                         T.C. Memo. 2003-212



                       UNITED STATES TAX COURT



                   DIANE S. BLODGETT, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 5480-00.               Filed July 16, 2003.


     Diane S. Blodgett, pro se.

     Melissa J. Hedtke, for respondent.



                          MEMORANDUM OPINION


     COUVILLION, Special Trial Judge: Respondent determined a

deficiency of $7,704 in petitioner’s Federal income tax for the

year 1998.

     The issues for decision are:    (1) Whether petitioner is

entitled to all or part of a $38,046,524 loss deduction that was

claimed on her 1998 Federal income tax return as a net operating

loss carryover from 1992, and (2) in the alternative, whether
                               - 2 -


petitioner is entitled to the following deductions claimed at

trial and framed by her as (a) $733,500 for the theft loss of a

pension, (b) $225,000 as carryforward legal expenses, (c) a

$142,482 investment loss on a condominium and lot in Florida, (d)

a $42,500 investment loss on a Simbari painting, (e) a $561,375

carryforward business or investment loss on rare coins, and (f) a

$125,403 carryforward business or investment loss on historical

documents.

     Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.   At the time the petition was filed, petitioner's

legal residence was Minnetonka, Minnesota.

     Petitioner was previously married to Michael W. Blodgett

(Mr. Blodgett).   She was no longer married to Mr. Blodgett at the

time of trial, and the record is unclear as to the date of their

divorce.   During the year at issue, petitioner was employed as a

teacher by the Minneapolis public school system.    Her filing

status in 1998 was head-of-household.

     Mr. Blodgett has a doctoral degree in educational

administration.   In the 1970s, he founded a business, T.G.

Morgan, Inc. (the business), which bought and sold rare coins.

The business began as a sole proprietorship but was incorporated,

with a subchapter S election, in 1985.   During 1992, petitioner

was a 27.5 percent owner of the business.    Mr. Blodgett also
                                - 3 -


owned 27.5 percent of the business.     The children of petitioner

and Mr. Blodgett, Michael J., Matthew, and Christina, each held

15 percent of the business.   The record is silent as to

petitioner’s participation in the business.

     The business had a defined benefit pension plan, the T.G.

Morgan Defined Benefit Pension Plan (pension plan).    However, the

record is not complete with respect to the formation,

administration, and records of the pension plan.    Insofar as the

record reveals, its activity was not reported to the Internal

Revenue Service on Form 5500-EZ, Annual Return of One-Participant

(Owners and Their Spouses) Retirement Plan.    Petitioner

introduced at trial an unfiled Form 5500-EZ relating to the

pension plan.

     Through the financial success of the business, petitioner

and Mr. Blodgett were able to lead a lavish lifestyle.      In 1989,

Mr. Blodgett purchased an original Simbari oil painting for

petitioner for $85,000.    Petitioner admired the artist, and the

painting was displayed in petitioner’s home.    In 1990, petitioner

and Mr. Blodgett purchased a condominium and lot at Key Largo,

Florida (Florida property).   They bought furniture and had it

shipped to the property.   They never occupied the property, nor

did they rent it out for any period of time.     They visited the

property once, as Mr. Blodgett stated, “to tour it”.
                               - 4 -


     It is a matter of public record that Mr. Blodgett operated

the business as a ponzi scheme.   Stoebner v. FTC, 1997 U.S. Dist.

LEXIS 4639 (D. Minn. Apr. 7, 1997).1   There were both civil and

criminal consequences for this behavior.   Mr. Blodgett was

charged with and convicted of several counts of fraud, for which

he served a prison sentence from 1993 to 1999.   United States v.

Blodgett, 1994 U.S. App. LEXIS 21564 (8th Cir. Aug. 15, 1994).

Petitioner was not charged with criminal wrongdoing.   In addition

to the criminal case, the Federal Trade Commission (FTC)

initiated a civil action (FTC case) against the business and Mr.

