                        T.C. Memo. 2007-366



                      UNITED STATES TAX COURT



         JAMES G. AND ELAINE A. WANCHEK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17614-05.               Filed December 11, 2007.


          On their amended 2001 Federal income tax return, P’s
     claimed a theft loss deduction of $172,904 on the basis that
     their contractor had committed fraud against them. R
     disallowed the entire theft loss deduction and determined a
     deficiency.

          Held: Ps are not entitled to any theft loss deduction
     for the 2001 taxable year.

     Paul A. Bleicher, for petitioners.

     Vicki L. Miller, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for redetermination of a deficiency of $10,255 that respondent
                               - 2 -

determined for petitioners’ 2001 taxable year.     The sole issue

before the Court is whether petitioners are entitled to a theft

loss deduction for the 2001 taxable year.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts and accompanying exhibits are hereby incorporated by

reference into our findings.   Petitioners, husband and wife,

resided in Tijeras, New Mexico, when they filed their petition.

     In September 1994, petitioners and James Green (Mr. Green)

entered into a preconstruction agreement for the construction of

a new house.   Mr. Green hired Max Cabber (Mr. Cabber) to draw

plans and assist in the design of petitioners’ house.     On

February 3, 1995, petitioners contracted with Mr. Green for the

construction of a $190,900 house.1     Construction of petitioners’

house was completed on August 4, 1995, and petitioners moved in

that same day.

     Sometime thereafter, petitioners began noticing problems

with their new house.   Those problems escalated and became a

living nightmare, despite various repair efforts by Mr. Green and

the subcontractors.   On May 12, 1999, petitioners filed a civil

lawsuit in the Second Judicial District Court of Bernalillo

County, New Mexico (State court) against Mr. Green and several


     1
       That contract was later revised as the result of change
orders. The total amount ultimately paid to Mr. Green was
$196,183.
                               - 3 -

other parties2 involved in the construction and design of

petitioners’ house.   In their complaint, petitioners alleged

negligence, negligent misrepresentation, fraud, unfair trade

practices, breach of warranty, breach of duty of good faith and

fair dealing, breach of contract, prima facie tort, and emotional

distress.3

     In October 2001, before trial, petitioners and the parties

whom they had sued agreed to settle the lawsuit for $130,000,

$40,500 of which was to be paid by Mr. Green.   The settlement

agreement provided, among other things, that no party was to

admit “any responsibility or wrongdoing whatsoever.”   On February

4, 2002, the State court granted a joint motion to dismiss the

lawsuit filed by petitioners and dismissed that lawsuit with

prejudice.   No criminal charges were ever filed against Mr.

Green, or any of the other parties involved in the design and

construction of petitioners’ house, for any matter relating to

the design and construction of petitioners’ house.

     In January 2003, petitioners filed a Form 1040X, Amended

U.S. Individual Income Tax Return, for the 2001 taxable year in

which they claimed a net theft loss deduction of $172,904 for


     2
       Those parties included Mr. Cabber and, ultimately, eight
subcontractors.
     3
        Petitioners also filed three amended complaints. Those
amended complaints, other than adding as defendants two of the
eight subcontractors, do not differ materially from the original
complaint so as to warrant discussion.
                                 - 4 -

that taxable year.4   This claimed loss eliminated their taxable

income for 2001 and resulted in a refund of the claimed $10,225

overpayment plus any statutory interest.    Respondent then audited

the amended 2001 Federal income tax return and, on June 15, 2005,

issued the aforementioned notice of deficiency denying the

claimed theft loss deduction.    Petitioners filed a timely

petition with this Court, and a trial was held on November 28,

2006, in Albuquerque, New Mexico.

                                OPINION

I.   Parties’ Contentions

      Citing section 165(c)(3),5 petitioners assert entitlement to

a theft loss deduction on the basis that Mr. Green committed

“fraud” within the meaning of New Mexico law.    In essence, they

contend that Mr. Green took money from them intending not to

conform with the plans that he had agreed to follow in

constructing their house.   Acknowledging that they must rely on

circumstantial evidence to prove Mr. Green’s intent to defraud

them, petitioners assert that the magnitude of Mr. Green’s

noncompliance with the construction plans “is not accidental.”



      4
       The manner in which petitioners arrived at that amount is
subject to dispute. In light of our ultimate disposition,
however, we need not delve into that issue.
      5
       Unless otherwise noted, all section references are to the
Internal Revenue Code of 1986, as amended and in effect for the
taxable year at issue. The Rule reference is to the Tax Court
Rules of Practice and Procedure.
                                - 5 -

Petitioners go on to point out that (1) “landfill was added to

the sides of the house to hide the fact that foundations were

improperly set”; (2) “the location of the sewer” and “the

thickness of the stucco” did not conform to the housing plan,

without notice to petitioners; and (3) Mr. Green misrepresented

that the land was “engineered,” when “there was no engineering of

the soil besides grading.”    Petitioners assert that Mr. Green

misrepresented the quality of his houses and his role in their

construction in promotional materials and misrepresented that Mr.

