                       T.C. Memo. 2008-271



                      UNITED STATES TAX COURT



              DOMINICK J. VINCENTINI, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7166-03.               Filed December 8, 2008.



     Robert J. Stientjes and Anthony Scott Gasaway, for

petitioner.

     A. Gary Begun, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     MARVEL, Judge:   Respondent determined a deficiency of

$309,382 and a section 66621 accuracy-related penalty of

$61,876.40 with respect to petitioner’s 1999 Federal income tax.


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                   - 2 -

        After concessions,2 the issues for decision are:   (1)

Whether petitioner may claim and carry back to 1999 a deduction

for a theft loss that arose in 2001 or alternatively in 2002, and

(2) whether petitioner is liable for the section 6662 accuracy-

related penalty.

                             FINDINGS OF FACT

     Some of the facts have been stipulated.      We incorporate the

stipulation of facts into our findings by this reference.        On the

date the petition was filed, petitioner resided in Michigan.

     From 1999 to 2001 petitioner was involved with an

organization known as Anderson Ark & Associates (Anderson Ark).

Anderson Ark operated an international fraud scheme that involved

marketing various phoney investment programs.

     Petitioner first became involved with Anderson Ark after

listening to audiocassette tapes by Keith Anderson, founder of

Anderson Ark, and attending an Anderson Ark conference in Costa

Rica.       In 1999 petitioner invested in two Anderson Ark programs.

The first program was known as the Loan Four Program.      The Loan

Four Program, also known as the Factoring Program, involved a

scheme where investors would transfer funds to Anderson Ark in



        2
      Petitioner concedes that he is not entitled to deduct the
$907,470 partnership loss from Birdlane Marketing Venture
reported on his 1999 Form 1040, U.S. Individual Income Tax
Return. Petitioner also concedes that he is liable for the 10-
percent additional tax under sec. 72(t) for the premature IRA
distribution of $796,629 he received in 1999.
                                 - 3 -

anticipation of large returns on their investments.     The second

program was known as the Complex Business Organization (CBO) or

Look Back Program.     Under the CBO Program, an investor would

establish with an Anderson Ark entity a joint venture through

which the investor would receive a partnership loss that would

reduce the investor’s tax liability.

     In connection with his investment in the CBO Program,

petitioner was referred to Gary Kuzel, who was involved with

Anderson Ark and who represented himself to be a certified public

accountant.   Gary Kuzel prepared a package of documents (CBO

package) explaining the CBO Program for petitioner that included

an invoice for loan fees, a tax analysis report, a marketing

proposal, a business plan, and “projections”.

     Petitioner, with the help of Gary Kuzel, took various steps

to effect his investment in the CBO Program.     Petitioner formed a

partnership called Birdlane Marketing Venture (Birdlane) with an

Anderson Ark entity, Macro Media Advertising, L.L.C. (Macro

Media).3   Birdlane executed4 a promissory note for a $950,000

“loan” from La Maquina Blanca, S.A. (La Maquina Blanca), another

Anderson Ark entity.    The invoice included in the CBO package




     3
      Petitioner had a 95-percent interest in Birdlane, and Macro
Media had a 5-percent interest.
     4
      Petitioner and Richard Grosnickle, on behalf of Macro
Media, signed the promissory note.
                                - 4 -

showed that petitioner owed La Maquina Blanca $76,5005 in various

loan fees for initiating and processing the La Maquina Blanca

loan.6   Under the CBO Program, Birdlane had to use the borrowed

money as a so-called guaranteed payment to Macro Media,

supposedly for services.   Because Birdlane had no income for

1999, Birdlane generated a net loss by deducting the “guaranteed

payment” paid to Macro Media.   Birdlane allocated to petitioner

most of its net loss generated by the “guaranteed payment”.

     Gary Kuzel prepared petitioner’s 1999 Form 1040, U.S.

Individual Income Tax Return (1999 return), on which petitioner

reported a $907,470 partnership loss from Birdlane and a $796,629

IRA distribution.7

     From 1999 to 2001 petitioner never received a profit from

either Anderson Ark investment program.

