                     T.C. Summary Opinion 2008-44



                        UNITED STATES TAX COURT



                    MEHDI TAGHADOSS, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 25116-06S.               Filed April 29, 2008.



        Mehdi Taghadoss, pro se.

        Andrew M. Stroot, for respondent.



     DEAN, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.    Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice

and Procedure.

     Respondent determined a $25,545 deficiency in petitioner’s

2003 Federal income tax.   The issue for decision is whether

petitioner is entitled to claim a $1,344,863 casualty or theft

loss deduction for the loss of value in his WorldCom stock

options and stock holdings (securities).

                            Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the exhibits received into evidence

are incorporated herein by reference.    At the time the petition

was filed, petitioner resided in Virginia.

     Petitioner was employed by the WorldCom Group (WorldCom) for

17 years.   During the course of petitioner’s employment, he

received options to purchase shares of WorldCom stock that he

exercised on October 31, 2001, for a “hold”.   Petitioner also

acquired shares of WorldCom stock on the open market, through

WorldCom’s section 401(k) retirement plan, and through WorldCom’s

employee stock purchase plan (ESPP).

     Unfortunately for the shareholders of WorldCom, it filed a

chapter 11 bankruptcy petition on July 21, 2002.   Fraudulent

accounting practices by certain WorldCom officials contributed to

WorldCom’s bankruptcy filing.   Bernard Ebbers, WorldCom’s chief

executive officer, was convicted of violating the securities laws
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for fraud, conspiracy, and filing false financial statements with

the Securities and Exchange Commission (SEC).     Two other WorldCom

officials pleaded guilty to fraud and conspiracy.

     The bankruptcy filing and the fraudulent accounting

practices caused the value of WorldCom securities to

significantly decline.    Because the value of petitioner’s

securities had severely declined, he claimed a $1,344,863

deduction for a casualty or theft loss on his 2003 Form 1040,

U.S. Individual Income Tax Return.      Petitioner’s claimed casualty

or theft loss consisted of the following:     (1) $144,863 for

“35,318 shares of WorldCom stock purchased”; (2) $450,000 for “17

years’ worth of max 401(k) contribution with company match all in

WorldCom stock”; and (3) $750,000 for “10 years’ worth of stock

options, fully vested”.    Petitioner claimed a $26,853 refund of

all tax withheld on account of his claimed casualty or theft

loss.

     On October 31, 2003, the bankruptcy court confirmed

WorldCom’s plan of reorganization, and it emerged from bankruptcy

on April 20, 2004.   The plan of reorganization provided for the

cancellation of certain junior interests, such as petitioner’s,

on its “Effective Date”; i.e., April 20, 2004.     The bankruptcy

court was aware that WorldCom’s restated consolidated balance

sheets for yearend 2001 showed that WorldCom was insolvent for

that period.   See In re WorldCom, Inc. No. 02-13533 (Bankr.
                                - 4 -

S.D.N.Y. Oct. 31, 2003) (discussing the confirmation of

WorldCom’s plan).1

      After filing his 2003 Form 1040, petitioner received a

statement from his broker (account statement) for the period

March 1-28, 2004, listing the current price and value for his

31,083 securities as follows:

          Quantity     Current price          Current value

           1,086           $.021                  $23.67
           9,999            .021                  217.98
           8,900            .021                  194.02
           9,999            .021                  217.98
           1,099            .021                   23.96

      On May 12, 2004, petitioner’s broker issued a notification

to petitioner that his 31,083 securities were no longer

transferrable because WorldCom had closed its transfer books.

      Respondent initiated an examination of petitioner’s 2003

Form 1040 and disallowed petitioner’s $1,344,863 claimed casualty

or theft loss deduction, determining a $25,545 deficiency.

                            Discussion

I.   Burden of Proof

      The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer has the burden to prove

that the determinations are in error.    Rule 142(a); Welch v.


      1
        The Court takes judicial notice of the bankruptcy court’s
opinion. See Fed. R. Evid. 201; see also Jeanmarie v.
Commissioner, T.C. Memo. 2003-337 (taking judicial notice of
another court’s decision).
                                 - 5 -

Helvering, 290 U.S. 111, 115 (1933).      But the burden of proof on

factual issues that affect a taxpayer’s tax liability may be

shifted to the Commissioner if the taxpayer introduces credible

evidence with respect to the issue.      See sec. 7491(a)(1).