Blodgett, alleging deceptive trade practices and seeking

permanent injunctive relief and consumer redress.   See 15 U.S.C.

sec. 45(a)(2), 53(b) (1988).   In the FTC case, Mr. Blodgett, the

business, and the FTC reached a settlement that was memorialized

in a Final Judgment and Order (consent order) entered by the U.S.

District Court for the District of Minnesota in March 1992.     FTC

v. T.G. Morgan, Inc., 1992 U.S. Dist. LEXIS 3309 (D. Minn. Mar.

4, 1992).   Petitioner signed the consent order as a nonparty

spouse.




     1
          The U.S. Court of Appeals for the Eighth Circuit
described Mr. Blodgett’s activity as follows: “Blodgett * * *
was in the habit of selling single coins to multiple customers,
greatly overstating the value of such coins, and using coins he
had already sold as collateral to obtain loans for his personal
use.” Hartje v. FTC, 106 F.3d 1406, 1407 (8th Cir. 1997).
                               - 5 -


     The consent order provided for the creation of a “settlement

estate” and a “litigation estate,” to consist of assets

transferred from the business, Mr. Blodgett, and petitioner.      Id.

A receiver was appointed to liquidate the assets in the two

estates and disburse the money.   The litigation estate was used

to pay litigation expenses for the defense of actual or

reasonably anticipated governmental enforcement actions against

Mr. Blodgett or petitioner.   The settlement estate was used to

pay claims of defrauded customers of the business.   The

litigation estate was established with $300,000, funded solely

through the liquidation of a so-called Coin Fund.    The remaining

proceeds from the liquidation of the Coin Fund were transferred

to the settlement estate.   The settlement estate also included

the Florida property and the Simbari painting, among other

assets.

     After the onset of the FTC case but prior to the consent

order, creditors of the business filed a chapter 7 involuntary

bankruptcy petition against the business pursuant to 11 U.S.C.

section 303.   Although the business converted the case to a

chapter 11 proceeding, the bankruptcy court reconverted the case

to a chapter 7 proceeding and appointed John Stoebner the trustee

on May 28, 1992.   See Stoebner v. Vaughan, 179 Bankr. 600, 601

(D. Minn. 1995).   On August 21, 1992, an order was issued by the

U.S. District Court for the District of Minnesota to the receiver
                                - 6 -


in the FTC case to turn over all assets held in the settlement

estate to the bankruptcy trustee (turnover order).2   FTC v. T.G.

Morgan, Inc., supra.    The turnover order specified that those

assets determined in the bankruptcy proceeding “to be property of

the Federal Trade Commission, defendant Michael W. Blodgett, his

spouse Diane Blodgett, or any entity that is owned or controlled

by Michael W. Blodgett or Diane Blodgett, such asset or proceeds

thereof shall be returned by the trustee to the T.G. Morgan

Settlement Estate”.    The turnover order further provided:    “all

assets determined to be property of the estate of defendant T.G.

Morgan, Inc. shall be retained by the trustee.”    After the

turnover order, the Florida property and Simbari painting became

a part of the bankruptcy estate and were not returned to the

settlement estate.

     As part of the bankruptcy proceedings, the bankruptcy

trustee prepared and filed Forms 1120S, U.S. Income Tax Return

for an S Corporation, for the business for the years 1990 through

1998.    Petitioner did not participate in the preparation of these

returns.    On the 1992 return, filed by the trustee in February

1999, the business reported an ordinary loss in the amount of

$17,202.    The trustee prepared and issued to the shareholders

Schedules K-1, Shareholder’s Share of Income, Credits,


     2
          At the time of the turnover order, the litigation
estate fund had been exhausted.
                                 - 7 -


Deductions, Etc., for the five shareholders, including

petitioner.    Line 23 of petitioner’s Schedule K-1, Supplemental

Information Required To Be Reported Separately to Each

Shareholder, stated:    “The overall S corporation loss reported on

this K-1 is deductible only to the extent you have basis in your

S corporation stock.    To the best of the bankruptcy trustee’s

knowledge your basis is $-0-.”