     In 2001 agents of the United States and Costa Rica raided

Anderson Ark’s Costa Rican offices, and agents of the United

States also raided Anderson Ark’s domestic offices.   Also in 2001

several Anderson Ark principals (Anderson Ark defendants) were

arrested and indicted.   In 2002 the Anderson Ark defendants were


     5
      The invoice showed total loan fees of $78,500, but
petitioner had a $2,000 credit for a deposit.
     6
      The evidence in the Anderson Ark criminal trial showed that
the loans associated with the CBO Program were nonexistent and
that Anderson Ark told its clients that the fees were necessary
to process the nonexistent loans.
     7
      Petitioner had not reached the age of 59-1/2 during 1999.
                                - 5 -

convicted in the U.S. District Court for the Eastern District of

California (California District Court) on charges of money

laundering and/or conspiracy to commit money laundering.   See

United States v. Anderson, 391 F.3d 970, 974 (9th Cir. 2004).

Also in 2002 the same Anderson Ark defendants and two other

Anderson Ark principals (hereafter collectively referred to as

the Anderson Ark defendants) were indicted in the U.S. District

Court for the Western District of Washington (Washington District

Court).

     On March 6, 2003, respondent sent petitioner a notice of

deficiency disallowing the Birdlane partnership loss and

determining a section 6662 accuracy-related penalty.    Petitioner

timely petitioned this Court.   In his petition, petitioner

asserted that respondent erred in disallowing the Birdlane

partnership loss.8

     In 2004 the Anderson Ark defendants were convicted in the

Washington District Court on charges of conspiracy to defraud the

United States, conspiracy to commit mail and wire fraud, aiding

and assisting the filing of false income tax returns, mail fraud,

and wire fraud.   Keith and Wayne Anderson, two of the Anderson

Ark defendants, were also convicted of international money

laundering and conspiracy to commit money laundering.



     8
      Petitioner now concedes that he is not entitled to the
$907,470 Birdlane partnership loss reported on his 1999 return.
                              - 6 -

     In 2005 the Washington District Court entered amended

judgments in the criminal case.   In the amended judgments the

Washington District Court ordered the Anderson Ark defendants to

pay restitution to petitioner and others in connection with their

investments in the Anderson Ark programs.   The restitution

ordered with respect to petitioner was as follows:

                                     Restitution1
     Defendant           CBO Program          Loan Four Program

   Keith Anderson          $76,500                   $435,000
   Wayne Anderson           76,500                    435,000
   Richard Marks            76,500                      –
   Karolyn Grosnickle       76,500                      –
   Pamela Moran             76,500                      –
   James Moran              76,500                      –
     1
      The Anderson Ark defendants are jointly and severally
liable for the restitution.

The Washington District Court also ordered several of the

defendants to forfeit property to the United States.    The

Washington District Court ordered Keith9 and Wayne Anderson to

forfeit seven condominiums in Costa Rica, a residence in

Hoodsport, Washington, and $28 million in cash.   The Washington




     9
      A complete copy of Keith Anderson’s amended judgment in a
criminal case was not included in the exhibits admitted into
evidence. However, the complete amended judgment is available on
the Public Access to Court Electronic Records (PACER) system and
confirms that Keith Anderson was ordered to forfeit the same
property as Wayne Anderson.
                               - 7 -

District Court also ordered Pamela and James Moran to forfeit

property as set forth in a preliminary order of forfeiture.10

     On April 14, 2006, while petitioner’s case was pending

before the Tax Court, respondent received petitioner’s Form

1040X, Amended U.S. Individual Income Tax Return, for 1999.     On

Form 4684, Casualties and Thefts, attached to the Form 1040X,

petitioner claimed an $835,000 theft loss deduction for his

involvement with Anderson Ark.11   Petitioner also attached to the

Form 1040X a protective claim explaining his reasons for claiming

the theft loss deduction.   In response, respondent sent

petitioner’s representative a letter explaining that petitioner’s

1999 Federal income tax liability was pending before the Tax

Court and that the Tax Court was the more appropriate place to

raise his argument.   Respondent explained that the Form 1040X

would be regarded only as an “information return”.

     On March 8, 2006, petitioner’s motion for leave to amend

petition was filed, and an amended petition was lodged.    In the

motion petitioner asserted that he was entitled to a theft loss

deduction under section 165(c)(3) for 1999.   On March 17, 2006,

respondent filed a response to petitioner’s motion.   On March 21,



     10
      The record does not contain the preliminary order of
forfeiture or otherwise show what property Pamela and James Moran
were required to forfeit.
     11
      Petitioner’s description of the theft loss was “CASH
$76,500 ‘LOAN FEE’” and “CASH $758,500 ‘LOAN 4 PROGRAM’”.
                               - 8 -

2006, we denied petitioner’s motion for leave to amend petition.

