               Case: 16-11042       Date Filed: 11/21/2016      Page: 1 of 22


                                                                                [PUBLISH]



                 IN THE UNITED STATES COURT OF APPEALS

                           FOR THE ELEVENTH CIRCUIT
                             ________________________

                                    No. 16-11042
                              ________________________

                                 Agency No. 019797-13



HARVEY L. TUCKER,

                                                                      Petitioner-Appellant,

                                          versus

COMMISSIONER OF INTERNAL REVENUE,

                                                                     Respondent-Appellee,

                              ________________________

                        Petition for Review of a Decision of the
                                     U.S. Tax Court
                              ________________________

                                   (November 21, 2016)

Before TJOFLAT and HULL, Circuit Judges, and MENDOZA, * District Judge.

HULL, Circuit Judge:

       *
          Honorable Carlos Eduardo Mendoza, United States District Judge, for the Middle
District of Florida, sitting by designation.
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       Appellant Harvey L. Tucker petitions for review of the United States Tax

Court’s decision upholding the Commissioner of Internal Revenue’s (the

“Commissioner”) determination that he owes income tax deficiencies and related

penalties 1 for 2004, 2005, and 2006. After review and oral argument, we affirm.

                           I.      FACTUAL BACKGROUND

A.     Tucker’s Real Estate Development Company

       At all times relevant to this appeal, Tucker was the president, director, and

sole shareholder of a Florida “S” corporation 2 called Paragon Homes Corporation

(“Paragon”), which was in the business of real estate acquisition, development, and

sales. Paragon was incorporated in November 1997. Paragon filed annual reports

in 2008, 2010, and 2011. Paragon remained an active corporation until September

28, 2012. Paragon owned several properties in Hillsborough County, Florida,

including multiacre tracts, platted subdivisions, lots, and single-family homes. At

the beginning of 2008, Paragon was a solvent company meeting its payroll and

paying its mortgage obligations, rent, insurance premiums, real estate taxes, and

utility bills.



1
  The parties dispute whether Tucker has waived his argument pertaining to the penalties
imposed by the Tax Court. Regardless, Tucker concedes that, should we rule against him on the
loss-deduction issue, we need not reach the penalty issue. Accordingly, we do not address it.
2
  Paragon elected to be an “S” corporation for federal income tax purposes. This simply means
that the tax attributes of the corporation pass through to the shareholders. See I.R.C. §§ 1366(a),
6037(a).
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      In order to obtain the funds to purchase real property, Paragon took out

mortgages with several banks, including Platinum Bank (“Platinum”), Branch

Banking & Trust Co. (“BB&T”), Wachovia Bank (“Wachovia”), and Fidelity Bank

(“Fidelity”). All mortgages were with recourse to Paragon. Tucker also personally

guaranteed the mortgage loans on Paragon’s properties.

B.    The 2008 Housing Market Crash

      In 2007 and 2008, the residential real estate market in Hillsborough County

went into sharp decline, with annual housing starts down 79% from their peak in

June 2006, annual closings down 65% from that date, and with a 36% decline in

median home price for a single-family unit.

      According to Tucker’s trial testimony, Paragon was out of business and

insolvent by the end of 2008. Paragon had no sales and no revenue. As a result,

Paragon “cease[d] . . . operations” at the end of 2008—it closed its office,

dismissed its employees, and stopped making payments on its mortgages,

insurance premiums, and taxes. At the close of 2008, Paragon had little over

$12,000 in its bank accounts. In Tucker’s mind, Paragon’s real estate inventory—

individually and in the aggregate—was “worthless” as of December 31, 2008,

because “prices had fallen through the floor. There was no demand and we

couldn’t generate any sales. So, Paragon Homes . . . had no value, had a negative

value.”