Cabber was an architect.    Petitioners further assert that “Mr.

Green had no intention to cure or even acknowledge any defects

and he made himself absent from the state by moving to Las

Vegas.”

       Respondent contends that petitioners have failed to prove

that Mr. Green’s conduct constituted a theft under New Mexico

law.    Respondent notes that Mr. Green obtained the requisite

building permit, hired subcontractors whom he had worked with

before, was present at the construction site on a daily basis,

oversaw the subcontractors’ work, and, once construction of

petitioners’ house was completed, received a certificate of

occupancy from the county.    With respect to Mr. Cabber’s

credentials, respondent notes that neither the preconstruction

agreement nor the contract provided that an architect would

design petitioners’ house and that petitioners never asked Mr.
                               - 6 -

Cabber or Mr. Green whether Mr. Cabber was an architect.

Regarding Mr. Green’s representations as to the “fine quality” of

his houses, respondent asserts that even petitioners have

conceded such a term is subjective and that Mr. Green believes

that he provided the highest quality work.    When petitioners

discovered defects in their house, respondent observes that,

until Mr. Green moved to Las Vegas in 1998, and even after the 1-

year warranty period had expired, he sent repairmen to fix those

defects.   Respondent’s ultimate contention is that this is a

contractual dispute, not a criminal matter.     In that regard,

respondent notes that this dispute was the subject of a civil

suit, that the civil suit settled with no admission of fault, and

that no criminal complaint was ever filed in this matter.

Finally, respondent addresses this Court’s decisions dealing with

similar situations and asserts that this case is like those in

which this Court has disallowed theft loss deductions.

II.   Theft Loss

      Deductions are a matter of legislative grace, and the

taxpayer must maintain adequate records to substantiate the

amounts of any deductions or credits claimed.    Sec. 6001; INDOPCO

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a),

Income Tax Regs.   As a general rule, the Commissioner’s

determination of a taxpayer’s liability in the notice of

deficiency is presumed correct, and the taxpayer bears the burden
                                - 7 -

of proving that the determination is improper.   See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    But see sec.

7491(a).

     Section 165(a) allows a taxpayer to deduct any loss

sustained during the taxable year that is not compensated for by

insurance or otherwise.   Section 165(c)(3), which limits losses

for individuals, allows an individual taxpayer to deduct losses

of property arising from, among other things, theft.   The

existence of a theft must be determined by reference to the law

of the jurisdiction in which the loss occurred; however, a

criminal conviction is not necessary in order for a taxpayer to

demonstrate a theft loss.   See Monteleone v. Commissioner, 34

T.C. 688, 692-694 (1960).

     The New Mexico Criminal Code does not list “theft” as a

crime.   See McCullough v. Commissioner, T.C. Memo. 1990-653 (“The

New Mexico Criminal Code does not specifically make ‘theft’ a

crime.”).   Under New Mexico law, fraud, the crime Mr. Green

allegedly committed against petitioners, is “the intentional

misappropriation or taking of anything of value that belongs to

another by means of fraudulent conduct, practices or

representations.”   N.M. Stat. Ann. sec. 30-16-6 (LexisNexis Supp.

2006).   The elements of criminal fraud include “a specific intent

to cheat or deceive someone.”   State v. Higgins, 762 P.2d 904,

908 (N.M. Ct. App. 1988).   “Intent is seldom provable by direct
                                 - 8 -

testimony” and usually “must be proved by the reasonable

inferences shown by the evidence and the surrounding

circumstances.”     State v. Ortiz, 563 P.2d 113, 116 (N.M. Ct. App.

1977).   Finally, petitioners must prove a theft under applicable

State law only by a preponderance of the evidence, not beyond a

reasonable 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.”).

     Petitioners have fallen short of proving that Mr. Green

possessed the specific intent to cheat or deceive them when he

took their money in exchange for building their house.       To begin

with, Mr. Green’s general representations in his promotional

materials regarding the quality of his work amounted to no more

than sales talk, or puffing.6    For instance, Mr. Green’s

statements in his promotional materials that his houses are

“built with unyielding allegiance to quality and craftsmanship”

and that “As a builder, James Green is unequalled” merely

represented Mr. Green’s opinion of his own work.    Such

statements, in this context, do not constitute fraud.


     6
       “‘“Puffing” means an exaggerated commendation of wares or
worth in communications addressed to the public or to a class or
group.’” West v. Commissioner, 88 T.C. 152, 163 (1987) (quoting
Utah Code Ann. sec. 76-6-405 (1978)).
                               - 9 -

     Petitioners also argue that because Mr. Green himself had no

qualifications in any trade, Mr. Green’s promotional materials

fraudulently reflected that he would personally supervise the

construction of their house.   We disagree.   Even though Mr. Green

has admitted that he lacked the technical ability to perform many

of the tasks performed by the subcontractors, there is a

fundamental flaw in petitioners’ argument.    The fact that Mr.