On May 5, 2006, and September 18, 2006, petitioner filed motions

to reconsider the denial of petitioner’s motion to amend

petition, and we denied both motions.

     On May 23, 2007, we held a trial in Detroit, Michigan.     At

the trial petitioner again requested that the Court reconsider

petitioner’s motion to amend the pleadings to assert a theft loss

deduction.   Petitioner informed the Court that he did not need to

introduce additional evidence at trial with regard to the theft

loss deduction.   The Court concluded that although this Court had

previously denied petitioner’s motion, petitioner would be barred

from arguing for and receiving the benefit of a theft loss

deduction that would carry back to 1999 if he could not assert

the theft loss deduction issue in this case.   The Court also

found that respondent knew about the theft loss issue more than a

year before trial.   Respondent’s only argument for denying

petitioner’s motion was that the Court had already ruled on

petitioner’s motion to amend petition.

     Rule 41(a) provides that after the pleadings are closed, a

party may amend a pleading only by leave of Court or by written

consent of the adverse party, and leave shall be given freely

when justice so requires.   Because respondent was not prejudiced

by our granting petitioner’s motion to amend petition and this

was petitioner’s only opportunity to argue for the benefit of the
                                - 9 -

theft loss deduction for 1999, the Court concluded that justice

was best served by exercising its discretion under Rule 41(a) to

allow petitioner to amend his petition to raise the theft loss

deduction issue.    On June 1, 2007, the Court filed petitioner’s

amendment to petition.

                               OPINION

I.   Jurisdiction

     The Tax Court is a court of limited jurisdiction, and it may

exercise its jurisdiction only to the extent authorized by

Congress.   Naftel v. Commissioner, 85 T.C. 527, 529 (1985).

Section 7442 expressly provides that the Court and its divisions

shall have such jurisdiction as is conferred on them by the

Internal Revenue Code and by laws enacted after February 26,

1926.

     Petitioner received a notice of deficiency, and he invoked

our jurisdiction by timely filing a petition for redetermination

of a deficiency under section 6213(a).    Section 6214(a) grants us

jurisdiction to redetermine the correct amount of a deficiency12

and any additional amounts or any additions to tax.

     Pursuant to section 6214(b), the Court, in redetermining a

deficiency of income tax for any taxable year, shall consider


     12
      Sec. 6211(a) defines “deficiency” generally as the amount
by which the tax imposed exceeds the sum of the amount of tax
shown on the return and the amount of tax previously assessed
over any rebates. White v. Commissioner, 95 T.C. 209, 213
(1990).
                               - 10 -

facts with relation to the taxes for other years as may be

necessary to redetermine the correct amount of the deficiency.

The Court, however, does not have jurisdiction to determine

whether the tax for any other year has been overpaid or

underpaid.    Id.

      In response to respondent’s notice of deficiency, petitioner

timely filed a petition seeking redetermination of the deficiency

for 1999 that resulted from the disallowance of the Birdlane

partnership loss.   Although petitioner concedes that he is not

entitled to the partnership loss for 1999, he asserts that he is

entitled to a theft loss deduction for 2001 or 2002 that can be

carried back to 1999.   Under section 6214(b) we may consider

facts occurring in years other than 1999 to redetermine

petitioner’s tax liability for 1999.    Consequently, we have

jurisdiction to determine whether petitioner is entitled to a

theft loss deduction for 2001 or 2002.

II.   Burden of Proof

      A taxpayer generally has the burden of proving that the

Commissioner’s determination is in error.    Rule 142(a).

Moreover, deductions are a matter of legislative grace, and a

taxpayer must clearly demonstrate entitlement to the claimed

deductions.    INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); Segel v. Commissioner, 89 T.C. 816, 842 (1987).
                              - 11 -

     The burden of proof shifts to the Commissioner if the

taxpayer produces credible evidence with respect to any relevant

factual issue and the taxpayer has complied with substantiation

requirements, maintained all required records, and cooperated

with reasonable requests by the Commissioner for witnesses,

information, documents, meetings, and interviews.   Sec. 7491(a).

Petitioner concedes that section 7491(a) does not apply.13

Consequently, petitioner bears the burden of proof herein.

III. Theft Loss Deduction

     Petitioner asserts that he may claim a $511,50014 theft loss

deduction under section 165 for 2001 or alternatively for 2002

that may be carried back to 1999 in connection with his

investment in the Anderson Ark programs.

