Mr. Davidson told him that the account had been opened as a

“trading account,” which meant that the balance could not be withdrawn

for six months. According to Mr. Visel, Mr. Davidson said there was no

way to get the money now unless they paid $4.2 million in penalties and

fines for the early withdrawal. Mr. Visel further explained that he was

told that the fines and fees could not be deducted from the $70 million

balance allegedly in the account.

At this point, Mr. Deutsch began to question the deal. He emailed

Mr. Visel on November 21, 2009, asking for him to provide the names,

addresses, and phone numbers for all of the people he worked with on

the deal. Mr. Deutsch was concerned that the individuals involved were

taking advantage of Mr. Visel and either he or Mr. Lamberth needed

their information in case something happened to Mr. Visel. Mr. Visel

7

[*7] never provided any information to Mr. Deutsch other than their

names.

F.

December 2009 $350,000 Payment

In December 2009 Mr. Visel said he had secured an outside

investor to raise $1.7 million of the needed $4.2 million, and he would

put in $2 million of his own money. However, they still needed $500,000.

Mr. Visel said Lloyds Bank would permit him to inspect documents

showing that the balance of $70 million was there but they first needed

the $500,000 as a “good faith” payment that the balance of fines, fees,

and penalties would be paid. Mr. Deutsch reluctantly agreed to pay

$350,000 but asked that he also be shown the documents. Mr. Visel

agreed, and told Mr. Deutsch that the $350,000 would remain in the JM

Property Services account until they saw the documents.

On December 14, 2009, Mr. Deutsch sent $350,000 to the JM

Property Services account. However, Mr. Visel told Mr. Deutsch that a

mid-December snowstorm in London prevented his outside investor

from landing to view the Lloyds Bank documents as planned. In early

January 2010 Mr. Visel told Mr. Deutsch that this investor abandoned

the deal.

On January 25, 2010, Mr. Deutsch traveled to London in order to

view the promised documents at Lloyds Bank. On this trip, Mr. Visel’s

story about the $70 million deal changed from his original story of

developing his ranch in Mexico. Mr. Visel now claimed he had proposed

to the Dubai Group a development in Panama and he would be paid a

20% commission for securing the release of the $70 million. Mr. Visel

also told Mr. Deutsch that he had lost the ranch in Mexico provided as

security in the promissory note. Mr. Deutsch ultimately spent two days

in London but was never able to see the promised documents.

G.

Calls from Mr. Davidson

In March 2010 Mr. Deutsch began receiving phone calls on his

office and cell phones from Mr. Davidson using a blocked international

phone number. Mr. Deutsch was uncertain how Mr. Davidson learned

his number but believed Mr. Davidson had received his phone numbers

from Mr. Visel. Mr. Davidson told Mr. Deutsch that the deal had stalled

because of Mr. Visel’s errors. He stated that Mr. Visel was off the deal,

he would be in charge now, and Mr. Deutsch would work directly with

him. Mr. Deutsch told Mr. Visel about his conversation with Mr.

8

[*8] Davidson, and in response Mr. Visel stated that Mr. Davidson’s

statements were false as he was still in charge.

H.

Financier David Stockard

Also in March 2010 Mr. Lamberth helped Mr. Deutsch connect

with a businessman, David Stockard. Although Mr. Stockard was not a

banker himself, his professional experience included frequent banking

and financial transactions in London, and he had contacts at the banks

involved in the deal. Mr. Stockard agreed to travel to London on Mr.

Deutsch’s behalf to perform “basic due diligence” on the deal in return

for a $50,000 retainer. Mr. Stockard met with Mr. Visel in London, and

as a result of this meeting Mr. Stockard felt that the deal was likely a

fraud.

In the past Mr. Stockard had attempted to do business with the

Dubai Group, and he found them to be very professional, using extensive

due diligence documents when they assessed business proposals. Mr.

Visel on the other hand could not answer basic questions about the

parties to the deal and loan documentation. The only contact

information he could provide was a “Gmail” address for somebody who

claimed to be a senior official with the Dubai Group. This was a bright

red flag for Mr. Stockard because in his experience individuals at the

Dubai Group always used company email addresses rather than easily

falsified “Gmail” accounts.

Mr. Stockard called Mr. Deutsch and recommended that he

return to London to hire fraud investigators, RISC Management Ltd.

(RISC), and the law firm Peters & Peters Solicitors LLP (Peters &

Peters), who had experience investigating fraud. On March 25, 2010,

Mr. Deutsch traveled to London with Mr. Lamberth to meet with Mr.

Stockard, investigators at RISC, and, at a subsequent meeting,

attorneys from Peters & Peters. On April 9, 2010, Mr. Deutsch, Mr.

Stockard, and RISC entered into an “upside” agreement to recover the

funds owed to Mr. Deutsch in which any amount recovered over $1.7

million less expenses and professional fees would be divided equally

among them. The attorneys from Peters & Peters billed for their time

and effort.

I.

Investigating Mr. Visel and the Dubai Group

At this time Mr. Visel had no place to stay in London, so the

investigators decided to begin the investigation by moving him into a

hotel room they could access. They decided to keep Mr. Visel unaware

9

[*9] of the investigation. Therefore, the investigators and Mr. Stockard

posed as investors interested in the $70 million deal and offered to help

him get the funds released in order to contact and investigate the Dubai

Group.

