                   T.C. Summary Opinion 2001-47



                      UNITED STATES TAX COURT



             HEM C. AND KRISHNA GUPTA, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 15534-99S.            Filed April 3, 2001.


     Bradley S. Shannon, for petitioners.

     Paul K. Voelker, for respondent.



     COUVILLION, Special Trial Judge:   This case was heard

pursuant to section 7463 in effect at the time the petition was

filed.1   The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.

     Respondent determined a deficiency of $5,094 in petitioners'

1996 Federal income tax.


     1
          Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
year at issue.
                               - 2 -


     The issues for decision are whether petitioners, under

section 165, are entitled to a deduction in 1996 for either an

ordinary abandonment loss or a theft loss in the amount of

$25,800.   On brief, respondent agrees that petitioners sustained

an ordinary loss of $25,800 due to abandonment but contends that

the loss was not sustained by petitioners during 1996.

Petitioners contend they sustained the loss during 1996 either by

a theft that they discovered during 1996 or by an abandonment

that occurred during 1996.2

     Some of the facts were stipulated.   Those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.   At the time the petition was filed, petitioners were

legal residents of Las Vegas, Nevada.

     Sometime in early 1994, Hem Gupta (petitioner) responded to

an advertisement in a Las Vegas newspaper soliciting participants

in a trade or business activity that involved the sale of

telephone debit cards and musical greeting cards.   The promoter

of the enterprise was a company based in Atlanta, Georgia, known

as Business Motivations, Inc./Telebanc (BMI).   On or about March

24, 1994, after having been contacted by BMI, petitioner agreed


     2
          It appears that petitioners' claim to an abandonment
loss is not based on respondent's concession but is based on
petitioners' contention of an abandonment of their claim for
reimbursement or recovery of the moneys paid by petitioner to the
promoter of the aborted business activity described more fully in
the following pages.
                               - 3 -


to become a distributor for BMI.   The financial outlay required

by BMI was $24,900, of which petitioner paid $12,500 initially,

and the remainder shortly thereafter.    The activity involved the

placement of display stands, preferably in supermarkets, on which

the greeting cards were displayed for purchase, along with

brochures describing the telephone debit cards.    A customer

desiring a telephone debit card would present the brochure at the

checkout counter, and the cashier would activate a telephone card

for a certain number of minutes allowable for telephone use.    For

the $24,900 paid by petitioner, he was to receive display stands

to be placed at 12 locations, 2,400 telephone debit cards, and

4,800 greeting cards and envelopes.    On the suggestion of BMI,

petitioner engaged the services of Silver Star Locating of

Arlington, Texas, to find suitable locations for the 12 display

stands.   The cost for that service was $3,600.   Petitioner made

one payment of $3,000.   The agreement with Silver Star Locating

allowed for cancellation.   However, if the agreement was

canceled, Silver Star Locating was entitled to retain 25 percent

of the $3,600 contracted amount.   Petitioner elected to cancel

the contract, and, on June 7, 1994, Silver Star Locating refunded

$2,100 to petitioner, retaining $900 (or 25 percent of the $3,600

contracted amount) as a forfeited fee.

     Problems also developed between petitioner and BMI.    BMI did

not immediately ship the necessary merchandise to petitioner to
                                - 4 -


enable him to commence the activity.    It appears that petitioner

became aware that telephone debit cards of competitors were being

marketed in Las Vegas for amounts less than those of BMI.

Petitioner complained about this to BMI; however, the record does

not reflect whether BMI addressed this complaint.

     Petitioner later decided that, in lieu of distributing the

musical greeting cards, since BMI also promoted the sale of

Medical Emergency Response Cards (MERC), petitioner would instead

market MERC.   BMI agreed to this switch.   MERC were programmed to

contain vital medical information of the holder so that, in an

emergency, if the cardholder was incapacitated, such information

would be available by telephone.

     BMI did not immediately send the MERC to petitioner,

although the record shows petitioner made several telephone

requests to BMI during 1994 in order that he could commence his

business.    However, in a letter to BMI dated May 31, 1994,

petitioner, expressing frustration, requested his money back.    On

July 18, 1994, BMI shipped some of the telephone debit cards and

brochures; however, BMI did not provide the store locations with

the necessary computer to activate the cards.    In a letter to BMI

dated July 27, 1994, petitioner concluded the letter with the

following:
                               - 5 -


     The last four months have only proved that there is no
     product, no marketing and no organization. It is only a
     garage operation. I again request immediate refund of my
     money.


     On August 17, 1994, petitioner, through a prepaid legal

services plan, engaged an attorney from Norcross, Georgia, who

wrote BMI declaring that the contract with petitioner had been

breached and demanded the return of the amounts petitioner had

paid to BMI.   Petitioner also contacted, during 1994, the Better

Business Bureau of Atlanta, Georgia, requesting information for

filing a complaint against BMI.   This action by petitioner

apparently prompted BMI to attempt a reworking of the agreement

with petitioner.   That was confirmed in a letter by petitioner to

BMI dated August 24, 1994.   However, BMI apparently did not live

up to the terms and conditions of that agreement.   BMI did ship

MERC and brochures to petitioner but no display stands nor

information as to the locations for the display stands for which

BMI had assumed responsibility in the new agreement.   Petitioner

returned the MERC to BMI on October 24, 1994.

