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Adkins v. United States

United States Court of Appeals, Federal Circuit

May 8, 2017

CHARLES P. ADKINS, JANE E. ADKINS, Plaintiffs-Appellants
UNITED STATES, Defendant-Appellee

         Appeal from the United States Court of Federal Claims in No. 1:10-cv-00851-MMS, Judge Margaret M. Sweeney.

          John Franklin Rodgers, Redmon, Peyton & Bras-well, LLP, Alexandria, VA, argued for plaintiffs-appellants.

          Anthony T. Sheehan, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by Richard Farber, Caroline D. Ciraolo.

          Before Lourie, O'Malley, and Taranto, Circuit Judges.

          O'Malley, Circuit Judge.

         Charles P. Adkins and Jane E. Adkins seek review of the February 23, 2016 decision of the Court of Federal Claims (the "Claims Court") dismissing with prejudice their complaint for an income tax refund. Adkins v. United States, 125 Fed.Cl. 304 (2016). For the following reasons, we vacate and remand.


         This case concerns a federal income tax refund sought by the Adkinses, based on financial losses they sustained as victims of a fraudulent investment scheme. The main facts are not in dispute-the central issue on appeal is whether that loss was properly claimed as a deduction in the 2004 tax year, as opposed to some other year. For context, we reiterate the background facts as found by the Claims Court.

         Beginning in 1997, the Adkinses began investing in securities via Donald & Company, primarily through its employee Mr. Otto Kozak. Unbeknownst to the Adkinses, Donald & Co. was operating a "pump-and-dump" scheme-(1) purchasing stock in a company; (2) encouraging its customers to do the same; (3) selling stock in the company at the artificially increased price for a profit; and (4) leaving its customers holding stock worth significantly less due to the aforementioned sales. At their peak in 2000, the Adkinses' investments with Donald & Co. were valued at $3.6 million. By the end of 2001, as a result of the scheme, the value of their investments had declined to $9, 849. In February 2002, the Adkinses, discovering that they had been the victims of fraud, submitted a statement of claim to the National Association of Securities Dealers ("NASD") in support of arbitration against Donald & Co. and three of its principals: David Stetson, Slava Volman, and Steven Ingrassia.

          In March 2003, the Adkinses requested that their arbitration hearing (then scheduled for April) be postponed in light of recent information from the Department of Justice indicating that indictments would be handed down against several Donald & Co. principals and employees in the near future. In particular, the Adkinses' lawyers "suggested that the arbitration claim be left open in the event that proceedings in the criminal matter revealed pertinent information." Adkins, 125 Fed.Cl. at 309. In May 2004, an indictment was returned in the United States District Court for the Eastern District of New York against Volman, Ingrassia, Kozak, and others, charging conspiracy to commit securities fraud, securities fraud, and conspiracy to commit money laundering. In September and October of 2004, Volman, Ingrassia, and Stetson pleaded guilty, receiving sentences including imprisonment, supervised release, fines, mandatory restitution, and forfeiture. Proceedings against other Donald & Co. principals continued from 2005 to 2009.

         While the criminal proceedings were pending, in 2006, the Adkinses attempted to recoup some of their losses by claiming a federal income tax deduction for theft loss under 26 U.S.C. § 165. Specifically, the Adkinses claimed a loss of $2, 118, 725 for tax year 2004, with excess refund portions carried back over the three previous years, 2001- 2003. On December 12, 2008, the IRS disallowed the Adkinses' refund claims for all tax years but 2002.[1] The Adkinses protested at the IRS Office of Appeals, but thereafter filed suit in the Claims Court before their appeal was complete, removing the IRS's jurisdictional authority to settle the claim. After disposing of certain preliminary disputes via summary judgment, the Claims Court conducted a trial and concluded that the Adkinses were "not entitled to a theft loss deduction for the 2004 tax year." Adkins, 125 Fed.Cl. at 305. In particular, the Claims Court found that the Adkinses had failed to satisfy the requirements of 26 C.F.R. § 1.165-1(d)(3) (i.e., Treas. Reg. § 1.165-1(d)(3)), insofar as they had not shown that, in 2004, they could have "ascertained with reasonable certainty that they would not receive reimbursement of their losses." Id. at 317. The Adkinses timely appealed to this court.


         "The Claims Court's legal determinations, including interpretations of statutes and regulations, are subject to de novo review and its factual determinations are reviewed for clear error." Tinton Falls Lodging Realty, LLC v. United States, 800 F.3d 1353, 1357-58 (Fed. Cir. 2015). On appeal, the Adkinses make essentially four arguments: (1) the Claims Court failed to correctly apply Treas. Reg. § 1.165-1(d)(3)'s test for determining the year in which a taxpayer can deduct a theft loss under 26 U.S.C. § 165; (2) even under the Claims Court's interpretation of Treas. Reg. § 1.165-1(d)(3), it improperly required abandonment of their arbitration claim; (3) the Claims Court failed to apply Revenue Procedure 2009-20 in this case; and (4) if 2004 was ...

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