                        T.C. Memo. 1998-58



                      UNITED STATES TAX COURT



        RUSSELL W. AND REBECCA A. WILLEY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27751-96.                Filed February 11, 1998.



     Russell W. and Rebecca A. Willey, pro sese.

     Ruth M. Spadaro, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   Respondent determined a $19,026 deficiency in

petitioners' 1993 Federal income tax.   After concessions by

petitioners, the issue for decision is whether petitioners are

entitled to deduct a theft loss of $769,800.    We hold they are to

the extent provided below.   Unless otherwise indicated, all
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section references are to the Internal Revenue Code for the year

in issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

                           FINDINGS OF FACT

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

Petitioners resided in Wilmington, Delaware, at the time they

filed their petition.

     In 1991, Russell Willey made short-term loans (i.e.,

repayment was promised within 6 months) of $200,000 to Casey

Foods, Inc. (Casey), $200,000 to Nanna's Treasures, Inc.

(Treasures), and $70,000 to the Electra Group, Inc. (Electra).

The three companies invested the loan proceeds in the Euro-

American Money Trust Fund (the trust fund).    The trust fund was

an independent, unrelated entity, and Mr. Willey did not have any

contact or dealings with anyone associated with it.    Mr. Willey's

loans were never repaid.

     In July of 1992, Treasures was in need of capital, so its

owner, Wanda M. Dugan, offered to sell 49 percent of Treasures'

stock to Mr. Willey.    After reviewing Treasures' operations,

financial records, and projections, Mr. Willey agreed to purchase

the 49-percent stock interest for $300,000.    Petitioners

transferred $300,000 to Treasures but never received any

Treasures stock.   In 1993, Ms. Dugan filed for bankruptcy, and in

1994 petitioners filed a proof of claim in the proceeding.    In
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1995, Ms. Dugan received a bankruptcy discharge, and petitioners

did not receive any funds.

     In 1993, several trust fund representatives were indicted in

the U.S. District Court for the District of New Jersey for wire

fraud, money laundering, and tax evasion relating to the trust

fund's activities.   In 1995, two of these individuals pled guilty

and were convicted of the charged offenses.

     On their 1993 joint Federal income tax returns, petitioners

claimed a theft loss of $769,800 (i.e., $470,000, less $100

pursuant to section 165(h)(1), attributable to the loans to

Casey, Treasures, and Electra and $300,000, less $100 pursuant to

section 165(h)(1), attributable to Treasures' stock).      On October

15, 1996, respondent issued a notice of deficiency to

petitioners.   Respondent determined that petitioners were not

entitled to the theft loss but were entitled to a nonbusiness bad

debt subject to the $3,000 annual limitation.

                              OPINION

     Section 165(c)(3) allows a deduction for any theft loss that

is not compensated by insurance or otherwise.    Whether a theft

has occurred is determined under State law.     Paine v.

Commissioner, 63 T.C. 736, 740 (1975), affd. without published

opinion 523 F.2d 1053 (5th Cir. 1975).   The Delaware Code

provides that a person commits theft when "the person takes,

exercises control over or obtains property of another person
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intending to deprive that person of it or appropriate it."       Del.

Code Ann. tit. 11, sec. 841 (1995).     A person commits theft

through a false promise when:

     with the intent prescribed in § 841 of this title, the
     person obtains property of another person by means of a
     representation, express or implied, that the person * *
     * will in the future engage in particular conduct, and
     * * * the person does not intend to engage in such
     conduct * * * [Del. Code Ann. tit. 11, sec. 844
     (1995).]

     Petitioners contend that they are entitled to a $469,900

theft loss because their loans to Casey, Treasures, and Electra

were misappropriated by trust fund representatives.     While the

trust fund representatives may have committed a theft from Casey,

Treasures, and Electra, the representatives did not commit a

theft from petitioners.    See, e.g., Perrotto v. Commissioner,

T.C. Memo. 1977-99; Silverman v. Commissioner, T.C. Memo. 1975-

255, affd. without published opinion 538 F.2d 320 (3d Cir. 1976).

The trust fund was an independent, unrelated entity, and Mr.

Willey did not have any contact or dealings with it.     Indeed, Mr.

Willey testified that Casey, Treasures, and Electra were not

acting as agents for the trust fund.     Therefore, petitioners are

not entitled to deduct a theft loss attributable to their loans

to Casey, Treasures, and Electra.

     Petitioners contend that they are entitled to deduct, in

1993, a $299,900 theft loss attributable to Mr. Willey's purchase

of Treasures   stock.   Respondent, however, contends that
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petitioners have not established that a theft occurred.     We

conclude that Ms. Dugan committed a theft from Mr. Willey when

she solicited and received payment for, but failed to deliver,

Treasures stock.

     Respondent further contends that even if petitioners

establish that a theft occurred, they are not entitled to a

deduction in 1993 because at the end of that year Ms. Dugan's

bankruptcy proceeding was pending and, as a result, petitioners

had a reasonable expectation of recovering some of their funds.

See sec. 1.165-1(d)(3), Income Tax Regs.    We disagree.   "A

reasonable prospect of recovery exists when the taxpayer has bona

fide claims for recoupment from third parties or otherwise, and

when there is a substantial possibility that such claims will be

decided in his favor."    Ramsay Scarlett & Co. v. Commissioner, 61

T.C. 795, 811 (1974), affd. 521 F.2d 786 (4th Cir. 1975).

Petitioners did not file a proof of claim until 1994, and even

then their chances of recovery were remote.    Therefore, in 1993

petitioners did not have a reasonable expectation of recovery.

Accordingly, we hold that petitioners are entitled to deduct a

theft loss of $299,900.

     To reflect the foregoing,


                                     Decision will be entered

                                 under Rule 155.