The investigators believed that Mr. Davidson and the Dubai

Group thought the “fraud was still live.” The investigators reported that

on April 14, 2010, Mr. Davidson requested that Mr. Visel send another

$500,000 to a Barclays Bank account. In continuing the ruse, Mr.

Stockard’s associate spoke with Mr. Davidson three times posing as a

potential investor and attempted to set up a meeting. However, Mr.

Davidson repeatedly canceled at the last minute. Ultimately, the

investigators were never able to meet or identify Mr. Davidson or other

members of the Dubai Group but concluded that they were likely using

false names and misrepresented themselves. Because they could not

identify the members of the Dubai Group, the investigators concluded

recovery actions could not be taken against them.

During the investigation, the investigators observed that Mr.

Davidson repeatedly tried to assure Mr. Visel that the money was real

and Mr. Visel just needed to send additional funds to resolve the issue.

On the basis of his interactions with Mr. Visel, Mr. Stockard believed

that Mr. Visel was “over his head into fraud and ultimately turned out

to be a participant.”

The investigators also sought to identify the banker Peter that

Mr. Visel stated was assisting with the deal. On the basis of their

investigation, they believed it may have been a retired banker named

Peter Sainsbury, who had recently been convicted of conspiracy to

defraud in the United Kingdom. They could not definitively identify

Peter Sainsbury as the Peter that worked with the Dubai Group and

determined he would not have recoverable assets because of his recent

conviction even if they could.

Finally, during the investigation, RISC members accessed Mr.

Visel’s computer without his knowledge and found documents and

emails relating to the $70 million deal. In addition, two documents from

the Peters & Peters file included agreements with Dubai Group

members. One such document was an unsigned promissory note dated

July 5, 2009, between Mr. Visel and “Mohammed Aziz Mohammed

Private Lending” in the principal amount of $70 million at a 4.5%

interest rate that would mature ten years from the date of signing.

Another such document was a signed and notarized partnership

10

[*10] agreement between Mr. Visel and “Mohammed Aziz Mohammed

Private Lending” dated July 5, 2009.

J.

Recovery from the Banks

In addition to their attempt to identify recoverable assets, the

investigators assessed whether Mr. Deutsch had any claim against the

banks involved. The attorneys concluded that Mr. Deutsch’s claim was

weak because Mr. Deutsch was not a client of the banks and had no

fiduciary relationship with them. The attorneys also advised Mr.

Deutsch that suing the banks would be extremely expensive, the banks

would likely defend any claim vigorously, and suing the banks could

possibly subject Mr. Deutsch to counterclaims for damages.

K.

Statement and Transfer Agreement

As the investigation continued, the investigators revealed their

true identities to Mr. Visel, and Mr. Visel ceased contact with them.

They suspected that Mr. Visel was staying in Florida. In August 2010

Mr. Deutsch lured Mr. Visel back to London. RISC located him and took

him to Peters & Peters to get a statement of what happened. In his

statement, Mr. Visel admitted only that he had been a victim of fraud

and denied that he was a knowing participant. However, he admitted

that he had learned in 2007 that the man claiming to be Omar Bin

Sulaiman was actually Mohammed Ibn Saad, who claimed to work for

Mr. Bin Sulaiman at the Dubai Group. In addition, Mr. Ibn Saad

suggested that Mr. Bin Sulaiman did not know what he was doing. The

attorneys from Peters & Peters believed Mr. Visel was not being entirely

truthful, so they advised him not to sign the statement. At least one

attorney was confident that the transaction involved a fraud and

believed Mr. Visel may have started out innocently in it but that at some

point he had “crossed the line.”

On September 9, 2010, the attorneys at Peters & Peters

persuaded Mr. Visel to sign an agreement transferring certain

properties to Mr. Deutsch by November 8, 2010. However, the RISC

investigators and the Peters & Peters attorneys had concluded

previously that Mr. Visel no longer possessed any property or cash of

substantial value. Mr. Visel represented that he had transferred

ownership of two properties in Mexico, “Casita 301 Akumal” and “Arter

Caribe Inc[.],” to his son six years before but agreed to get those

properties transferred to Mr. Deutsch.

11

[*11] Mr. Deutsch acquired copies of documents regarding the

properties. Mr. Deutsch forwarded them to an attorney in Mexico who

told him that the documents were copies that were “worthless” and not

sufficient to transfer the property. This attorney also told Mr. Deutsch

that any attempt to pursue a civil claim to recover these properties

would likely be fruitless and expensive. The deadline passed, and Mr.

Visel neither transferred the properties nor cooperated further with Mr.

Deutsch.

Ultimately, Mr. Deutsch did not pursue civil or criminal charges

against Mr. Visel or anyone else with respect to the $70 million deal. At

the time of trial, Mr. Deutsch was not aware of Mr. Visel’s current

whereabouts but had heard from Mr. Lamberth that he was last working

in Costa Rica.

L.

2013 Email

Mr. Deutsch sent an email to Mr. Visel on January 28, 2013,

asking him to sign and notarize documents in order for the Mexican

properties to be transferred. Mr. Visel sent an expletive-laden response

and refused to send back the documents signed and notarized.

III.

