Alioto v. Commissioner , 699 F.3d 948 ( 2012 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 12a0380p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
Petitioners-Appellants, -
DAVID S. ALIOTO; MELANIE S. ALIOTO,
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No. 12-1201
v.
,
>
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Respondent-Appellee. -
COMMISSIONER OF INTERNAL REVENUE,
N
Appeal from the United States Tax Court—No. 11312-09.
Decided and Filed: November 7, 2012
Before: MOORE and COOK, Circuit Judges; BERTELSMAN, District Judge.*
_________________
COUNSEL
ON BRIEF: Dianne F. Marx, SEBALY SHILLITO + DYER, Dayton, Ohio, for
Appellants. Marion E.M. Erickson, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee.
_________________
OPINION
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KAREN NELSON MOORE, Circuit Judge. In 2000 and 2001, Petitioner-
Appellant David S. Alioto (“Alioto”) spent several hundred thousand dollars of his own
money on expenses relating to a new business venture with which he was involved.
Although Alioto alleges that he believed he would be reimbursed for the funds expended
on behalf of the business, he was never fully repaid. Alioto and his wife, Petitioner-
Appellant Melanie S. Alioto (together, the “Aliotos”), sought to deduct the unreimbursed
funds as losses on their joint federal income tax return for tax year 2005. Alioto sought
*
The Honorable William O. Bertelsman, United States District Judge for the Eastern District of
Kentucky, sitting by designation.
1
No. 12-1201 Alioto et al. v. CIR Page 2
to carry forward some of these losses as deductions on his individual income tax returns
for tax years 2006 and 2007. Respondent-Appellee Commissioner of Internal Revenue
(the “Commissioner”) denied the deductions and issued notices of deficiency to the
Aliotos. The Aliotos contested the denial of the deductions, and the Tax Court agreed
with the Commissioner’s determination, finding that the Aliotos had not met their burden
of proof to show that the deductions were allowable as business losses or theft losses in
the tax years claimed. Because we find no clear error in the Tax Court’s determination
that the Aliotos had not met their burden of proof to establish that the losses were
deductible in tax years 2005, 2006, and 2007, we AFFIRM.
I. BACKGROUND
Alioto is a businessman involved in the transportation and logistics industry.
Appendix for Brief of Appellants (“Appellant App.”) at 93 (Trial Tr. at 7:20–22). From
1995 to 2000, he founded and developed his own company, which was in the business
of transporting unusual items that other commercial carriers would not transport. See
id. at 94 (Trial Tr. at 8:7–9). In early 2000, Alioto hired John Ratzenberger
(“Ratzenberger”), an actor famous for his role on the television show Cheers, to speak
at a conference relating to Alioto’s business. Id. (Trial Tr. at 8:9–22). Ratzenberger
approached Alioto about a new business venture, called Big Red Tent (“BRT”), which
was to involve using “celebrity talent” to “create short form media that would be sold
to corporations” as internet advertisements. Id. at 96 (Trial Tr. at 10:3–21); see also
Appellee’s Appendix (“Appellee App.”) at 310–20 (Ex. 15-P, Big Red Tent Business
Plan).
Alioto testified that he agreed to join the venture as a CEO and agreed to provide
services including setting up the office operations and meeting with investment and
venture firms to raise capital for the business. See Appellant App. at 97 (Trial Tr. at
11:8–22). During 2000 and 2001, Alioto proceeded to spend approximately $200,000
of his own money on expenses related to BRT. Id. at 99 (Trial Tr. at 13:6–7). Alioto
contends that he believed he would be reimbursed by Ratzenberger for all of the BRT-
related expenses. See id. at 112 (Trial Tr. at 26:1–4). However, Alioto asserts that he
No. 12-1201 Alioto et al. v. CIR Page 3
was never fully reimbursed. He did receive approximately $35,081 as reimbursement
from a $100,000 line of credit he took out on behalf of BRT, and in mid-2001, he was
reimbursed $52,875.96 from Ratzenberger for BRT-related expenses. See Appellant Br.
at 6–7; Appellee App. at 340 (Ex. 16-R, July 16, 2001 Fax).
Ultimately, Alioto testified that he “removed [himself] from the situation in mid
2001” because the business was a financial “drain” on him. Appellant App. at 99 (Trial
Tr. at 13:14–15, 13:10). He stated at trial that by early 2002, he came to believe that
some of Ratzenberger’s representations regarding his financial condition had been false.
