                  T.C. Memo. 2003-129



                UNITED STATES TAX COURT



           RUDOLPH H. BEAVER, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 10305-01.              Filed May 2, 2003.



     For 1993, P claimed a $2,816,540 capital loss on
his sale of H stock, believing that the loss in the
value of the stock was caused by the market. In 1997,
P discovered that the loss in the value of the stock
was attributable to a theft. In 1997, P claimed the
$2,816,540 loss as a theft loss. At trial, P did not
establish that any portion of the capital loss claimed
in 1993 remained for carryover after that year.
     Held: P is not entitled to deduct in 1997 any of
the loss as a theft loss. In that P has failed to
establish that any portion of the capital loss remained
for carryover after 1993, P has not established that he
had in 1997 any basis in the H stock that would allow
him to deduct for 1997 a theft loss with respect to the
H stock.
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      John F. Lyle III, Gwen D. Skinner, and Mark M. Gibson, for

petitioner.

      Horace Crump, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


      LARO, Judge:    Respondent determined deficiencies of

$257,442, and $406,438 in petitioner’s 1997 and 1998 Federal

income taxes.     We decide whether petitioner may deduct for 1997

any portion of a theft loss that he had previously deducted for

1993 as a capital loss.    We hold he may not.1   Unless otherwise

noted, section references are to the applicable versions of the

Internal Revenue Code.     Rule references are to the Tax Court

Rules of Practice and Procedure.     Amounts are rounded to the

dollar.

                           FINDINGS OF FACT

A.   Background

      Some facts were stipulated.    The stipulated facts and the

exhibits submitted therewith are incorporated herein by this

reference.    We find the stipulated facts accordingly.   Petitioner

resided in Albertville, Alabama, when he petitioned the Court.

He filed a 1997 Federal income tax return on which he claimed a



      1
       On the basis of our holding, we also hold as a
computational matter that petitioner does not have a net
operating loss in 1997 that he may carry over to 1998.
                                 -3-

$2,816,540 theft loss.   Respondent disallowed that loss in a

notice of deficiency sent to petitioner on May 17, 2001.

B.   Petitioner’s Investment in HPI Stock

      Petitioner began investing in stock in or about 1990.   At or

about that time, he started receiving unsolicited phone calls

from Jeffrey Weissman (Weissman), Andrew Bressman (Bressman), and

other brokers with the brokerage firm of D.H. Blair & Co., Inc.

(Blair).   Weissman suggested to petitioner that he invest in the

initial public offering of a company managed by Weissman’s

father, Martin (Martin).   Weissman guaranteed to petitioner that

he would double his money.    Petitioner invested $25,000 in the

company and later realized from his investment a profit of

approximately $20,000.   Afterwards, Weissman and Bressman

persuaded petitioner to invest in the publicly traded stock of

Health Professionals, Inc. (HPI), a corporation for which Martin

served as the chairman from its (and its predecessor’s) founding

in the 1970s until May 1992.

      In August 1992, Weissman and Bressman left Blair and founded

A.R. Baron & Co., Inc. (Baron), a brokerage firm of which

Bressman was the president.    Weissman and Bressman continued to

persuade petitioner to invest in HPI without disclosing the fact

that HPI’s predecessor had previously been convicted of fraud.

From February 12 through June 8, 1993, petitioner purchased

307,900 shares of HPI stock at a total cost of $3,527,002.    On
                                 -4-

June 24 and 25, 1993, petitioner sold all of those shares at a

loss of $2,816,540.   Petitioner claimed this loss as a capital

loss for 1993.    Four years later, petitioner reported on his 1997

Federal income tax return that he had at the beginning of 1997 a

capital loss carryover of $460,486.    The record does not specify

the source of that carryover.

C.   Administrative Proceedings by the SEC

      During 1996, the Securities and Exchange Commission (SEC)

instituted administrative proceedings against Weissman, Martin,

Baron, and Bressman (collectively, the brokers) in connection

with their sale of HPI stock.   The SEC found that the brokers

manipulated the market for HPI stock from October 1991 through

June 1993 and effectively controlled the market for HPI stock.

See SEC Release No. 42103 (Nov. 4, 1999); SEC Release No. 37831

(Oct. 17, 1996); SEC Release No. 37661 (Sept. 9, 1996); SEC

Litigation Release No. 14987 (July 23, 1996).

D.   Indictment

      On May 13, 1997, the District Attorney for the County of New

York, New York, announced the criminal indictment of Baron,

Bressman, and 12 other members of Baron.     Among other things, the

174-count indictment charged the defendants with violating the

New York Enterprise Corruption Statute, NY Penal Law, sec. 460.20

(Consol. 1993).   In the fall of 1997, Baron pleaded guilty to the

charges filed against it.   On December 15, 1997, Bressman pleaded
                                 -5-

guilty to New York felony charges of enterprise corruption and

grand larceny.

                               OPINION

     Petitioner argues that he may deduct for 1997 a theft loss

of $2,816,540.   Petitioner recognizes that he deducted this loss

as a capital loss in 1993.    Petitioner asserts that the fact that

he discovered in 1997 that the loss was attributable to a theft

means that he now can deduct the loss as a theft loss for 1997.

     Respondent’s determinations in the notice of deficiency are

presumed correct, and petitioner must prove those determinations

wrong in order to prevail.    Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).    Petitioner also must prove that he is

entitled to his claimed theft loss deduction.     New Colonial Ice

Co. v. Helvering, 292 U.S. 435, 440 (1934).     Whereas section

7491(a) in certain cases shifts the burden of proof to the

Commissioner, we conclude that this is not one of those cases.