Petitioner has not alleged or proven that section 7491(a)

applies; accordingly, the burden remains on him.      See INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (stating that

deductions are strictly a matter of legislative grace, and

taxpayers bear the burden of proving that they are entitled to

claim the deduction).

II.   Individuals’ Loss Deductions

      Section 165(a) allows a deduction for any loss sustained

during the taxable year and not compensated for by insurance or

otherwise.   With respect to individuals, deductions for losses

are limited to losses:   (1) Incurred in a trade or business; (2)

incurred in a transaction for profit; or (3) of property not

connected with a trade or business or a transaction entered into

for profit if the losses arise from fire, storm, shipwreck, or

other casualty, or from theft.    Sec. 165(c).    In order for the

loss to be deductible, the loss must be evidenced by a closed and

completed transaction, fixed by an identifiable event, and

actually sustained during the taxable year.      Sec. 1.165-1(b),

Income Tax Regs.
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     A.   Casualty Loss

     In Furer v. Commissioner, T.C. Memo. 1993-165, affd. without

published opinion 33 F.3d 58 (9th Cir. 1994), the taxpayers

claimed a casualty loss on account of their securities’ decline

in value that was attributable to a stock market crash.     The

Court disallowed the loss stating:     “In order for a loss to

qualify as a casualty loss it ordinarily must be the result of

physical damage to the taxpayer’s property.”     Id.

     Similar to Furer, there is no physical damage to

petitioner’s securities.   Rather, petitioner’s losses arise from

the misconduct of certain WorldCom officials, WorldCom’s

bankruptcy filings, and the liquidation of his securities

pursuant to WorldCom’s plan of reorganization.     Therefore,

petitioner did not sustain a casualty loss within the meaning of

section 165(c)(3).   See Matheson v. Commissioner, 54 F.2d 537,

539 (2d Cir. 1931), affg. 18 B.T.A. 674 (1930) (The term

“casualty” includes an event that is “due to some sudden,

unexpected, or unusual cause.”); Coleman v. Commissioner, 76 T.C.

580, 589 (1981) (The term “casualty” includes an event that is

similar in nature to a fire, storm, or shipwreck).     Accordingly,

respondent’s determination denying petitioner’s $1,344,863

casualty loss is sustained.
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     B.   Theft Loss

     A loss arising from theft is treated as sustained “during

the taxable year in which the taxpayer discovers such loss.”

Sec. 165(e); secs. 1.165-1(d)(3), 1.165-8(a)(2), Income Tax Regs.

The term “theft” includes larceny, embezzlement, and robbery.

Sec. 1.165-8(d), Income Tax Regs.   Whether the fraudulent acts of

corporate officials constitute a theft is determined by the law

of the State where the loss was sustained, which the Court

assumes occurred within petitioner’s State of residence.   Compare

Wanchek v. Commissioner, T.C. Memo. 2007-366, with Viehweg v.

Commissioner, 90 T.C. 1248 (1988), Paine v. Commissioner, 63 T.C.

736, 740 (1975), affd. without published opinion 523 F.2d 1053

(5th Cir. 1975), Knowles v. Commissioner, T.C. Memo. 1991-57, and

McCullough v. Commissioner, T.C. Memo. 1990-653.

     Under Virginia law, the term “larceny” is defined as “‘the

wrongful or fraudulent taking of personal goods of some intrinsic

value, belonging to another, without his assent, and with the

intention to deprive the owner thereof permanently.’”   Foster v.

Commonwealth, 606 S.E.2d 518, 519 (Va. Ct. App. 2004) (quoting

Dunlavey v. Commonwealth, 35 S.E.2d 763, 764 (Va. 1945)), affd.

