Case: 19-1356 Document: 37 Page: 1 Filed: 05/29/2020
United States Court of Appeals
for the Federal Circuit
______________________
CHARLES P. ADKINS, JANE E. ADKINS,
Plaintiffs-Appellants
v.
UNITED STATES,
Defendant-Appellee
______________________
2019-1356
______________________
Appeal from the United States Court of Federal Claims
in No. 1:10-cv-00851-MMS, Chief Judge Margaret M.
Sweeney.
______________________
Decided: May 29, 2020
______________________
JOHN FRANKLIN RODGERS, Redmon, Peyton & Braswell,
LLP, Alexandria, VA, argued for plaintiffs-appellants.
NORAH BRINGER, Tax Division, United States Depart-
ment of Justice, Washington, DC, argued for defendant-ap-
pellee. Also represented by TERESA E. MCLAUGHLIN,
RICHARD E. ZUCKERMAN.
______________________
Case: 19-1356 Document: 37 Page: 2 Filed: 05/29/2020
2 ADKINS v. UNITED STATES
Before NEWMAN, O’MALLEY, and TARANTO, Circuit Judges.
O’MALLEY, Circuit Judge.
Charles P. Adkins and Jane E. Adkins (collectively,
“the Adkinses”) appeal the Court of Federal Claims’ (the
“Claims Court”) decision dismissing with prejudice their
claim for an income tax refund. Adkins v. United States,
140 Fed. Cl. 297 (2018) (“Adkins II”).
This case has a long history. After receiving a favora-
ble ruling from the IRS with respect to their refund claim,
the Adkinses were forced to file suit seeking a refund when
the IRS was unable to formalize the parties’ settlement be-
fore the statute of limitations on the refund request was set
to expire. The Claims Court ruled against the Adkinses on
their refund request. On appeal, we vacated that decision.
On remand the Claims Court again ruled against the tax-
payers. The case now returns to us for a second appeal.
For the reasons that follow, we now put an end to the Ad-
kinses’ saga by reversing the Claims Court’s decision.
In the first appeal, we reviewed the Claims Court’s
February 16, 2016 Opinion and Order, concluded that the
court misconstrued the regulation concerning the timing of
a theft loss deduction, vacated the Claims Court’s opinion
and order, and remanded the case for further proceedings.
In that appeal, we concluded that the Claims Court erred
in two ways: (1) reading Treasury Regulation § 1.165-
1(d)(3) as imposing a higher burden on taxpayers who at-
tempt to recover their losses after discovering a fraud than
on taxpayers who claim the same loss immediately upon
discovery; and (2) holding that, where a taxpayer has filed
a claim for reimbursement from those who defrauded her,
the taxpayer may not claim a loss until that claim is fully
resolved or abandoned. Adkins v. United States,
856 F.3d
914, 918–20 (Fed. Cir. 2017) (“Adkins I”). We explained
that what a taxpayer must prove by reasonable certainty
is that, as of the time the loss was claimed, there was no
reasonable “prospect of recovery”; she is not required to
Case: 19-1356 Document: 37 Page: 3 Filed: 05/29/2020
ADKINS v. UNITED STATES 3
prove that it was certain no recovery could be had. We also
explained that, while one could establish the absence of any
reasonable prospect of recovery by abandonment of a claim,
abandonment is not a prerequisite to such a showing. In
short, we explained that the Claims Court had required too
much from the taxpayers—both with regard to what they
must prove and with regard to what evidence is needed to
satisfy that burden of proof.
The Adkinses now allege that, in addition to errone-
ously finding that they failed to establish a lack of a rea-
sonable prospect of recovery in 2004, the Claims Court
improperly relied on the government’s affirmative de-
fenses; again misconstrued the relevant legal standard; ig-
nored regulations governing the effect of a criminal
indictment; and abused its discretion in denying the Ad-
kinses’ motion to compel. Because we find that the Claims
Court once more misconstrued a taxpayer’s legal obliga-
tions in this tax refund context and thus, required too much
with respect to the showing required, we reverse the
Claims Court’s conclusion that the Adkinses failed to show
that, as of 2004, they lacked a reasonable prospect of recov-
ery for the losses they incurred by virtue of the substantial
fraud perpetuated upon them. We do not reach the Ad-
kinses’ other objections to the Claims Court’s reasoning
and rulings.
I. BACKGROUND
This appeal involves the Adkinses’ claim for a federal
income tax refund, based on financial losses they sustained
as victims of a fraudulent investment scheme. The main
facts are not in dispute. We reiterate the background facts
as described by the Claims Court, however, because such
facts are integral to the court’s ultimate conclusion that a
reasonable taxpayer “could not have known” in 2004
whether she had a reasonable prospect of recovery.
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4 ADKINS v. UNITED STATES
A. The Adkinses and Their Investments
with Donald & Co.
In September 1997, the Adkinses began investing in
securities with Otto Kozak, who was employed by E.C.
Capital, Ltd. at the time. Adkins II, 140 Fed. Cl. at 300.
The Adkinses continued to do so when Otto Kozak moved
to GKN Securities Corp., and eventually, to Donald & Co.
Securities, Inc. (“Donald & Co.”), a broker-dealer of securi-
ties registered with the Securities and Exchange Commis-
sion (“SEC”) and the National Association of Securities
Dealers (“NASD”), in March 1999. Id. In late 1999, the
Adkinses opened investment accounts at Donald & Co. Id.
Unbeknownst to the Adkinses, Donald & Co. was oper-
ating a “pump-and-dump” scheme. 1 Id. at 300. Donald &
Co. would arrange to purchase large blocks of stock in var-
ious companies and then encourage its clients to purchase
those stocks. Id. This sudden rush to buy a significant
number of stocks would inflate the price of that stock. Id.
Donald & Co. would subsequently sell the stock that it
owned at this inflated price, resulting in gains for the com-
pany. But when the stock price would eventually decline
back to a normal level, the company’s customers would in-
evitably incur a loss because they had purchased those
1 A “pump-and-dump” scheme, as defined by the
SEC, is “touting [] a company’s stock (typically small, so-
called ‘microcap’ companies) through false and misleading
statements to the marketplace.” Adkins II, 140 Fed. Cl. at
300 n. 4. Promoters of the stock may claim to have “inside”
information about an impending development or to use an
“infallible” combination of economic and stock market data
to pick stocks. Id. These promoters sell their shares after
the stock price is “pumped” up by the sudden rush to pur-
chase the stock. Id. Once promoters “dump” their shares
and stop hyping the stock, the price typically falls, and in-
vestors lose their money. Id.
