                        T.C. Memo. 1996-284



                      UNITED STATES TAX COURT



              TIMOTHY DEMITRI BROWN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2121-95.              Filed June 19, 1996.


     Timothy Demitri Brown, pro se.

     Richard L. Hunn, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined a deficiency in

petitioner Timothy Demitri Brown’s (Mr. Brown) 1993 Federal

income tax in the amount of $14,156 and an accuracy-related

penalty under section 6662(a)1 in the amount of $1,656.2


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
                                                   (continued...)
                               - 2 -

     After concessions, the issues for decision are:    (1) Whether

Mr. Brown is entitled to a loss deduction in the amount of

$30,900 for currency that was seized by Louisiana law enforcement

officials pursuant to a civil forfeiture statute; (2) whether Mr.

Brown is entitled to a Schedule E loss deduction in the amount of

$5,000 for a deposit he made on a townhouse; (3) whether Mr.

Brown is entitled to claim a deduction for a theft loss in the

amount of $22,300; and (4) whether Mr. Brown is liable for self-

employment taxes under the provisions of section 1401.


                          FINDINGS OF FACT


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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Mr. Brown resided in

Alexandria, Louisiana, at the time the petition was filed.

     On September 28, 1993, Mr. Brown was arrested along with two

other individuals in Lake Charles, Louisiana.   At the time of his

arrest, Mr. Brown was carrying $30,900 in currency.    Law

enforcement officials confiscated the currency as suspected drug

money.   On November 2, 1993, before the State of Louisiana had

instituted formal judicial forfeiture proceedings, Mr. Brown


     1
      (...continued)
Practice and Procedure.
     2
      On Mar. 18, 1996, respondent filed a report to the Court
conceding that Mr. Brown was not liable for the accuracy-related
penalty under sec. 6662(a).
                               - 3 -

filed a motion with the 14th Judicial District Court of Calcasieu

Parish, Louisiana, for return of the seized property.   On January

13, 1994, the State of Louisiana initiated a civil judicial

forfeiture proceeding against the currency.   Mr. Brown filed both

an answer to the pending forfeiture and a claim for the return of

the currency in early 1994.   The forfeiture proceeding is still

pending.

     On September 23, 1993, Mr. Brown entered into a contract to

purchase a townhouse in Houston, Texas.   Pursuant to the

contract, Mr. Brown made an earnest money deposit in the amount

of $5,000.   The closing was to take place on November 9, 1993.

In the event that the buyer defaulted on the contract, the

contract provided, in pertinent part:


     If Buyer fails to comply with this contract, Buyer
     shall be in default, and Seller may either (a) enforce
     specific performance, seek such other relief as may be
     provided by law, or both, or (b) terminate this
     contract and receive the Earnest Money as liquidated
     damages, thereby releasing both parties from this
     contract. * * *


     Mr. Brown was unable to close due to the seizure of the

$30,900, which he planned to use to purchase the townhouse.    Mr.

Brown reported the $5,000 deposit as a loss on his 1993 Federal

income tax return.   In 1994, Mr. Brown recovered the $5,000

deposit and reported it as income on his 1994 Federal income tax

return.

     In August 1993, Mr. Brown purchased a 1985 Cadillac DeVille
                                - 4 -

from Richard Kellogg for $3,000.    Sometime thereafter, Alice Faye

Lotts, who cohabited with Mr. Brown until early December 1993,

filed for a change of title, making it appear as if she purchased

the vehicle from Mr. Kellogg.    On or about December 9, 1993, Ms.

Lotts filed a complaint with the police department alleging that

the vehicle had been stolen.    Mr. Brown was arrested as a result

of the complaint, and the vehicle was turned over to Ms. Lotts.

On or about December 14, 1993, Ms. Lotts, after having moved out

of Mr. Brown’s residence, returned to the residence and removed

several items of personal property belonging to Mr. Brown.     Mr.

Brown valued these items (including the vehicle) at $22,300 and

deducted this amount as a theft loss on his 1993 Federal income

tax return.

       On July 29, 1994, Mr. Brown filed a civil lawsuit against

Ms. Lotts seeking the return of his property.     Mr. Brown secured

a default judgment against Ms. Lotts on November 14, 1994.     Mr.

Brown has made efforts to collect on the judgment, including

filing for a writ of execution in February 1995, and he is still

attempting to recover the property.     Mr. Brown did manage to

recover the vehicle in 1995, and he reported $3,000 in income on

his 1995 Federal income tax return as a result of the recovery.

       Mr. Brown reported a net profit of $41,600 on Schedule C

(Profit or Loss from Business) of his 1993 Federal income tax

return from his business as a wholesale distributor of audio

equipment.    He did not file a Schedule SE or pay self-employment

tax.
                                - 5 -

                               OPINION


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

during the taxable year and not compensated for by insurance or

otherwise.   Section 165(c) limits the deduction in the case of an

individual to losses incurred in a trade or business or any

transaction entered into for profit, casualty losses, and theft

losses.

     Before a loss may be claimed as a deduction, however, it

must be evidenced by a closed or completed transaction.     United

States v. S.S. White Dental Manufacturing Co., 274 U.S. 398, 401

(1927); Ramsay Scarlett & Co. v. Commissioner, 61 T.C. 795, 807

(1974), affd. 521 F.2d 786 (4th Cir. 1975); sec. 1.165-1(b),

Income Tax Regs.   Thus, if there exists a claim for reimbursement

with respect to which there is a reasonable prospect of recovery,

the loss is not deductible until it can be ascertained with

reasonable certainty whether or not such reimbursement will be

received.    Estate of Scofield v. Commissioner, 266 F.2d 154, 159

(6th Cir. 1959), affg. in part and revg. in part 25 T.C. 774

(1956); Ramsay Scarlett & Co. v. Commissioner, supra; sec. 1.165-

1(d)(2)(i) and (3), Income Tax Regs.     This determination requires

an objective inquiry into the facts and circumstances surrounding

the loss as of the close of the taxable year in which the

deduction is claimed.    Boehm v. Commissioner, 326 U.S. 287, 292-

293 (1945); Ramsay Scarlett & Co. v. Commissioner, supra at 811.