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C.     Paragon’s Properties

       According to the record evidence, Paragon owned (and owed mortgages on)

the following properties 3 as of December 31, 2008:

    Property Name          Fair Market              Balance due on           Bank that owned
                          Value (“FMV”)4             mortgages 5              the mortgage
   Long Pond /              $1,250,000                $1,859,725                Platinum
  Hunter’s Lake
Culbreath Estates             $510,0006                 $591,244                     Platinum
  (3 properties)                  (total)                  (total)

   Massaro II /                $475,000                 $643,500                     BB&T
 Meadow Chase
   Amberwave                   $127,500                 $115,000                     BB&T
 Estates—Lot 1
Walden Reserve—                $270,000                 $270,113                     BB&T
 Lot 11 / Block 2
Walden Reserve—                $270,000                 $206,478                     Fidelity
 Lot 15 / Block 2
Walden Reserve—                $270,000                 $192,524                     Fidelity
 Lot 3 / Block 2




3
 On August 29, 2008, Paragon sold a parcel in Hillsborough County identified as the Huntley
property for $735,000, a contract price less than the mortgage on the property. The lender,
Platinum, held the mortgage on that property, but it released the mortgage to permit the sale to
proceed. The balance of the mortgage was extinguished as part of the parties’ settlement
agreement. Neither Tucker nor the Commissioner included the Huntley property in the
determination of Paragon’s inventory as of December 31, 2008.
4
 The FMV for each property was determined by Jamie Myers, a real estate appraiser and
Tucker’s expert witness at trial. Myers also gave his opinion that, at the end of 2008, there was
value to all of these properties and “some demand” for the properties.
5
 Amounts are rounded to the nearest dollar. The “balance due” figure represents only the
outstanding mortgage and does not include taxes, interest, fees, etc.
6
 In his brief, Tucker lists these properties as having a total FMV of $520,000, but the record
evidence shows that the three properties were given the following FMVs: $310,000, $105,000,
and $95,000, which total $510,000.
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Walden Reserve—           $1,180,000             $2,126,158                    Fidelity
Lot 8 / Block 2 and           (total)                (total)
 Walden Reserve
   Vacant Lots
  Misty Glen—              $270,000               $223,000                     Fidelity
 Lot 5 / Block B
Walden Reserve—            $260,000               $198,298                 Wachovia
 Lot 19 / Block 1
  Misty Glen—              $307,000               $293,739                 Wachovia
 Lot 2 / Block B
    Misty Glen             $620,000               $984,409                 Wachovia
   (Windhorst)
 McMullen Road /           $950,000               $887,250                 Wachovia
    Forest Glen


D.    Paragon Disposes of its Properties

      Even after Paragon was allegedly shuttered at the end of 2008, Tucker was

aware of his continuing obligations on the mortgages. He claimed that, at the end

of 2008, he owed more than $2 million on Paragon’s “underwater” properties.

      In the summer of 2009, Tucker transferred funds to Paragon, a move he later

called a “disastrous mistake.” Specifically, bank records for Paragon’s business

account show deposits / credits of $85,028 in June 2009; $70,000 in July 2009;

$460,000 in August 2009; and $772,525.81 in September 2009. Tucker testified

that he did this in order to use Paragon as a “conduit” to discharge his liabilities

and “protect” himself. Tucker testified that he wished to complete and sell homes

under construction in order to pay off the mortgages and limit his personal losses.




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      According to Tucker, he continued acting throughout 2009 and 2010 solely

to mitigate his personal losses. Tucker testified that this infusion of money was not

a capital contribution to Paragon, nor did he on any occasion act to save or protect

Paragon.

      The record shows that the properties and mortgages were disposed of as

follows:

      1. Properties Secured by Mortgages from Platinum

      On October 27, 2008, Platinum filed a foreclosure lawsuit against Tucker

and Paragon in the Circuit Court for Hillsborough County, Florida. On February

11, 2009, a final judgment of foreclosure was entered in favor of Platinum. On

October 12, 2009, Platinum, Paragon, and Tucker entered into a Mutual General

Release, which relieved Tucker and Paragon of all liabilities on the properties in

exchange for a $275,000 payment. Tucker testified that he alone paid the

settlement amount.