Petitioners’ Tax Reporting and the Notice of Deficiency

Petitioners prepared and timely filed (with the assistance of a

certified public accountant (CPA)) their joint Form 1040, U.S. Individual

Income Tax Return, for 2010 (joint return). As relevant here, they

attached to the joint return Schedule A, claiming $2,075,597 of itemized

deductions. On this Schedule A petitioners reported, among other items,

a theft loss of $1,552,777. 6 Further information regarding this theft loss

was shown on Form 4684, Casualties and Thefts, which they also

attached to the joint return. Section A of the form, titled “Personal Use

Property,” identified two separate thefts: a $1,250,000 theft attributable

to “Paul Visel Promissory Note/Theft 6/01/2008” and a $350,000 theft

attributable to “Paul Visel – Theft of Money/Fraud 12/14/2009.”

Following an examination of the joint return, the IRS determined

in pertinent part that petitioners’ theft loss deduction should be

disallowed and that an accuracy-related penalty for a substantial

understatement of income tax should be imposed. The August 27, 2014,

Notice of Deficiency to petitioners reflects those determinations. The

6 Petitioners now concede that the correct amount of the claimed theft loss is

$1,377,005.

12

[*12] record includes a completed Civil Penalty Approval Form for an

accuracy-related penalty for a substantial understatement of income tax

for 2010. 7 The form includes a signature on the line provided on the

form for “Group Manager Approval to Assess Penalties Identified Above”

dated May 29, 2013, nearly 15 months before the issuance of the Notice

of Deficiency.

OPINION

I.

Burden of Proof

In general, the Commissioner’s determinations set forth in a

Notice of Deficiency are presumed correct, and, except for the burden of

production in any court proceeding with respect to an individual

taxpayer’s liability for any “penalty, addition to tax, or additional

amount,” see § 7491(c), the taxpayer bears the burden of proving that

the Commissioner’s determinations are erroneous, see Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). Furthermore, tax

deductions are a matter of legislative grace, and the taxpayer bears the

burden of proving entitlement to any claimed deduction. INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934). This specific burden requires the

taxpayer to demonstrate that the deductions claimed are allowable

pursuant to some statutory provision and to substantiate by producing

adequate records that enable the Commissioner to determine the

taxpayer’s correct liability. § 6001; Higbee v. Commissioner, 116 T.C.

438, 440 (2001).

If the taxpayer produces credible evidence with respect to any

factual issue relevant to ascertaining his or her federal income tax

liability and meets certain other requirements, the burden of proof shifts

from the taxpayer to the Commissioner as to that factual issue. See

§ 7491(a)(1) and (2). Petitioners do not contend, and the evidence does

not establish, that the burden of proof shifts to respondent under section

7491(a)(1) and (2) as to any issue of fact.

7 As explained infra pp. 22–24, we are reopening the record to admit the Civil

Penalty Approval Form and a declaration of IRS Supervisory Internal Revenue Agent

Cynthia Mendiola insofar as it authenticates the Civil Penalty Approval Form for the

purposes of Rule 902(11) of the Federal Rules of Evidence.

13

[*13] II.

Theft Loss Deduction

Section 165(a) permits a deduction against ordinary income for

“any loss sustained during the taxable year and not compensated for by

insurance or otherwise.” For individuals, the deduction is limited to

(1) losses incurred in a trade or business; (2) losses incurred in any

transaction entered into for profit though not connected with a trade or

business; or (3) losses of property not connected with a trade or business

or a transaction entered into for profit if such losses arise from “fire,

storm, shipwreck, or other casualty, or from theft.” § 165(c).

A theft loss deduction is sustained during the taxable year in

which the taxpayer discovers it. § 165(a), (e). However, even after a

theft loss is discovered, if a claim for reimbursement exists for which

there is a reasonable prospect of recovery, the deduction may not be

claimed until such time as the prospect no longer exists. Halata v.

Commissioner, T.C. Memo. 2012-351, at *19–20 (first citing Jeppsen v.

Commissioner, 128 F.3d 1410, 1414 (10th Cir. 1997), aff’g T.C. Memo.

1995-342; and then citing Treas. Reg. §§ 1.165-1(d)(2)(i), (3), 1.1658(a)(2)). Whether a reasonable prospect of recovery exists with respect

to a claim for reimbursement of a loss is a question of fact to be

determined upon an examination of all facts and circumstances. Treas.

Reg. § 1.165-1(d)(2)(i). “The standard to be applied is primarily

objective, but the taxpayer’s subjective attitude and beliefs are not to be

ignored.” Urtis v. Commissioner, T.C. Memo. 2013-66, at *16 (quoting

Premji v. Commissioner, T.C. Memo. 1996-304, slip op. at 20, aff’d, 139

F.3d 912 (10th Cir. 1998) (unpublished table decision)).

The

determination of whether a reasonable prospect of recovery exists is

made at the time the taxpayer claims the deduction; the test is foresight,

not hindsight. See Estate of Scofield v. Commissioner, 266 F.2d 154, 163

(6th Cir. 1959), aff’g in part, rev’g in part 25 T.C. 774 (1956).

The term “theft” under section 165 is a word of general and broad

meaning that includes any criminal appropriation of another’s property,

including theft by swindling, false pretenses, and other forms of guile.

Edwards v. Bromberg, 232 F.2d 107, 110 (5th Cir. 1956); Treas. Reg.

§ 1.165-8(d). Whether a theft loss has occurred depends upon the law of

the state where the alleged theft occurred. Bellis v. Commissioner, 540

F.2d 448, 449 (9th Cir. 1976), aff’g 61 T.C. 354 (1973); Luman v.

Commissioner, 79 T.C. 846, 860 (1982); Paine v. Commissioner, 63 T.C.