In determining whether a taxpayer had a reasonable prospect for
                                - 6 -

reimbursement, the fact that the taxpayer filed a lawsuit to

recover the deducted loss gives rise to an inference that he or

she had such a prospect.   Estate of Scofield v. Commissioner,

supra; Ramsay Scarlett & Co. v. Commissioner, supra at 812-813.

     The first issue is whether Mr. Brown is entitled to a loss

deduction with respect to the $30,900 currency that was seized by

Louisiana law enforcement officials pursuant to a civil

forfeiture statute.   Mr. Brown filed a motion to recover the

currency in 1993, and formal civil forfeiture proceedings, which

are still pending, were instituted in early 1994.    We find that

the fact that Mr. Brown took legal action in late 1993 and early

1994 indicates that he had a reasonable prospect of recovery at

the end of 1993.

     Furthermore, even if Mr. Brown had lost the forfeiture case

and was required to forfeit the currency, he would be prohibited

by public policy from claiming a loss deduction.    There is a

strong public policy against drug trafficking, and case law has

established that any deduction for property forfeited under the

forfeiture laws is precluded.    Wood v. United States, 863 F.2d

417, 421 (5th Cir. 1989); Holmes Enters., Inc. v. Commissioner,

69 T.C. 114, 117 (1977); Holt v. Commissioner, 69 T.C. 75, 79-80

(1977), affd. 611 F.2d 1160 (5th Cir. 1980).   Accordingly, we

sustain respondent’s disallowance of the $30,900 loss deduction.

     The next issue is whether Mr. Brown is entitled to a loss

deduction with respect to the $5,000 deposit on the townhouse.
                               - 7 -

Mr. Brown argues that because he was unable to close on the

townhouse, he forfeited the deposit under the terms of the

contract and, therefore, was entitled to claim a loss deduction.

     However, this assumption is not supported by the terms of

the contract.   The contract provided that upon the buyer’s

default, the seller may either seek specific performance or any

other relief provided by law or terminate the contract and keep

the earnest money deposit as liquidated damages.     Mr. Brown has

not shown that the seller elected to keep the deposit as

liquidated damages or even that the seller intended to enforce

its contract claim against Mr. Brown.   Indeed, Mr. Brown

admittedly received the $5,000 back from the seller during the

next taxable year.   Accordingly, we find that Mr. Brown’s breach

of contract, in itself, was not a closed and completed

transaction giving rise to a deductible loss.3    See Lucas v.

American Code Co., 280 U.S. 445, 450 (1930).

     Next, we must determine whether Mr. Brown is entitled to

claim a deduction for a theft loss in the amount of $22,300 for

the property taken from him by Ms. Lotts.   Mr. Brown filed a

civil suit against Ms. Lotts in 1994, obtained a default

judgment, and has pursued collection since then.     Mr. Brown did,

in fact, recover the vehicle from Ms. Lotts.     We find that the

     3
      We note, however, that because Mr. Brown reported the
recovery of the $5,000 deposit as income in 1994, he overreported
his taxable income in 1994 and may be entitled to a refund for
that year.
                                - 8 -

fact that Mr. Brown undertook to litigate his claim against Ms.

Lotts indicates that he had a reasonable prospect of recovery as

of the end of 1993.    The fact that the lawsuit was not actually

filed until 1994 does not negate the inference that there was a

recoverable claim for reimbursement during 1993.    Dawn v.

Commissioner, 675 F.2d 1077, 1078 (9th Cir. 1982), affg. T.C.

Memo. 1979-479; see National Home Prods., Inc. v. Commissioner,

71 T.C. 501, 525-526 (1979).

     Moreover, even if Mr. Brown established that there was a

closed and completed transaction giving rise to a deductible

theft loss, he has failed to establish the fair market value of

the property stolen.   The amount of a theft loss is equal to the

lesser of (1) the fair market value, or (2) the adjusted cost

basis of the property stolen.   Sec. 1.165-7(b), 8(c), Income Tax

Regs.    The regulations further require that the fair market value

be ascertained by competent appraisal.   Sec. 1.165-7(a)(2),

Income Tax Regs.   Therefore, we sustain respondent’s disallowance

of Mr. Brown’s claimed theft loss.4

     Finally, we must determine whether Mr. Brown is liable for

the self-employment tax under section 1401.   Section 1401(a)

imposes a tax on the self-employment income of every individual.


     4
      Similar to Mr. Brown’s recovery of his deposit in 1994, Mr.
Brown reported the recovery of his vehicle in the amount of
$3,000 in 1995. Thus, we note that Mr. Brown overreported his
taxable income in 1995 and may be entitled to a refund for that
year.
                                 - 9 -

Self-employment income generally consists of the gross income

derived by an individual from any trade or business, less

allowable deductions.   Sec. 1402(a) and (b).      Mr. Brown bears the

burden of proving that he is not liable for the self-employment

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

Mr. Brown reported net taxable income from his business in 1993

and offered no proof that such income is not subject to the self-

employment tax.   We, therefore, sustain respondent’s

determination that Mr. Brown is liable for the self-employment

tax for the taxable year 1993.



                                              Decision will be entered

                                         for respondent with respect to

                                         the deficiency.

                                              Decision will be entered

                                         for petitioner with respect to

                                         the accuracy-related penalty.