      2. Properties Secured by Mortgages from BB&T

      On September 24, 2008, BB&T filed a foreclosure lawsuit against Tucker

and Paragon in the Circuit Court for Hillsborough County, Florida. On March 4,

2009, a final judgment of foreclosure was entered in favor of BB&T. On

September 9, 2009, BB&T, Paragon, and Tucker entered into a Settlement

Agreement and Release of Claims, which relieved Tucker and Paragon of all


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liabilities on the properties, as well as Paragon’s line of credit with BB&T, in

exchange for a $160,000 payment. Tucker testified that he alone paid the

settlement amount. Yet Paragon’s business account reflects a $160,000 check

drawn on Paragon’s account on September 4, 2009.

      3. Properties Secured by Mortgages from Fidelity

      On May 12, 2009, Tucker, through Paragon, signed and filed a Notice of

Commencement as to Walden Reserve—Lot 8 / Block 2, identifying Paragon as

the owner and contractor for a single-family residence to be built on this property.

As Tucker explained, this was an attempt “to finish the [construction of the

property] to put [it] in a saleable condition to help mitigate my damages.” Tucker

stated that the Notice of Commencement was in Paragon’s name because Paragon

was the named owner of the property.

      On September 25, 2009, another lot in Walden Reserve (Lot 15 / Block 2)

was sold for $239,000, satisfying the mortgage obligation on that property. On

October 29, 2009, Misty Glen—Lot 5 / Block B was sold for $254,000, satisfying

the mortgage obligation on that property.

      On March 1, 2010, Fidelity filed a foreclosure suit against Tucker and

Paragon in the Circuit Court for Hillsborough County, Florida, seeking foreclosure




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on 33 lots in a tract identified as Walden Reserve. On February 23, 2011, a final

judgment of foreclosure was entered in favor of Fidelity. 7

         On July 28, 2010, Walden Reserve—Lot 3, Block 2 was sold for $210,000,

satisfying the mortgage obligation on that property.

         4. Properties Secured by Mortgages from Wachovia

         In September 2010, Wells Fargo Bank, as successor to Wachovia, filed a

foreclosure suit against Tucker and Paragon, as to all properties except Misty

Glen—Lot 2, Block B.

         On October 8, 2010: Paragon undertook development of Walden Reserve—

Lot 19, Block 1. Tucker, through Paragon, signed and filed a Notice of

Commencement, identifying Paragon as the owner and contractor for a single-

family residence to be built on this property.

E.       Tucker Transfers Funds Out of Paragon

         On November 30, 2009, there was a balance of $839,744.58 in Paragon’s

bank account. In December 2009, on the advice of his counsel, Tucker established

Harvey L. Tucker Family, LLLP, and transferred $358,255.63 from Paragon’s

bank account to the LLLP. He also transferred a little over $400,000 from the

Paragon account to himself, and he used these funds to purchase a variable annuity




7
    The judgment lists an effective date of August 19, 2009.
                                                  8
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life insurance policy. Tucker testified that he did this to protect himself from

“[b]anks and other creditors.”

F.     The Federal Income Tax Returns

       On its 2008 federal income tax return, Paragon reported a loss of

approximately $10.8 million. Of this, approximately $8,928,845 was attributable

to a “write down” of Paragon’s real estate inventory to current market value as of

December 31, 2008.8 Tucker then claimed a flow-through loss from Paragon of

roughly $6.78 million on his individual 2008 income tax return. As a result of this

loss, Tucker reported a 2008 net operating loss (“NOL”) of more than $6.7 million.

       Tucker then elected to carry the 2008 NOL back to tax years 2003, 2004,

2005, 2006, and 2007. 9 Tucker sought a refund totaling almost $2 million for tax

years 2003, 2004, 2005, and 2006 based on the loss carrybacks.