623 S.E.2d 902 (Va. 2006).   The term also includes embezzlement,

false pretenses, and receiving stolen property knowing it to be

stolen.   See Va. Code Ann. secs. 18.2-95, -96, -108, -111, -178

(2008); see also Bruhn v. Commonwealth 559 S.E.2d 880, 883 n.2
                                - 8 -

(Va. Ct. App. 2002) (and cases cited thereat), affd. 570 S.E.2d

866 (Va. 2002).   Intent is an essential element of each, and if

the theft is accomplished by false pretenses, the false pretenses

must have induced the person to part with money or property.     See

Va. Code Ann. secs. 18.2-95, -96, -108, -111, -178; see also

Parker v. Commonwealth, 654 S.E.2d 580, 582 (Va. 2008).

     Although certain WorldCom officials caused the publication

of fraudulent financial statements and filed the statements with

the SEC, the Court finds that petitioner has failed to prove that

he suffered a theft under Virginia law.   There is no evidence in

the record establishing that WorldCom officials wrongfully took

petitioner’s money or property (i.e., the value of his

securities) with the requisite intent to deprive him permanently

thereof.   Moreover, petitioner did not purchase his securities

from the WorldCom officials; rather, his acquisitions were

conducted through brokers on the open market, through WorldCom’s

section 401(k) retirement plan, and through WorldCom’s ESPP.     The

WorldCom officials had no direct dealings with petitioner.   In

this respect the Court finds this case indistinguishable from

Paine v. Commissioner, supra, where a theft loss deduction was

denied.    See also Barry v. Commissioner, T.C. Memo. 1978-215

(denying a theft loss deduction involving similar circumstances).

But see Vietzke v. Commissioner, 37 T.C. 504, 511 (1961)

(taxpayer’s theft loss deduction was allowed because he showed
                               - 9 -

that he departed with his money in reliance on the offering

material’s information, he dealt directly with the directors in

his acquisition of the stock, and the directors effectively

absconded with the offering proceeds); Rev. Rul. 71-381, 1971-2

C.B. 126 (taxpayer’s theft loss deduction was allowed where

taxpayer lent money to the corporation in exchange for a note,

the corporation issued fraudulent financial reports to the

taxpayer, and he relied on that information in deciding to

invest).

     Petitioner testified that he received several memos “in

which they told us that everything is fine”.     But petitioner has

failed to establish that he relied on the misrepresentations in

the memos and the financial statements and that his losses were

related to the misrepresentations.     To establish a causal

connection between the fraudulent representations and

petitioner’s purchases and his decision(s) to retain his

securities, the representations must have been made before

petitioner’s purchases and his decision(s) to retain his

securities.   See Paine v. Commissioner, supra at 742.    There is

no evidence in the record indicating that petitioner relied on

the fraudulent financial statements or the memos when he

purchased his securities.   Because petitioner did not provide the

memos to respondent or produce them at trial, petitioner has also

failed to establish that he relied on the alleged
                                - 10 -

misrepresentations in the memos in deciding to retain his

securities.    The Court finds that petitioner has failed to show

that the misrepresentations induced him to part with his money or

property (i.e., the value of the securities) and thus constitute

false pretenses.

     To the extent that petitioner is attempting to claim a

deduction for the corporation’s theft loss rather than his own

theft loss, he cannot do so.    It is well settled that a

corporation is a taxable entity separate from its shareholders.

Moline Props., Inc. v. Commissioner, 319 U.S. 436, 438-439

(1943).   Consequently, shareholders generally cannot claim a

deduction for a theft loss where the corporation itself was the

victim of the theft.    See Malik v. Commissioner, T.C. Memo.

1995-204.     But see Vietzke v. Commisioner, supra at 511

(taxpayer’s theft loss deduction was allowed because the Court

found that the corporate entity was nothing more than a device to

swindle the investors).    Unlike the record in Vietzke, however,

the record in this case does not support an inference that

WorldCom was nothing more than a device to defraud its investors.

     Although the Court sympathizes with petitioner’s

circumstances, the Court concludes that section 165(c)(3) does

not support the allowance of his claimed theft loss deduction.

Accordingly, respondent’s determination denying a $1,344,863

theft loss deduction is sustained.
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     C.   Worthless Securities

     Although the issue was not raised by the parties, the Court

has considered the possibility that petitioner’s losses might be

deductible as worthless securities.