736, 740 (1975), aff’d, 523 F.2d 1053 (5th Cir. 1975) (unpublished table

decision). A taxpayer must prove a theft occurred under applicable state

law by only a preponderance of the evidence and not beyond a reasonable

14

[*14] doubt. See Allen v. Commissioner, 16 T.C. 163, 166 (1951) (“If the

reasonable inferences from the evidence point to theft, the proponent is

entitled to prevail. If the contrary be true and reasonable inferences

point to another conclusion, the proponent must fail.”). A criminal

conviction, or even the prosecution of one, is not necessary in order for a

taxpayer to demonstrate a theft loss. See Monteleone v. Commissioner,

34 T.C. 688, 694 (1960); Price v. Commissioner, T.C. Memo. 1971-323,

1971 Tax Ct. Memo LEXIS 8, at *22. But the fact that a taxpayer does

not claim or charge a crime of theft may raise doubts as to whether an

“actual fraud” exists. Price, 1971 Tax Ct. Memo LEXIS 8, at *22. Mr.

Deutsch and respondent do not dispute that the law of the State of Texas

applies in this case. Therefore, we will decide whether the evidence

presented allows for us to determine that a theft occurred under Texas

law.

Under Texas law, theft is defined as the unlawful appropriation

of property “with intent to deprive the owner of [the] property.” Tex.

Penal Code Ann. § 31.03(a) (West 2011). An appropriation of property

is unlawful if “it is without the owner’s effective consent.” Id.

§ 31.03(b)(1). An owner’s consent is not effective if it is induced by

deception. Id. § 31.01(3)(A). Under Texas law, deception means:

(A) creating or confirming by words or conduct a

false impression of law or fact that is likely to affect the

judgment of another in the transaction, and that the actor

does not believe to be true;

(B) failing to correct a false impression of law or fact

that is likely to affect the judgment of another in the

transaction, that the actor previously created or confirmed

by words or conduct, and that the actor does not believe to

be true;

(C) preventing another from acquiring information

likely to affect his judgment in the transaction;

(D) selling or otherwise transferring or encumbering

property without disclosing a lien, security interest,

adverse claim, or other legal impediment to the enjoyment

of the property, whether the lien, security interest, claim,

or impediment is or is not valid, or is or is not a matter of

official record; or

(E) promising performance that is likely to affect the

judgment of another in the transaction and that the actor

does not intend to perform or knows will not be performed,

except that failure to perform the promise in issue without

15

[*15] other evidence of intent or knowledge is not sufficient proof

that the actor did not intend to perform or knew the

promise would not be performed.

Id. § 31.01(1). Thus, pursuant to Texas law, Mr. Deutsch suffered a theft

loss if someone appropriated his money through deception and intended

to deprive him of it.

Under this standard, petitioners argue that Mr. Deutsch suffered

a theft loss because Mr. Visel and/or the Dubai Group appropriated Mr.

Deutsch’s money by deceiving him with the intent to deprive him of that

money. Respondent, on the other hand, argues that there is no evidence

that Mr. Visel made false statements; that petitioners have not shown

that Mr. Visel had criminal intent; and that there is no evidence of a

fraudulent theft committed by Mr. Visel or anyone else. We will take

each of respondent’s arguments in turn.

A.

Mr. Visel’s Acts of Deception

We find unpersuasive respondent’s argument that there is no

evidence that Mr. Visel made false statements. First, the relevant

standard is whether Mr. Visel performed an act of deception in a manner

that precludes Mr. Deutsch’s effective consent pursuant to Texas law.

Second, we find the record indeed shows Mr. Visel performed acts

meeting that definition.

The record shows that Mr. Visel created “a false impression” of

fact regarding collateral he pledged as security in the June 19, 2008,

promissory note. According to the note, Mr. Visel put up several

properties as security on the loan including his 50% interest in Arter

Caribe, Inc. However, Mr. Visel stated in an agreement signed

September 9, 2010, that he did not own an interest in Arter Caribe, Inc.,

because he had transferred his ownership to his son approximately four

years before he signed the promissory note. The promissory note does

not disclose that Mr. Visel no longer owned this asset, and his failure to

do so created a false impression of fact that affected Mr. Deutsch’s

judgment of the transaction pursuant to Texas law.

Additionally, Mr. Visel falsely represented to Mr. Deutsch that he

had signature authority over the Winilov account. On October 19, 2009,

Mr. Deutsch transferred $200,000 to the account; but immediately

afterwards Mr. Davidson informed him and Mr. Visel that he had sent

it to the wrong account. Mr. Visel assured Mr. Deutsch that he had

signatory authority over the account and that he would return the funds

16

[*16] to him but asked him to send another $200,000 the following day

to another account. Mr. Deutsch tried to get the funds from the first

transfer returned to him until Mr. Visel told him that he in fact no longer

had signature authority over this account. While it is possible that Mr.

Visel was misinformed over his signature authority over that account,

we think it is much more likely that he lied about his authority to induce

Mr. Deutsch to send the additional funds. Thus, we find that he

deceived Mr. Deutsch in this instance as defined under Texas law, and

the deception affected Mr. Deutsch’s judgment of the transaction.

B.

Other Acts of Deception

Furthermore, beyond Mr. Visel’s acts of deception, Mr. Davidson

misrepresented facts directly to Mr. Deutsch or through Mr. Visel. 8 Mr.