G.     The Commissioner Issues a Notice of Deficiency to Tucker

       The Commissioner conducted an audit and concluded that Paragon’s

allowable loss for 2008 was, in actuality, only $1.5 million. As a result, on June 4,

8
  The remainder of the claimed loss consisted of interest expense deductions, depreciation
deductions, and a deduction for financial fees. Tucker has not contested the Tax Court’s
disallowance of these other deductions. Thus, Tucker has waived any claim with respect to these
items. See Little v. T-Mobile USA, Inc., 691 F.3d 1302, 1306 (11th Cir. 2012).
9
  In general, a net operating loss may be carried back only to the two taxable years preceding the
loss year. I.R.C. § 172(b)(1)(A)(i). A special rule, however, applied to net operating losses
incurred during the 2008 taxable year that allowed taxpayers to elect to carry back a 2008 net
operating loss attributable to an eligible small business for a period of three to five years instead
of the usual two. The Worker, Homeownership, and Business Assistance Act of 2009, Pub. L.
No. 111-92, § 13(a), Nov. 6, 2009, 123 Stat. 2984, 2992.
                                                  9
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2013, the Commissioner issued a Notice of Deficiency to Tucker, indicating that it

had disallowed his claimed NOL carrybacks for 2004, 2005, and 2006. The Notice

of Deficiency indicated that Tucker owed the following amounts:

          Year                    Tax Deficiency                   Penalty
                                                              (I.R.C. § 6662(a))
           2004                     $610,541.00                  $122,108.20

           2005                     $714,979.00                  $142,995.80

           2006                     $152,851.00                   $30,570.20



                        II.   PROCEDURAL HISTORY

      On August 26, 2013, Tucker filed a petition with the Tax Court challenging

the Commissioner’s Notice of Deficiency. On December 9, 2014, the Tax Court

held a one-day bench trial.

      On September 22, 2015, the Tax Court released its memorandum opinion.

The Tax Court explained that whether Tucker’s NOL carrybacks were proper

depended on whether the Commissioner correctly disallowed Paragon’s claimed

deduction under I.R.C. § 165(a) and its accompanying regulation, which allow

deductions for losses stemming from “closed and completed transactions,” which

may include abandonment of an asset or an asset becoming worthless. The Tax

Court stated the general rule that, when a taxpayer’s real property is secured by a




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recourse obligation, 10 the taxpayer is not entitled to a loss deduction until the year

of the foreclosure sale, regardless of abandonment or worthlessness. The Tax

Court noted Tucker’s argument that Paragon’s investments in its properties were

“closed and completed” at the end of 2008 because it was “impossible” for

Paragon to pay a deficiency judgment, and that any money later invested in the

properties came from Tucker’s own pocket in an effort to mitigate his own

personal exposure. The Tax Court summarized that, “[i]n essence [Tucker] argues

that the facts and circumstances of his case distinguish it from other cases

involving recourse loans [and that, therefore,] the general rule . . . should not

apply.”

       In support of this argument, as the Tax Court noted, Tucker relied on

Treasury Reg. § 1.165-1(d)(2). But the Tax Court rejected this argument because

it “confuses the test for ‘closed and completed transactions’ with respect to

casualty losses and losses on land due to abandonment and worthlessness of

property” and “mistakes the taxpayer for the banks.” The Tax Court also rejected

Tucker’s argument that Paragon could not pay a deficiency judgment as “simply

not true,” pointing to the funds that Paragon had in its accounts during 2009.