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ADKINS v. UNITED STATES 5
stocks at the inflated price. Id. While the Adkinses were
investing with Donald & Co., the company pumped-and-
dumped at least five stocks: Elec Communications Corp.
(“Elec”), The Classica Group, Inc. (“Classica”), My-
Turn.com, Inc. (“MyTurn”), Great Train Store Co., and
Tera Computer Co. Id. Many of Donald & Co.’s house
stocks were owned via Odyssey Capital LLC, a holding
company. Id.
By February 2000, the value of the Adkinses’ invest-
ments with Donald & Co. was approximately $3.6 million.
Id. at 301. At that time, the Adkinses’ portfolio included a
number of stocks, with holdings in MyTurn stock repre-
senting the vast majority of the portfolio’s value. Id. at
301–02. It was during this month that the value of the My-
Turn stock began to decline. Id. at 302. The Adkinses’ My-
Turn stock, which was valued at $2,936,250 in February
2000, had fallen to $1,029,420 by April 2000. Id. As a re-
sult, the equity in the Adkinses’ margin account fell below
the required threshold and Donald & Co. began to issue
margin calls. 2 Id.
To meet these margin calls, Mr. Adkins instructed Otto
Kozak to sell some of the Adkinses’ stock holdings, partic-
ularly the MyTurn stock. Id. But Kozak did not follow this
instruction. Instead, he convinced Mr. Adkins to retain the
MyTurn stock and to meet the margin calls by transferring
additional cash ($1,074,181.11) and securities (valued at
$1,261,082.37) to Donald & Co. Id. To meet Donald & Co.’s
margin calls, the Adkinses transferred certain securities
2 If a person buys on margin and the value of his se-
curities declines, his brokerage firm can require him to de-
posit cash or securities to his account immediately, or sell
any of the securities in his account to cover any shortfall.
Adkins II, 140 Fed. Cl. at 302 n.12 (quoting SEC, Margin
Call, https://www.investor.gov/glossary/glossary_terms/
margin-call (last visited May 28, 2020)).
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6 ADKINS v. UNITED STATES
that they purchased through other firms, including Bear
Stearns, May Davis Group Inc., and H.J. Meyers & Co., Inc.
(collectively, “third-party brokers”). Through these third-
party brokers, the Adkinses had purchased MyTurn stock
in the amount of $143,617.72; Tera Computer Co. stock in
the amount of $26,793.13; and Great Train Store Co. stock
in the amount of $40,890.00. Id. All of the Adkinses’ pur-
chases of MyTurn stock through these third-party brokers
were made at Otto Kozak’s urging. Id.
By the beginning of 2002, the value of the Adkinses’
investments with Donald & Co. had fallen below $10,000.
Id. (reflecting a value of $9,848.62 at the end of December
2001). Id. On July 24, 2002, Donald & Co. ceased opera-
tions due to insufficient capital. Id. at 304. Donald & Co.
was expelled from the NASD on March 18, 2003. Id. As
noted below, moreover, indictments relating to this fraud-
ulent scheme soon followed.
B. The NASD Arbitrations, Criminal Indictments,
and Criminal Forfeitures and Penalties
In 2002, after the value of the Adkinses’ investments
had fallen below $10,000, Mr. Adkins conducted some re-
search and realized that he was being defrauded. Id. at
302. Shortly thereafter, on February 7, 2002, the Adkinses
submitted a statement of claim to the NASD in support of
their demand for arbitration against Donald & Co. and Da-
vid Stetson, Slava Volman, and Steven Ingrassia (collec-
tively, the “named principals”), three of the four principals
at Donald & Co. Id. at 303. The Adkinses alleged that the
respondents manipulated the value of the MyTurn stock,
causing the Adkinses to incur substantial losses. Id. The
Adkinses did not include Marc Freeman (the remaining
principal at Donald & Co.), Robert Kozak (an employee of
Donald & Co.), or Otto Kozak (collectively, “the Kozaks”) in
their complaint. Id. The Adkinses represented that they
did not include Freeman because they did not believe he
was actively involved in any of their MyTurn stock trades,
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ADKINS v. UNITED STATES 7
or that he had any substantial role in the fraudulent
scheme. Indeed, Mr. Adkins testified that he did not know
who Mr. Freeman was. J.A. 1733 (“[Mr. Adkins]: I didn’t
know anything about Marc Freeman whatsoever. He
wasn’t involved in my case. As far as I knew, he wasn’t
involved in the stocks I dealt with.”). See also Adkins v.
United States, No. 19-1356, Oral Arg. at 5:35–6:33, availa-
ble at http://oralarguments.cafc.uscourts.gov/default.aspx
?fl=2019-1356.mp3 (“[Freeman’s] name appeared on
maybe a few trading slips but [Mr. Adkins] never really
knew who he was . . . [Mr. Adkins] went after [Stetson, Vol-
man, and Ingrassia] and not the lesser players. His view
was that Mr. Freeman was not a very important part of the
scheme.”). Mr. Adkins explained that they decided not to
add the Kozaks to their arbitration claim because Otto
Kozak had advised Mr. Adkins and their arbitration attor-
ney that they “didn’t have any money.” Adkins II, 140 Fed.
Cl. at 303. Indeed, when Otto Kozak and Robert Kozak
were eventually brought to court in 2004 in connection with
the criminal proceedings against them, attorneys were ap-
pointed for them pursuant to the Criminal Justice Act of
1964, which provides for the appointment of counsel “for
any person financially unable to obtain adequate represen-
tation.” Id. at 303–04; see 18 U.S.C. § 3006A(a) (2000).
On March 24, 2003, one of the Adkinses’ arbitration at-
torneys sent a letter to the NASD, requesting that the
NASD adjourn the arbitration hearing scheduled for April
1, 2003. Id. at 304. The letter explained that Donald & Co.
“ha[d] not responded fully to [the Adkinses’] demands for
discovery and [was] no longer in business.” 3 Id. He ex-
plained that the Adkinses needed additional time for dis-
covery in order to proceed with the hearing. The letter
3 Mr. Adkins testified that Donald & Co. had not re-
plied at all to the Adkinses’ discovery requests. Adkins II,
140 Fed. Cl. at 304 n.16.
Case: 19-1356 Document: 37 Page: 8 Filed: 05/29/2020
8 ADKINS v. UNITED STATES
explained, moreover, that Mr. Adkins had been contacted
by the Department of Justice, which was investigating
Donald & Co. and certain persons associated with it. Id.
The Adkinses had been informed that “an indictment
[would] be handed down in the case” and were told that the
U.S. Attorney would ask that “all civil litigation involving
Donald & Co., including arbitrations, be stayed pending
disposition of the criminal case.” Id.