     Section 165 generally authorizes a deduction for losses

resulting from theft for the year in which the taxpayer discovers

the loss.   Sec. 165(a), (c), (e).   In order to claim a theft loss

deduction, the taxpayer must prove (1) that a theft actually

occurred under the law of the jurisdiction wherein the alleged


     13
      Petitioner argues, however, that he is entitled to a shift
of the burden of proof under caselaw predating the enactment of
sec. 7491(a). Petitioner’s argument is not convincing, and we
reject it.
     14
      Although petitioner claimed an $835,000 theft loss
deduction on his Form 1040X, petitioner argued at trial and on
brief that he is entitled to a $511,500 theft loss deduction. We
shall under the circumstances consider petitioner to have
abandoned his claim to a theft loss greater than $511,500.
                               - 12 -

loss occurred, Monteleone v. Commissioner, 34 T.C. 688, 692

(1960), (2) the amount of the loss, Gerstell v. Commissioner, 46

T.C. 161, 175 (1966), and (3) the date the taxpayer discovered

the loss, sec. 165(e); McKinley v. Commissioner, 34 T.C. 59, 63

(1960); see also River City Ranches #1 Ltd. v. Commissioner, T.C.

Memo. 2003-150, affd. in part, revd. in part and remanded 401

F.3d 1136 (9th Cir. 2005); Yates v. Commissioner, T.C. Memo.

1988-565.

     A.     Theft Occurrence and Loss Amount

     The term “theft” under section 165 has a general and broad

meaning that includes any criminal appropriation of another’s

property, including theft by swindling, false pretenses, and

other forms of guile.    Edwards v. Bromberg, 232 F.2d 107, 110

(5th Cir. 1956); see also sec. 1.165-8(d), Income Tax Regs.

Generally the law of the jurisdiction where the taxpayer

sustained the loss governs whether a theft has occurred under

section 165.    Bellis v. Commissioner, 540 F.2d 448, 449 (9th Cir.

1976), affg. 61 T.C. 354 (1973).    A violation of a Federal

criminal statute may also establish that a theft occurred for

purposes of section 165.    Nichols v. Commissioner, 43 T.C. 842,

884-885 (1965); River City Ranches #1 Ltd. v. Commissioner,

supra.

     Petitioner argues that the doctrine of judicial estoppel

precludes respondent from taking the position that petitioner was
                                - 13 -

not a victim of theft by the Anderson Ark defendants and that

petitioner failed to substantiate the theft loss amount.

Petitioner contends that the conviction of the Anderson Ark

defendants and the Washington District Court’s amended judgments

in the criminal case ordering the defendants to pay petitioner

restitution establish that petitioner was a victim of theft in

the amount of $511,500.

     The doctrine of judicial estoppel prevents a party from

asserting in subsequent judicial proceedings a position contrary

to the position the party had previously persuaded a court to

accept.   Huddleston v. Commissioner, 100 T.C. 17, 26 (1993).    The

Tax Court and the Court of Appeals for the Sixth Circuit, where

appeal in this case would lie absent a stipulation to the

contrary, have applied the doctrine of judicial estoppel in

appropriate cases.   See Lorillard Tobacco Co. v. Chester, Willcox

& Saxbe, LLP, 546 F.3d 752, 757 (6th Cir. 2008); see also In re

Cassidy, 892 F.2d 637 (7th Cir. 1990); Huddleston v.

Commissioner, supra at 28-29.    Judicial estoppel, however, must

be “‘applied with caution to avoid impinging on the truth-seeking

function of the court because the doctrine precludes a

contradictory position without examining the truth of either

statement.’”   Fazi v. Commissioner, 105 T.C. 436, 445-446 (1995)

(quoting Teledyne Indus., Inc. v. NLRB, 911 F.2d 1214, 1218 (6th

Cir. 1990)).
                              - 14 -

     Judicial estoppel focuses on the relationship between a

party and the courts and seeks to protect the integrity of the

judicial process by preventing a party from successfully

asserting one position before a court and then asserting a

contradictory position before the same or another court merely

because it is now in that party’s favor to do so.      Huddleston v.

Commissioner, supra at 26.   In order for judicial estoppel to

apply, a court must actually have considered and accepted the

position in an earlier court proceeding.      Id.   Acceptance by a

court does not require that the party being estopped ultimately

prevailed in the prior proceeding.     Id.   Acceptance by a court

means only that the court accepted a specific position or

argument asserted in the prior proceeding.      Id.