10
  A recourse obligation or debt is one guaranteed by a third party such that the lender would
have recourse to seek payment from this third party in the event of default. See Laney v.
Comm’r, 674 F.2d 342, 349 (5th Cir. Unit A 1982). There is no dispute in this case that the
mortgages securing the properties were recourse debts.
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       The Tax Court also determined that “the record does not indicate that any of

Paragon’s properties were abandoned or became worthless.” It determined,

instead, that Paragon’s “subsequent attempts in 2009 and 2010 to sell the

properties, construct homes, and settle claims with the banks show that Paragon

did not abandon the properties.” Furthermore, the properties were not worthless to

Paragon at the end of 2008 because “the properties could be used to reduce

Paragon’s liability exposure for a deficiency judgment.” In addition, Tucker’s own

expert witness testified that the properties had some value and there was “some

demand” for the properties at the end of 2008. Thus, the Tax Court concluded that

Tucker had not met his burden of establishing the abandonment or worthlessness

of the properties by the end of 2008.11

       On February 3, 2016, the Tax Court entered a formal decision imposing the

following deficiencies and penalties against Tucker:

           Year                      Tax Deficiency                     Penalty
                                                                   (I.R.C. § 6662(a))
            2004                       $539,666.00                    $107,933.20

            2005                       $714,979.00                     $142,995.80

            2006                       $152,851.00                     $30,570.20




11
  The Tax Court also affirmed the Commissioner’s disallowance of additional deductions and
the imposition of penalties.


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      Tucker timely appealed the Tax Court’s determination to this Court.

                                III.   DISCUSSION

      We review the Tax Court’s legal conclusions de novo, and its factual

findings for clear error. Gustashaw v. Comm’r, 696 F.3d 1124, 1134 (11th Cir.

2012). The Commissioner’s determination of a deficiency is presumed correct,

and the taxpayer has the burden of proving otherwise. Welch v. Helvering, 290

U.S. 111, 115, 54 S. Ct. 8, 9 (1933). Additionally, deductions are a matter of

legislative grace, and the taxpayer has the burden of proving his entitlement to any

claimed deduction. C. A. White Trucking Co., Inc. v. Comm’r, 601 F.2d 867, 869

(5th Cir. 1979).

      Section 165(a) of the Internal Revenue Code allows a deduction for “any

loss sustained during the taxable year and not compensated for by insurance or

otherwise.” I.R.C. § 165(a). The accompanying regulation states, “[t]o be

allowable as a deduction under section 165(a), a loss must be evidenced by closed

and completed transactions, fixed by identifiable events, and . . . actually sustained

during the taxable year.” Treas. Reg. § 1.165–1(b); see also id. § 1.165-1(d)(1). In

most cases, a “closed and completed transaction[]” will occur upon a sale or other

disposition of the property, but this requirement may also be satisfied if the

taxpayer abandons the asset or the asset becomes worthless. Proesel v. Comm’r,

77 T.C. 992, 1005-06 (1981). “Abandonment” and “worthlessness” are separate


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and distinct grounds, either one of which may give rise to a deduction under

§ 165(a). Echols v. Comm’r, 935 F.2d 703, 706 (5th Cir. 1991).

A.     Paragon 12 Did Not Abandon the Properties in 2008

       To show abandonment, the taxpayer must demonstrate both “an intention to

abandon and some act evidencing that intention.” Dezendorf v. Comm’r, 312 F.2d

95, 96 (5th Cir. 1963); see also Echols, 935 F.2d at 707 (“[T]he abandoning party

must manifest an intent to abandon by some overt act or statement reasonably

calculated to give a third party notice of the abandonment.”); Middleton v.

Comm’r, 77 T.C. 310, 322 (1981), (writing that abandonment requires (1) an

intention on the part of the owner to abandon the asset; and (2) an affirmative act

of abandonment), aff’d 693 F.2d 124 (11th Cir. 1982). Additionally, the

abandonment must occur in the tax year for which the deduction is claimed.

Dezendorf, 312 F.2d at 96. Determinations regarding the existence and timing of

an abandonment are issues of fact. L & C Springs Assocs. v. Comm’r, 188 F.3d

866, 870 (7th Cir. 1999).