Based on the circumstances described in the NASD let-
ter, the Adkinses’ arbitration attorneys advised their cli-
ents that their claim likely would be forestalled based on
the pending indictment and that, without discovery, the ar-
bitration could not proceed. Id. The attorneys suggested,
however, that the Adkinses leave their arbitration claim
open in case the criminal proceedings revealed pertinent
information that might enhance their arbitration position.
Id. Mr. Adkins did not object to this suggestion, but in-
formed his attorneys that, while awaiting the indictments,
he “wasn’t going to pay them anymore and there’s no real
need to pursue it.” Id.
In May 2004, a federal grand jury in the Eastern Dis-
trict of New York returned the first of the predicted indict-
ments against several principals and employees of Donald
& Co, including Ingrassia, Volman, and the Kozaks, for
“conspiracy to commit securities fraud” and “securities
fraud related to the Elec and Classica stocks.” Id. at 305.
There was no charge in the indictment pertaining to fraud
with respect to the MyTurn stock. Id. Ingrassia and Vol-
man were also indicted for money laundering. Id. The in-
dictment contained two criminal forfeiture allegations. Id.
The first, which pertained to the securities fraud
charges, indicated that the government intended,
upon the criminal defendants’ convictions, to seek
the forfeiture “of any property constituting or de-
rived from proceeds obtained directly or indirectly
as a result of such offenses” pursuant to 18 U.S.C.
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ADKINS v. UNITED STATES 9
§ 981(a)(1)(C) and
28 U.S.C. § 2461(c), or if neces-
sary, the forfeiture of substitute property pursuant
to
21 U.S.C. § 853(p). The second, which pertained
to the money laundering charges, indicated that
the government intended, upon the criminal de-
fendants’ convictions, to seek the forfeiture of all
property involved in the offenses, as well as all
property traceable to that property, pursuant to
18
U.S.C. § 982, or, if necessary, the forfeiture of sub-
stitute property pursuant to
21 U.S.C. § 853(p).
Id. (internal citations omitted). Marc Freeman was not
named in this indictment.
After discussing the 2004 indictment with counsel, Mr.
Adkins concluded that the criminal forfeiture sections re-
flected the government’s intention to seize “any document
concerning the identity and ownership of the criminal de-
fendants’ assets.”
Id. Without these documents, the Ad-
kinses would be unable to prove the existence of a theft loss
or locate assets that could be used to reimburse the Ad-
kinses for their theft loss.
Id. Mr. Adkins also believed
that, based on the indictment, the government intended to
seize “all of the criminal defendants’ assets, preventing
plaintiffs from attaching those assets to recover their theft
loss.”
Id.
On September 21, 2004, Stetson was charged with
“conspiracy to commit securities fraud, securities fraud re-
lated to the Classica stock, and money laundering conspir-
acy.”
Id. at 306. Like Ingrassia and Volman’s indictment,
Stetson’s indictment contained the same two criminal for-
feiture allegations.
Id. And, like the prior indictment,
there was no mention of the MyTurn stock and no charges
against Freeman. Mr. Adkins was told in 2004 of the crim-
inal case against Stetson and the fact that it contained for-
feiture counts, but Mr. Adkins did not see the actual
charging document until after the 2004 tax year.
Id.
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10 ADKINS v. UNITED STATES
In September 2004, Ingrassia and Stetson agreed to
plead guilty to securities fraud conspiracy, securities fraud,
and money laundering conspiracy.
Id. The following
month, Volman agreed to plead guilty to the same charges.
Id. at 307. Consequently, the named principals received
terms of imprisonment and supervised release.
Id. The
defendants were subject to fines exceeding $1.75 million
and mandatory restitution in an amount to be determined
later by the court after assessment of all losses incurred
regarding the identified stocks.
Id. With respect to forfei-
ture, the three criminal defendants agreed to entry of for-
feiture money judgments against them in which Ingrassia
would forfeit $100,000, Volman would forfeit $300,000, and
Stetson would forfeit $150,000 to the United States.
Id.
The three criminal defendants’ plea agreements remained
under seal until August 26, 2005.
Id. Mr. Adkins learned
in 2004 from his arbitration attorneys and Otto Kozak,
however, that all of the criminal defendants intended to
plead guilty.
Id.
That same year, the named principals were barred by
the SEC from acting as brokers or dealers in securities.
Id.
The Adkinses learned about these SEC orders from their
arbitration attorneys in 2004.
Id. Mr. Adkins believed
that, as a result of these orders, the criminal defendants’
earning power would be cut off.
Id. By the end of 2004,
Ingrassia, Volman, and Otto Kozak had not paid the Ad-
kinses anything for their losses, and the district court had
not entered a restitution order.
Id.
Criminal proceedings for the other Donald & Co. bro-
kers continued in 2005. In August 2005, the Kozaks agreed
to plead guilty to the securities fraud conspiracy and secu-
rities fraud charges filed against them.
Id. at 307–08. Otto
Kozak was sentenced in July 2006 and ordered to pay res-
titution in the amount of $631,482.26.
Id. at 308. Robert
Kozak was sentenced in August 2006 and ordered to pay
restitution in the amount of $231,641.80.
Id. Like the
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ADKINS v. UNITED STATES 11
named principals’ indictment, the Kozaks’ indictment did
not mention MyTurn stock. Id.; J.A. 1410.
In August 2005, Freeman—the only principal of Don-
ald & Co. not charged in the 2004 indictments—was
charged with conspiracy to commit securities fraud, secu-
rities fraud, and money laundering conspiracy. Adkins II,
140 Fed. Cl. at 307. Freeman’s indictment did not mention
MyTurn stock. Id.; J.A. 1410. Freeman agreed to plead
guilty to all three charges, to forfeit $50,000 to the United
States, and to pay restitution in the amount of $4,243,858.
Adkins II, 140 Fed. Cl. at 307. The named principals were
sentenced a few years later. Ingrassia was sentenced in
December 2009 and directed to pay restitution in the
amount of $4,243,858.44. Id. at 308. Stetson was sen-
tenced in March 2011 and directed to pay restitution in the
amount of $3,590,466.50. Id. Volman was sentenced in
July 2012 and directed to pay restitution in the amount of
$3,590,466.50. Id. Despite these substantial judgments,
however, the criminal defendants made almost no pay-
ments toward restitution. By the time Otto Kozak passed
away in April 2011, he had made restitution payments to-
taling $255. Id. And as of January 28, 2014, the named
principals and Freeman had paid a combined total of only
$7,093.27 toward their obligations. Id.