See id. at 112 (Trial Tr. at 26:20–24); see also Appellee App. at 308–09 (Ex. 14-P, Feb.
7, 2002 Letter to Ropes & Gray) (indicating that Alioto believed Ratzenberger had made
misrepresentations regarding his finances). Alioto testified that after he ended his
involvement with BRT, he continued to seek reimbursement from Ratzenberger
throughout 2002, 2003, and 2004, through emails, phone calls, and discussions with
Ratzenberger. See Appellant App. at 102 (Trial Tr. at 16). None of these emails were
submitted as evidence to the Tax Court. Alioto asserts that he received a “very specific”
email in 2004 or 2005 from Ratzenberger’s agent from which he inferred that no further
reimbursement was forthcoming, and it was at this time that Alioto concluded that he
would not receive any repayment. See id. at 103 (Trial Tr. at 17:6–15). Alioto has not
produced this email.
On October 14, 2005, Alioto commenced a voluntary Chapter 7 bankruptcy
proceeding in the U.S. Bankruptcy Court for the Southern District of Ohio. See
Appellant App. at 15 (Stipulation of Facts ¶ 18). He listed $341,363 as outstanding
business expenses or loans owed to him from BRT as part of his assets. See Appellee
App. at 273 (Ex. 7-J, Bankruptcy Pet. Sched. B). He testified that the majority of
creditors’ nonpriority claims against him were related to BRT expenses. See Appellant
App. at 147–153 (Trial Tr. at 60–66). The result of the bankruptcy petition was a “no
asset” Chapter 7 case, and Alioto received a discharge on February 27, 2006. Id. at 16
(Stipulation of Facts ¶¶ 21–22); Appellee App. at 300 (Ex. 10-J, Discharge of Debtor).
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The Aliotos filed a joint individual federal income tax return for tax year 2005,
and for tax years 2006 and 2007, Alioto filed separate individual returns. See Appellant
App. at 10–11 (Stipulation of Facts ¶¶ 2–4). In these returns, the Aliotos claimed loss
deductions for the unreimbursed BRT-related expenses. On February 12, 2009, the
Commissioner issued notices of deficiency and assessed penalties related to the Aliotos’
2005, 2006, and 2007 tax returns. See id. at 11 (Stipulation of Facts ¶¶ 5–6). The
Aliotos disputed the deficiency determinations and the assessed penalties, and petitioned
the United States Tax Court for relief on May 12, 2009. See id. at 2–3 (Petition). After
a trial was held, the Tax Court found that the Aliotos were liable for the deficiencies, but
not for the penalties. See Alioto v. Comm’r, 101 T.C.M. 1722, 2011 WL
2601511, at *5 (2011). The Aliotos timely appealed the decision as to the deficiencies,
see Appellant App. at 54 (Notice of Appeal), and the Commissioner did not appeal the
decision as to the penalties. This court has jurisdiction over the appeal pursuant to
26 U.S.C. § 7482.
II. STANDARD OF REVIEW
“We review the Tax Court’s factual findings for ‘clear error’ and its application
of law de novo.” Indmar Prods. Co. v. Comm’r, 444 F.3d 771, 777 (6th Cir. 2006).
Under the clear-error standard, we give deference to the Tax Court’s findings of fact and
to inferences drawn from those findings, and we give “even greater discretion to any
credibility determinations made by the Tax Court.” See id. at 777–78 (citing Anderson
v. City of Bessemer City, 470 U.S. 564, 574–75 (1985)). The Tax Court’s findings of
fact will be upheld under the clear-error standard “unless we are left with a definite and
firm conviction that a mistake has been made.” Kearns v. Comm’r, 979 F.2d 1176, 1178
(6th Cir. 1992).
“The Commissioner’s deficiency determinations are presumed correct and the
taxpayer bears the burden of proving otherwise.” Ekman v. Comm’r, 184 F.3d 522, 524
(6th Cir. 1999); see Welch v. Helvering, 290 U.S. 111, 115 (1933); Kearns, 979 F.2d at
1178; I.R.C. Rule 142(a). To defeat this presumption, the taxpayer must prove by a
preponderance of the evidence that the Commissioner’s determinations are arbitrary and
No. 12-1201 Alioto et al. v. CIR Page 5
erroneous, as well as the amount in deductions to which the taxpayer is entitled. See
United Dairy Farmers, Inc. v. United States, 267 F.3d 510, 515–16 (6th Cir. 2001).