     On her 1998 Federal income tax return, which was prepared by

Mr. Blodgett from prison, petitioner reported wage income of

$45,788.24 and income tax withheld of $5,582.56.    The return also

included a $38,046,524 loss deduction on line 12, Business Income

or (Loss).    This amount represented the amount listed on the

proof of claim filed by the Federal Trade Commission in the

bankruptcy case against T.G. Morgan, Inc.    The return claimed a

refund of all of petitioner’s withholdings for 1998.     A letter

attached to her return entitled “Explanation for Large Loss Carry

Forwards from 1992...for Diane S. Blodgett” stated:


          In 1991, I was a “non-party” spouse signatory and
     supposedly a beneficiary of a series of at least three
     “consent settlement” contracts with the Federal Trade
     Commission, and thus and under Minnesota marital property
     and contract and RICO laws, promised property or property or
     Constitutional rights which by breach of contract,
     extortion, alienation, or other RICO or federal or state
     civil or criminal misconduct were taken from me.

          Documents suppressed by the parties at that time, later
     became available showing wrongdoing and a high level
     conspiracy involving very powerful people and lawyers.
                               - 8 -


          A lawsuit is currently pending in federal court, Case
     98-49, and it has much key evidence proving my losses. In
     any case my entire ERISA Pension was alienated involving
     more than $1,000,000 in losses to me personally, plus the
     loss of all equity in my Minnesota homestead of more than
     $300,000. The ERISA and homestead losses alone more than
     cover any taxes which would otherwise be due but were paid
     already . . . please send me the refund requested.

          Sincerely,
          [signature]
          Diane S. Blodgett

     P.S. The State of Minnesota was a party to the contracts
     . . . but has never honored them either . . .
     My rent is paid out of my earnings from teaching school.


     Petitioner claimed deductions on her 1994, 1995, 1996, and

1997 returns that were similar in amount and nature to the loss

deduction claimed on the 1998 return.3   She claimed and received

refunds of her annual withholdings of $736.36 in 1996 and

$2,722.78 in 1997.   The 1996 and 1997 returns also attached

explanatory letters.   In the letter attached to the 1996 return,

petitioner alleged that the FTC stole the pension plan funds

worth $815,000 and claimed that the assets turned over to settle




     3
          On her 1994 return, petitioner reported a $3 million
capital loss and other losses of $5 million. She explained the
losses on her 1994 return as “loss carry forward, no taxes owed.”
On her 1995 amended return, petitioner reported $3 million as a
business loss carryforward, $5 million as a capital loss
carryforward, and $3 million as other losses. She reported her
adjusted gross income as an $8 million loss carryforward. On her
1996 return, petitioner claimed a $9 million capital loss
carryforward and $38,046,524 as other losses. On her 1997
return, petitioner claimed a business loss carryforward of
$41,046,524.
                               - 9 -


the FTC case “were still ‘our’ property when the FTC made

hundreds of illegal sales in commercially unreasonable

manner-–while serving as fiduciary".4

     The primary issue for decision is whether petitioner is

entitled to all or part of the $38,046,524 loss deduction claimed

on her 1998 return as the carryover of a 1992 business loss.    At

trial, petitioner stated that she was no longer claiming the

entire amount of that deduction; yet, she reiterated that she was

entitled to deduct losses carried forward from T.G. Morgan, Inc.

In the alternative, petitioner claimed the following items as

deductible losses:   (1) $733,500 for the theft loss of a pension

fund; (2) $225,000 as carryforward legal expenses; (3) a $142,482

investment loss on a condominium and lot in Florida; (4) a

$42,500 investment loss on a Simbari painting; (5) a $561,375

carryforward business or investment loss on rare coins;5 and (6) a

$125,403 carryforward business or investment loss on historical

documents (collectively referred to as the enumerated items).