       Here, Paragon points to the fact that it had closed its office, dismissed its

employees, and stopped making payments on its obligations by December 31,

2008, as evidence of its abandonment. The parties dispute whether cessation of
12
  As explained above, Tucker’s NOL carrybacks stem from Paragon’s claimed $10.8 million
loss in 2008, which in turn relied on a massive write down of the FMV of its properties on
December 31, 2008. Accordingly, as the Tax Court noted, the issue is Paragon’s claimed
§ 165(a) loss, and the operative question is whether Paragon (not Tucker) abandoned the
properties and/or whether the properties were worthless to Paragon by the end of 2008.
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business operations is itself enough to show abandonment. We need not decide

this issue, however, because the Tax Court’s finding that “the record does not

indicate that any of Paragon’s properties were abandoned” by the end of 2008 was

not clearly erroneous. See Gustashaw, 696 F.3d at 1134.

      The record demonstrates that Paragon continued to develop and sell the

properties throughout 2009 and 2010. This is evidenced by the fact that two

properties were sold in September and October 2009, another property was sold in

July 2010, and Paragon undertook construction of two homes, as evidenced by the

Notices of Commencement that were filed on May 12, 2009, and October 8, 2010.

Tucker also funneled more than $800,000 of his personal money into Paragon’s

business account in order to facilitate construction on the properties.

And, unlike the taxpayers in Middleton, Paragon never offered to reconvey the

properties back to the mortgagees in lieu of foreclosure. See 77 T.C. at 322-23.

Instead, Paragon signed settlement agreements with Platinum and BB&T in late

2009. Thus, Paragon’s overt acts did not evidence an intention to abandon the

properties. See Dezendorf, 312 F.2d at 96; Middleton, 77 T.C. at 322.

      We are cognizant of Tucker’s argument that all of these actions were

intended to protect himself from his creditors and personal obligations on the

mortgages, and that he did not act to protect or save Paragon. However, he has not

pointed us to any cases supporting his argument that his subjective intention to act


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purely for his own protection is sufficient to meet his burden.13 And his argument

that Paragon was essentially defunct and out of business by the end of 2008 is

belied by the record evidence demonstrating that Paragon continued to file reports

with the State of Florida after December 31, 2008, it signed the settlement

agreements with Platinum and BB&T, it was listed as the owner/builder on the

Notices of Commencement, and it was listed as the “seller” on the realty sales

documents. Under these circumstances, the Tax Court did not clearly err in

determining that Paragon did not abandon the properties in 2008.

B.     The Properties Did Not Become Worthless to Paragon in 2008

       To receive a deduction for “worthlessness,” a taxpayer must demonstrate

“his subjective determination of worthlessness in a given year, coupled with a

showing that in such year the asset in question is in fact essentially valueless.”

Echols, 935 F.2d at 708. The requirement of worthlessness is a “de minimus rule

that the taxpayer does not have to prove that a given asset is absolutely, positively

without any value whatsoever.” Id. at 708 n.2. Transfer of title is not a

prerequisite to a finding of either abandonment or worthlessness. Id. at 706.

Further, while a taxpayer need not be “an incorrigible optimist in his determination

13
   It is true that the Tax Court has previously written that, where a taxpayer’s interest in a
partnership became worthless in a given year, the taxpayer could take a § 165(a) deduction in
that year, even though the taxpayer continued to contribute funds to the partnership “only to
minimize its own losses.” Tejon Ranch Co. & Subsidiaries v. Comm’r, 49 T.C.M. (CCH) 1357
(1985). Tucker did not cite this case in his briefs and, in any event, it is distinguishable because
it dealt with the worthlessness of a partnership interest, not the alleged worthlessness of a piece
of real property.
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of when property becomes worthless, a mere decline, diminution, or shrinkage in

value is not sufficient to establish a loss.” Proesel, 77 T.C. at 1006. The question

of worthlessness is “peculiarly one of fact” in which the petitioner bears the burden

of proof. Id.; see also Boehm v. Comm’r, 326 U.S. 287, 293, 66 S. Ct. 120, 124

(1945) (stating that the question of whether an asset became worthless during a

given taxable year “is purely a question of fact to be determined in the first

instance by the Tax Court.”).

