                  T.C. Memo. 2011-184



                UNITED STATES TAX COURT



   LOUISE E. NAGEL AND GARY B. NAGEL, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 30645-08.             Filed August 2, 2011.



     R determined deficiencies in Federal income taxes
and additions to tax pursuant to sec. 6651(a)(1),
I.R.C., for Ps’ 2004 and 2006 tax years. After
concessions, the issues for decision are: (1) Whether
Ps are entitled to deduct as a theft loss for their
2004 or 2006 tax year expenses relating to the
foreclosure of the mortgage on their then residence;
(2) whether Ps are entitled to deduct as a theft loss
for their 2004 and 2006 tax years expenses relating to
wage garnishments; and (3) whether Ps are liable for
sec. 6651(a)(1), I.R.C., additions to tax for their
2004 and 2006 tax years.

     Held: Ps are not entitled to deduct expenses relating
to the foreclosure of the mortgage on their then residence
for their 2004 or 2006 tax year. Held, further, Ps are not
entitled to deduct expenses relating to wage garnishments
for their 2004 and 2006 tax years. Held, further, Ps are
liable for additions to tax under sec. 6651(a)(1), I.R.C.,
for their 2004 and 2006 tax years.
                                 - 2 -

     Louise E. Nagel and Gary B. Nagel, pro sese.

     Anna A. Long, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:     This case is before the Court on a petition

for redetermination of deficiencies, as determined by respondent,

concerning petitioners’ 2004 and 2006 tax years.     After

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

petitioners are entitled to a $29,785 theft loss deduction for

2004 or 2006 relating to the 2003 foreclosure of the mortgage on

petitioners’ then residence; (2) whether petitioners are entitled

to a $1,925 theft loss deduction for 2004 and a $434 theft loss

deduction for 2006 relating to wage garnishments; (3) whether

petitioners are liable for a $100 addition to tax under section

6651(a)(1) for 2004; and (4) whether petitioners are liable for a

$203.25 addition to tax under section 6651(a)(1) for 2006.1

                           FINDINGS OF FACT

         Some of the facts have been stipulated, and the stipulated

facts and accompanying exhibits are hereby incorporated by

reference into our findings.     At the time they filed their




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the tax years at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 3 -

petition and during the tax years at issue, petitioners, who are

husband and wife, resided in California.

     From approximately 1989 through mid-October 1995 petitioner

Gary Nagel (Mr. Nagel) was an at-will employee truck driver with

Nature’s Best.

     From 2004 through 2006 and for years prior petitioner Louise

Nagel (Mrs. Nagel) was employed as a medical transcriptionist.

Filing of Federal Income Tax Returns

     Because petitioners did not timely file their Federal income

tax returns for the taxable years 2000 through 2006, respondent

prepared substitutes for returns for these taxable years pursuant

to section 6020(b).

     On November 16, 2007, petitioners belatedly mailed, by means

of United Parcel Service ground delivery, their Forms 1040, U.S.

Individual Income Tax Return, for their 2000, 2001, and 2002 tax

years, as well a Form 1040X, Amended U.S. Individual Income Tax

Return, for their 2003 tax year to respondent’s Taxpayer Advocate

Service office.

     On December 3, 2007, petitioners belatedly mailed by means

of United Parcel Service ground delivery, their 2004, 2005, and

2006 Forms 1040 to respondent’s Taxpayer Advocate Service office,

at Austin, Texas, which were delivered on or before December 6,

2007.   Petitioners did not apply for, nor did they receive, any

extensions of the due dates for their 2004 and 2006 tax returns.
                               - 4 -

The Foreclosure

     In 1978 petitioners bought a residence in Moreno Valley,

California (the residence).

     On November 15, 1990, an executed deed of trust to secure a

purchase money loan of $88,000 relating to the residence was

recorded between petitioners and petitioners’ mortgage servicing

company.   Under the deed of trust, the mortgage servicing company

had the right to require petitioners to reimburse expenses the

mortgage servicing company paid to prevent foreclosure of the

mortgage on the residence.

     In 1996 petitioners stopped paying Riverside County

property taxes on the residence.   On June 3, 2002, Riverside

County mailed petitioners a final notice of power to sell the

residence (notice to sell).   The notice to sell required

petitioners to make full payment of, or start an installment plan

to pay, their delinquent Riverside County property taxes.    The

notice to sell also informed petitioners that if they did not

redeem or start an installment plan to pay their delinquent

property taxes by June 28, 2002, Riverside County would sell the

residence.   In response to receiving the notice to sell, Mr.