     Before applying judicial estoppel, we must decide whether

respondent’s position is inconsistent with the one the Government

asserted in the Anderson Ark criminal case and whether the

Washington District Court in the criminal case accepted the

Government’s position.   See In re Cassidy, supra at 641;

Huddleston v. Commissioner, supra at 27.

     The Washington District Court entered amended judgments in a

criminal case involving the Anderson Ark defendants that ordered

certain defendants to pay petitioner restitution in connection

with petitioner’s investment in the Anderson Ark programs.      Title

18 U.S.C. section 3663 (2006) authorizes a sentencing court to
                                - 15 -

order a defendant convicted of an offense under title 18 of the

United States Code to make restitution to any victim of such

offense.    The sentencing court must support its restitution order

against a defendant with a finding that the person to whom it

awards restitution was a victim of the offense for which the

defendant was convicted.     18 U.S.C. sec. 3663(a)(1)(A).   Under 18

U.S.C. section 3663(a)(2), the term “victim” means a person

directly and proximately harmed as a result of the commission of

an offense for which restitution may be ordered.     A court may

award restitution to a victim not specifically named in the

indictment as long as the indictment details a broad scheme

involving victims in addition to those identified in the

indictment.     United States v. Liner, 435 F.3d 920, 926 (8th Cir.

2006).     As support for an order of restitution under 18 U.S.C.

section 3663, the court orders the probation officer to obtain

and include in the presentence report, or a separate report,

information sufficient for the court to exercise discretion in

ordering restitution.     18 U.S.C. sec. 3664(a) (2006).

     The Government took the position in the Anderson Ark

criminal case that petitioner was a victim of fraud and was

entitled to $511,500 of restitution for his loss related to the

offenses for which the Anderson Ark defendants were convicted.

The Washington District Court accepted that position.      Pursuant

to 18 U.S.C. section 3664(a), the Government, through a probation
                                - 16 -

officer, was required to obtain and report information sufficient

for the court to order restitution to victims.   Although that

report is not a part of the record in this case, we infer from

the fact that the Washington District Court ordered restitution

in favor of petitioner that the Government presented to the

Washington District Court sufficient information to establish

that petitioner was a victim of theft by the Anderson Ark

defendants in the amount of $511,500.

     Respondent now asserts that petitioner was not a victim of

theft by the Anderson Ark defendants and that petitioner did not

prove the amount of his loss.    Because respondent’s position is

inconsistent with the position asserted by the Government in the

Anderson Ark criminal case, we conclude that the application of

the doctrine of judicial estoppel is appropriate.   Applying the

doctrine, we hold that respondent is precluded from arguing that

petitioner was not a victim of theft by the Anderson Ark

defendants in the amount of $511,500.

     B.   Year of Discovery

     A taxpayer may deduct a theft loss in the year in which the

loss is sustained.   Sec. 165(a).   Any loss arising from theft is

treated as sustained during the taxable year in which the

taxpayer discovers the loss and in which the loss is evidenced by

a “closed and completed” transaction.    Sec. 165(e); sec. 1.165-

1(d)(1), Income Tax Regs.   Whether there is a closed and
                               - 17 -

completed transaction with respect to a theft loss depends on the

taxpayer’s prospect of recovering the loss.    Sec. 1.165-

1(d)(2)(i), Income Tax Regs.   If in the year of discovery there

exists a claim for reimbursement with respect to which there is a

reasonable prospect of recovery, no portion of the loss with

respect to which reimbursement may be received is sustained until

the year in which it can be ascertained with reasonable certainty

whether or not such reimbursement will be received.    Sec. 1.165-

1(d)(3), Income Tax Regs.    Whether there is a reasonable prospect

of recovery is a question of fact that must be determined by

examining all facts and circumstances.    Sec. 1.165-1(d)(2)(i),

Income Tax Regs.

     A reasonable prospect of recovery exists when the taxpayer

has a bona fide claim for recoupment from third parties or

otherwise and there is a substantial possibility that such claims

will be decided in the taxpayer’s favor.     Ramsay Scarlett & Co.

v. Commissioner, 61 T.C. 795, 811 (1974), affd. 521 F.2d 786 (4th

Cir. 1975).   Such prospect should not be viewed through the eyes

of an “incorrigible optimist”, and claims for recovery whose

potential for success are remote or nebulous will not cause a

postponement of the deduction.    Id.   We do not look at facts

whose existence and production for use in later proceedings were

not reasonably foreseeable as of the end of the year in which the

loss was discovered.   Id.   The fact of a future settlement or a
                                - 18 -

favorable judicial action on the claim does not control our

determination if we find that at the end of the year of discovery

no reasonable prospect of recovery existed.15    Id. at 811-812.