Davidson’s statements and actions indicate Mr. Davidson was deceiving

either Mr. Visel or Mr. Deutsch in conjunction with Mr. Visel. Mr.

Deutsch never met Mr. Davidson but spoke with him on the phone

multiple times during which he made false statements concerning the

$70 million deal and asked for additional funds. In addition, Mr.

Davidson orchestrated Mr. Visel’s actions by assuring him the funds

were real.

For example, Mr. Deutsch spoke with Mr. Davidson via telephone

before transferring $200,000 on October 19, 2009. Mr. Davidson

misrepresented that if Mr. Deutsch transferred $200,000, the alleged

$70 million would be released the following day. The alleged $70 million

was not released. We conclude that Mr. Davidson deceived Mr. Deutsch

in this instance as defined under Texas law.

In addition, Mr. Visel told Mr. Deutsch on October 21, 2009, that

Mr. Davidson and other bankers presented him with a $70 million

check. Mr. Visel said that they had printed the check to “Paul SVisel”

rather than “Paul S Visel,” so they took it back and stated he would be

issued a corrected one the next day. However, Mr. Visel never received

another check because he claimed Mr. Davidson told him the wrong type

of account was used. We find credible Mr. Stockard’s testimony at trial

that this story is consistent with a fraud because bankers from an

established institution such as Lloyds Bank would be able to resolve this

issue immediately, if necessary. Under the circumstances we conclude

that either Mr. Visel entirely fabricated the story to deceive Mr.

8 As the investigators opined, we find that the name Mr. Davidson is likely a

false identity; but for our purposes we will continue to refer to this individual as such.

17

[*17] Deutsch or Mr. Davidson deceived them both as defined under

Texas law.

C.

Appropriation and Intent to Deprive

We have concluded that Mr. Visel and Mr. Davidson both

deceived Mr. Deutsch while coaxing him to make multiple bank

transfers. We also conclude that someone appropriated Mr. Deutsch’s

money and intended to do so because it is the only plausible explanation

consistent with a preponderance of the evidence.

However, the evidence does not definitively resolve the identity of

the person who (1) appropriated Mr. Deutsch’s money and (2) intended

to deprive him of that money. In other words, the evidence does not

definitively resolve whether Mr. Visel ultimately appropriated Mr.

Deutsch’s money and acted with the intent to do so, or Mr. Davidson

appropriated Mr. Deutsch’s money and intended to do so while deceiving

Mr. Visel. Finally, it is also possible that an unknown third party

directed them both with or without their being willing accomplices.

If we had to determine the identity of the thief, we would name

Mr. Davidson. Much of the evidence supports the proposition that Mr.

Davidson directed Mr. Visel’s actions with the intent to deprive whoever

was lured to transfer funds anticipating Mr. Visel’s fictitious pay day.

Mr. Davidson represented himself as the central contact among the

multiple parties: the Dubai Group, Lloyds Bank, UBS, Mr. Visel, and

Mr. Deutsch. Mr. Davidson informed Mr. Visel with Mr. Deutsch

present that the funds could not be released for various reasons until

they paid additional sums. The investigators reported that Mr.

Davidson avoided meeting them directly and appeared desperate to

convince Mr. Visel that the funds were real and would be released after

another payment. The investigators reported that Mr. Davidson was

the “originator of banking instructions” for Mr. Visel and during their

investigation Mr. Davidson requested that another $500,000 be

deposited into a new bank account on April 14, 2010. Finally, Mr.

Davidson also called Mr. Deutsch from a blocked international number

and claimed Mr. Visel was out of the deal and that he would work

directly with Mr. Deutsch to get the funds released. We conclude these

actions indicate that he intended to deprive Mr. Deutsch of his money

(at times through Mr. Visel).

Even without direct evidence, we find that (1) Mr. Davidson

would not have orchestrated the fraud unless he thought he would

18

[*18] ultimately receive the wire transfers and (2) he did actually

receive the wire transfers. 9 In the alternative, even if Mr. Davidson was

merely an unwitting facilitator of the advance fee scam, had no intent

to deceive Mr. Deutsch, did not receive the wire transfers, and did not

appropriate Mr. Deutsch’s money, Mr. Deutsch still suffered a theft at

the hands of whoever orchestrated the scheme. See Halata, T.C. Memo.

2012-351, at *24–26 (finding that taxpayer suffered a theft loss

pursuant to Texas law even though the identity of the thief that

appropriated money was not definitively resolved in a fictitious bankguaranty transaction); see also Jensen v. Commissioner, T.C. Memo.

1993-393, 1993 Tax Ct. Memo LEXIS 404, at *12–13 (finding that

taxpayers were entitled to a theft loss deduction even though they had

contact only with their insurance broker, who invested their money in a

Ponzi scheme and who was not alleged to have been part of the scheme),

aff’d, 72 F.3d 135 (9th Cir. 1995) (unpublished table decision).

Respondent cites Price, 1971 Tax Ct. Memo LEXIS 8, and Riley v.

Commissioner, T.C. Memo. 2016-46, for the proposition that the fact that

criminal charges were not brought against Mr. Visel or anyone else

weighs against finding that the requisite criminal intent existed.

However, in this case the investigators were never able to identify or

locate Mr. Davidson or other members of the Dubai Group, and so the

fact that charges were not brought against them is unpersuasive.

Furthermore, any weight we may assign to the failure to pursue

criminal charges against Mr. Visel is negated by the fact that the

evidence does not definitively resolve that he was the perpetrator and

the investigators determined he did not have any recoverable assets.