Nagel went to the County Recorder’s office to discuss payment of

his delinquent taxes.   Petitioners did not pay their delinquent

Riverside County property taxes, and petitioners’ mortgage

servicing company exercised its right to pay them on petitioners’
                               - 5 -

behalf.   Accordingly, petitioners’ mortgage servicing company

increased petitioners’ monthly mortgage payments to reflect its

payment of petitioners’ property taxes.   The mortgage servicing

company sent petitioners a letter on October 7, 2002, explaining

the increase in their monthly mortgage payment from $796.96 to

$1,664.10 to account for petitioners’ delinquent property taxes

and explaining that they would not accept partial payments.

Petitioners continued to make payments of only $796.76, and the

mortgage servicing company returned petitioners’ checks for

September and October 2002 on account of insufficient payment.

     After petitioners’ mortgage servicing company began refusing

acceptance of partial payments, petitioners made monthly deposits

of $796.76 into a trust account and no longer sent the mortgage

servicing company any payments.   On October 16, 2002,

petitioners’ mortgage servicing company informed petitioners that

if full monthly payments were not made and default cured, the

mortgage servicing company would foreclose on the mortgage.

     In January 2003 petitioners’ mortgage servicing company

informed petitioners that Attorneys Equity National Corp.

(Attorneys Equity) had been substituted as trustee under the deed

of trust.   In February 2003 foreclosure procedures were initiated

against petitioners.   On February 8, 2003, Attorneys Equity

recorded a notice of default and election to sell dated December

6, 2002, with Riverside County.
                              - 6 -

     On May 7, 2003, Attorneys Equity mailed petitioners a notice

of trustee’s sale, informing them it was the trustee appointed

under the deed of trust relating to the foreclosure of the

mortgage on the residence and warning them that unless they took

immediate action, the residence could be sold.   A day later,

Attorneys Equity recorded the notice of trustee’s sale with

Riverside County.

     On June 4, 2003, Attorneys Equity recorded a trustee’s

deed granting the foreclosed residence to J&K Equities.    The

trustee’s deed recorded June 4, 2003, indicates that the

foreclosed residence was sold to J&K Equities for $142,400 at a

public auction on May 27, 2003.

     Petitioners’ unpaid debt at the time of foreclosure was

somewhere between $77,960.35 and $96,345.71.2

     Attorneys Equity paid petitioners’ then mortgage servicing

company, Alliance Mortgage, $95,074.57 from the 2003 foreclosure.

     A judgment granting Joe Harper, president of J&K Equities, a

writ of possession to the residence was entered on June 10, 2003.

     On July 16, 2003, a copy of the writ of possession was

mailed to petitioners, as well as posted to the premises of the



     2
      Federal Home Loan Mortgage Corporation Form 1099-A,
Acquisition or Abandonment of Secured Property, reported to
respondent that petitioners’ unpaid debt at the time of sale of
the foreclosed residence was $77,960.35, but the trustee’s deed
recorded June 4, 2003, indicates that petitioners’ unpaid debt at
the time of sale was $96,345.71.
                               - 7 -

foreclosed residence.   Petitioners did not voluntarily vacate the

premises of the foreclosed residence and were evicted on July 24,

2003.

     On July 25, 2003, Mr. Nagel attended a hearing regarding the

enforcement of the June 10, 2003, writ of possession, at which

time he filed a motion to vacate the writ and it was denied.

     On or about July 26, 2003, petitioners filed a claim with

their home insurance company, Century-National Insurance (Century

National), relating to the foreclosure of the mortgage on the

residence.   After conducting a thorough investigation, Century

National denied petitioners’ claim on September 29, 2003.