     If a security that is a capital asset with respect to the

taxpayer is sold, exchanged, or becomes “wholly” worthless during

the taxable year, the loss resulting therefrom is treated as a

loss arising from the sale or exchange of a capital asset on the

last day of the taxable year.     Sec. 165(g)(1); sec. 1.165-5(b)

and (c), Income Tax Regs.; see also Ark. Best Corp. v.

Commissioner, 800 F.2d 215, 218-220 (8th Cir. 1986) (stating that

securities are a capital asset unless the taxpayer is a

securities dealer or the securities fall within one of the

exceptions in section 1221) (citing Campbell Taggart, Inc. v.

United States, 744 F.2d 442, 449 (5th Cir. 1984)), affd. 485 U.S.

212 (1988).

     Section 1.165-4(a), Income Tax Regs., imposes a further

limitation:   no deduction for a loss is allowed under section

165(a) solely because of a decline in the stock’s value when the

decline is attributable to a fluctuation in the stock’s market

price or to similar causes.      See also sec. 1.165-5(f), Income Tax

Regs. (imposing a similar limitation for securities).     Mere

shrinkage in a stock’s value does not give rise to a deduction

for a loss under section 165(a) “if the stock has any
                                - 12 -

recognizable value on the date claimed as the date of loss.”

Sec. 1.165-4(a), Income Tax Regs.     No loss is allowed for a

decline in a stock’s value unless the stock is sold, exchanged,

or has become “wholly” worthless (subject to the limitations on

capital losses).     Secs. 1.165-4(a), 1.165-5(c), Income Tax Regs.

     In order to have deductible losses, petitioner must show

that his securities had value at the end of 2002 and prove some

identifiable event that establishes the subsequent losses in

2003.    Popovich v. Commissioner, T.C. Memo. 1965-174 (citing

Feinstein v. Commissioner, 24 T.C. 656, 657-658 (1955)).

        Petitioner has failed to establish both elements.   There is

no evidence as to the value of petitioner’s securities in 2002.

Moreover, petitioner’s evidence, the account statement, indicates

that his securities had retained some value in 2004.      The record

does contain countervailing facts:       (1) WorldCom was insolvent in

2001 and filed for bankruptcy in 2002; (2) the plan of

reorganization provided for the cancellation of petitioner’s

securities; (3) petitioner “abandoned” his securities in 2003;

and (4) WorldCom closed their transfer books in 2004.       But it was

petitioner’s burden to show that his securities had no value in

2003.     Compare Ruud v. Commissioner, T.C. Memo. 1969-252 (stock

was worthless before the bankruptcy filing), with Steadman v.

Commissioner, 50 T.C. 369, 376-77 (1968) (bankruptcy filing is an

identifiable event indicative of worthlessness), affd. 424 F.2d 1
                             - 13 -

(6th Cir. 1970)), Delk v. Commissioner, 113 F.3d 984, 986 (9th

Cir. 1997) (cancellation of shares pursuant to a plan of

reorganization is an identifiable event), revg. T.C. Memo. 1995-

265, In re Steffen, 294 Bankr. 388, 393 (Bankr. M.D. Fla. 2003)

(neither the filing of a bankruptcy petition nor confirmation of

a plan canceling stock is an identifiable event), and Boehm v

Commissioner, 326 U.S. 287 (1945) (taxpayer’s subjective belief

as to worthlessness is a factor to consider).    Therefore, the

Court concludes that petitioner’s losses are not deductible as

worthless securities in 2003.2

     To reflect the foregoing,

                                      Decision will be entered for

                                 respondent.




     2
        Even if the Court were to find that petitioner sustained
a casualty or theft loss or that his securities were “wholly”
worthless in 2003, the Court would nevertheless disallow the
losses because petitioner failed to establish that there was no
reasonable prospect of recovering his losses. See secs.
1.165-1(c)(4), (d)(2)(I), 1.165-8(a)(2), Income Tax Regs.
Compare 15 U.S.C. secs. 77k, 77l(a)(2), 77o, 78j(b), 78t(a)
(2000) and Rule 10b-5 (17 C.F.R. sec. 240.10b-5 (2007))
thereunder (provisions relating to securities law violations and
liability therefor), with 15 U.S.C. sec. 7246 (2000) (discussing
a disgorgement fund for the benefit of the victims of violations
of certain securities laws).
