                  T.C. Summary Opinion 2008-65




                      UNITED STATES TAX COURT



               SAMRA AND SHAH ADEL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21982-05S.             Filed June 10, 2008.



     Samra and Shah Adel, pro sese.

     Michael T. Sargent, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time 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
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the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     Respondent determined a $3,034 deficiency in petitioners’

Federal income tax for 2002.   The sole issue for decision is

whether petitioners are entitled to a theft loss deduction for

the taxable year at issue.

                             Background

     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.    Petitioners resided in

Virginia when they filed their petition.

     Petitioners were born and raised in Afghanistan, where they

met and were married.   In 1980 in the midst of the Soviet-Afghan

War, petitioners fled Afghanistan for Pakistan.    Needing cash for

their journey but unable to sell their greatest assets (a house

and a Mercedes-Benz automobile) because of government-imposed

restrictions on the sale of such assets,1 petitioners arranged to

sell their car to an uncle for $25,000.    The uncle had some cash

on hand to complete the transaction but not to pay the full price

of the car, $25,000.    Petitioners and the uncle agreed that the

difference would be satisfied by the transfer of a gold and




     1
       Transactions between unrelated parties were prohibited,
heavily monitored, or both.
                               - 3 -

emerald jewelry set that the uncle had in his possession as a

result of a bequest from his grandmother.

     Before embarking upon their journey to Pakistan, petitioners

took the jewelry set (comprising a necklace, ring, earrings, and

a bracelet) to an Afghani jewelry appraiser.    The appraiser, who

was both appraising the pieces and setting a price in case

petitioners wished to sell him the set, valued the jewelry at

“11,300 U.S. dollars”.   Because of the unstable political

environment causing many similarly situated families to attempt

to sell such jewelry sets, petitioners decided to retain the set

in the hope of attaining a higher price for it in either Pakistan

or another country.

     After 1 year in Pakistan, petitioners emigrated to Canada,

where they lived from 1981 through 1998.    While they lived in

Canada, petitioners kept the jewelry in a safe deposit box at

their bank.   They did not have any further appraisal done on the

set while living in Canada.

     In 1998 petitioner husband (Mr. Shah) was offered a position

with the “U.S. Trade Office” and later as a military consultant

and translator.   Petitioners moved to Virginia sometime in 1998

and have lived there since in a three-story, single-family home.

Petitioners have family in Canada and Afghanistan and

occasionally travel to both places to visit their relatives.
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     In late February 2002 petitioner wife traveled to visit her

ailing mother in Canada.    At or about this same time, Mr. Shah

had oral surgery.    While Mr. Shah was recuperating, he stayed in

a bedroom on the top floor of their three-story home.    Sometime

between February 24 and February 26, 2002, petitioners’ home was

burglarized.   The burglary occurred in the basement of the home

while Mr. Shah was on the top floor convalescing.

     On February 26, 2002, petitioners filed a police report with

the Prince William County Police Department in Manassas,

Virginia, wherein they detailed the items stolen as follows:      (1)

A Sony Playstation 2 video game console, game controllers, and a

memory card ($850 value); (2) a stereo ($110 value); (3) a

camcorder ($500 value); and (4) an emerald and gold jewelry set.

The values reported for the articles in the set were as follows:

(1) Necklace--$12,000; (2) earrings--$7,000; (3) ring--$5,000;

and (4) bracelet--$8,000.    The total value on the police report

for all items reported stolen was $33,460.    None of the items

stolen were ever recovered, and petitioners’ homeowners insurance

covered only the value of the nonjewelry items taken in the

burglary and the damage done to petitioners’ home.

     During the year in issue, petitioners filed a joint Form

1040, U.S. Individual Income Tax Return, which was prepared by a

paid tax return preparer.    Petitioners reported adjusted gross

income of $47,870.   Petitioners attached a Form 4684, Casualties
                               - 5 -

and Thefts, to their 2002 return.    Petitioners’ Form 4684 listed

their cost basis in the items stolen as $33,7672 less an

insurance reimbursement of $3,985.     After subtracting the $100

limitation imposed on theft losses under section 165(h)(1), and

the adjusted gross income limitation under section 165(h)(2),

petitioners computed the amount of their total theft loss on Form

4684 to be $24,895 and claimed a casualty and theft loss

deduction for the same amount on Schedule A, Itemized Deductions.

     On October 13, 2005, respondent sent petitioners a statutory

notice of deficiency wherein respondent determined a deficiency

of $3,034 resulting from the disallowance of petitioners’ claimed

deduction for theft loss for lack of substantiation.

                            Discussion

     In general the Commissioner’s determination in a notice of

deficiency is presumed correct, and the burden of proof is on the

taxpayer to prove otherwise.   Rule 142(a)(1); Welch v. Helvering,

290 U.S. 111, 115 (1933).   Tax deductions are a matter of

legislative grace, and the taxpayer bears the burden of proving

entitlement to deductions claimed on a return.    Rule 142(a)(1);

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

     Under certain circumstances, the burden of proof with

respect to relevant factual issues may shift to the Commissioner


     2
       The record is silent as to the discrepancy between the
total loss figure contained in the police report ($33,460) and
the figure listed on Form 4684 ($33,767).
                               - 6 -

under section 7491(a).   Petitioners have not alleged that section

7491(a) applies, and therefore, the burden of proof has not

shifted to respondent.