     Respondent concedes, and we find, that petitioner discovered

the loss in 2001.16    However, petitioner must prove that it was

reasonably certain as of the end of 2001 that he would not

recover his loss.     See Jeppsen v. Commissioner, 128 F.3d 1410,

1418 (10th Cir. 1997), affg. T.C. Memo. 1995-342; Moravec v.

Commissioner, 500 F.2d 1298, 1300 (7th Cir. 1974), affg. T.C.

Memo. 1973-83.17    Petitioner is not entitled to a theft loss


     15
      Although the test for determining whether the taxpayer had
a reasonable prospect of recovery at the end of the year in which
the taxpayer discovered the loss is an objective test, the Court
may also consider the taxpayer’s subjective belief at the end of
such year. Jeppsen v. Commissioner, 128 F.3d 1410, 1418 (10th
Cir. 1997), affg. T.C. Memo. 1995-342.
     16
      In February 2001 petitioner learned from a local radio
station that six people were arrested on charges of money
laundering and tax evasion in connection with Anderson Ark. Gary
Kuzel confirmed the arrests but informed petitioner that Keith
Anderson had not been arrested. Gary Kuzel also told petitioner
to participate in the next scheduled conference call for an
update. During the month after the raid petitioner participated
in conference calls with representatives of Anderson Ark and was
assured that the money was safe and that Anderson Ark would be
back operating in 30 days. Sometime around April 2001
representatives of Anderson Ark stopped assuring petitioner that
everything was okay, and the Anderson Ark representatives stopped
participating in the conference calls.
     17
      Absent   a stipulation to the contrary, see sec. 7482(b)(2),
this case is   appealable to the Court of Appeals for the Sixth
Circuit, see   sec. 7482(b)(1)(A). We have found no precedent in
the Court of   Appeals for the Sixth Circuit directly addressing
the issue of   whether and to what extent a court may consider
                                                     (continued...)
                                - 19 -

deduction if his prospect of recovery was merely unknown at the

end of 2001.     See Jeppsen v. Commissioner, supra at 1418.

     Petitioner argues that in 2001 he had no reasonable prospect

of recovering his money from Anderson Ark.    Petitioner testified

that in 2001, after learning about the arrests, he contacted

Anderson Ark for advice on how to recover his money and was

directed to fill out forms.    Petitioner claims that he filled out

the forms as directed and submitted them by e-mail.    Petitioner

also testified that in 2001 he participated in conference calls

involving discussions about hiring attorneys to recover the

money.    According to petitioner, he chose not to hire attorneys

because he thought it was a waste of money and no one knew where

the money was.

     The only evidence offered by petitioner regarding his

analysis of his prospect of recovery in 2001 was petitioner’s

uncorroborated testimony that he made some attempts to recover

his money.18   Petitioner did not offer in evidence the forms that



     17
      (...continued)
events occurring after the year of discovery to determine whether
a taxpayer had a reasonable prospect of recovery. However, the
Tax Court and at least one other Court of Appeals have addressed
the issue. See Jeppsen v. Commissioner, supra; Ramsay Scarlett &
Co. v. Commissioner, 61 T.C. 795, 811 (1974), affd. 521 F.2d 786
(4th Cir. 1975).
     18
      Even if we were to accept petitioner’s testimony as
credible, petitioner’s belief that no one knew the whereabouts of
the money does not establish that it was reasonably certain at
the end of 2001 that he would not recover his money.
                               - 20 -

he supposedly filled out and submitted to Anderson Ark.

Petitioner did not call as a witness at trial anyone who could

testify as to his participation in the conference calls or any

other attempts to recover his money.    More importantly,

petitioner did not testify that he believed at the end of 2001

that he had no reasonable prospect of recovering his money.