In an August 12, 2005 letter to the Adkinses, the Vic-
tim Witness Coordinator from the United States Attorney’s
Office (“USAO”) advised them of the charges filed against
the Donald & Co. brokers and the Adkinses’ “right to full
and timely restitution as provided in law.” Id. The Ad-
kinses decided that they did not want to be officially iden-
tified as victims, however, because (1) the indictment did
not mention MyTurn stock, which represented the vast
percentage of their losses; and (2) the Adkinses wanted to
avoid any accompanying embarrassing public exposure.
Id. Accordingly, they were not included on the victim lists
submitted to the federal district court for purposes of
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12 ADKINS v. UNITED STATES
receiving restitution with respect to their Classica and Elec
stocks. Id. at 308–09.
As the case stands, “[c]urrently, there are no funds
available from the convicted Donald & Co. brokers to pay
restitution to plaintiffs.” Id. at 310. None of the named
victims of the Donald & Co. pump-and-dump scheme have
been fully reimbursed for their losses; indeed, none have
received anything more than de minimis reimbursement
and there is no evidence that the convicted Donald & Co.
brokers or principals possess assets sufficient to pay resti-
tution or any judgment against them. Id. The Adkinses do
not have “insurance or [any] other vehicle for recovery for
[their] loss.” Id.
C. The Adkinses’ Federal Income Tax Returns
While the criminal proceedings were pending, the Ad-
kinses attempted to recoup some of their losses by claiming
a federal income tax deduction. Id. at 309. Pursuant to
section 165 of the Internal Revenue Code, taxpayers are
permitted to deduct a theft loss from their income in the
year that they sustained the loss. Id.;
26 U.S.C. § 165(a), (e) (2000);
Treas. Reg. §§ 1.165-1(a), (d),
1.165-8(a) (2001). The Adkinses claimed their theft loss for
the 2004 taxable year, and then carried back portions of
their loss to the previous three years. Adkins II, 140 Fed.
Cl. at 309. Accordingly, in 2006, the Adkinses timely filed
federal income tax returns reflecting a total theft loss of
$2,118,725. Id. The Adkinses sought income tax refunds
of $115,736 for 2004; $24,021 for 2003; $71,621 for 2002;
and $177,707 for 2001. Id.
On April 5, 2011, an IRS Appeals Officer concluded
that, pending the final computations of the Tax Computa-
tion Specialist, the Adkinses had sustained a theft loss, and
were entitled to a deduction for the 2004 tax year. J.A.
1343 ¶ 58. The Appeals Officer determined that the Ad-
kinses had incurred a theft loss of $2,532,996.01 in 2004.
Id. at ¶ 59. The proposed settlement, however, was never
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ADKINS v. UNITED STATES 13
finalized. Adkins II, 140 Fed. Cl. at 310. As reflected in
the IRS Appeals Officer’s memorandum and attached
transmittal form, the IRS Office of Appeals lacked jurisdic-
tion to settle the Adkinses’ claim because the Adkinses had
filed suit in the United States Court of Federal Claims be-
fore their appeal was complete. Id. The Adkinses ex-
plained that they were forced to seek reimbursement in
this new venue because they feared that their IRS claim
would be precluded due to the statute of limitations if they
did not move forward. See Adkins v. United States, No. 16-
1961, Oral Arg. at 31:16–31:40, available at http://
oralarguments.cafc.uscourts.gov/default.aspx?fl=2016-
1961.mp3 (“The IRS looked at this, and Mr. Kaplan [the
Appeals Officer] was ready to grant the refund, but the
statute of limitations ran out and we had to file in court.”).
D. The Claims Court’s Second Determination
As noted above, the Claims Court initially ruled
against the Adkinses and we vacated that determination
on appeal. Adkins I, 856 F.3d at 916. On remand, the par-
ties filed a joint status report indicating that no further tes-
timony or evidence was required and proposed a schedule
for supplemental briefing. Adkins II, 140 Fed. Cl. at 311.
On October 26, 2018, the Claims Court issued an opinion,
again concluding that the Adkinses are not entitled to a
theft loss deduction for the 2004 tax year. Id. at 300.
The Claims Court assessed the evidence to determine
whether the Adkinses had any reasonable probability of re-
covery in 2004. Two related legal principles guided this
inquiry. First, the Claims Court concluded that, if a rea-
sonable prospect of recovery was “unknowable” as of the
year in which the loss was claimed, the taxpayer can never
bear her burden of establishing that there was no reasona-
ble prospect of recovery in that tax year. Second, the
Claims Court assumed that, for a taxpayer to establish the
absence of a reasonable prospect of recovery, she must af-
firmatively establish, for each potential avenue of recovery
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14 ADKINS v. UNITED STATES
placed in issue, that it presented no reasonable probability
of recovering any amount of her losses, no matter how dif-
ficult the avenue nor how small the potential recovery. See
Adkins v. United States, No. 19-1356, Oral Arg. at 26:18–
27:25. It is through these lenses that the Claims Court as-
sessed the record before it.
The Claims Court said there were three ways the Ad-
kinses, “or any reasonable taxpayer with plaintiffs’
knowledge,” could have attempted to recover their losses:
(1) the arbitration claim they filed against Donald & Co.
and Messrs. Stetson, Volman, and Ingrassia in 2002;
(2) possible claims against Freeman, Otto Kozak, and Rob-
ert Kozak; and (3) restitution in conjunction with the crim-
inal proceedings initiated in 2004 against Donald & Co.’s
principals and employees regarding the Elec and Classica
stock fraud. Id. at 316.
With respect to the Adkinses’ arbitration claim, the
Claims Court explained that there was no evidence in the
record that the respondents’ failure to fully respond to dis-
covery requests foreclosed the Adkinses from proceeding
with their claim and obtaining an award. Id. at 317. “In
addition, there [was] no evidence in the record that [the
Adkinses] sought to determine whether Donald & Co. or
Messrs. Stetson, Volman, and Ingrassia had any assets
that could be used to satisfy an arbitration award.” Id.
And, although a U.S. Attorney had advised Mr. Adkins that
any arbitration proceedings would be stayed pending reso-
lution of the criminal proceedings, the Claims Court
pointed out that there was no evidence of a formal request
to stay. Id.
The Claims Court rejected the Adkinses’ argument
that, once Volman and Ingrassia were indicted for securi-
ties fraud and money laundering, it was clear that the gov-
ernment would seize all of the criminal defendants’ assets
and any relevant documentation, which would foreclose fu-
ture recovery from them. Id. at 317–18. The Claims Court
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ADKINS v. UNITED STATES 15
concluded that knowing of an intent to plead guilty is not
the same as knowing the contents of the plea agreement,
which remained under seal until August 2005. Id. at 318.