     On November 21, 1994, petitioner wrote his attorney and

stated: "as of now I seek your help in getting full refund of my

money immediately plus expenses and damages with no ifs, buts, or

any reasoning what-so-ever."   On the same date, petitioner wrote

directly to BMI stating: "This is my FINAL notice and request for

REFUND OF MY MONEY."   In that letter, petitioner requested
                                - 6 -


$27,828.81.    On December 27, 1994, petitioner wrote his attorney

requesting that he file suit against BMI and file a lien against

BMI.    Such action was not taken by petitioner's attorney because

the requested work went beyond what the attorney was required to

do under the prepaid legal services agreement.    Petitioner did

not independently pursue legal action against BMI, nor did

petitioner receive any money from BMI as he had demanded in his

November 21, 1994, letter to BMI.    Further, BMI did not ship any

further materials to petitioner.    Although petitioner at trial

contended he made continued demands on BMI on his own and through

his attorney up to November 1995, there was no written

documentation offered into evidence to support these claims, nor

was any documentary evidence offered regarding communications

between petitioner and BMI during 1996.    During 1996, petitioner

contends he came to realize that he would not recover any amount

from BMI.

       On their 1996 Federal income tax return, petitioners filed a

Schedule C, Profit or Loss From Business, on which they reported

their transaction with BMI as a business activity for "Sales of

Medical Response Systems".    They reported no gross receipts,

$25,800 cost of goods sold, and negative gross income of $25,800.

Petitioners claimed office expenses of $120 and a net loss of

$25,920.    In the notice of deficiency, respondent disallowed the

$25,800 cost of goods sold and $927 in itemized deductions
                               - 7 -


resulting from the $25,800 disallowance for cost of goods sold.3

At trial and on brief, petitioners presented their case as a

claim for a loss under section 165.

     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.   Under section 165(c), in the case of an

individual, the deduction under section 165(a) is limited to (1)

losses incurred in a trade or business; (2) losses incurred in

any transaction entered into for profit, though not connected

with a trade or business; and (3) losses of property not

connected with a trade or business or a transaction entered into

for profit, if such losses arise from "fire, storm, shipwreck, or

other casualty, or from theft."   This latter deduction is subject

to additional limitations under section 165(h).4

     As noted earlier, respondent, on brief, conceded that

petitioners sustained an ordinary abandonment loss in the amount

of $25,800, but respondent disagrees that this loss was sustained



     3
          In a trial memorandum, respondent stated that allowance
of the $120 in office expenses claimed on Schedule C of
petitioners' return was inadvertent; however, respondent did not
file an answer or otherwise move to increase the deficiency with
respect to this item.
     4
          Sec. 165(h)(1) allows the loss deduction only to the
extent that the amount of the loss from each casualty exceeds
$100, and sec. 165(h)(2) generally allows the net casualty loss
deduction only to the extent the net casualty losses exceed 10
percent of the taxpayer's adjusted gross income.
                                - 8 -


in 1996.    As a result of respondent's concession, the Court need

not address whether the agreed loss was incurred by petitioners

in a trade or business or in a transaction not connected with a

trade or business but entered into for profit, nor does the Court

need to decide whether petitioners' loss was an abandonment loss.

See secs. 1.165-2(a), 1.167(a)-8, Income Tax Regs.      Petitioners

contend they sustained a theft loss and that the loss was

sustained during 1996.

     The basic question, therefore, is factual: whether

petitioners sustained their loss during 1996.      The documentation

offered into evidence at trial dealt almost exclusively with the

year 1994, consisting of various communications between

petitioner, his attorney, and BMI.      There was no documentary

information offered into evidence between petitioner and BMI

during 1995, although petitioner claimed he continued making

demands on BMI that year.   During 1996, however, the record does

not reflect any communications between petitioner or his attorney

with BMI.   Petitioners have not pointed to any factual event that

occurred during 1996 that would relate to the loss in question.

Section 1.165-1(d)(2)(i), Income Tax Regs., provides, in

pertinent part: "When a taxpayer claims that the taxable year in

which a loss is sustained is fixed by his abandonment of the

claim for reimbursement, he must be able to produce objective

evidence of his having abandoned the claim, such as the execution
                               - 9 -


of a release."   There is no objective evidence that petitioner

abandoned the claim with BMI during 1996.   The record does not

support a finding that petitioners sustained an abandonment loss

during 1996.   The Court sustains respondent on this issue.

     With respect to petitioners' claim that the loss was a theft

loss, section 165(e) provides that any loss arising from theft is

treated as sustained during the taxable year in which the

taxpayer discovers the loss.   See sec. 1.165-8(a)(2), Income Tax

Regs.   Section 1.165-1(d)(3), Income Tax Regs., provides

generally that, if, in the year of discovery of the theft, there

is a reasonable prospect for recovery, the theft loss related

thereto is not considered sustained "until the taxable year in

which it can be ascertained with reasonable certainty whether or

not such reimbursement will be received."   On this record, the

Court is satisfied that petitioners were reasonably certain,

prior to 1996, that they would not be reimbursed by BMI.    The

record does not support petitioners' claim that they sustained a

theft during 1996.   The record, moreover, does not satisfy the

Court that a theft occurred.   However, if a theft did occur, the

Court is satisfied it did not occur during 1996.   Respondent,

therefore, is sustained on this issue.
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    Reviewed and adopted as the report of the Small Tax Case

Division.



                                       Decision will be entered

                                  for respondent.
