                              T.C. Memo. 2015-25



                        UNITED STATES TAX COURT



                   TIM SHERIDAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 7371-13.                        Filed February 18, 2015.



      Tim Sheridan, pro se.

      Kirsten E. Brimer, for respondent.



                          MEMORANDUM OPINION


      LAUBER, Judge: With respect to petitioner’s Federal income tax for 2009,

2010, and 2011, the Internal Revenue Service (IRS or respondent) determined
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[*2] deficiencies and accuracy-related penalties under section 6662(a)1 in the

following amounts:

                                                                   Penalty
           Year                      Deficiency                  sec. 6662(a)
           2009                       $15,661                       $3,132
           2010                         12,630                       2,526
           2011                          7,682                       1,536

For each year at issue petitioner claimed a deduction of $1 million under section

165(e) for a “loss arising from theft.” He contends that these theft losses occurred

when “pirates” stole the intellectual property underlying a patent that he holds.

Respondent disallowed these deductions because there was no evidence that patent

infringement had occurred or that petitioner had incurred actual damages. Re-

spondent has moved for summary judgment under Rule 121, contending that there

are no disputed issues of material fact and that he is entitled to judgment as a mat-

ter of law. We agree and accordingly will grant the motion.




      1
        Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (Code) in effect for the tax years at issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure. We round all monetary
amounts to the nearest dollar.
                                        -3-

[*3]                                Background

       Petitioner is an inventor and an entrepreneur. He is the holder of U.S.

patent No. 7,415,982, filed in 2001, for a “smokeless tobacco vaporizer.” Certain

other patents, which also involve a mechanism for heating materials so that they

can be vaporized and inhaled through a tube, predate petitioner’s patent. His

patent, like those other patents, precedes by almost a decade the recent rise to

popularity of “e-cigarettes.”

       Following a long period of disappointing sales, petitioner began to view

each roadblock in his vaporizer’s path to success as evidence of multiple con-

spiracies to prevent him from enjoying the fruits of his labor. He alleges (among

other things) that Internet search engines have intentionally demoted his product;

that social media platforms have conspired to diminish his product’s visibility; that

the U.S. Postal Service has intentionally misspelled the name of his business; that

a telecommunications firm has prevented him from sending crucial emails; that his

computer has been continuously hacked to prevent him from retrieving important

information; and that Wikipedia has improperly removed edits he sought to make

to an Internet article discussing vaporizers. He contends that these perceived

wrongs have enabled other companies to use his intellectual property and make

vaporizer sales that his business would otherwise have made.
                                         -4-

[*4] Petitioner contends that these conspiracies have resulted in “thefts” that

have caused him losses ranging from $282 million to $294 million annually. In

calculating these losses, petitioner begins with his estimate of the total market for

vaporizers worldwide, which he believes to be $1.8 billion. From this figure, he

derives his damages by applying various formulas of his own creation, which

apply estimates and randomly assigned multipliers to geographic populations,

Internet traffic, total market, competitors’ sales, and other items. Inputs to these

formulas include petitioner’s estimates of smokers as a percentage of the popu-

lation, smokers who use “alternative” smoking devices, smokers who “actually

quit” annually, smokers who “virtually quit” annually and use replacements, an-

nual sales of vaporizers to customers “lured away” by alleged market persecution

of his product, and Internet traffic lost to his business because of “inappropriate

throttling” of online search results.

      In 2013 petitioner filed suit in the U.S. District Court for the Eastern District

of Pennsylvania seeking to enjoin IRS actions against him, to obtain a judicial

“acknowledgment” of the losses he had calculated, and to compel the IRS to return

to him, as damages, taxes that alleged patent infringers had paid on their ill-gotten

gains. The District Court granted the United States’ motion to dismiss the case

under section 7421(a), which prohibits taxpayers from bringing suit “for the
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[*5] purpose of restraining the assessment or collection of any tax.” See Sheridan

v. United States, 2013 WL 2419167, at *2 (E.D. Pa. 2013) (quoting Anti-

Injunction Act, 26 U.S.C. sec 7421(a)), aff’d, 553 Fed. Appx. 187 (3d Cir. 2014).

Petitioner appealed that dismissal to the U.S. Court of Appeals for the Third

Circuit, which affirmed the District Court’s ruling. See Sheridan, 553 Fed. Appx.

187. The Court of Appeals termed “nonsensical” petitioner’s claim that he was

entitled to a refund of $20 billion on account of losses he had suffered over the life

of his patent.

      Petitioner filed Federal income tax returns for 2009, 2010, and 2011 that

included respective Schedules C, Profit and Loss From Business. On each

Schedule C, petitioner claimed a deduction of $1 million for “Other Expenses.”

During the IRS examination of these returns, he attempted to justify these

deductions as “theft losses,” asserting that he had claimed “a small amount of loss

to prevent further victimization.”