      Tucker and the Commissioner agree on the general rule that, in the case of

recourse debts, the loss deduction must be taken in the year that the foreclosure

sale occurs, regardless of whether the property was abandoned by or became

worthless to the mortgagor in a prior year. See Helvering v. Hammel, 311 U.S.

504, 512, 61 S. Ct. 368, 372 (1941) (holding that the foreclosure sale was the

“definitive event” establishing the taxpayers’ loss); George v. United States, 124

F.3d 216 (10th Cir. 1997) (unpublished table decision) (determining, in the context

of a recourse loan, that the taxpayer was entitled to a deduction on the loss from

real property in the year in which it was sold at a foreclosure sale, not in the year in

which it was abandoned and/or became worthless to him); Comm’r v. Green, 126

F.2d 70, 71-72 (3d Cir. 1942) (concluding that taxpayers could not deduct their

loss on property secured by a recourse obligation in the year they allegedly




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abandoned the property; instead, they must take the loss deduction in the year that

the foreclosure sale occurred).

      The Third Circuit in Green explained whether the mortgage at issue was a

recourse mortgage was of “fundamental importance” to resolving the case. 126

F.2d at 72. That is because where the mortgagor retains liability for the debt, “the

property continues until [the] foreclosure sale to have some value which, when

determined by the sale, bears directly upon the extent of the owner’s liability for a

deficiency judgment.” Id.

       Tucker attempts to evade this general rule by relying on a novel

interpretation of Treas. Reg. § 1.165-1(d). That regulation provides:

      A loss shall be allowed as a deduction under section 165(a) only for
      the taxable year in which the loss is sustained. For this purpose, a loss
      shall be treated as sustained during the taxable year in which the loss
      occurs as evidenced by closed and completed transactions and as fixed
      by identifiable events occurring in such taxable year.

Treas. Reg. § 1.165-1(d)(1). The regulation then goes on to distinguish between

instances where the loss is covered by a claim for reimbursement “to which there is

a reasonable prospect of recovery” and losses that are not covered by such claims.

See id. § 1.165-1(d)(2)(i)-(iii). Where there exists a claim with a reasonable

prospect of recovery, “no portion of the loss . . . may be . . . sustained, for purposes

of section 165, until it can be ascertained with reasonable certainty whether or not

such reimbursement will be received.” See id. § 1.165-1(d)(2)(i). Where such a


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claim does not exist, however, the loss may be sustained during the taxable year

“in which the casualty or other event occurs.” See id. § 1.165-1(d)(2)(ii).

      By way of illustration, the regulation gives the following examples:

Suppose a property worth $10,000 is completely destroyed in a fire in 1961, and

the taxpayer’s only claim for reimbursement consists of an insurance claim for

$8,000, which claim is settled in 1962. Id. The taxpayer would then sustain a loss

of $2,000 in 1961 under § 1.165-1(d)(2)(ii). Id. If, on the other hand, the

taxpayer’s car were completely destroyed in 1961 due to the negligence of another

person, and there exists a reasonable prospect of recovery on a claim for the full

value of the car against that other driver, the taxpayer would not sustain the loss

“until the taxable year in which the claim is adjudicated or otherwise settled” under

§ 1.165-1(d)(2)(i). Id.

      Tucker argues that, because the regulation authorizes the loss event to be a

“closed and completed transaction” in the year the loss occurred where there is no

claim with a reasonable prospect of recovery when considering whether a taxpayer

will receive additional money, the inverse must also be true: certain loss events

can constitute a “closed and completed transaction” when determining whether the

taxpayer will pay additional monies. Further, by the end of 2008, there was “no

reasonable prospect” that Paragon would be able to pay a deficiency judgment.