The court further suggested that the Adkinses could have
pursued recovery through Odyssey Capital LLC, the hold-
ing company for Donald & Co.’s house stocks, despite the
indictments. Id. (“Donald & Co. principals executed trades
through Odyssey Capital LLC; Donald & Co. accumulated
profits in bank accounts owed by Odyssey Capital LLC.”).
With respect to the Adkinses’ potential claims against
the Kozaks and Freeman, the Claims Court concluded that
a reasonable taxpayer could have concluded that he had no
prospect of recovery against the Kozaks but could not have
come to that same conclusion with respect to Freeman. Id.
at 319. The court noted that Freeman was a principal of
Donald & Co., served as an account representative for sev-
eral of the plaintiffs’ accounts for at least one year, and was
not charged with any crimes until August 2005. Id. Ac-
cordingly, the court concluded that the Adkinses’ decision
to not name Freeman as a respondent in the arbitration
proceedings was inexcusable. Id. “A reasonable taxpayer
in plaintiffs’ position would have pursued a claim against
Freeman in 2002 or thereafter[] and would not have had
any reason to suspect in 2004 that he would not be able to
recover at least some of his losses through that claim.” Id.
at 319–20.
Finally, the Claims Court faulted the Adkinses for fail-
ing to pursue restitution awards through the criminal pro-
ceedings. Based on the record, the Claims Court
determined that the Adkinses did not know in 2004 the
charges to which the criminal defendants would be plead-
ing guilty or any details regarding the expected restitution
awards relating to the Elec and Classica stock frauds. Id.
at 320. The court then found that, with the exception of
the Kozaks, the Adkinses did not know whether the crimi-
nal defendants had the wherewithal to satisfy their resti-
tution obligations. Id. at 321. The court found insufficient
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16 ADKINS v. UNITED STATES
evidence that the Adkinses attempted to ascertain the fi-
nancial condition of any of the criminal defendants, or that
the government seized any of the criminal defendants’ as-
sets prior to September 2005 “such that the assets would
be unavailable for restitution.” Id.
Based on these three possible avenues of recovery, the
Claims Court concluded that the Adkinses failed to meet
their burden of proving that they were entitled to claim a
theft loss deduction because “a reasonable taxpayer in
plaintiffs’ position could not have known, in 2004, whether
he had a reasonable prospect of recovering at least some of
his losses.” Id. at 316 (emphasis added). See also id. at 318
(“A reasonable taxpayer . . . could not have known in 2004
whether he had a reasonable prospect of recovery.”); id. at
320 (“[The Adkinses’] reasonable prospect of recovery from
Mr. Freeman was simply unknowable in 2004.”); id. at 321
(“[P]laintiffs’ reasonable prospect of recovering their losses
was simply unknowable by the end of 2004.”).
The Adkinses timely appealed the Claims Court’s deci-
sion.
II. DISCUSSION
“The Claims Court’s legal determinations, including in-
terpretations 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).
The Adkinses allege that the Claims Court (1) erred in
its finding that the Adkinses failed to establish that they
lacked a reasonable prospect of recovery; (2) misconstrued
the appropriate standard for
26 U.S.C. § 165(e),
26 C.F.R.
§ 1.165-1(d)(3), and
26 C.F.R. § 1.165-1(d)(2)(i); (3) improp-
erly relied on the government’s affirmative defenses;
(4) improperly ignored Rev. Proc. 2009-20 regarding the ef-
fect of the criminal indictment; and (5) abused its discre-
tion when it denied the Adkinses’ motion to compel.
Case: 19-1356 Document: 37 Page: 17 Filed: 05/29/2020
ADKINS v. UNITED STATES 17
For the reasons described below, we agree with the Ad-
kinses that the Claims Court misconstrued the relevant le-
gal standard and, accordingly, erred in its finding that the
Adkinses failed to establish they lacked a reasonable pro-
spect of recovery in 2004.
A. The Claims Court Misconstrued
26 U.S.C. § 165(e) and
26 C.F.R. § 1.165-1(d)
The Adkinses argue that the Claims Court miscon-
strued
26 U.S.C. § 165(e) and
26 C.F.R. §§ 1.165-1(d)(2)(i)
and (d)(3) because it allegedly ruled that “abandonment of
a claim must be shown with reasonable certainty even
when there was no reasonable likelihood of success.” Ap-
pellant Br. 1. Though it had required that showing before
the first appeal, the Claims Court did not treat abandon-
ment as the factual predicate for the Adkinses’ loss date on
remand. See Adkins II, 140 Fed. Cl. at 318–21. Despite
their mischaracterization, however, we agree with the Ad-
kinses that the Claims Court misconstrued the relevant le-
gal standard when it premised its holding on the erroneous
assumptions that a taxpayer cannot establish lack of a
“reasonable prospect of recovery” if (1) the prospect of re-
covery is “unknowable”; and (2) the taxpayer has not ex-
hausted all avenues of recovery, at least those identified by
the government as potential avenues, regardless of the
likelihood of success or cost associated with pursuit of the
potential avenues. See id. at 316.
i. Treasury Regulation § 1.165-1(d)(2)(i) Does
Not Require a Showing of “Knowability”
The Claims Court concluded that the Adkinses could
not establish lack of a “reasonable prospect of recovery”—
not because it affirmatively found evidence of a prospect
but because any such prospect of recovery was “unknowa-
ble” in 2004. See also id. at 318 (“A reasonable tax-
payer . . . could not have known in 2004 whether he had a
reasonable prospect of recovery.”), 320 (“[The Adkinses’]
reasonable prospect of recovery from Freeman was simply
Case: 19-1356 Document: 37 Page: 18 Filed: 05/29/2020
18 ADKINS v. UNITED STATES
unknowable in 2004.”), 321 (“[P]laintiffs’ reasonable pro-
spect of recovering their losses was simply unknowable by
the end of 2004.”). The Claims Court’s reliance on this “un-
knowable” standard was legally erroneous.
This “unknowable” language comes from Jeppsen v.
Commissioner,
128 F.3d 1410 (10th Cir. 1997). 4 In
Jeppsen, a Tenth Circuit panel majority affirmed a Tax
Court ruling that the taxpayer was not entitled to claim a
deduction on his 1987 federal income tax return for the loss
of money stolen by his stockbroker Barker.