      The IRS disallowed the claimed theft loss deductions, made other minor

adjustments to his returns,2 and timely mailed petitioner a notice of deficiency. He


      2
       Respondent determined that petitioner had additional income of $185 in
2010 from ordinary dividends and royalties, determined that petitioner had
additional Schedule C gross receipts of $1,861 for 2011, and made certain compu-
tational adjustments. Petitioner does not dispute these adjustments.
                                         -6-

[*6] timely sought review in this Court, residing in Pennsylvania at the time of his

petition. Respondent filed a motion for summary judgment on August 5, 2014, to

which petitioner responded on September 11, 2014. In his petition and in his

response to the motion, petitioner addressed only the disallowance of his claimed

theft loss deductions. All other adjustments set forth in the notice of deficiency

are thus deemed conceded. See Rules 34(b)(4), 121(d).

                                     Discussion

A.    Summary Judgment Standard

      The purpose of summary judgment is to expedite litigation and avoid costly,

time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90

T.C. 678, 681 (1988). Under Rule 121(b) the Court may grant summary judgment

when there is no genuine dispute as to any material fact and a decision may be

rendered as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), aff’d, 17 F.3d 965 (7th Cir. 1994). Rule 121(d) provides that where the

moving party properly makes and supports a motion for summary judgment, “an

adverse party may not rest upon the mere allegations or denials of such party’s

pleading” but rather must set forth specific facts, by affidavits or otherwise,

“showing that there is a genuine dispute for trial.” In light of respondent’s motion,
                                         -7-

[*7] his supporting affidavit, and petitioner’s response, which alleges no dispute

as to any material fact, we conclude that this case may be adjudicated summarily.

B.    Theft Losses

      Section 162(a) allows a taxpayer to deduct “all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or busi-

ness.” Section 165(a) permits a deduction for any loss sustained during the tax-

able year and not compensated for by insurance or otherwise. Section 165(e)

provides: “For purposes of subsection (a), any loss arising from theft shall be

treated as sustained during the taxable year in which the taxpayer discovers such

loss.” In all cases, the deduction is allowable only if the loss is bona fide. Sec.

1.165-1(b), Income Tax Regs.

      The term “theft” is broadly defined to include larceny, embezzlement, and

robbery. Sec. 1.165-8(d), Income Tax Regs.; see also Bellis v. Commissioner, 61

T.C. 354, 357 (1973), aff’d, 540 F.2d 448 (9th Cir. 1976). Normally, a loss will be

regarded as arising from theft only if there is a criminal element to the appropria-

tion of the taxpayer’s property. See Edwards v. Bromberg, 232 F.2d 107, 110 (5th

Cir. 1956); Johnson v. Commissioner, T.C. Memo. 2001-97, 81 T.C.M. (CCH)

1538, 1540. To substantiate a theft loss deduction, the taxpayer must prove both

that a theft actually occurred under the law of the relevant State (or under an
                                         -8-

[*8] applicable Federal criminal statute) and the amount of the loss. See Nichols

v. Commissioner, 43 T.C. 842, 884-885 (1965); Alioto v. Commissioner, T.C.

Memo. 2011-151, slip op. at 9, aff’d, 699 F.3d 948 (6th Cir. 2012).

      On the basis of the pleadings filed, petitioner cannot satisfy any aspect of

the section 165(e) requirements for demonstrating a theft loss. First, he has iden-

tified no genuine issue for trial as to whether a “theft” occurred under the law of

any relevant jurisdiction. His assertion that his intellectual property has been

stolen is based on his unsupported belief that criminal conspiracies are the only

possible explanation for his vaporizer business’ relative lack of success. He has

alleged no facts to show that an infringement of his patent has occurred, much less

that a crime has been committed under State or Federal law. Although patent No.

7,415,982 belongs to him, the mere existence of this patent is not sufficient to

prove patent infringement. In any event, this is not the proper forum in which to

litigate such a claim. See 35 U.S.C. sec. 281 (2006) (“A patentee shall have

remedy by civil action for infringement of his patent.”); 28 U.S.C. sec. 1338(a)

(2006) (“The district courts shall have original jurisdiction of any civil action

arising under any Act of Congress relating to patents[.]”).

      Second, petitioner has raised no genuine issue for trial concerning his ability

to substantiate the amount of his supposed loss. Taxpayers are required to keep
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[*9] permanent records sufficient to substantiate the amount of any claimed

deduction. See Higbee v. Commissioner, 116 T.C. 438, 440 (2001); sec. 1.6001-

1(a), Income Tax Regs. To substantiate a theft loss, a taxpayer must prove, at a

minimum, the fair market value of the stolen property before the theft and the

adjusted basis of the property. See Griggs v. Commissioner, T.C. Memo. 2008-

234, 96 T.C.M. (CCH) 248, 256; sec. 1.165-8(c), Income Tax Regs. (providing

that the amount of a theft loss deduction “shall be determined consistently with the

manner prescribed in § 1.165-7 for determining the amount of casualty loss”); sec.