     Petitioners filed a claim with the Office of Thrift

Supervision, Department of the Treasury (Office of Thrift

Supervision), relating to the foreclosure of the mortgage on the

residence.   On September 27, 2004, the Office of Thrift

Supervision sent petitioners a letter informing them that it had

contacted EverBank Mortgage Co. (EverBank), formerly Alliance

Mortgage Co., on petitioners’ behalf and that EverBank’s response

letter “and the supporting sixteen exhibits” were “enclosed for

[petitioners’] information.”   The Office of Thrift Supervision’s

letter further informed petitioners that their claim was “not

subject to our jurisdiction” and encouraged them “to consult with

legal counsel regarding any recourse * * * [they] might have

regarding the sale” of the residence.   Finally, the September 27,
                               - 8 -

2004, letter notes that Everbank’s response letter “points to a

source from which you may be able to claim excess funds from the

sale of your former home. * * * We encourage you to take prompt

action to follow up on this lead and to investigate submitting a

claim.”   It is unclear from the record whether petitioners ever

contacted this potential recovery source.

     Petitioners contacted Freddie Mac, their onetime lender,

concerning the foreclosure of the mortgage on the residence.     On

June 9, 2006, Freddie Mac responded to petitioners indicating

that “As I have informed you both in writing and over the

telephone, on numerous occasions, you lost your property to

foreclosure sale because you defaulted in the repayment of your

mortgage loan obligation”.   Freddie Mac’s response encouraged

petitioners to seek legal advice if they thought “the mortgage

loan transaction that * * * [they] entered into, or the servicing

of that loan, or the foreclosure of the secured property, was in

any way unlawful”.   Petitioners did not seek legal advice.

     On April 23, 2007, the Office of the District Attorney for

Riverside County sent Mr. Nagel a letter, informing him that they

had “reviewed the information in * * * [his] complaint” regarding

the foreclosure of the mortgage on the residence, but “determined

that there is insufficient evidence to warrant a criminal

investigation.”
                              - 9 -

     On March 3, 2009, the Boss Law Firm, APLC, counsel for

Commonwealth Land Title Insurance Co., informed petitioners,

after review of recorded instruments, that the 2003 foreclosure

appeared to have been properly executed.   The letter noted that

petitioners had “not provided any documentation or evidence to

substantiate any allegations that the legal requirements under

the Trustee’s Deed were not satisfied or that a bona fide

purchaser for value did not acquire the Property upon Trustee’s

Deed.”

     In relation to the 2003 foreclosure of the mortgage on the

residence, petitioners claimed $29,785 on Schedules A, Itemized

Deductions, as a theft loss for both their 2004 and 2006 tax

years.

The Wage Garnishment

     On December 2, 1996, Mr. Nagel filed a complaint in the

Superior Court of the State of California (superior court) for

wrongful termination against Nature’s Best, captioned Nagel v.

Nature’s Best, No. 772346.

     On March 27, 1998, the superior court granted a motion for

summary judgment filed by Nature’s Best.

     On May 26, 1998, Nature’s Best filed a motion for $42,404 of

attorney’s fees.

     On May 27, 1998, Mr. Nagel filed a notice of appeal from the

superior court’s March 27, 1998, summary judgment.
                               - 10 -

     On August 14, 1998, the superior court ordered Mr. Nagel to

pay Nature’s Best $21,223.25 for attorney’s fees.

     From 1999 through 2001 Mr. Nagel was unemployed and the

judgment against him remained unpaid.   To collect the judgment

previously obtained against Mr. Nagel, in 1999 Nature’s Best

began garnishing Mrs. Nagel’s wages to the extent of Mr. Nagel’s

community property interest.

     On March 12, 1999, Mr. Nagel filed with the superior court a

claim of exemption from the Nature’s Best garnishment.    On May 3,

1999, Mrs. Nagel filed with the superior court a claim of

exemption from the Nature’s Best garnishment.   On June 8, 1999,

the superior court entered an order affirming the garnishment of

Mrs. Nagel’s wages as provided by law but excepting her exempt

disposable earnings of $915 per month or alternatively, $457.50

per 2-week period.

     On April 28, 2000, after petitioners filed a motion to

reconsider the June 8, 1999, judgment, and after a February 25,

2000, hearing on the motion to reconsider, the superior court

denied reconsideration of the June 8, 1999, judgment.    The

Nature’s Best garnishment of Mrs. Nagel’s wages continued from

1999 through 2001.

     In September 2001, the California Fourth District Court of

Appeals (appeals court) issued an opinion affirming the superior

court’s grant of summary judgment for Nature’s Best as to five
                                - 11 -

causes of action but reversing it as to two causes of action.