128 F.3d at
1411. Having noted that Jeppsen actually ended up recov-
ering his losses in full in 1995, after seven years of litiga-
tion against Barker and others, including Barker’s
successive employers (E.F. Hutton and PJ & H), the major-
ity laid out the bases on which the Tax Court had found
that, in 1987, Jeppsen had a reasonable prospect of recov-
ery:
[B]y the end of 1987:(1) Barker had engaged in con-
duct that was both illegal and actionable; (2)
Jeppsen knew what Barker had done; (3) Jeppsen
began shopping for lawyers immediately and never
at any time ceased attempting to recover his
money; (4) Barker’s former employers PJ & H and
E.F. Hutton were proper co-defendants, both of
whom had more than sufficient assets available to
satisfy any judgment awards against them; and (5)
Jeppsen filed suit in March, 1988, several months
before he filed his 1987 tax return.
Id. at 1419.
4 This language is echoed in one other case, Vincen-
tini v. Comm’r, 429 F. App’x 560 (6th Cir. 2011), but the
court did not rely on a finding of “unknowable” prospects
when concluding that the taxpayer failed to establish that
there was no reasonable prospect of recovery.
Case: 19-1356 Document: 37 Page: 19 Filed: 05/29/2020
ADKINS v. UNITED STATES 19
The majority upheld the Tax Court’s determination,
even while recognizing that “several countervailing facts
indicate that Jeppsen’s prospects of recovery were never,
until he prevailed, 100 percent.”
Id. For example, the par-
ties Jeppsen sued consistently disclaimed any liability, no
lawyer would take Jeppsen’s case on a contingency basis,
and several lawyers—including the firm he eventually re-
tained—informed Jeppsen that the case would be lengthy
and expensive, with no guarantee of winning.
Id. Notwith-
standing those facts, the majority explained, Jeppsen ac-
tively pursued his suit for years (until success), the suit
was not based on a meritless legal theory (it ultimately suc-
ceeded), and his ultimate recovery did not depend on the
outcome of some unforeseeable intervening event.
Id.
There were, moreover, no criminal charges or forfeiture
counts brought against the defendants in Jeppsen’s civil
suit.
Id. The Tenth Circuit’s ruling, therefore, was based
on a multiplicity of facts quite different from those in this
case.
Before reviewing the finding of a reasonable prospect
of recovery, the majority discussed the governing legal
standards. In the course of that discussion, the majority
stated that “if Jeppsen’s prospect of recovery was simply
unknowable as of December 31, 1987, then Jeppsen would
not be entitled to take the theft loss deduction in 1987.”
Id.
at 1418. That statement, phrased as a conditional, appears
to be dictum, i.e., not necessary to the judgment. In up-
holding the Tax Court’s finding that “as of Dec. 31, 1987,
Jeppsen had a reasonable prospect of recovering” his loss,
id. at 1417, the majority did not rely on the quoted state-
ment, or declare that the prospects in Jeppsen’s case were
“unknowable” in 1987 but instead set forth the multiple
facts, recited above, providing substantial enough indica-
tions of reasonable recovery prospects as of 1987,
id. at
1419.
The Jeppsen dissent, besides disagreeing with the re-
sult, took issue with the “simply unknowable” language.
Case: 19-1356 Document: 37 Page: 20 Filed: 05/29/2020
20 ADKINS v. UNITED STATES
The dissent interpreted the majority’s statement that an
“unknowable” prospect of recovery will always doom a loss
claim as an implicit requirement of affirmative proof that
the loss will never be recovered, and it characterized that
as placing an “insurmountable barrier on the taxpayer.”
Id. at 1419–20 (Kelly, J., dissenting). The dissent reasoned
that the fact that Jeppsen ultimately recovered his losses
did not mean he had a reasonable prospect of recovery in
the years leading up to his civil victory.
Id.
We agree with the Jeppsen dissent as to the inappro-
priateness of an unknowability standard. The governing
statute and regulations do not require affirmative proof
that a taxpayer’s loss will never be recovered. The regula-
tion is clear: a taxpayer must only demonstrate that he had
no reasonable prospect of recovery at the time.
Treas.
Reg. §§ 1.165-1(d)(2)(i), (d)(3). A conclusion that the pro-
spect of recovery was “unknowable” replaces that inquiry
with a term that is at best confusingly unhelpful and at
worst incorrect. It is confusingly unhelpful because on its
face it leaves wholly undefined the crucial questions of
what it means to “know” the prospect of recovery (to what
degree of certainty?) and what it means for the prospect to
be unknowable (understanding that pursuit of possibilities
of recovery vary in cost and likelihood of bearing fruit).
And the “unknowable” standard is a departure from the
“reasonable prospect” regulation if the recovery prospect
will always be deemed “unknowable” when the court can
identify uncertainties in the information available as of the
tax year at issue.
Although it is possible that the Jeppsen majority did
not intend to require a taxpayer to prove that “the loss
would never be recovered,” the Claims Court’s application
of this language had that effect here. The Claims Court
never concluded that there was a reasonable prospect of re-
covery in 2004, or in 2003 or 2005 for that matter. Rather,
the Claims Court repeatedly stated that a reasonable tax-
payer “could not have known in 2004 whether he had a
Case: 19-1356 Document: 37 Page: 21 Filed: 05/29/2020
ADKINS v. UNITED STATES 21
reasonable prospect of recovery” because such a prospect
“would have been simply unknowable.” Adkins II, 140 Fed.
Cl. at 318–22. In fact, the Claims Court doubled down on
this rule when it found that any reasonable taxpayer “could
not have known at the end of 2004 the impact that the plea
agreements and SEC orders would have on the financial
resources of Messrs. Stetson, Volman, and Ingrassia.” Id.
at 318.
The Claims Court’s reliance on this “unknowable”
standard as a basis for its conclusion was erroneous be-
cause the correct inquiry focuses on a “reasonable prospect
of recovery.” The taxpayer does bear the burden of proving
his entitlement to a theft loss deduction, Interstate Transit
Lines v. Comm’r,
319 U.S. 590, 593 (1943), and the question
as to whether there was a reasonable prospect of recovery
for a particular tax year requires a binary answer: yes or
no. 5 But this new standard employed by the Claims
Court—whether the prospect of recovering a taxpayer’s
losses is unknowable—ignores the plain language of the
regulation, heightens the evidentiary burden on the tax-
payer, and punishes the victim for any factual ambiguity.
We also reject the government’s argument that the
Claims Court simply applied our holding in Adkins I.