1.165-7(b)(1), Income Tax Regs. (providing that amount deductible as a casualty

loss is determined by reference to fair market value or adjusted basis of damaged

property).

      Petitioner has supplied no evidence concerning the fair market value of his

patent before the alleged theft or the patent’s adjusted basis. His calculation of

“loss” has nothing to do with the ex ante value of his patent but is based on his

unsupported estimate of the portion of the worldwide vaporizer market to which

he believes himself entitled. A taxpayer claiming a theft loss must supply

sufficient evidence for the Court to make a reasonable estimate of the property’s

value. See Lockett v. Commissioner, T.C. Memo. 2008-5, 95 T.C.M. (CCH)

1029, 1031, aff’d, 306 Fed. Appx. 464 (11th Cir. 2009). Petitioner has failed to
                                        - 10 -

[*10] set forth specific facts showing there is a genuine dispute for trial

concerning his ability to do this. See Rule 121(d).

      Finally, a taxpayer must claim a theft loss deduction for “the taxable year in

which the taxpayer discovers the loss.” Sec. 1.165-8(a)(2); see Asphalt Indus.,

Inc. v. Commissioner, 411 F.2d 13 (3d Cir. 1969), aff’g T.C. Memo. 1968-155.

Petitioner claimed a theft loss deduction of $1 million for each of 2009, 2010, and

2011. He has set forth no specific facts tending to show that he “discovered” the

supposed theft in one of these years as opposed to some prior year after his patent

was filed in 2001. Indeed, petitioner has informed the IRS that he intends to claim

similar deductions on his tax returns through the year 2070. Petitioner clearly is

not claiming a loss deduction for “theft” but for alleged damage to his business

from supposed anticompetitive behavior. Such damages, if they can be proved,

are not deductible as “theft losses” under section 165(e).

      Alternatively, petitioner contends that he is entitled to his $1 million

deductions under section 186. Section 186(a) provides that, “[i]f a compensatory

amount which is included in gross income” is received for a “compensable injury,”

a deduction is allowed equal to the lesser of the “compensable amount” or “the

unrecovered losses sustained as a result of such compensable injury.” Section

186(b)(1) defines a “compensable injury” to include “injuries sustained as a result
                                       - 11 -

[*11] of an infringement of a patent issued by the United States.” Even if

petitioner could establish patent infringement, which he has not done, he has not

alleged that he received, or included in gross income for 2009, 2010, or 2011, any

“compensatory amount.” See sec. 186(c) (defining “compensatory amount” to

mean an amount received “as damages as a result of an award in, or in settlement

of, a civil action for recovery for a compensable injury”). Section 186 has no

possible application here.

C.    Accuracy-Related Penalty

      The Code imposes a 20% accuracy-related penalty on any underpayment

attributable to any substantial understatement of income tax. See sec. 6662(a),

(b)(2). An understatement is “substantial” if it exceeds the greater of $5,000 or

10% of the tax required to be shown on the return. Sec. 6662(d)(1)(A). The tax

deficiencies determined in the notice of deficiency, which we have sustained in

full, reflect understatements that exceed $5,000 and 10% of the total tax required

to be shown on petitioner’s 2009, 2010, and 2011 returns. Respondent has thus

carried his burden of production by demonstrating a “substantial understatement of

income tax.” See secs. 6662(b)(2), 7491(c).

      Section 6664(c)(1) provides that the accuracy-related penalty shall not be

imposed with respect to any portion of an underpayment “if it is shown that there
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[*12] was a reasonable cause for such portion and that the taxpayer acted in good

faith with respect to * * * [it].” Once the Commissioner has carried his burden of

production, the taxpayer bears the burden of proving reasonable cause and good

faith. Higbee v. Commissioner, 116 T.C. at 446-447.

      The decision as to whether the taxpayer acted with reasonable cause and in

good faith is made on a case-by-case basis, taking into account all pertinent facts

and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. Circumstances

that may signal reasonable cause and good faith “include an honest misunder-

standing of fact or law that is reasonable in light of all of the facts and circum-

stances, including the experience, knowledge, and education of the taxpayer.”

Ibid. “Reasonable cause” may also be shown by demonstrating reliance on the

advice of a competent tax professional. Id. para. (c).

      Petitioner had no colorable basis for claiming $1 million theft loss deduc-

tions for 2009, 2010, and 2011. He has set forth no specific facts to show that

there is a genuine dispute for trial in this regard. His claiming these deductions

reflects not a genuine effort to ascertain his tax liabilities correctly but a misguided

effort to recoup from the IRS profits that he thinks “pirates” have taken from him.

He has set forth no specific facts showing there is a genuine dispute as to whether

he used the services of a tax return preparer or that he otherwise relied on
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[*13] professional tax advice. We accordingly sustain respondent’s imposition of

an accuracy-related penalty for each year at issue.

      To reflect the foregoing,


                                                An appropriate order and decision for

                                       respondent will be entered.