Because “[d]eductions are a matter of legislative grace, . . . the taxpayer must satisfy the
specific statutory requirements claimed to reduce a tax liability.” Ekman, 184 F.3d at
524–25 (citing New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934)).
III. BUSINESS LOSSES
The Aliotos first argue that the losses relating to Alioto’s involvement with BRT
in 2000 and 2001 were deductible as business losses for tax year 2005.1 Section 165(a)
of the Internal Revenue Code states: “There shall be allowed as a deduction any loss
sustained during the taxable year and not compensated for by insurance or otherwise.”
26 U.S.C. § 165(a). For individuals, these deductions are limited to losses incurred in
a trade or business, or otherwise incurred in a transaction entered into for profit, and to
losses arising from certain casualties, such as fire, or from theft. See id. § 165(c). A loss
deduction under § 165(a) “shall be allowed . . . only for the taxable year in which the
loss is sustained.” Treas. Reg. § 1.165-1(d)(1) (emphasis added). When an event results
in a loss that gives rise to a “claim for reimbursement with respect to which there is a
reasonable prospect of recovery,” the loss will not be treated as sustained “until it can
be ascertained with reasonable certainty whether or not such reimbursement will be
received.” Id. § 1.165-1(d)(2)(i). Further, “[w]hether a reasonable prospect of recovery
exists with respect to a claim for reimbursement of a loss is a question of fact to be
determined upon an examination of all facts and circumstances.” Id.
The determination of whether a reasonable prospect of recovery exists is an
objective inquiry, and the court “must determine what was a ‘reasonable expectation’
as of the close of the taxable year for which the deduction is claimed.” Ramsay Scarlett
& Co. v. Comm’r, 61 T.C. 795, 811 (1974), aff’d, 521 F.2d 786 (4th Cir. 1975); see also
1
Alioto argues that the losses were sustained in 2005 for purposes of § 165 of the Internal
Revenue Code, and that Alioto was entitled to carry forward some of the losses to tax years 2006 and 2007.
See Appellant Br. at 10–11; see also 26 U.S.C. § 172. If he was not entitled to deduct the losses in 2005,
then he also was not entitled to apply the carryover provisions to deduct the losses in tax years 2006 and
2007.
No. 12-1201 Alioto et al. v. CIR Page 6
Vincentini v. Comm’r, 429 F. App’x 560, 564 (6th Cir. 2011) (stating that a
determination of whether a reasonable prospect of recovery existed for a particular
taxable year involves an objective standard). The analysis “requires a practical
approach” and involves consideration of “all pertinent facts and circumstances.”
Boehm v. Comm’r, 326 U.S. 287, 292 (1945). The taxpayer’s honest, subjective belief
as to the prospect of recovery cannot be “the controlling or sole criterion” used to
determine when a loss is sustained. Id; see also id. (“[A] determination of whether a loss
was in fact sustained in a particular year cannot fairly be made by confining the trier of
facts to an examination of the taxpayer’s beliefs and actions.”). Further, the taxpayer is
explicitly required to produce “objective evidence” if he or she claims that a loss is
sustained in a particular year because of an abandonment of a claim for reimbursement.
Treas. Reg. § 1.165-1(d)(2)(i) (“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 of a release.” (emphasis added)).
Because Alioto has the burden of demonstrating that the losses were deductible
under § 165 in tax years 2005, 2006, and 2007, he has the burden of proving that the
losses incurred through his involvement in BRT in 2000 and 2001 were not sustained
until 2005. See Ekman, 184 F.3d at 524–25. Alioto’s theory is that prior to 2005, it
could not be ascertained with reasonable certainty whether or not he would receive
reimbursement from Ratzenberger for his BRT-related expenses. See Appellant Br. at
14. He contends that in 2005, he abandoned his claim for reimbursement, and thus the
losses were sustained in that year because there was no longer a reasonable prospect of
recovery. The Tax Court found that there was no objective evidence that Alioto
abandoned his claim for reimbursement in 2005, and further found that the weight of the
evidence indicated that it was in 2001 and early 2002 when Alioto could ascertain with
reasonable certainty that the BRT-related expenses would not be reimbursed. Alioto,
2011 WL 2601511, at *3.
No. 12-1201 Alioto et al. v. CIR Page 7
On appeal, Alioto points to two pieces of evidence to support his theory of
abandonment. First, he cites his own testimony that he received an email in 2005 from
Ratzenberger’s agent notifying him that no further reimbursement was forthcoming.