The appeals court reversed the grant of summary judgment as to:

(1) The statute of limitations, and (2) whether workman’s

compensation was the sole available remedy.   Nature’s Best

voluntarily stopped garnishment of Mrs. Nagel’s wages when

Nature’s Best learned the Appeals Court had reversed as to some

causes of action.   Some of the amounts Nature’s Best garnished

were returned to petitioners.

     In relation to the garnishment of Mrs. Nagel’s wages,

petitioners claimed $1,925 on Schedule A as a theft loss for

their 2004 tax year and $434 as a Schedule A theft loss for their

2006 tax year.

     Respondent issued notices of deficiency on September 24,

2008, determining that petitioners were liable for deficiencies

of $3,667 in income tax for the 2004 tax year and $4,146 in

income tax for the 2006 tax year and additions to tax under

section 6651 of $100 for the 2004 tax year and $203.25 for the

2006 tax year for failing to file timely returns for the tax

years at issue.

     In response to the notices of deficiency, petitioners filed

a timely petition with this Court.
                              - 12 -

                              OPINION

I.   Theft Loss

     Deductions are a matter of legislative grace, and the

taxpayer must maintain adequate records to substantiate the

amounts of any deductions or credits claimed.    Sec. 6001; INDOPCO

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a),

Income Tax Regs.   As a general rule, the Commissioner’s

determination of a taxpayer’s liability in the notice of

deficiency is presumed correct, and the taxpayer bears the burden

of proving that the determination is improper.   See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Section 165(a) allows a taxpayer to deduct any loss

sustained during the taxable year that is not compensated for by

insurance or otherwise.   Section 165(c)(3), which limits losses

for individuals, allows an individual taxpayer to deduct losses

of property arising from, inter alia, theft.    Theft includes but

is not necessarily limited to larceny, embezzlement, and robbery.

Sec. 1.165-8(d), Income Tax Regs.   It includes “any criminal

appropriation of another’s property to the use of the taker”.

Edwards v. Bromberg, 232 F.2d 107, 110 (5th Cir. 1956).    The

amount of a casualty or theft loss is generally limited to the

lesser of the property’s reduction in fair market value or the

property’s adjusted tax basis.   Secs. 1.165–7(b)(1), 1.165–8(c),

Income Tax Regs.   Petitioners bear the burden of proving both the
                               - 13 -

occurrence of a theft within the meaning of section 165 and the

amount of the loss.   See Rule 142(a); Welch v. Helvering, supra

at 115.

     For tax purposes, whether a theft loss has been sustained

depends upon the law of the jurisdiction in which the loss

occurred.    Edwards v. Bromberg, supra at 111; Monteleone v.

Commissioner, 34 T.C. 688, 692 (1960).   The exact nature of a

theft, whether it be larceny, embezzlement, obtaining money by

false pretenses, or other wrongful misappropriation of property

of another, is of little importance provided it constitutes a

theft.    Edwards v. Bromberg, supra at 111; see also sec.

1.165–8(d), Income Tax Regs.

     Petitioners’ alleged theft losses occurred in California.

The California Penal Code provides the following definition of

theft:

     Every person who shall feloniously steal, take, carry,
     lead, or drive away the personal property of another,
     or who shall fraudulently appropriate property which
     has been entrusted to him or her, or who shall
     knowingly and designedly, by any false or fraudulent
     representation or pretense, defraud any other person of
     money, labor or real or personal property * * * or
     obtains possession of money, or property * * * is
     guilty of theft. * * * [Cal. Penal Code sec. 484 (West
     2010).]

     A.    The Foreclosure

     Petitioners contend that losses of approximately $29,875

arose from an alleged illegal foreclosure action in 2003, which
                             - 14 -

they claimed as a theft loss on Schedules A for their 2004 and

2006 tax years.

     This Court has previously questioned whether an illegal

foreclosure action is a theft for purposes of section 165(c).

See Johnson v. Commissioner, T.C. Memo. 2001–97.    We need not

decide this issue, however, because petitioners defaulted on

their loan and have failed either to show that the foreclosure

action was illegal pursuant to the deed of trust securing that

loan or to substantiate the alleged theft loss.    The Court is

sympathetic to petitioners’ economic problems and the need to

annually pay property taxes without regard to employment status.

But practical considerations would dictate that Mr. Nagel seek

other gainful employment to assist Mrs. Nagel in her efforts to

support the family and avoid foreclosure in lieu of spending

excessive time and effort fruitlessly fighting the foreclosure,

property taxes, and income tax obligations.