Thus, we conclude that the bank transfers Mr. Deutsch made

totaling $925,000 in the $70 million deal were lost on account of theft as

defined by Texas law. 10

9 As might be predicted in an advance fee scam, the investigators could not

identify the beneficial owners of the Espanica, Winilov, or JM Property Services

accounts where Mr. Deutsch transferred the advance fee payments.

10 This $925,000 is the total of the following transfers made by Mr. Deutsch:

$175,000, $200,000, $200,000, and $350,000 on June 23, 2008, October 19, 2009,

October 20, 2009, and December 14, 2009, respectively.

19

[*19] D.

Theft Loss Sustained in 2010

As previously indicated, generally a theft loss is considered

sustained during the year in which the taxpayer discovers it. § 165(a),

(e). Thus, we must determine the year in which Mr. Deutsch discovered

the loss. Mr. Deutsch credibly testified that he realized in 2010, with

the help of paid attorneys, a private investigation firm, and an

individual with experience in London financial markets, that he had

been defrauded. Therefore, we conclude Mr. Deutsch discovered the

theft in 2010.

The theft loss is not considered to have been sustained in 2010 if

Mr. Deutsch had a claim for reimbursement with respect to which there

was a reasonable prospect of recovery. See Treas. Reg. § 1.165-1(d)(2)(i).

But we have previously held that for a taxpayer to no longer have a

reasonable prospect of recovery, the “taxpayer is not required to be an

‘incorrigible optimist,’ and a claim for recovery with little potential for

success will not require that the deduction be postponed.” Geisler v.

Commissioner, T.C. Memo. 1988-404, 1988 Tax Ct. Memo LEXIS 432,

at *7 (quoting United States v. S.S. White Dental Mfg. Co., 274 U.S. 398,

403 (1927)), aff’d, 955 F.2d 47 (9th Cir. 1992) (unpublished table

decision).

In September 2010, with the help of attorneys and investigators,

Mr. Deutsch convinced Mr. Visel to agree to transfer Mexican properties

owned by Mr. Visel’s son to Mr. Deutsch by November 8, 2010. However,

Mr. Visel failed to do so. Also in 2010, an attorney at Peters & Peters

told Mr. Deutsch that further legal action against Mr. Visel or the Dubai

Group was impractical because (1) Mr. Visel held very few assets;

(2) they could not identify Mr. Davidson or any of his potential coconspirators; and (3) claims against the banks that received the money

transfers were weak because there was no fiduciary relationship with

Mr. Deutsch and the banks would “defend vigorously” any claim while

possibly subjecting Mr. Deutsch to counterclaims for damages. In

addition, Mr. Deutsch’s attorney in Mexico told him that any attempt to

recover the Mexican properties through legal action would not likely be

fruitful and would be prohibitively expensive because Mr. Visel had

transferred the properties to his son and provided Mr. Deutsch with only

“worthless” copies of documents.

Respondent argues that Mr. Deutsch had a reasonable prospect

of recovery through the end of 2010 because he sent an email to Mr. Visel

in 2013 asking whether he would sign additional documents to transfer

20

[*20] the Mexican properties or pay him back. However, on the basis of

Mr. Visel’s response (and then lack thereof), we conclude the email

correspondence does not demonstrate that a reasonable prospect of

recovery existed.

We conclude that Mr. Deutsch did not have a reasonable prospect

of recovery after Mr. Visel failed to meet the November 8, 2010, deadline

and Mr. Deutsch was advised by his attorneys that other recovery

methods would not be fruitful. Thus, Mr. Deutsch sustained the theft

loss (totaling $925,000) in 2010.

E.

Mr. Visel’s Living Expenses

Mr. Deutsch gave Mr. Visel $295,600 over 19 months to pay his

living expenses while Mr. Visel claimed he was attempting to close the

deal. Mr. Visel told Mr. Deutsch that he would repay him for the living

expenses once the deal was done. Mr. Deutsch agreed to pay these

expenses because he thought it was the only way to complete the deal

and get his investment returned.

Mr. Deutsch claims he is entitled to a theft loss deduction for the

amount he lent Mr. Visel to pay his living expenses and never recovered.

However, while we conclude on a preponderance of the evidence that Mr.

Deutsch suffered a theft loss for the payments he made in the $70

million deal, we do not conclude that Mr. Visel was the thief.

In fact, evidence suggests that Mr. Visel was likely defrauded

himself, and he never wavered in his claims of innocence to the

investigators. According to the investigators, Mr. Davidson appeared

desperate to convince Mr. Visel that the $70 million existed, and Mr.

Davidson directly called Mr. Deutsch once it seemed Mr. Visel was out

of resources. In addition, attorneys conducting the investigation found

a partnership contract and loan agreement for $70 million between Mr.

Visel and a member of the Dubai Group. These seemingly official but

likely fraudulent documents show that Mr. Visel may have been duped.

If Mr. Visel was defrauded himself, then he did not deceive Mr.

Deutsch when he told Mr. Deutsch that he would repay him for the

living expenses after the deal closed. Thus, we conclude that petitioners

have failed to meet their burden of proof to establish that Mr. Visel

committed theft as defined under Texas law and they are not entitled to

a theft loss deduction with respect to funds advanced for Mr. Visel’s

living expenses.

21

[*21] III.