See Appellant App. at 113 (Trial Tr. at 27:8–13). Alioto did not produce this email at
trial, nor did he otherwise prove that the communication occurred. See Alioto, 2011 WL
2601511, at *3. Given that Alioto’s statements about the contents of the email were
hearsay, his testimony was admissible only to show his subjective understanding that he
would not be paid back, as the trial judge noted on the record. See Appellant App. at
103–04 (Trial Tr. at 17:21–18:5); see also Fed. R. Evid. 801(c); 802. Alioto’s testimony
concerning the email does not meet the requirement of “objective evidence” to prove
abandonment. See Treas. Reg. § 1.165-1(d)(2)(i); Vincentini, 429 F. App’x at 564–65
(upholding the Tax Court’s finding that a taxpayer’s testimony was not credible relating
to the reasonable-prospect-of-recovery standard for loss deductions, where the sole
evidence presented was the taxpayer’s uncorroborated testimony regarding written
requests for reimbursement and participation in conference calls with legal counsel).
Second, Alioto points to his petition for bankruptcy, which was filed in 2005.
See Appellee App. at 266 (Ex. 6-J, Notice of Bankruptcy Case Filing). Alioto asserts
that the fact that he was “forced” to file for bankruptcy is “evidence of the
uncollectibility of the reimbursement claim at that time.” Appellant Br. at 12. However,
the Tax Court was not required to infer from the fact that Alioto filed for bankruptcy in
2005 that this was the year in which it became ascertainable with reasonable certainty
that no reimbursement would be received. Alioto’s decision to file for bankruptcy could
have been motivated by a variety of considerations. If anything, that Alioto filed for
bankruptcy in 2005 may lend weight to his assertion that he subjectively believed there
was no longer a prospect of recovery in 2005—but even this does not necessitate a
finding, using an objective standard, that a reasonable certainty regarding the
reimbursement did not exist until that year.
The Tax Court found that other evidence in the record indicated that the losses
were sustained prior to 2005. The judge determined that “[i]t is clear that at the end of
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2001 and early 2002 Mr. Alioto understood that the expenses would not be paid back.”
Alioto, 2011 WL 2601511, at *3. Although Alioto’s testimony that he took action to
recover his investment during 2002, 2003, and 2004 may be considered as some
evidence of lack of abandonment, see Abraitis v. Comm’r, T.C.M. (RIA) 98,239, 1998
WL 352259, at *2 (1998), such testimony cannot be the sole factor used to determine at
what point there was no longer a reasonable prospect for recovery, see Boehm, 326 U.S.
at 292. Further, we note that while Alioto testified that he pursued reimbursement
through phone calls and emails up until 2005, he did not produce any of the emails at
trial.2 Especially given the great deference we give to a trial court’s credibility
determinations, see Indmar Prods., 444 F.3d at 778, the Tax Court’s conclusion that
Alioto did not produce objective evidence that he abandoned his claim in 2005 did not
constitute clear error.3
IV. THEFT LOSSES
The Aliotos argue in the alternative that the BRT-related losses were deductible
as theft losses, pursuant to § 165(e), because Ratzenberger allegedly stole money from
Alioto using false pretenses. See Appellant Br. at 17. A loss from theft may be deducted
under § 165(c)(3), see Treas. Reg. § 1.165-8(a)(1), and the loss “shall be treated as
sustained during the taxable year in which the taxpayer discovers such loss.” 26 U.S.C.
§ 165(e). Whether a “theft” has occurred for purposes of § 165 is determined by the law
of the jurisdiction where the theft took place. See MTS Int’l, Inc. v. Comm’r, 169 F.3d
1018, 1021 (6th Cir. 1999) (“The tax court looks to state law to determine whether a
particular loss constitutes a § 165(e) theft loss.”); Estate of Meriano v. Comm’r, 142 F.3d
651, 658 (3d Cir. 1998); Bellis v. Comm’r, 540 F.2d 448, 449 (9th Cir. 1976) (“It is
2
Further, the February 2002 letter that Alioto sent to his legal counsel which was admitted into
evidence demonstrates only that as of early 2002, Alioto subjectively believed Ratzenberger had made
misrepresentations and wanted to pursue reimbursement. Appellee App. at 308–09 (Ex. 14-P, Feb. 7, 2002
Letter to Ropes & Gray).
