Adkins v. United States
2017 U.S. App. LEXIS 8103
| Fed. Cir. | 2017Background
- Charles and Jane Adkins invested with Donald & Company and were defrauded by a pump‑and‑dump scheme; their portfolio fell from ~$3.6M (2000) to about $9,849 (2001).
- They discovered the fraud in 2002 and filed an NASD arbitration claim; related criminal indictments and guilty pleas for Donald & Co. principals occurred in 2004 and later.
- In 2006 the Adkinses claimed a §165 theft loss of $2,118,725 for tax year 2004 (carrying back portions to 2001–2003); the IRS disallowed refunds except for 2002.
- The Claims Court held the Adkinses were not entitled to a 2004 theft‑loss deduction because they failed to show in 2004 that it could be ascertained with reasonable certainty they would not be reimbursed, and treated abandonment of the arbitration as effectively required.
- The Adkinses appealed, arguing (1) the regulation’s standards are one test not two, (2) abandonment was not required, (3) Revenue Proc. 2009‑20 applies, and (4) if 2004 is wrong, mitigation should fix 2003 as the loss year.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper standard under Treas. Reg. §1.165‑1(d)(3): one test or two distinct standards | Adkins: regulation sets a single test — loss year is first year no reasonable prospect of recovery exists (reasonable prospect = inverse of reasonable certainty) | Government/Claims Court: courts may separate a lower “reasonable prospect” inquiry (discovery year) and a higher “reasonable certainty” inquiry (later years) | Court: adopts Adkins’ view — regulation should be read as a single probabilistic test (consistent with several circuits) |
| Whether abandonment of arbitration was required to fix 2004 as the loss year | Adkins: abandonment is not required; totality of circumstances can establish reasonable certainty of no recovery even with a pending claim | Claims Court: treated settlement/adjudication/abandonment as the primary means to ascertain no recovery and effectively required abandonment | Court: reversal — pending arbitration is only one factor; abandonment is not a prerequisite and the Claims Court must apply a holistic all‑facts test on remand |
| Application of Revenue Procedure 2009‑20 | Adkins: argues Claims Court failed to apply Revenue Proc. 2009‑20 | Government: (responded below) | Court: did not reach this issue because it resolved primary regulatory errors |
| Alternative relief under Treas. Reg. §1.1311(c) (mitigation to 2003) | Adkins: if 2004 is improper, mitigation rules should allow 2003 as the loss year | Government: (contested below) | Court: did not reach this question on appeal; remanded for further factfinding on primary issues |
Key Cases Cited
- Tinton Falls Lodging Realty, LLC v. United States, 800 F.3d 1353 (Fed. Cir.) (standard of review for Claims Court decisions)
- Johnson v. United States, 74 Fed. Cl. 360 (Fed. Cl. 2006) (distinguishing "reasonable prospect" and "reasonable certainty" tests)
- Vincentini v. Comm’r of Internal Revenue, [citation="429 F. App'x 560"] (6th Cir.) (treating the regulation as a single test requiring reasonable certainty of no recovery)
- Jeppsen v. Comm’r of Internal Revenue, 128 F.3d 1410 (10th Cir.) (using "reasonable prospect" and "reasonable certainty" language interchangeably)
- Rainbow Inn, Inc. v. Comm’r of Internal Revenue, 433 F.2d 640 (3d Cir.) (describing the regulation's test as whether a reasonable prospect of recovery existed at time of claim)
- Florsheim Shoe Co. v. United States, 744 F.2d 787 (Fed. Cir.) (trial court’s discovery rulings reviewed for abuse of discretion)