Section 6662(a) Penalty

We now address whether petitioners are liable for an accuracyrelated penalty pursuant to section 6662(a) and (b)(2) on an

underpayment due to a substantial understatement of income tax.

Section 6662(a) imposes a 20% accuracy-related penalty on any

portion of an underpayment of tax required to be shown on a return if,

as provided by section 6662(b)(2), the underpayment is attributable to

any “substantial understatement of income tax.” For purposes of section

6662(b)(2), an understatement generally means the excess of the

amount of tax required to be reported on the return over the amount

shown on the return. § 6662(d)(2)(A). An understatement is substantial

in the case of an individual if the understatement for the taxable year

exceeds the greater of 10% of the tax required to be shown on the return

for that taxable year or $5,000. § 6662(d)(1)(A).

As indicated supra p. 12, respondent bears the burden of

production with respect to petitioners’ liability for the accuracy-related

penalty, requiring him to come forward with sufficient evidence

establishing that it is appropriate to impose this penalty in the absence

of available defenses. See § 7491(c); Higbee, 116 T.C. at 446.

Additionally, this initial burden of production under section 7491(c)

includes producing evidence that the procedural requirements of section

6751(b) have been met; to wit, that the initial determination of the

accuracy-related penalty has been “personally approved (in writing) by

the immediate supervisor of the individual making such determination

or such higher level official as the Secretary may designate.” See Graev

v. Commissioner, 149 T.C. 485, 492–93 (2017), supplementing and

overruling in part 147 T.C. 460 (2016); see also Frost v. Commissioner,

154 T.C. 23, 34 (2020); Clay v. Commissioner, 152 T.C. 223, 248 (2019),

aff’d, 990 F.3d 1296 (11th Cir. 2021).

In Swift v. Commissioner, 144 F.4th 756, 770 (5th Cir. 2025), aff’g

T.C. Memo. 2024-13, the U.S. Court of Appeals for the Fifth Circuit

adopted the “timely supervisory approval” formulation set forth by the

U.S. Court of Appeals for the Ninth Circuit in Laidlaw’s Harley

Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir.

2022), rev’g and remanding 154 T.C. 68 (2020). The Ninth Circuit in

Laidlaw’s ruled that supervisory approval is timely if secured “before

the assessment of the penalty or, if earlier, before the relevant

supervisor loses discretion whether to approve the penalty assessment.”

Id.

22

[*22] We follow the relevant precedent of the court of appeals to which

an appeal would ordinarily lie. See Golsen v. Commissioner, 54 T.C. 742,

757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). An appeal by petitioners

would lie in the Fifth Circuit, and therefore Swift is controlling. Trial of

this case, however, was held, and the record was closed, before we issued

Graev (and Clay and Frost). Accordingly, in the light of Graev, we

ordered respondent to file a response addressing the effect of section

6751(b) on this case and directing the Court to any evidence of section

6751(b) supervisory approval in the record, and petitioners to respond.

Respondent was unable to direct the Court to any evidence in the record

that satisfies his burden of production with respect to section 6751(b)(1)

and filed a Motion to Reopen the Record (Motion) to offer into evidence

(1) the declaration of Ms. Mendiola 11 and (2) the Civil Penalty Approval

Form dated before the issuance of the August 27, 2014, Notice of

Deficiency and signed by Ms. Mendiola. Petitioners objected to the

introduction of any additional evidence with respect to the substantial

understatement penalty and requested that the Court deny

respondent’s Motion.

Reopening the record for the submission of additional evidence

lies within the Court’s discretion. Zenith Radio Corp. v. Hazeltine Rsch.,

Inc., 401 U.S. 321, 330 (1971); Chieftain Int’l (U.S.), Inc. v. Se. Offshore,

Inc., 553 F.3d 817, 820 (5th Cir. 2008); Butler v. Commissioner, 114 T.C.

276, 286–87 (2000); see also Nor-Cal Adjusters v. Commissioner, 503

F.2d 359, 363 (9th Cir. 1974) (“[T]he Tax Court’s ruling [denying a

motion to reopen the record] is not subject to review except upon a

demonstration of extraordinary circumstances which reveal a clear

abuse of discretion.”), aff’g T.C. Memo. 1971-200. We will not grant a

motion to reopen the record unless, among other requirements, the

evidence relied on is not merely cumulative or impeaching, is material

to the issues involved, and probably would change some aspect of the

outcome of the case. Butler, 114 T.C. at 287; see also Chieftain Int’l

(U.S.), Inc., 553 F.3d at 820 (explaining that trial courts, in deciding

whether to allow a reopening of the record, should “weigh ‘the

importance and probative value of the evidence, the reason for the

moving party’s failure to introduce the evidence earlier, and the

possibility of prejudice to the non-moving party’” (quoting Garcia v.

Woman’s Hosp. of Tex., 97 F.3d 810, 814 (5th Cir. 1996))); SEC v. Rogers,

790 F.2d 1450, 1460 (9th Cir. 1986) (explaining that the trial court

“should take into account, in considering a motion to hold open the trial

record, the character of the additional [evidence] and the effect of

11 Respondent subsequently supplemented Ms. Mendiola’s declaration.

23

[*23] granting the motion”), abrogated on other grounds by Pinter v.

Dahl, 486 U.S. 622 (1988).