     The record demonstrates that the foreclosure and sale of the

residence were properly executed within the full force of

California State and Federal Law.   The legality of the

foreclosure was confirmed by multiple sources, including the

Office of Thrift Supervision and the Office of the District

Attorney for Riverside County.   In their brief it appears that

petitioners are alleging that recording errors occurred during

the foreclosure procedure that constituted criminal activity.
                                 - 15 -

However, petitioners have not provided adequate evidence to

support their claim that such errors occurred or if they did,

that such errors constituted criminal activity.

     Petitioners have also failed to substantiate properly their

alleged theft loss from the foreclosure of the mortgage on the

residence.    They have provided no evidence to demonstrate the

exact amount of their remaining debt at the time of the

foreclosure or how the amount claimed relates to their adjusted

tax basis in the residence.    Accordingly, because petitioners

have failed to prove either the occurrence of a theft within the

meaning of section 165 or the amount of the alleged loss, we

sustain respondent’s determination with regard to the

foreclosure.

     B.   The Wage Garnishment

     Petitioners claimed $1,925 as a theft loss deduction for

2004 and $434 as a theft loss deduction for 2006 with regard to

the garnishment of Mrs. Nagel’s wages by Nature’s Best.    It

appears from their brief and Mr. Nagel’s testimony that

petitioners are alleging the garnishment was illegal because it

occurred without the proper legal procedures.    Specifically,

“under Code Civil Procedure 706051 and 052, its forbidden to do

it if you have no disposable earnings or * * * where you have to

pay taxes.”    However, the record demonstrates that a valid

judgment was entered by the superior court on June 8, 1999,
                              - 16 -

affirming the garnishment of Mrs. Nagel’s wages.   The garnishment

continued until the Appeals Court reversed the superior court in

case No. 772346.   At that time, Nature’s Best, through its

attorney Christopher A. Minier, immediately requested the

Sheriff’s Office to “stop this wage garnishment immediately and

return all funds which you (the Sheriff’s Office) are holding

* * * to Louise Nagel.”   Petitioners have not demonstrated to the

Court that any of the actions by Nature’s Best were illegal when

taken.

     Further, petitioners have not substantiated the amounts of

their alleged losses.   From the evidence they presented, the

Court is unable to determine how petitioners calculated their

alleged theft losses from the garnishment of Mrs. Nagel’s wages.

Mr. Nagel stated at trial that Nature’s Best collected

approximately “$23,000, $24,000” between 1999 and 2001, but

petitioners never demonstrated how they arrived at the amounts

they claimed as theft losses on Schedules A.   Under section 6001,

it is a taxpayer’s responsibility to maintain adequate records to

substantiate the amounts of any deductions claimed.   Accordingly,

petitioners have not met the requirements under section

165(c)(3), and we sustain respondent’s determination with regard

to the Nature’s Best wage garnishment.
                              - 17 -

II.   Section 6651(a)(1) Additions to Tax

      Respondent determined that petitioners are liable for

additions to tax under section 6651(a)(1) for their 2004 and 2006

tax years.   We agree with respondent.

      Section 6651(a)(1) imposes an addition to tax of 5 percent

per month or a fraction of a month up to a maximum of 25 percent

for failure to file a timely return unless it is shown that such

failure is due to reasonable cause and not to willful neglect.

      Petitioners argue that Taxpayer Advocate Service Caseworker

Rey Soliz told petitioners he had “postponed any of our federal

tax filing until we had been satisfied by the Ca. Franchise Tax

Board information.”   However, petitioners have introduced no

additional evidence to support their assertion that they received

valid extensions for filing their 2004 and 2006 Forms 1040.

      Petitioners signed both their 2004 and 2006 Forms 1040 on

December 2, 2007, and mailed them to respondent on December 3,

2007.   Petitioners have not introduced any evidence to

demonstrate that their failure to file timely returns was

supported by reasonable cause.   Accordingly, we conclude that

petitioners are liable for the section 6651(a)(1) additions to

tax for 2004 and 2006.

      The Court has considered all of petitioners’ contentions,

arguments, requests, and statements.     To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.
                        - 18 -

To reflect the foregoing,


                                  Decision will be entered

                             under Rule 155.