     Respondent’s position is that petitioners have failed to

substantiate either their bases in or the fair market values

immediately before the theft of the items stolen for which they

claimed a theft loss deduction on their 2002 return.    Petitioners

have presented evidence only with respect to the jewelry set, and

it is petitioners’ contention that the car sale price, the

Afghani jeweler’s appraisal of the set, and their own estimate of

the appreciated value of the set over the course of 22 years

adequately substantiate their basis in, and the fair market value

of, the set.

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

during the taxable year and not compensated for by insurance or

otherwise.   For individuals, section 165(c)(3) allows a taxpayer

to deduct a loss from theft.   The deduction is only allowed to

the extent that the loss exceeds $100 and to the extent that the

net loss exceeds 10 percent of adjusted gross income.    Sec.

165(h)(1) and (2).   The amount allowed as a deduction is the

lesser of:   (1) The difference between the fair market value of

the property immediately before and after the theft, and (2) the

adjusted basis in the property.   Helvering v. Owens, 305 U.S. 468

(1939); secs. 1.165-7(b), 1.165-8(c), Income Tax Regs.    In
                                - 7 -

applying section 1.165-7(b), Income Tax Regs., the fair market

value of the property immediately after the theft is zero.    Sec.

1.165-8(c), Income Tax Regs.

     Inherent in section 165 are several requirements.    First,

the taxpayer must have been the owner of the property at the time

of the loss.    Draper v. Commissioner, 15 T.C. 135 (1950).   The

parties agree that petitioners owned the jewelry set at the time

of the theft.    In addition to the ownership requirement, either

the taxpayer’s basis in the stolen property or the fair market

value of the property immediately before the theft must be

ascertained.    Secs. 1.165-7(b), 1.165-8(c), Income Tax Regs.

Where a taxpayer fails to credibly establish either the basis or

the fair market value of the property immediately preceding the

theft, we are unable to determine the amount of loss deductible.

See id.

     On the basis of petitioners’ account of the sale of their

car in 1980, we are unclear as to how much of the $25,000

purchase price was satisfied by petitioners’ uncle through the

transfer of his grandmother’s jewelry set.    While we believe that

petitioners did sell the car to their uncle for $25,000, we also

believe that their uncle gave them cash for at least one-half of

the stated value of the car, $25,000.    Therefore, on the basis of

this analysis, we find that petitioners’ basis in the jewelry set

could be no more than $12,500, although petitioners themselves
                               - 8 -

provided no documentation or credible testimony to establish the

amount of cash their uncle gave them for the car.    Accordingly,

we find that petitioners have failed to adequately substantiate

their basis in the jewelry set for purposes of determining the

deductible amount of theft loss.   See id.

     Petitioners next argue that the Afghani jeweler’s 1980

appraisal, coupled with their estimate of the appreciation of the

jewelry set over the course of 22 years, should suffice as

credible substantiation of the fair market value of the jewelry

set for purposes of their claiming a $24,895 theft loss

deduction.   For the following reasons, we disagree.

     First, petitioners claimed a $24,895 deduction for the loss

of four pieces of gold and emerald jewelry.    This amount reflects

petitioners’ estimate of the replacement cost of those items and

therefore is not the appropriate standard.    See Jenny v.

Commissioner, T.C. Memo. 1977-142.     With respect to the $24,895

figure claimed on their return, petitioners presented no evidence

to establish the fair market value of the jewelry immediately

before the theft.   The only credible evidence presented was a

translated copy of the Afghani jeweler’s 1980 appraisal.     While

we find the appraisal to be credible, we have serious doubts as

to petitioners’ estimate of the fair market value of the jewelry

before the theft.   We acknowledge, generally, that the prices of

gold and gemstones have risen markedly over the past 22 years,
                                - 9 -

and we are confident that that amount would be greater than even

the highest basis we have already presumed that petitioners could

have had in the jewelry ($12,500).      However, because the amount

allowed as a deduction is limited to the lesser of either the

fair market value of the property immediately preceding the theft

or the taxpayer’s basis, the amount of the allowable deduction

would be limited to petitioners’ basis in the jewelry set.     See

sec. 1.165-8(c), Income Tax Regs.

     As previously discussed, we lack credible evidence to

specifically determine petitioners’ basis in the jewelry set.      In

the absence of such evidence, we will apply our best judgment to

approximate this amount.    See Cohan v. Commissioner, 39 F.2d 540

(2d Cir. 1930).   Bearing heavily against the taxpayer “whose

inexactitude is of his own making”, id. at 544, we find that

petitioners’ basis in the jewelry set before the theft was

$5,000.

     Because petitioners did not receive any insurance

reimbursement for the jewelry, no amount for such reimbursement

must be deducted.    The amount of theft loss deduction to which

petitioners are entitled is, however, limited:     petitioners must

first deduct $100 from the total amount of allowable loss under

section 165(h)(1).    Second, under section 165(h)(2), petitioners

are allowed a deduction only to the extent that the amount

allowable exceeds 10 percent of the petitioners’ adjusted gross
                              - 10 -

income.   The allowable amount is $4,900.   After applying section

165(h)(2), the total theft loss amount allowable is $113.


                                            Decision will be entered

                                       under Rule 155.