Green, a homebuilder, could not do the job himself does not

render fraudulent his statement that he would supervise the work

to ensure quality control.   Petitioners have not alleged, and the

record does not reflect, that Mr. Green ever made a false

statement of fact regarding his technical skills.7   We will not

find fraud by conjecture.8

     Petitioners’ contention that Mr. Green defrauded them by

misrepresenting that Mr. Cabber was an architect is equally

unavailing.   Aside from petitioners’ testimony, there is no

evidence that Mr. Green ever represented that Mr. Cabber was an


     7
       For example, Mr. Green never represented that he was a
licensed electrician, plumber, or carpenter, etc. The fact that
petitioners might have incorrectly assumed that Mr. Green
possessed certain technical skills does not render fraudulent any
of Mr. Green’s representations.
     8
       In the end, it is telling that petitioners would have us
infer fraud from Mr. Green’s promotional materials when those
promotional materials contain clear factual statements regarding
Mr. Green that petitioners fail to challenge and that, if proven
false, might lend significant support to an argument that Mr.
Green committed fraud. For example, Mr. Green represented that
he had “won five major awards over the years,” including State
Achievement in Building Excellence awards in two categories.
                               - 10 -

architect.   Neither the preconstruction agreement nor the

contract contains such a representation.    Moreover, even assuming

arguendo that Mr. Green at one time misrepresented Mr. Cabber as

an architect, we would have no basis to conclude that such a

misrepresentation was coupled with an intent to cheat or deceive

petitioners.9

     Nor does the fact that specifications in the construction

plans might not have been met shed light on Mr. Green’s intent;

it is certainly not determinative evidence of fraud on Mr.

Green’s part.    At most, Mr. Green’s failure to carry out the

construction plans constitutes a breach of contract or negligence

on his part.    Petitioners’ position ignores the fact that, in

addition to Mr. Green, there were at least nine other parties

involved in the design and construction of petitioners’ house.10

Because so many parties were involved in designing and building

petitioners’ house, any fraud perpetrated by Mr. Green would

likely have involved some or all of those other parties.     If Mr.

Green had intended to deceive petitioners through a scheme of

such proportions, we would expect that petitioners would present




     9
       In their reply brief, petitioners assert that Mr. Cabber
was providing architectural services in violation of the New
Mexico Architectural Act. In our view, the veracity of that
allegation has no bearing on whether Mr. Green defrauded
petitioners.
     10
       Petitioners’ civil suit was against Mr. Green and those
nine other parties.
                              - 11 -

more than weak circumstantial evidence buttressed by scant

allegations.

     Petitioners’ case is not novel.    This Court has addressed

similar issues in a number of cases.    For the most part, as in

this case, the Court has found against taxpayers on the basis

that they had not proven that the contractors acted with the

requisite intent to constitute a theft crime.    See Friedman v.

Commissioner, T.C. Memo. 1992-588, affd. without published

opinion 48 F.3d 535 (11th Cir. 1995); Schneider v. Commissioner,

T.C. Memo 1981-603; Godine v. Commissioner, T.C. Memo. 1977-393;

Price v. Commissioner, T.C. Memo. 1971-323.

     The few cases in which this Court has allowed theft loss

deductions involved contractors who took money from taxpayers

under false pretenses and then either absconded or ceased

construction and used the money for purposes not related to the

construction agreement.   See Norton v. Commissioner, 40 T.C. 500

(1963), affd. 333 F.2d 1005 (9th Cir. 1964); Miller v.

Commissioner, 19 T.C. 1046 (1953); see also Hartley v.

Commissioner, T.C. Memo. 1977-317.     Mr. Green did not take

petitioners’ money and run.   To the contrary, although the

quality of the construction was not what petitioners had

bargained for, Mr. Green completed the job and made some repairs.

The circumstantial evidence does not demonstrate that Mr. Green

ever intended to defraud petitioners.    Nor is our conclusion
                                - 12 -

altered by the fact that, years after constructing petitioners’

house, Mr. Green left the homebuilding business and moved out of

New Mexico.     Petitioners were the victims of poor workmanship,

which, without more, is not a crime.

     The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.     To the extent not discussed

herein, we conclude that they are meritless, moot, or

irrelevant.11

     To reflect the foregoing,

                                           An appropriate order and

                                      decision will be entered.




     11
       Because petitioners have not sustained a theft loss, we
need not discuss issues relating to the amount of the claimed
loss. Also, respondent filed a motion in limine to prevent the
testimony of two experts. Because we hold for respondent without
considering that evidence, the question of whether that evidence
should be admitted is also moot, and respondent’s motion will
therefore be denied.
