Adkins v. United States
960 F.3d 1352
| Fed. Cir. | 2020Background
- The Adkinses invested heavily with Donald & Co., a broker-dealer running a pump-and-dump scheme; most of their loss centered on MyTurn stock, reducing their portfolio from ~$3.6M in 2000 to under $10,000 by 2002.
- The Adkinses filed NASD arbitration claims in 2002 against several Donald & Co. principals (Stetson, Volman, Ingrassia) but did not name Marc Freeman or the Kozaks; discovery stalled and the arbitration was effectively frozen by pending criminal matters.
- Federal indictments beginning in 2004 charged multiple Donald & Co. principals with securities fraud and money laundering and included criminal forfeiture allegations; plaintiffs learned defendants intended to plead guilty and SEC bans later removed their broker livelihoods.
- The Adkinses claimed a theft-loss deduction for 2004 (carrying back portions to 2001–2003); an IRS Appeals Officer concluded the loss existed, but the IRS settlement was not finalized before statute of limitations concerns prompted suit in the Court of Federal Claims.
- The Claims Court (after remand from this Court) denied the tax refund, applying an "unknowable" standard and faulting the Adkinses for not pursuing all possible recovery avenues (e.g., naming Freeman, seeking restitution); the Federal Circuit reverses, holding the Claims Court misapplied the legal standard and erred factually.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proper legal standard for timing a theft-loss deduction under §165 and Treas. Reg. §1.165-1(d) ("reasonable prospect of recovery") | Adkins: taxpayer must show, by preponderance, there was no reasonable prospect of recovery in the claimed year; abandonment not required. | Gov: (as applied by Claims Court) uncertainty about prospects can preclude a finding of no reasonable prospect. | Court: Adopted Adkins I standard—focus on whether a reasonable prospect existed; rejected the Claims Court's "unknowable" gloss. |
| Whether an "unknowable" prospect of recovery (uncertainty) automatically defeats the deduction | Adkins: "Unknowable" is not the correct test and improperly raises taxpayer's burden. | Gov/Claims Ct: uncertainty meant prospects could not be established, foiling the deduction. | Court: Rejected the "unknowable" standard as legally erroneous and confusing; the regulation asks whether a reasonable prospect existed, not whether it was perfectly knowable. |
| Whether taxpayer must pursue/exhaust all conceivable avenues (e.g., add Freeman, seek restitution) before claiming loss | Adkins: No—taxpayer need not pursue every conceivable, unlikely, or costly avenue; courts consider reasonableness and likelihood. | Gov/Claims Ct: Adkins should have pursued claims against Freeman and restitution avenues; failure to do so showed possible recovery. | Court: Taxpayer need not exhaust every avenue; pursuing every theoretical claim is not required and the Claims Court erred in demanding it. |
| Factual question whether Adkinses lacked a reasonable prospect of recovery in 2004 | Adkins: Given indictments, forfeiture counts, SEC bans, stalled arbitration, and lack of assets or insurance, there was no reasonable prospect of recovery by end of 2004. | Gov: Argued uncertainty and potential recovery avenues meant the prospect was not proven to be absent in 2004. | Court: On the whole record, the Claims Court clearly erred; Adkinses had no reasonable prospect of recovery in 2004—reversed and remanded for refund calculation. |
Key Cases Cited
- Adkins v. United States, 856 F.3d 914 (Fed. Cir. 2017) (prior Federal Circuit decision clarifying the "reasonable prospect of recovery" standard and that abandonment is not required)
- Jeppsen v. Commissioner, 128 F.3d 1410 (10th Cir. 1997) (Tenth Circuit language describing an "unknowable" prospect of recovery, criticized by the court)
- United States v. S.S. White Dental Mfg. Co., 274 U.S. 398 (1927) (taxpayer not required to be an "incorrigible optimist" to claim a completed loss)
- Interstate Transit Lines v. Commissioner, 319 U.S. 590 (1943) (taxpayer bears burden to prove entitlement to deduction)
- Ramsay Scarlett & Co. v. Commissioner, 61 T.C. 795 (1974) (defining reasonable prospect as a substantial possibility that claims will be decided in taxpayer's favor)