3
Because Alioto’s failure to prove abandonment is sufficient to sustain the Tax Court’s decision,
we do not address whether Alioto met his evidentiary burden as to whether the losses could be considered
losses incurred in a trade or business under § 165(c)(1), or as to the specific amounts that could be
deducted.
No. 12-1201 Alioto et al. v. CIR Page 9
fundamental that the law of the Jurisdiction where the loss is sustained determines
whether a theft has occurred for purposes of Section 165(e).”).
The Aliotos make an argument, to which the Commissioner does not object, that
Massachusetts law applies to the contested theft losses. See Appellant Br. at 17;
Appellee Br. at 28 n.5. A person is guilty of larceny in Massachusetts if, “with intent
to defraud and by a false pretence, [he] induces another to part with property of any
kind.” MASS. GEN. LAWS ANN. ch. 266, § 34 (West 2012). Prosecution under this
statute requires proof that:
(1) a false statement of fact was made; (2) the defendant knew or
believed that the statement was false when he made it; (3) the defendant
intended that the person to whom he made the false statement would rely
on it; and (4) the person to whom the false statement was made did rely
on it and, consequently, parted with property.
Commonwealth v. Mills, 764 N.E.2d 854, 863 (Mass. 2002). Based on these elements,
Alioto would need to prove that Ratzenberger knowingly made false statements to
Alioto, and that Ratzenberger intended for Alioto to rely on those statements, in order
to show that he was entitled to deduct the BRT losses as theft losses. See Treas. Reg.
§ 1.165-8(d) (stating that “[f]or purposes of [§ 165] the term ‘theft’ shall be deemed to
include . . . larceny”).
The Aliotos argue on appeal that the evidence presented at trial establishes the
elements of larceny under Massachusetts law. See Appellant Br. at 18–19. The Tax
Court found that “[t]here is nothing in the record that would prove that Mr. Ratzenberger
committed any wrongdoing. Mr. Alioto did not present any evidence demonstrating that
Mr. Ratzenberger or his agents did anything illegal and failed to show any specific
promises or agreements made by Mr. Ratzenberger and his agents.” Alioto, 2011 WL
2601511, at *4. After reviewing the record, we find no clear error in the Tax Court’s
determination. No evidence was presented of any criminal intent on the part of
Ratzenberger. See Krahmer v. United States, 810 F.2d 1145, 1148 (Fed. Cir. 1987)
(holding that a taxpayer was not entitled to a theft-loss deduction because he “failed to
prove that either painting was sold with an intent to defraud him”); cf. Farcasanu v.
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Comm’r, 436 F.2d 146, 149 (D.C. Cir. 1970) (noting that courts construing the theft-loss
provision “have consistently required that the taking be accompanied by criminal intent
in order to render the taxpayer’s loss deductible”). Further, Alioto did not present any
evidence that Ratzenberger knowingly made false statements, aside from Alioto’s own
testimony regarding alleged representations made to him. Alioto did not call
Ratzenberger or any of his agents as witnesses, and did not present any written evidence
of any promises made to Alioto. Although Alioto testified that there was a “formation
agreement” between him and Ratzenberger, Alioto chose not to “share[]” the agreement
with the court. Appellant App. at 170 (Trial Tr. at 83:12–13). Based on this trial record,
there was no clear error in the Tax Court’s finding that Alioto did not prove that a theft
occurred under Massachusetts law. See Washington v. Comm’r, 974 F.2d 1339, No. 91-
2143, 1992 WL 212177, at *3 (6th Cir. Sept. 1, 1992) (holding that when a taxpayer
attempts to meet his burden of proof solely with his own testimony “uncorroborated by
other evidence that would normally be available, the Tax Court may make the
determination that the taxpayer’s testimony is not credible”) (citing Davis v. Comm’r,
866 F.2d 852, 859 (6th Cir. 1989)). Given the Tax Court’s determination that the
Aliotos had not met their burden of proof to show that a theft occurred, we agree with
the Tax Court that Alioto was not entitled to deduct the BRT-related losses as theft
losses under § 165(e).
V. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the Tax Court in favor
of the Commissioner’s determination to deny the Aliotos’ claimed loss deductions.