These enumerated items, by the Court’s own calculation, total




     4
          The record does not explain the difference between the
$815,000 value petitioner placed on the pension fund in the
letter attached to her 1996 return and the $733,500 value she
placed on it at trial.
     5
          Petitioner characterized the losses on the coins as
rare coins held personally, $302,500; rare coins mishandled out
of Safrabank personal loan account in 1991, $155,650; and rare
miscellaneous coins lost in 1994-97, $103,225.
                                  - 10 -


$1,830,260.6      Petitioner did not provide a more precise accounting

of the remaining losses.

       Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving entitlement to any

deductions claimed.      Rule 142(a);7 INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992).      The taxpayer is required to identify

each deduction available and show that all requirements have been

met.       New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).       Petitioner concedes that she bears the burden of proof.

       A shareholder of an S corporation can deduct a proportionate

share of the corporation’s net operating loss to the extent the

loss does not exceed the sum of the adjusted basis of the

shareholder’s stock in the corporation and any indebtedness of

the S corporation to the shareholder.      Sec. 1366(d)(1).   Here,

under section 1366, petitioner is not entitled to deduct in 1998

a business carryover loss from 1992.       She failed to present any

evidence to establish her basis in the stock of the S

corporation, T.G. Morgan, Inc.      Further, there is no evidence

that the business was indebted to her.      Without basis in her



       6
          On briefs, petitioner made separate references to the
total as equaling $1,830,250 and $1,830,225; there is no
explanation in the record for these discrepancies.
       7
           Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 11 -


stock or qualifying debt with respect to her ownership of T.G.

Morgan, Inc., petitioner may not deduct any portion of a net

operating loss of that corporation.

     Even if petitioner could deduct a portion of the loss, the

amount of her loss has not been established.     T.G. Morgan, Inc.

reported a loss in 1992 of $17,202.      If that amount is correct,

petitioner’s share of that loss, 27.5 percent, would be

$4,730.55.   Sec. 1366(a)(1).   Yet, petitioner presented neither

evidence of the transactions giving rise to the claimed loss nor

evidence of how much of that loss was absorbed in prior years.

Bohannon v. Commissioner, T.C. Memo. 1997-153 (NOL carryforwards

denied to taxpayer who failed to show that the losses had not

been absorbed in prior years).

     Petitioner claimed that the income tax returns filed by the

bankruptcy trustee on behalf of T.G. Morgan, Inc., were false.

However, no evidence was presented to establish that any action

was instituted in the bankruptcy court to compel a correction of

the income tax returns filed by the trustee.     Moreover, as noted

earlier, petitioner’s claimed loss on her return is not based on

the Schedule K-1, which was issued to her by the bankruptcy

trustee (and which reflected a loss of $17,202 of the business),

but instead is based on a proof of claim in the amount of

$38,046,524 filed by the FTC as a creditor in the T.G. Morgan,

Inc., bankruptcy proceeding.    The record of this case does not
                              - 12 -


establish that petitioner was the sole beneficiary for whom the

proof of claim was filed; what amounts were turned over to the

FTC in satisfaction of this claim; or whether petitioner filed a

proof of claim on her own behalf in the T.G. Morgan, Inc.,

bankruptcy proceeding.   Petitioner has not met her burden of

proving she is entitled to deduct a 1992 net operating loss of

T.G. Morgan, Inc., as claimed in 1998.

     Petitioner argued that, because she received refunds from

respondent in prior years based on the reported net operating

loss carryovers, the carryover deduction should not now be

treated differently.   The Court rejects this argument.   Each

taxable year stands alone, and the Commissioner may challenge in

a succeeding year what was condoned or agreed to in a prior year.

Rose v. Commissioner, 55 T.C. 28 (1970).     Thus, a taxpayer must

abide by the Internal Revenue Code even if an improper deduction

is claimed and allowed by the Internal Revenue Service in a prior

year.   Accordingly, the refunds petitioner received in past years

are inapposite to the decision in this case.    Respondent is

sustained on the issue of the net operating loss carryover

deduction.