Among other things, we note that petitioner has neither asserted

that respondent bears the burden of proof as to the issue at

hand, nor disputed respondent’s assertions that the burden of

proof lies with petitioner.

     Petitioner’s theft loss deduction requires that we focus

primarily on section 165.    Section 165(a) allows a deduction for

any loss sustained during the taxable year that is not

compensated for by insurance or otherwise.    In the case of an
                                  -6-

individual such as petitioner, however, losses are deductible

only to the extent that they (1) were incurred in a trade or

business, (2) were incurred in a transaction entered into for

profit, or (3) arose from a casualty or a theft.    Sec. 165(c)(3).

For this purpose, the amount of a theft loss deduction generally

equals the lesser of (1) the reduction in the property’s fair

market value from the time immediately before the theft until the

time immediately after the theft, or (2) the property’s cost or

other basis.   See sec. 1.165-7(b)(1), Income Tax Regs.; see also

sec. 1.1011-1, Income Tax Regs.    Whereas a loss in general is

deductible in the year in which it is sustained, sec. 165(a), a

loss from a theft is deductible in the year in which it is

discovered, sec. 165(e).

     The parties dispute primarily whether the brokers’

activities amounted to a “theft” committed against petitioner

under applicable law, which the parties agree is the law of New

York.   We need not decide this dispute.   Even assuming arguendo

that petitioner’s loss was attributable to a theft that was

discovered in 1997, he would still not prevail because he has

failed to establish that he had any basis in HPI stock that he

could deduct as a theft loss for 1997.

     Petitioner claimed for 1993 a capital loss of $2,816,540

from the sale of HPI stock and reported for 1997 that he had a

$460,486 capital loss carryover as of the beginning of that year.
                                 -7-

We conclude from this representation that petitioner has utilized

as of January 1, 1997, all of the capital loss that he claimed in

1993, but for, at the most, $460,486.   As to the $460,486, the

record does not indicate the source of that amount.   The record

does not contain, for example, any of petitioner’s tax returns

from 1993 to 1996 or any credible evidence as to the gains or

losses from petitioner’s capital transactions in years before

1997.   Whereas the $460,486 could possibly stem from the capital

loss on HPI stock that petitioner claimed in 1993, it could just

as easily be a carryover from a capital loss sustained in 1994,

1995, or 1996.

     A loss from the sale or other disposition of property cannot

exceed the taxpayer’s basis in the property, sec. 1.165-1(c),

Income Tax Regs., and a taxpayer such as petitioner who cannot

prove his basis in his property cannot compute a theft loss

deduction, see Millsap v. Commissioner, 46 T.C. 751, 760 (1966),

affd. 387 F.2d 420 (8th Cir. 1968); Towers v. Commissioner,

24 T.C. 199, 239 (1955), affd. on other grounds sub nom. Bonney

v. Commissioner, 247 F.2d 237 (2d Cir. 1957); Heckett v.

Commissioner, 8 T.C. 841 (1947).   We believe that this burden

requires that petitioner prove that he did not recognize in one

or more years before 1997 as a capital loss what he now claims as

a theft loss.    Cf. Associated Dentists v. Commissioner, T.C.

Memo. 1998-287 (citing, among other cases, United States v.
                                 -8-

Olympic Radio & Television, Inc., 349 U.S. 232, 235 (1955), and

Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), revd. and

remanded on other grounds 259 F.2d 300 (5th Cir. 1958), for the

requirement that a taxpayer seeking to deduct a net operating

loss (NOL) carryover must establish that the NOL was properly

applied in the later year).    To the extent that petitioner has

recognized before 1997 the full capital loss claimed on the stock

for 1993, he has recovered his entire basis in that stock so that

he now lacks any basis to deduct as a theft loss for 1997.    See,

e.g., Carloate Indus., Inc. v. United States, 354 F.2d 814 (5th

Cir. 1966); United States v. Koshland, 208 F.2d 636 (9th Cir.

1953); Robinson v. Commissioner, 12 T.C. 246 (1949), affd. 181

F.2d 17 (5th Cir. 1950).    Given the record at hand, we cannot

determine in any manner what portion, if any, of the capital loss

has not been recognized.2

     We conclude that petitioner is not entitled to any of the

claimed theft loss deduction and hold for respondent.    In so

concluding, we have considered all arguments made by the parties




     2
       Petitioner testified that he has never received any
benefit from his deduction of the $2,816,540 for 1993. On the
basis of the record as a whole, including our observation and
perception of petitioner while he testified at trial, we find
this testimony incredible and decline to rely upon it.
Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 84
(2000), affd. 299 F.3d 221 (3d Cir. 2002).
                               -9-

and have found those arguments not discussed herein to be

irrelevant and/or without merit.3    Accordingly,



                                          Decision will be entered

                                     for respondent.




     3
       Although not cited by either party, we also have
considered B.C. Cook & Sons, Inc. v. Commissioner, 59 T.C. 516
(1972). That case is factually distinguishable from the case at
hand. First, in B.C. Cook & Sons, the taxpayer’s inclusion of
the fictitious purchases in its cost of goods sold was erroneous
in that the taxpayer had not made an actual economic outlay for
those purchases. Second, that case involved the claiming of two
deductions for two different items; i.e., (1) the cash for the
embezzlement for which the deduction was claimed and (2) the
fictitious purchases which were erroneously taken into the
computation of costs of goods sold.
