                   T.C. Summary Opinion 2005-4



                     UNITED STATES TAX COURT



               RONALD C. SINGERMAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11227-03S.           Filed January 5, 2005.


     Ronald C. Singerman, pro se.

     Lorraine Wu, for respondent.


     PANUTHOS, Chief 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.   The decision

to be entered is not reviewable by any other court, and this

opinion should not be cited as authority.   Unless otherwise

indicated, all subsequent section references are to the Internal

Revenue Code in effect at relevant times, and all Rule references

are to the Tax Court Rules of Practice and Procedure.
                               - 2 -

     Respondent determined a deficiency in petitioner’s Federal

income tax for 2000 in the amount of $13,801.    The sole issue for

decision is whether petitioner is entitled to a theft loss

deduction under section 165(a) of $202,830 with respect to his

investment in the stock of Ampex Corp. (Ampex).

                            Background

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

The stipulation of facts, the supplemental stipulation of facts,

and the attached exhibits are incorporated herein by this

reference.   At the time of filing the petition, petitioner

resided at Culver City, California.

     Petitioner is a certified public accountant.    Since 1981,

his practice has involved financial audits of publicly held

corporations, income tax return preparation for individuals and

business entities, and tax audit representation.

     In October 1999, petitioner received a positive

recommendation on Ampex from a securities broker.    Ampex is a

publicly traded corporation, and during the period in question it

was listed on the American Stock Exchange under the symbol

“AXC”.1   Ampex is a provider of technologies for the acquisition,

storage, and processing of visual information.    During 1999, a

     1
        Ampex’s Class A common shares were traded on the American
Stock Exchange from Jan. 16, 1996, until Nov. 21, 2003, when
Ampex was delisted for failure to meet the minimum stockholders’
equity requirement. Subsequently, its Class A common shares were
listed for quotation on the OTC Bulletin Board, an interdealer,
over-the-counter market.
                              - 3 -

significant portion of Ampex’s business was dedicated to

developing Internet video programming and technology, often

through its wholly owned subsidiary, iNEXTV.

     Petitioner decided to invest in Ampex common stock after

reviewing its public disclosures, including recent financial

statements and a number of press releases issued by the company.

From November 29, 1999, to December 7, 2000, petitioner purchased

60,000 shares of Ampex common stock through his brokerage account

with TD Waterhouse, as follows:

  Trade                      Price Per      Total Cost (including
  Date     No. of Shares       Share        commissions and fees)
11/29/99       3,000          $4.6875           $14,107.50
12/03/99       3,000           4.5625            13,722.50
12/08/99       2,000           5.3750            10,795.00
12/08/99       2,000           5.2500            10,535.00
12/10/99       2,000           6.0625            12,137.00
12/10/99       6,000           6.0625            36,435.00
12/10/99       2,000           6.0000            12,035.00
12/10/99       2,000           6.0000            12,035.00
12/13/99       3,000           6.0000            18,012.00
12/13/99       1,000           5.9375             5,972.50
12/14/99       1,500           5.8750             8,824.50
12/14/99       2,500           5.8750            14,722.50
12/14/99       2,000           5.7500            11,535.00
12/23/99       2,000           4.9325             9,887.00
01/31/00       1,000           3.3750             3,410.00
07/28/00       5,000           1.5000             7,512.00
10/31/00       5,000           0.7500             3,765.00
12/01/00       5,000           0.5625             2,827.50
12/04/00       5,000           0.5000             2,515.00
12/07/00       5,000           0.4375             2,202.50
  Total       60,000                           $212,987.50

As provided in the above table, petitioner’s overall cost basis

in the Ampex stock was $212,987.50.   Petitioner purchased shares

at prices ranging from $0.4375 to $6.0625 per share.
                                - 4 -

     Ampex’s stock began to decline in December 1999, which

coincides with the timing of a failed joint venture with

Information Superstation, LLC (ISS).    On May 12, 1999, Ampex and

ISS agreed to jointly develop Executive Branch TV (EXBTV), a

video-based Internet Web site providing 24-hour coverage of the

White House and executive agency activities.   By late 1999, the

joint venture had ended, and the parties accused each other of

wrongdoing.   In December 1999, ISS filed a lawsuit against Ampex

in the Superior Court of the District of Columbia for theft of

corporate opportunity and breach of fiduciary responsibility.

