Dominick J. VINCENTINI, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 10-1231.
United States Court of Appeals, Sixth Circuit.
July 12, 2011.
Before: ROGERS and KETHLEDGE, Circuit Judges; RUSSELL, Chief District Judge.
* The Honorable Thomas B. Russell, United States Chief District Judge for the Western District of Kentucky, sitting by designation.
Petitioner-Appellant Dominick J. Vincentini (“Vincentini“) appeals a final decision issued by the Tax Court which upheld the Internal Revenue Service‘s (“IRS“) disallowance of a theft-loss deduction that Vincentini had claimed he could carry back to 1999, and its decision to impose an accuracy-related penalty under
I. BACKGROUND
Beginning sometime in 1997, Vincentini began listening to a series of financial and investment audiocassette tapes entitled “Gateway to Financial Freedom” created by Keith Anderson. Through the tapes, Vincentini learned about an organization created by Anderson known as Anderson Ark & Associates (“AAA“). AAA marketed itself as an investment company with offices in the United States and Costa Rica. Listening to the tapes motivated Vincentini to attend two international conferences where the investment opportunities offered by AAA were pitched to potential investors.
In 1999, following the conferences, Vincentini decided to invest in two of AAA‘s programs: the Loan Four Program and the Look Back Program. Regarding the former, it was marketed as an investment in factoring commissions for high-end consumer goods. Vincentini claims that he was promised annualized returns of 30 to 50 percent. All told, he invested $800,000.00 in the Loan Four Program. With the Look Back Program, Vincentini created the joint venture Birdlane Marketing Venture (“Birdlane“) with AAA, which would allow him to capitalize on an investment-loss deduction. AAA indicated to investors that the partnership would use the proceeds from a business loan to underwrite the marketing of books, electronic media, and audio tapes. On behalf of Birdlane, Vincentini executed a promissory note for $950,000.00 from La Maquina Blanca, S.A., a purported Costa Rican corporation. To effectuate the loan, Vincentini was required to pay some $76,000.00 in origination fees, while the majority of the loan was paid to Macro Media Advertising LLC, an entity operated by AAA. This
To aid Vincentini in the Look Back Program, AAA officials referred him to Gary Kuzel. Representing himself as a Certified Public Accountant, Kuzel drew up the legal documents for Birdlane, explained the partnership framework to Vincentini, and provided him with a number of documents relevant to his investment. Kuzel also prepared Vincentini‘s 1999 Form 1040, on which he claimed Birdlane‘s apparent partnership loss of $907,470.00, which offset a $796,629 early distribution from Vincentini‘s IRA. Despite his substantial investments in these programs, Vincentini claimed at trial that the profits he was promised failed to materialize.
On February 28, 2001, law enforcement officials from the United States and Costa Rica raided AAA‘s offices on the suspicion that the investment programs were in fact elaborate Ponzi schemes. Four of the principals for AAA, Keith Anderson, Wayne Anderson, Richard Marks, and Karolyn Grosnickle, were arrested and indicted. By 2002, a number of them had been convicted on federal criminal charges in the United States District Court for the Eastern District of California. See United States v. Anderson, 391 F.3d 970 (9th Cir. 2004). That same year, these criminal defendants, along with two other AAA employees (collectively “AAA Defendants“), were also indicted on a variety of federal criminal charges in the district court for the Western District of Washington. This case ended in convictions as well in 2004. The Washington district court ordered the AAA Defendants to pay restitution to their victims and to forfeit a substantial amount of personal and real property, proceeds from their ill-gotten gains.
Vincentini says that he learned of the raids on AAA‘s offices over the radio a few days after they occurred. In the months following, as the fraudulent scheme unraveled in the courts, he claims that he and other investors spoke with representatives from AAA, including Keith Anderson, on prescheduled teleconferences. The representatives worked to assuage the obvious concerns of Vincentini, telling him that his investment was safe and that the federal investigation was only a temporary setback. By May of 2001, AAA‘s conferences had stopped and Vincentini was actively trying to withdraw his investment from the Loan Four Program. There were also phone conferences between the investors and Costa Rican attorneys exploring whether to begin legal proceedings against the principals of AAA. Although Vincentini states that he participated in at least one of these conferences, he ultimately chose not to retain legal counsel to pursue his money because he thought such efforts to be in vain. Vincentini further says he tried, unsuccessfully, to withdraw his investment from AAA by submitting several “directives” to Kuzel and other principals requesting the release of his funds.
On March 6, 2003, the IRS sent a statutory notice of deficiency to Vincentini stating that the partnership-loss deduction he took in 1999 for Birdlane was inappropriate. The notice also assessed against him an accuracy-related penalty under
On May 23, 2007, a trial was held by the Tax Court to consider the new theft-loss argument and the penalty imposed under section 6662. After considering the evidence before it, the Tax Court concluded that Vincentini had not met his burden of proof in showing that there was no reasonable prospect of recovery for his theft loss from the AAA Defendants. Specifically, the Tax Court‘s opinion set out the following basis for this conclusion:
The only evidence offered by petitioner regarding his analysis of his prospect of recovery in 2001 was petitioner‘s uncorroborated testimony that he made some attempts to recover his money. Petitioner did not offer in evidence the forms that he supposedly filled out and submitted to [AAA]. Petitioner did not call as a witness at trial anyone who could testify as to his participation in the conference calls or any other attempts to recover his money. More importantly, petitioner did not testify that he believed at the end of 2001 that he had no reasonable prospect of recovering his money.