Tucker concedes that the regulation nominally applies to casualty losses, but he


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stresses that the regulation also encompasses “other event[s] . . . which may result

in a loss.” He claims that the 2008 market crash was just such an “other event.”

      There is support for Tucker’s contention that market events can sufficiently

“fix” a loss such that the deduction may be taken in the year that the loss occurs.

See Echols, 935 F.2d at 705-08; Helvering v. Gordon, 134 F.2d 685, 686-89 (4th

Cir. 1943); Rhodes v. Comm’r, 100 F.2d 966, 970 (6th Cir. 1939); Denman v.

Brumback, 58 F.2d 128, 129 (6th Cir. 1932); Tejon Ranch Co. & Subsidiaries v.

Comm’r, 49 T.C.M. (CCH) 1357 (1985); Middleton, 77 T.C. at 320-24. None of

these cases, however, involved recourse loans or a nominally defunct business that

continued to develop and sell the allegedly worthless asset after its alleged

dissolution.

      Moreover, Tucker has pointed us to no case law supporting his tortured and

novel reading of the regulation. The thrust of the regulation is that a taxpayer may

only claim a deduction under § 165(a) in the year that the amount of the loss

becomes readily ascertainable. See Treas. Reg. § 1.165-1(d)(2). Here, the total

losses to Paragon were not ascertainable or fixed at the end of 2008. None of the

homes had been formally foreclosed upon or sold. Further, in the event of

foreclosure, the banks would have recourse both to Paragon and to Tucker

personally. As the case law makes clear, in the case of a recourse debt, the amount

of the loss is not readily ascertainable until the foreclosure sale because the


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property’s value is directly linked to the extent of the owner’s liability on a

deficiency judgment. Green, 126 F.2d at 72.

      Tucker counters that Paragon would not have owed anything in a default

judgment because it was insolvent and out of business on December 31, 2008. But

the Tax Court made a finding of fact that this assertion was not true. The record

evidence amply supports this finding, along with the finding that the properties

were not worthless to Paragon at the end of 2008.

      It is common sense that, if the properties could be sold to satisfy the

mortgages, used as consideration in a settlement, or updated to increase the value

(all of which actually occurred), then Paragon’s liability on the mortgage debts

would be reduced. This reduction has value. Further, while it is not required that

the assets be “absolutely, positively without any value whatsoever,” Tucker’s own

expert witness testified that the properties had some value and there was “some

demand” for the properties at the end of 2008. Echols, 935 F.2d at 708 n.2. This

conclusion does not, as Tucker contends, mean that “property is never worthless

regardless of the encumbrances where it has any intrinsic value.” Such a holding

would be contrary to case law and, indeed, the Tax Court acknowledged that a

§ 165(a) deduction based on worthlessness “requires worthlessness of the

taxpayer’s equity in the property.” See Echols, 935 F.2d at 705-08; Gordon, 134

F.2d at 687-89; Middleton, 77 T.C. at 320-24. The Tax Court merely concluded


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that, in this case, the properties retained enough value to avoid being “worthless”

within the meaning of § 165(a).

      Finally, the Tax Court did not clearly err in determining that a deficiency

judgment against Paragon would not be “impossible” given the funds flowing in

and out of Paragon’s bank account in 2009. Though this money came from Tucker

in a purported attempt to use Paragon as a “conduit” to cut his own losses, a move

that Tucker now acknowledges was a “disastrous mistake,” his actions demonstrate

that a deficiency judgment against Paragon would have been possible after the

foreclosure sales. Taxpayers cannot have it both ways—they cannot both freely

use a business to settle debts and sell assets and then claim that the business was

defunct the whole while.

      Accordingly, the Tax Court properly determined that Tucker had not met his

burden of demonstrating that the Commissioner’s disallowance of the § 165(a) loss

deduction was incorrect.

                               IV.   CONCLUSION

      For the foregoing reasons, we affirm the decision of the Tax Court.

      AFFIRMED.




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