Neither party disclosed the filing of the lawsuit until ISS

announced it during a press conference on February 10, 2000.2    In

a press release dated February 11, 2000, Ampex defended its right

to continue to operate EXBTV and disclosed that it had filed a

countersuit against ISS for fraud and misappropriation of funds

on February 1, 2000.

     In December 1999, Ampex’s stock traded in a range of $4.4375

to $6.375 per share.   By the end of February 2000, the stock had

declined to $3.875 per share.   At the end of December 2000,

Ampex’s stock was trading at $0.375 per share.



     2
       In a U.S. Securities and Exchange Commission Form 8-K,
Current Report, filed on Feb. 10, 2000, Ampex acknowledged that
ISS had filed a lawsuit against the company but that it had yet
to be served with a copy of the complaint. The Form 8-K was not
introduced as part of the record in this case, but the Court
takes notice of this public filing.
                               - 5 -

     On his Federal income tax return for taxable year 2000,

petitioner reported a theft loss of $202,830 on his investment in

60,000 shares of Ampex common stock.   Petitioner used the closing

price of the stock at the end of 2000 to calculate a theft loss

deduction in the amount of $202,830 (60,000 shares x $0.375 less

a claimed cost basis of $225,330).3

     To explain his position for claiming a theft loss deduction

in 2000, petitioner attached to his 2000 return a Form 8275,

Disclosure Statement, and stated that Ampex engaged in “a pattern

of willful and mis-leading disclosures and non-disclosures” that

constitutes theft by fraud or false pretenses against its

shareholders.   In particular, petitioner cited that Ampex failed

to timely disclose the dissolution of its joint venture with ISS

and the resulting material lawsuits.   Furthermore, petitioner

accused Ampex’s corporate officers of continuing to mislead

investors in May 2000 by making unreasonably rosy revenue

projections at a meeting for institutional investors and by

discussing at a shareholder’s meeting in June 2000 the sale of an

operating subsidiary that subsequently did not occur.

     Petitioner filed complaints against Ampex with the U.S.

Securities and Exchange Commission on July 24, 2001, and with the

     3
        At trial, petitioner stipulated that his cost basis in
the 60,000 shares of Ampex stock is $212,987.50 rather than the
$225,330 that he used on his 2000 return. We consider the
stipulated cost basis as a concession of a portion of
petitioner’s claimed theft loss deduction to $190,487.50 (60,000
shares x $0.375 less a cost basis of $212,987.50).
                                - 6 -

California Department of Corporations on December 20, 2001.

There is no evidence that either agency conducted an

investigation.

                             Discussion

     Generally, a taxpayer bears the burden of proof.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     The burden

may shift to the Commissioner if the taxpayer introduces credible

evidence and satisfies the requirements under section 7491(a)(2)

to substantiate items, maintain required records, and fully

cooperate with the Commissioner’s reasonable requests.    Sec.

7491(a).   In this case petitioner has neither argued that section

7491 is applicable to shift the burden of proof to respondent nor

established that he complied with the requirements of section

7491(a)(2).    The resolution of the issue presented does not

depend on which party has the burden of proof.    We resolve the

issue on the preponderance of the evidence in the record.

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

during the taxable year not compensated for by insurance or

otherwise.    Under section 165(c), losses for individuals are

limited to (1) losses incurred in a trade or business, (2) losses

incurred in any transaction entered into for profit, though not

connected with a trade or business, and (3) losses of property

not connected with a trade or business or a transaction entered

into for profit, if such losses arise from fire, storm,

shipwreck, or other casualty, or from theft.
                               - 7 -

     Generally, a taxpayer is not entitled to a loss deduction

solely on the account of a decline in the value of stock unless

the stock is worthless and has no recognizable value or until the

stock is sold.   Sec. 165(g); sec. 1.165-4(a), Income Tax Regs.