Vincentini v. Comm‘r, 96 T.C.M. (CCH) 400, No. 7166-03, 2008 WL 5137345, at *8 (T.C. Dec. 8, 2008). The Tax Court also upheld the penalty under section 6662, finding that since Vincentini knew of Kuzel‘s affiliation with AAA, any reliance upon him was misplaced and unreasonable. Id. at *10. Although Vincentini reasserted his objections in a motion to reconsider, the Tax Court rejected his new arguments as well. See Vincentini v. Comm‘r, 98 T.C.M. (CCH) 427, No. 7166-03, 2009 WL 3739461 (T.C. Nov. 9, 2009). This appeal has followed.
II. ANALYSIS
A. Standard of Review
The statute that grants this Court the jurisdiction to hear appeals from the Tax Court also provides that the review of these decisions shall be in the “same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.”
B. Theft-Loss Deduction
The tax code provides a deduction for losses that are “sustained during the taxable year and not compensated for by insurance or otherwise.”
The genesis for the theft-loss analysis is the taxable year in which the taxpayer discovered the loss.
If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. 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.
Both parties concede that Vincentini discovered by 2001 that he had been the victim of AAA‘s fraudulent scheme. Given the three-year carry-back provision, the only remaining query is whether the Tax Court clearly erred in determining that Vincentini failed to demonstrate with reasonable certainty that there was no reasonably prospect of recovery in 2001 or 2002. “A reasonable prospect of recovery exists when the taxpayer has bona fide claims for recoupment from third parties or otherwise, and when there is a substantial possibility that such claims will be decided in his favor.” Ramsay Scarlett & Co. v. Comm‘r, 61 T.C. 795, 811, (1974) (citations omitted) aff‘d 521 F.2d 786 (4th Cir.1975); see Jeppsen v. Comm‘r, 128 F.3d 1410, 1418 (10th Cir.1997); Miller v. Comm‘r, 733 F.2d 399, 407 (6th Cir.1984) (Contie, J. dissenting). This is an objective standard, where the Court must examine a taxpayer‘s reasonable expectations at the close of the taxable year in which the deduction was claimed. Ramsay Scarlett & Co., 61 T.C. at 811. Taxpayers need not refrain from taking a loss deduction simply because there exists a remote or nebulous possibility of recovery. See United States v. S.S. White Dental Mfg. Co. of Pa., 274 U.S. 398, 402-03 (1927) (the tax code does “not require the taxpayer to be an incorrigible optimist“); Rudiger v. Comm‘r, 22 B.T.A. 204, 206 (1931) (taxpayer does not have to postpone a loss deduction when there is only a “bare hope” of recoupment); see also, 7 J. Mertens, Law of Federal Income Taxation § 28:33 (2011). Still, in a year where the prospect of recovery is simply unknowable, a theft-loss deduction under section 165 is inappropriate. Jeppsen, 128 F.3d at 1418.
In examining the objective evidence, the Tax Court could properly conclude that Vincentini did not meet his burden. At trial he declined to offer anything more than his own testimony to show that at the end of 2002 there was no reasonable prospect of recovery. Even though Vincentini testified that he had both sent written
On appeal, Vincentini insists that the Tax Court overlooked two important facts that were properly before it when it made its decision: that by 2002 convictions against the AAA Defendants had been handed down by the district court in California and that during this criminal trial they were represented by court-appointed counsel pursuant to
The Tax Court carefully confronted Vincentini‘s arguments and concluded that the evidentiary gaps at trial were too great for him to meet his burden of persuasion. This Court is in no better position to find otherwise.
C. Accuracy-Related Penalty
The Tax Court also upheld the IRS‘s decision that Vincentini was liable for an accuracy-related penalty under section 6662. The tax code levies a 20 percent penalty for a “substantial understatement” of a taxpayer‘s income tax liability.
The tax code also provides taxpayers a defense to penalties under section 6662. It says that “[n]o penalty shall be imposed under section 6662... with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.”
Vincentini does not contest that there was a substantial understatement of his tax liability on the 1999 return. Rather, he appeals the Tax Court‘s rejection of his argument that he relied in good faith on Kuzel‘s advice. On review, the Tax Court did not clearly err in this finding. Vincentini conducted no research on Kuzel‘s professional background or the extent of his ties with AAA. Nor did he solicit aid from another financial professional to create the Birdlane partnership or prepare his taxes for 1999, despite Kuzel‘s open affiliation with AAA. Claims by Vincentini at trial that he consulted his personal investment advisor were unsubstantiated and therefore properly discarded by the Tax Court. Finally, the imposition of an accuracy penalty under these circumstances is in line with this Court‘s previous decisions. See e.g., Mortensen, 440 F.3d at 387 (a taxpayer‘s reliance on a promoter of cattle breeding partnerships was insufficient to establish the good faith defense); Pasternak v. Comm‘r, 990 F.2d 893, 903 (6th Cir.1993) (investor could not reasonably rely on advice from financial advisors where “the purported experts were either the promoters themselves or agents of the promoters“).
Much like Mortensen and Pasternak, Vincentini put his faith in a biased professional, affiliated with the organization promoting the investments. That he did not question Kuzel about his professional background indicates that Vincentini either errantly omitted important investigatory steps or chose to ignore the telltale signs of an investment that was too good to be true. Either way, he did not act in good faith to determine his tax liability.
III. CONCLUSION
In closing, the Court must afford the Tax Court broad discretion under the clearly erroneous standard for each of these issues. Judging the evidence presented at trial through this lens, it cannot be said with firm conviction that a mistake has been made. For these reasons, the Tax Court‘s decision is AFFIRMED.