     In contrast, the objective facts established by the record

present a more refined picture.    In 2001 several Anderson Ark

defendants were arrested and indicted.    We find that it was

reasonably foreseeable at the end of 2001 that the Anderson Ark

defendants would be convicted of various charges related to

Anderson Ark’s schemes.    We also find that it was reasonable in

2001 to anticipate that the Washington District Court might order

the Anderson Ark defendants, if convicted, to pay restitution to

their victims, including petitioner, and to forfeit to the United

States property that could be used to satisfy the restitution

order.    See 18 U.S.C. secs. 3663, 982 (2006).19   Petitioner did

not testify about the status of any recovery under the

restitution order, nor did he offer any evidence about the effect

of the substantial forfeitures on his right to restitution.     This


     19
      Any seizure and disposition of property forfeited under 18
U.S.C. sec. 982 is governed by the provisions of 21 U.S.C. sec.
853. 18 U.S.C. sec. 982(b)(1). Tit. 21 U.S.C. sec. 853
authorizes the Attorney General, among other things, to restore
forfeited property to victims and to take any other action to
protect the rights of innocent persons which is in the interest
of justice. 21 U.S.C. sec. 853(i)(1) (2006).
                                - 21 -

lack of evidence is particularly telling because one of the

conditions of supervised release imposed on the Anderson Ark

defendants after their release from imprisonment was satisfaction

of their restitution obligation.

         We conclude after a careful review of the record that

petitioner has not established that it was reasonably certain at

the end of 2001 that he would not recover his loss from Anderson

Ark.20    As we stated above, petitioner has the burden of

establishing that no reasonable prospect of recovery existed at

the end of 2001, and he did not do so.     We therefore cannot

conclude that at the end of 2001 petitioner had no reasonable

prospect of recovering his loss from Anderson Ark.21

     We hold that petitioner has failed to prove that he is

entitled to a theft loss deduction in 2001 that can be carried

back to 1999.22



     20
      Although we evaluate whether or not a reasonable prospect
of recovery existed at the end of the year of discovery, we note
that petitioner reported the theft loss deduction for the first
time in 2006 when he sent respondent a Form 1040X, Amended U.S.
Individual Income Tax Return, for 1999. At that time, the
Washington District Court had already issued the amended
judgments in a criminal case ordering the Anderson Ark defendants
to pay petitioner $511,500 in restitution.
     21
      We also conclude that petitioner did not establish that he
had no reasonable prospect of recovering his losses in 2002 for
the same reasons we stated with regard to 2001.
     22
      Because we conclude that petitioner is not entitled to a
theft loss deduction in 2001 or 2002, we need not address
respondent’s public policy argument.
- 22 -
                              - 23 -

IV.   Section 6662 Penalty

      Respondent contends that petitioner is liable for the

accuracy-related penalty under section 6662 in connection with

the Birdlane partnership loss reported on his 1999 return.

Respondent asserts that petitioner is liable for the section 6662

penalty on alternative grounds:   (1) The underpayment resulting

from the disallowed partnership loss was attributable to

negligence or disregard of rules or regulations within the

meaning of section 6662(b)(1), or (2) there was a substantial

understatement of income tax within the meaning of section

6662(b)(2).

      Section 6662(a) and (b)(1) authorizes the Commissioner to

impose a penalty in an amount equal to 20 percent of the

underpayment attributable to negligence or disregard of the rules

or regulations.   Negligence is defined as any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code.   Sec. 6662(c); see also Neely v. Commissioner, 85

T.C. 934, 947 (1985) (negligence is lack of due care or failure

to do what a reasonable prudent person would do under the

circumstances).   Negligence is strongly indicated where a

taxpayer fails to make a reasonable attempt to ascertain the

correctness of a deduction, credit, or exclusion on a return

which would seem to a reasonable and prudent person to be “too
                                - 24 -

good to be true” under the circumstances.    Sec. 1.6662-

3(b)(1)(ii), Income Tax Regs.

     Section 6662(a) and (b)(2) also authorizes the Commissioner

to impose a 20-percent penalty if there is a substantial

understatement of income tax.    A substantial understatement of

income tax with respect to an individual taxpayer exists if the

amount of the understatement for the taxable year exceeds 10

percent of the tax required to be shown on the return for the

taxable year or $5,000, whichever is greater.    Sec.

6662(d)(1)(A).

     Respondent bears the initial burden of production with

respect to petitioner’s liability for the section 6662 penalty,

in that respondent must first produce sufficient evidence to

establish that the imposition of the section 6662 penalty is

appropriate.   Sec. 7491(c).   If respondent satisfies his initial

burden of production, the burden of producing evidence to refute

respondent’s evidence and to establish that petitioner is not

liable for the section 6662 penalty shifts to petitioner.     See

Higbee v. Commissioner, 116 T.C. 438, 447 (2001).