5 Consistent with the general applicability of a pre-
ponderance standard of proof in civil matters, Herman &
MacLean v. Huddleston,
459 U.S. 375, 390 (1983); United
States v. Regan,
232 U.S. 37, 49 (1914), the taxpayer must
make that showing only by a preponderance of the evi-
dence, see Louisville Store of Liberty, Ky., Inc. v. United
States,
376 F.2d 314, 318 (Ct. Cl. 1967); Dargie v. United
States,
742 F.3d 243, 245 (6th Cir. 2014). Under that
standard, the taxpayer must show simply that it was more
likely than not that there was no reasonable prospect of re-
covery. See Herman & MacLean,
459 U.S. at 390 (prepon-
derance means more likely than not).
Case: 19-1356 Document: 37 Page: 22 Filed: 05/29/2020
22 ADKINS v. UNITED STATES
Adkins v. United States, No. 19-1356, Oral Arg. at 16:25–
18:25. The Claims Court’s opinion did not find that the
taxpayers failed to demonstrate no reasonable prospect of
recovery in 2004. Rather, the Claims Court held that the
presence of uncertainty will always foreclose a showing of
“no reasonable prospect of recovery.” Such a holding is at
odds with providing “common-sense incentives for victims
of theft” to try to recover their losses from the perpetrators
of the fraud before asking for tax relief. Adkins I, 856 F.3d
at 918. Taxpayers would be incentivized to abandon ave-
nues of recovery at the first sign of difficulty, rather than
make good-faith efforts to recover losses. Id. (“To the ex-
tent that it is rendered more difficult to succeed on a loss
claim in years subsequent to discovery [because they fear
whether recovery is knowable], taxpayers will be dissuaded
from these good-faith efforts.”). 6
6 The government erroneously characterizes our
holding in Adkins I as espousing “two alternate formula-
tions:” one pertaining to a reasonable prospect of recovery,
and another pertaining to a reasonable certainty that there
will be no recovery. Adkins v. United States, No. 19-1356,
Oral Arg. at 16:58–17:45 (“This court gave two alternate
formulations.”). As we explained in the prior appeal,
Treasury Regulation § 1.165-1(d)(3) does not set forth two
different standards. Adkins I, 856 F.3d at 917–18. It sets
forth a single test: the proper year in which to claim a loss
is the first year in which no reasonable prospect of recovery
exists anymore, starting with the year of discovery. Id. at
917. When we explained, in a footnote, that this single test
could be “equivalently simplified” to mean “the first year in
which it can be ascertained with reasonable certainty that
there will be no recovery,” we were not creating an “alter-
nate” test. The government’s attempts to rely on this
“equivalent” language to avoid the legal standard clearly
set forth in Adkins I are unpersuasive.
Case: 19-1356 Document: 37 Page: 23 Filed: 05/29/2020
ADKINS v. UNITED STATES 23
Accordingly, we conclude that the Claims Court mis-
construed the governing statute and regulation when it
concluded that the Adkinses could not establish a reasona-
ble prospect of recovery because that prospect was “un-
knowable.”
ii. A Taxpayer Need Not Exhaust All Avenues
of Recovery, Regardless of Relevance
or Likelihood of Success
The Claims Court also suggested that, for a taxpayer
to prove that there is “no reasonable prospect of recovery”
for a particular tax year, he must pursue every conceivable
avenue of recovery, no matter the cost to the victim or the
likelihood of success. In this case, the Claims Court sug-
gested that the Adkinses should have pursued possible ar-
bitration claims against Freeman, and restitution claims
arising from the criminal proceedings against Ingrassia,
Volman, and Stetson. Id. at 319–20. According to the
Claims Court, the fact that certain Donald & Co. principals
realized “significant profits from the pump-and-dump
scheme” and owned attached assets superseded any weight
afforded to the Adkinses’ knowledge that all of the criminal
defendants intended to enter guilty pleas to the public in-
dictments. Id. at 318–20. We disagree.
A taxpayer need not exhaust every possible avenue of
recovery in order to prove “no reasonable prospect of recov-
ery.” Outside of the criminal defendants, the taxpayer
likely has the greatest knowledge about the facts of his case
and is the person best-equipped to decide, with the advice
of counsel, which claims are worth pursuing. Notably, the
Claims Court pointed to possible avenues of recovery but
did not calculate either the cost of pursuing that recovery
or attempt to balance those costs against the likelihood of
victory. While a taxpayer is not free to put her head in the
sand and ignore meaningful avenues of recovery, it would
be a tremendous waste of resources and time for the tax-
payer to pursue every option, regardless of the likelihood of
Case: 19-1356 Document: 37 Page: 24 Filed: 05/29/2020
24 ADKINS v. UNITED STATES
success or degree of difficulty. As the Supreme Court ex-
plained in United States v. S.S. White Dental Manufactur-
ing Co., “a loss may become complete enough for deduction
without the taxpayer’s establishing that there is no possi-
bility of an eventual recoupment . . . . The Taxing Act does
not require the taxpayer to be an incorrigible optimist.”
274 U.S. 398, 402–03 (1927). Treasury Regulation
§ 1.165-1(d)(2)(i) acknowledges this reality. It makes clear
that we may ascertain whether a reasonable prospect of re-
covery exists based on an abandonment of a claim for reim-
bursement.
Treas. Reg. § 1.165-1(d)(2)(i). If the IRS
believed, as the Claims Court clearly did, that a taxpayer
must follow through on every possible road to recovery, it
would not have propagated a regulation that allows for
abandonment. 7
B. The Adkinses Had No Reasonable Prospect
of Recovering Any Portion of Their Theft Loss in 2004
The determination of a reasonable prospect of recovery
is a question of foresight and of fact, to be determined upon
an examination of all facts and circumstances.
Treas. Reg.
§ 1.165-1(d)(2)(i). A reasonable prospect of recovery may
exist “when the taxpayer has bona fide claims for recoup-
ment from third parties or otherwise, and when there is a
substantial possibility that such claims will be decided in
his favor.” Ramsay Scarlett & Co. v. Comm’r,
61 T.C. 795,
807 (1974), aff’d,
521 F.2d 786 (4th Cir. 1975). What it
means for something to be decided in a taxpayer’s “favor”
necessarily must take into consideration what the tax-
payer’s net recovery might be, considering the costs in-
volved in pursuit of any potential avenue for possible
recovery. A taxpayer’s reasonable prospects of recovery
may be ascertained “by a settlement of the claim, by an
7 As we explained in Adkins I, however, a taxpayer
need not “abandon” a claim to establish “no reasonable pro-
spect of recovery.” Adkins I, 856 F.3d at 918.
Case: 19-1356 Document: 37 Page: 25 Filed: 05/29/2020
ADKINS v. UNITED STATES 25
adjudication of the claim, or by an abandonment of the
claim.”