     The Court next addresses petitioner’s alternative claims,

the deductibility of various other losses.    At trial, petitioner

claimed the theft loss of a pension plan of $733,500, based on

allegations of fraud, theft, estoppel, and breach of fiduciary
                                - 13 -


duty by the bankruptcy trustee and Internal Revenue Service

officials.   In particular, she disputed the bankruptcy court’s

treatment of various assets as belonging to the business when

those assets were not returned to the settlement estate.      Again,

no evidence was presented to show what, if any, actions were

taken by her in the bankruptcy court to rectify these claims.

     Section 165(a) allows as a deduction any loss sustained by a

taxpayer during the taxable year that is not compensated for by

insurance or otherwise.    In order to sustain a theft loss

deduction, a taxpayer has the burden of proving a loss discovered

in the taxable year was incurred as a result of a casualty or

theft and the amount of such loss.       Axelrod v. Commissioner, 56

T.C. 248, 256 (1971).     The taxpayer must also prove ownership of

the stolen property.    Draper v. Commissioner, 15 T.C. 135, 135

(1950); Jensen v. Commissioner, T.C. Memo. 1979-379; Silverman v.

Commissioner, T.C. Memo. 1975-255; Whiteman v. Commissioner, T.C.

Memo. 1973-124.

     For several reasons, petitioner is not entitled to a theft

loss deduction.   First, the record does not establish to the

Court’s satisfaction the existence of a pension plan or the

amount of any contributions made to the plan.      There can be no

theft of an asset whose existence is not firmly established, with

an ascertainable value, as belonging to the taxpayer.      See sec.

1.165-8(d), Income Tax Regs. (“the term ‘theft’ shall be deemed
                                - 14 -


to include, but shall not necessarily be limited to, larceny,

embezzlement, and robbery”); Whiteman v. Commissioner, supra,

(taxpayer denied theft loss deduction as to jewelry and furs

because he failed to establish both their value and ownership).

Further, theft losses are treated as sustained during the taxable

year in which the taxpayer discovers the loss.     Sec. 165(e).

Notwithstanding the fact that petitioner’s claims of theft by

Government officials in the bankruptcy case, the FTC case, and

the IRS audit are meritless, petitioner “discovered” these events

well before 1998, the year at issue.     She is not entitled to a

theft loss deduction in 1998.    Respondent is sustained on this

issue.

     Next, petitioner claimed entitlement to a deduction of

$225,000 as carryforward legal expenses.     To the extent this

deduction is related to the legal expenses of the business, such

expenses would be reflected in the net income or loss of the

business that would flow through to the individual shareholders.

As noted earlier, petitioner had no basis in the S corporation

entitling her to deduct losses from the business.     Moreover,

petitioner advanced no other convincing evidence or argument that

would entitle her to deduct the legal expenses.     She has failed

to prove that her costs, if any, for defending herself and Mr.

Blodgett from civil or criminal liability connected with the

business were other than nondeductible personal expenses.     Matula
                                - 15 -


v. Commissioner, 40 T.C. 914, 917-918 (1963) (costs and fees for

defending suits and indictments for torts and crimes are personal

expenses and not deductible).    Respondent is sustained on this

issue.

     Petitioner claimed a $142,482 investment loss on the Florida

property.8   The Florida property became part of the settlement

estate in the FTC case, which was used to pay claims of defrauded

customers of the business, and was eventually transferred to the

bankruptcy trustee.

     Section 165 allows a deduction for losses incurred in

connection with any transaction entered into for profit, though

not connected with a trade or business.    Sec. 165(c)(2).   The

burden of proof is on the taxpayer to demonstrate the necessary

profit objective.   Rule 142(a); Golanty v. Commissioner, 72 T.C.

411, 426 (1979), affd. without opinion 647 F.2d 170 (9th Cir.