     Respondent has carried his burden of production because

petitioner concedes that he is not entitled to the Birdlane

partnership loss reported on his 1999 return.    See, e.g., Rogers

v. Commissioner, T.C. Memo. 2005-248.    Respondent also met his

burden by showing that petitioner substantially understated his
                              - 25 -

1999 Federal income tax.   Because respondent has met his burden

of production, petitioner must come forward with sufficient

evidence to persuade the Court that respondent’s determination is

incorrect.   See Higbee v. Commissioner, supra at 446-447.

Petitioner also bears the burden of producing evidence to

demonstrate reasonable cause under section 6664(c)(1).     See id.

     Petitioner contends that he believed he was entitled to

claim the partnership loss and was misled by Anderson Ark about

the legitimacy of the CBO Program.     Petitioner asserts that he

adequately researched the CBO Program before deciding to invest

in it.   However, the record does not contain any credible

evidence that petitioner researched the legitimacy of the

Anderson Ark programs or that the steps he took to learn about

Anderson Ark represented an adequate investigation into the

Anderson Ark organization and the programs that it was selling.

Although petitioner testified that he consulted his financial

planner about the CBO Program, petitioner did not call his

financial planner to testify at trial and did not otherwise

introduce any corroborating evidence establishing that the

conversation occurred or the substance of the conversation.     See

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (uncorroborated

testimony of a party may be disregarded as self-serving and

unworthy of belief).   Moreover, petitioner did not introduce any

evidence that he sought outside advice or conducted any
                               - 26 -

independent research of Anderson Ark, the Anderson Ark programs

in which he invested, or the Birdlane partnership loss that he

deducted.   On this meager record, we cannot conclude that

petitioner made a reasonable attempt to ascertain the correctness

of the Birdlane partnership loss.

     Section 6664(c)(1) provides that no penalty shall be imposed

under section 6662 with respect to any portion of an underpayment

if it is shown that there was reasonable cause for that portion

and the taxpayer acted in good faith with respect to that

portion.    We determine reasonable cause and good faith on a case-

by-case basis, taking into account all pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.   The most

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability.    Id.

     A taxpayer’s reasonable reliance on the advice of an

independent professional adviser as to the tax treatment of an

item may demonstrate reasonable cause.    Neonatology Associates,

P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221

(3d Cir. 2002); sec. 1.6664-4(b)(1), Income Tax Regs.    To

successfully claim reasonable reliance on a professional adviser,

the taxpayer must show that (1) the adviser was a competent

professional who had sufficient expertise to justify the

taxpayer’s reliance on him, (2) the taxpayer provided necessary

and accurate information to the adviser, and (3) the taxpayer
                              - 27 -

actually relied in good faith on the adviser’s judgment.

Neonatology Associates, P.A. v. Commissioner, supra at 99.

     Petitioner argues that he had reasonable cause for and acted

in good faith with regard to the underpayment attributable to the

partnership loss reported on his 1999 return because he relied on

the advice of Gary Kuzel concerning the deduction of the Birdlane

partnership loss.   We find, however, that petitioner’s reliance

on Gary Kuzel was not reasonable.   Anderson Ark referred

petitioner to Gary Kuzel to help petitioner implement the steps

necessary to effect his investment in the CBO Program and

ultimately to receive the income tax benefits of the Birdlane

partnership loss.   Petitioner knew that Gary Kuzel was involved

with Anderson Ark, and he testified that Gary Kuzel’s services

were “part of the deal” with Anderson Ark.   We have held that

reliance on the advice of an accountant who was referred to a

taxpayer by the tax promoter promoting the transaction was not

reasonable.   See Rogers v. Commissioner, supra.   Petitioner

ignored Gary Kuzel’s ties to Anderson Ark and never researched

Gary Kuzel’s background.   Petitioner took no meaningful action to

verify that Gary Kuzel had sufficient expertise or was

sufficiently independent to justify petitioner’s reliance on him.

Consequently, we conclude that petitioner did not reasonably rely

in good faith on Gary Kuzel’s advice in claiming the Birdlane

partnership loss.
                               - 28 -

     We hold that petitioner is liable for the section 6662

accuracy-related penalty for the understatement of tax

attributable to the disallowance of the Birdlane partnership loss

reported on his 1999 return.


                                    Decision will be entered for

                               respondent.