In reviewing motions to reopen the record, courts have considered

when the moving party knew that a fact was disputed, whether the

evidentiary issue was foreseeable, and whether the moving party had

reason for the failure to produce the evidence earlier. See, e.g., George

v. Commissioner, 844 F.2d 225, 229–30 (5th Cir. 1988) (and cases cited

thereat) (holding that refusal to reopen the case was not an abuse of

discretion because the issue was foreseeable to the taxpayers and the

court could see no excuse for the taxpayers’ failure to produce evidence

earlier), aff’g Frink v. Commissioner, T.C. Memo. 1984-669. We also

balance the moving party’s diligence against the possible prejudice to

the nonmoving party. In particular, we consider whether reopening the

record after trial would prevent the nonmoving party from examining

and questioning the evidence as it would have during the proceeding.

See, e.g., Estate of Freedman v. Commissioner, T.C. Memo. 2007-61, slip

op. at 28; Megibow v. Commissioner, T.C. Memo. 2004-41, slip op. at 16.

The evidence that is the subject of respondent’s Motion would not

be cumulative of any evidence in the record and would not be

impeaching material. Respondent bears the burden of production with

respect to the substantial understatement penalty and would offer the

evidence as proof that the requirements of section 6751(b)(1) have been

met. The subject evidence is material to the penalty issue here, and the

outcome of that will be changed if we grant respondent’s Motion.

Petitioners argue that the issue of whether respondent met his

burden of proof regarding the accuracy-related penalty was raised in

their Petition and Opening Brief, respondent failed to exercise due

diligence when he failed to introduce written supervisory approval

before trial, and they would be prejudiced by not being allowed to crossexamine Ms. Mendiola or the revenue agent who conducted the

examination of the joint return. However, when this case was submitted

and the record closed, Graev (as well as Clay and Frost) had not been

issued. We agree with respondent that the evidence he now wishes to

have admitted into the record is not cumulative and is material to the

penalty issue in this case. We also agree with respondent that the Civil

Penalty Approval Form is a record kept in the ordinary course of

business activity and is authenticated by the declaration of Ms.

Mendiola. We will admit this document into evidence and the

declaration for purposes of authentication under Rule 902(11) of the

24

[*24] Federal Rules of Evidence. See Clough v. Commissioner, 119 T.C.

183, 190–91 (2002).

We now must decide whether respondent’s evidence is sufficient

to satisfy his initial burden of production under section 6751(b)(1). See

Swift v. Commissioner, 144 F.4th at 770. Since the Civil Penalty

Approval Form for petitioners was approved by Ms. Mendiola, who was

the revenue agent’s immediate supervisor, before the Notice of

Deficiency was issued to them, the IRS complied with section 6751(b).

Respondent having complied with the requirements of section

6751(b)(1), we now turn to the remainder of his initial burden of

production under section 7491(c), i.e., whether petitioners’

understatement of income tax for 2010 was substantial. As a result of

our holdings herein with respect to the theft loss deduction and

petitioners’ concession with respect to the miscellaneous itemized

deduction for investment expenses, see supra note 2, it would appear

that the Rule 155 computation must confirm a substantial

understatement of income tax by petitioners. Should the Rule 155

computation show a substantial understatement of income tax (which

we think it will), we conclude that respondent has met his burden of

production for the accuracy-related penalty under section 6662(b)(2).

Assuming there is a substantial understatement of income tax in

this case, petitioners can avoid application of the accuracy-related

penalty under section 6662(b)(2) with respect to any portion of the

underpayment for which they can show that they had reasonable cause

and acted in good faith. § 6664(c)(1); Higbee, 116 T.C. at 448–49.

Whether a taxpayer has acted with reasonable cause and in good faith

depends upon the pertinent facts and circumstances of a particular case.

Treas. Reg. § 1.6664-4(b)(1). We consider, among other factors, the

experience, education, and sophistication of the taxpayer; however, the

principal consideration is the extent of the taxpayer’s efforts to assess

the proper tax liability. Id.; see also Higbee, 116 T.C. at 448. In so

assessing, reliance on professional advice may indicate reasonable cause

and good faith “if, under all the circumstances, such reliance was

reasonable and the taxpayer acted in good faith.” Treas. Reg. § 1.66644(b)(1).

Petitioners contend that they had a reasonable basis for claiming

the theft loss deduction. We agree. Mr. Deutsch credibly testified as to

the conversations he had with, and the documents he provided to (all of

which are in the record), petitioners’ CPA regarding the series of

25

[*25] transactions he engaged in with Mr. Visel. As a result of those

conversations and the documents, the CPA instructed him that

petitioners were entitled to a theft loss deduction. On the basis of the

record in this case, we conclude that petitioners reasonably relied on the

advice of their CPA (who prepared the joint return) and acted with

reasonable cause and in good faith in claiming the theft loss deduction. 12

Accordingly, petitioners are not liable for the accuracy-related penalty.

IV.

Conclusion

We conclude that petitioners are entitled to a theft loss deduction

of $925,000 for 2010. Additionally, assuming the Rule 155 computation

confirms a substantial understatement of income tax, but because

petitioners have demonstrated reasonable cause, we do not sustain the

accuracy-related penalty.

In reaching our holdings, we have considered all of the arguments

made by the parties and, to the extent not addressed herein, we find

them to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

12 We also note that given the CPA’s involvement with the entire joint return,

petitioner acted with reasonable cause and good faith in claiming a miscellaneous

itemized deduction for investment expenses in an amount greater than what the IRS

allowed in the Notice of Deficiency. See supra note 2.