1981).   A taxpayer enters a transaction with a profit objective

if "the facts and circumstances * * * indicate that the taxpayer

entered into the activity, or continued the activity, with the

actual and honest objective of making a profit."    Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

F.2d 1205 (D.C. Cir. 1983); Surloff v. Commissioner, 81 T.C. 210,



     8
          This amount is derived from a faulty calculation of
petitioner’s basis in the Florida property. However, it is
unnecessary for the Court to determine the correct basis.
                               - 16 -

233 (1983).   Greater weight is given to objective facts than to

the parties’ mere statements of intent.    Engdahl v. Commissioner,

72 T.C. 659, 666 (1979).   In determining whether an activity was

entered into for profit, the following factors are considered:

(1) The manner in which the taxpayers carried on the activity;

(2) the expertise of the taxpayers or their advisers; (3) the

time and effort expended by the taxpayers in carrying on the

activity; (4) an expectation that the assets used might

appreciate in value; (5) the success of the taxpayer in carrying

other similar or dissimilar activities; (6) the taxpayer’s

history of income or losses with respect to the activity; (7) the

amount of occasional profits earned; (8) the financial status of

the taxpayer; and (9) the existence of elements of personal

pleasure in carrying out the activity.    Sec. 1.183-2(b), Income

Tax Regs.

     On this record, the Court concludes that the purchase of the

condominium and lot was not engaged in for profit, either from

business or investment.    The Court reaches this conclusion based

on petitioner and Mr. Blodgett’s lack of expertise in the real

estate business, their insufficient time and effort expended in

carrying out any rental of the condominium, a lack of market

analysis on the appreciation potential of the property, and the

lack of credibility of the witnesses at trial.   Although

petitioner claimed she and Mr. Blodgett purchased the Florida
                                - 17 -

property to rent it out, they never carried through with an

intention to do so.    Moreover, this Court is not bound to accept

a taxpayer's self-serving, unverified, and undocumented

testimony.    Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

Petitioner has simply not shown to the Court’s satisfaction that

the purchase of the condominium was for profit from business or

investment; thus, no deduction under section 165(c)(1) or (2) is

allowed.    The Court further holds that the property was purchased

for personal, living, and family purposes.    As a result, under

section 262, its loss is not deductible.    See Austin v.

Commissioner, 298 F.2d 583 (2d Cir. 1962), affg. 35 T.C. 221

(1960).    Respondent is sustained on this issue.

     Petitioner also claimed a $42,500 investment loss on a

Simbari painting.9    The painting was transferred to the settlement

estate in the FTC case and never returned to petitioner.    The

loss of the painting is not deductible by petitioner under

section 165(c)(1) or (2) as a loss from a transaction entered

into for profit.     The painting was displayed in petitioner’s home

and was never used for a business or investment purpose.    Despite

Mr. Blodgett’s claim to have bought the painting as an

investment, no credible evidence was presented as to petitioner's



     9
          The purchase price of the painting was $85,000.
Because she jointly owned the painting with Mr. Blodgett,
petitioner claimed one-half of its cost as her loss deduction.
                              - 18 -

or Mr. Blodgett’s expertise in art, the obtaining of a market

analysis on the painting, or a history of investments in art.

Mr. Blodgett’s expectation of 500 percent or more appreciation in

the value of the painting can best be described as a speculative

hope.   Moreover, the element of personal pleasure from owning the

painting was evident from Mr. Blodgett’s description of buying it

for his wife.   The Court holds that personal pleasure was the

primary reason for having the painting.   Its loss was a

nondeductible personal, living, or family expense.   Sec. 262.

Respondent is sustained on this issue.

     Finally, petitioner claimed carryforward business or

investment losses of $561,375 on rare coins and $125,403 on

historical documents.   She characterized the losses on the coins

as rare coins held personally, $302,500; rare coins mishandled

out of Safrabank personal loan account in 1991, $155,650; and

rare miscellaneous coins lost in 1994 to 1997, $103,225.

Petitioner presented scant evidence regarding the historical

documents.   Petitioner did not meet her burden of proof with

respect to the ownership, the value, and the transfer of the

coins and rare documents.   The Court disregards petitioner’s
                              - 19 -

self-serving statements.   Tokarski v. Commissioner, supra.

Respondent is sustained on this issue.




                                         Decision will be entered

                                    for respondent.