Section 165(e), however, provides that any loss arising from

theft will be treated under section 165(a) as sustained during

the taxable year in which the taxpayer discovers the loss.

     Whether a loss constitutes a theft loss is determined by

examining the law of the State where the alleged theft occurred.

Bellis v. Commissioner, 540 F.2d 448, 449 (9th Cir. 1976), affg.

61 T.C. 354 (1973); Edwards v. Bromberg, 232 F.2d 107, 111 (5th

Cir. 1956); Viehweg v. Commissioner, 90 T.C. 1248, 1253 (1988).

Section 484(a) of the California Penal Code (West Supp. 2004)

defines theft as follows:

     Every person who shall feloniously steal, take, carry,
     lead, or drive away the personal property of another,
     or who shall fraudulently appropriate property which
     has been entrusted to him or her, or who shall
     knowingly and designedly, by any false or fraudulent
     representation or pretense, defraud any other person of
     money, labor or real or personal property * * * is
     guilty of theft. * * *

To support a finding of theft by false pretense in California,

section 484(a) of the California Penal Code requires intent on

the part of the defrauder to obtain for himself the victim’s

property.   People v. Ashley, 267 P.2d 271, 279 (Cal. 1954);

People v. Fujita, 117 Cal. Rptr. 757, 764 (Ct. App. 1974); People

v. Conlon, 24 Cal. Rptr. 219, 222 (Dist. Ct. App. 1962).
                               - 8 -

Implicit in this element is a relationship of privity between the

perpetrator and the victim.   Crowell v. Commissioner, T.C. Memo.

1986-314.   In prior cases involving California Penal Code section

484, we established that a taxpayer who purchases corporate stock

on the open market cannot support a claim of theft under

California law because there is no privity between the alleged

corporate defrauder and the taxpayer.     Marr v. Commissioner, T.C.

Memo. 1995-250; Crowell v. Commissioner, supra; DeFusco v.

Commissioner, T.C. Memo. 1979-230.

     In the present case, petitioner purchased all of his shares

of Ampex stock on the open market.     Accordingly, there is no

privity between petitioner and Ampex’s corporate officers for

purposes of section 484 of the California Penal Code.     Thus, even

assuming that petitioner can support his allegation that Ampex is

guilty of criminal wrongdoing, petitioner is not entitled to a

theft loss deduction under California law.4

     Petitioner, while admitting that he was not a victim of

theft under California Penal Code section 484, argues that he is

entitled to a theft loss deduction based upon a cause of action

against Ampex for fraud or negligent misrepresentation under

California law.   Petitioner cites Small v. Fritz Cos., 65 P.3d

1255, 1257 (Cal. 2003), in which the California Supreme Court

held that a shareholder has the right to sue a corporation for

     4
        We make no finding as to whether Ampex committed any
wrongdoing in this case.
                                 - 9 -

fraud or negligent misrepresentation when he or she reasonably

relies on the misrepresentation to hold rather than sell his or

her stock.5

     We disagree with petitioner.        A cause of action based upon a

tort claim for fraud or negligent misrepresentation does not

support a theft loss deduction under section 165(a).       A theft

loss requires a criminal appropriation of another’s property.

Edwards v. Bomberg, supra at 110; Bellis v. Commissioner, 61 T.C.

354, 357 (1973), affd. 540 F.2d 448 (9th Cir. 1976); Harcinske v.

Commissioner, T.C. Memo. 1984-132.       As such, a tort cause of

action for fraudulent or negligent misrepresentation does not

give rise to a theft loss deduction under section 165(a).          We

conclude that petitioner is not entitled to the claimed theft

loss deduction for 2000.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                              Decision will be

                                         entered for respondent.




     5
        California has long recognized that persons induced by
misrepresentations into buying stock may sue for fraud and
misrepresentation. See Hobart v. Hobart Estate Co., 159 P.2d 958
(Cal. 1945); Sewell v. Christie, 124 P. 713 (Cal. 1912). Small
v. Fritz Cos., 65 P.3d 1255, 1257 (Cal. 2003), extended a cause
of action to shareholders who refrained from selling stock
because of fraud or negligent misrepresentations made by the
company.