Treas. Reg. § 1.165-1(d)(2)(i). But as we explained
in the prior appeal, the question of whether a “reasonable
prospect of recovery” exists in a particular taxable year is
a “holistic” inquiry. Adkins I, 856 F.3d at 919. “[T]he ex-
istence of an ongoing lawsuit or arbitration is only one fac-
tor to be considered among many.” Id. at 919–20. Upon a
review of the record, we conclude that the trial court’s find-
ings on remand are clearly erroneous. United States v. U.S.
Gypsum Co.,
333 U.S. 364, 395 (1948).
The record demonstrates that, in 2004, the Adkinses
had no reasonable prospect of recovery. By the end of 2004,
the Adkinses’ pending arbitration proceeding against Stet-
son, Volman, and Ingrassia was stagnant. The Adkinses
had yet to receive a response to their discovery requests,
were informed by a U.S. Attorney that all pending civil lit-
igation would be stayed until disposition of the criminal
cases, and had been advised by their arbitration attorneys
that they “could not go forward [with the arbitration] given
the lack of discovery documents and pending criminal in-
dictment against Donald [& Co.] brokers.” J.A. 1345; Ad-
kins II, 140 Fed. Cl. at 304.
Even if there were a positive arbitration outcome for
the Adkinses, the evidence as of 2004 suggested that the
respondents would not have had the ability to pay for the
Adkinses’ losses. In May 2004, a federal grand jury in the
Eastern District of New York returned an indictment
against several principals and employees of Donald & Co.,
including Ingrassia, Volman, and the Kozaks, for conspir-
acy to commit securities fraud, securities fraud, and money
laundering. Adkins II, 140 Fed. Cl. at 305. Only a few
months later, Stetson was also charged with conspiracy to
commit securities fraud and money laundering conspiracy.
Id. at 306. The criminal indictments were public and con-
tained two criminal forfeiture allegations, which stated
that the government intended to seek forfeiture of any
(1) assets “constituting or derived from proceeds obtained
Case: 19-1356 Document: 37 Page: 26 Filed: 05/29/2020
26 ADKINS v. UNITED STATES
directly or indirectly as a result of such offenses”; and
(2) property involved in the offenses Id. at 305–06. And, in
addition to the plain text of the indictments, the Adkinses
had been informed by their arbitration attorneys and Otto
Kozak that the criminal defendants intended to plead
guilty. Adkins II, 140 Fed. Cl. at 307.
There was also little chance that the respondents
would have secured additional employment capable of pay-
ing this theoretical arbitration award. In 2004, the SEC
banned Volman, Ingrassia, and Stetson from acting as bro-
kers or dealers in securities. Id. In effect, by 2004, the
Adkinses were left with an arbitration that was unlikely to
result in any outcome, and a hypothetical outcome that was
unlikely to result in any relief. As noted above, the state of
affairs prompted the Adkinses to tell their attorneys that
they did not want to incur any more out-of-pocket costs in
pursuit of such an unlikely benefit. Id. at 304.
Despite this overwhelming evidence, the Claims Court
maintained that a reasonable taxpayer “could not have
known in 2004 whether he had a reasonable prospect of re-
covery” because there was no evidence that the U.S. Attor-
ney had actually requested the arbitration proceedings be
stayed, or that, by the end of 2004, the government had ac-
tually seized any of the criminal defendants’ assets and
documents. Id. at 318. The court also criticized the Ad-
kinses for not “attempt[ing] to ascertain the financial con-
dition of any of the criminal defendants,” id. at 318–19,
321, noting that the Donald & Co. principals and employ-
ees accumulated profits in bank accounts owned by Odys-
sey Capital LLC. To the Claims Court, it was not enough
that the criminal defendants’ indictments indicated that
the government would seek forfeiture of “any property con-
stituting or derived from proceeds obtained directly, or in-
directly as a result of such offenses,” and that all
defendants intended to plead guilty. Id. at 306. The court
suggested that the Adkinses should have independently
verified the financial circumstances of each criminal
Case: 19-1356 Document: 37 Page: 27 Filed: 05/29/2020
ADKINS v. UNITED STATES 27
defendant, in order to confirm that there was no “reasona-
ble prospect of recovery.” Id.
The Claims Court required too much. There is no evi-
dence, from the Adkinses or the government, that the arbi-
tration proceedings would have gone forward. In 2003, the
Adkinses’ arbitration attorneys explained that “they could
not go forward . . . given the lack of discovery documents
and pending criminal indictment against Donald [& Co.]
brokers”—an explanation which the NASD panel accepted.
J.A. 589–90; J.A. 1345. And, as Donald & Co. had yet to
reply to a single discovery request and was no longer in
business, acquiring the necessary documents to proceed to
an arbitration hearing seemed unlikely. J.A. 589. Indeed,
the government admitted as much. Adkins v. United
States, No. 19-1356, Oral Arg. at 26:17–17:02 (“[The
Court]: [The Adkinses] couldn’t do any civil discovery to get
information relating to the criminal defendants because
the FBI wouldn’t have allowed it. [The government]: Well
during the—that very well may be true, your Honor . . . . ”).
We reject the Claims Court’s suggestion that the Adkinses
needed to embark on a fishing expedition for confirmation
of the respondents’ assets. The question of whether the
named principals had the assets to cover the Adkinses’
losses was answered by the forfeiture penalties discussed
in the public indictments, the Adkinses’ knowledge that all
the Donald & Co. defendants intended to plead guilty, and
the knowledge that the SEC had taken away their liveli-
hoods. On the off chance that any of the respondents had
any available assets squirreled away in their Odyssey Cap-
ital LLC accounts—as the Claims Court implied—there
was no reason for the taxpayers to believe that those funds
would have been untouched by the criminal forfeiture pen-
alties. The government had declared an intent to seize not
only all financial assets related to the defendants’ securi-
ties fraud but also those related to the money laundering
conspiracy implicating Ingrassia, Volman, and Stetson. In-
deed, the government itself admitted in a joint stipulation
Case: 19-1356 Document: 37 Page: 28 Filed: 05/29/2020
28 ADKINS v. UNITED STATES
that there was “no evidence that any of the criminal defend-
ants . . . have substantial assets of the magnitude to pay
restitution or to pay any judgment against them.” J.A.
1343 (emphasis added).
The Adkinses’ failure to name Freeman in their arbi-
tration claim also does not suggest that they still had a rea-
sonable prospect of recovery in 2004. As explained above,
a defrauded taxpayer need not exhaust every avenue of re-
covery. Possible avenues of recovery have varying likeli-
hoods of success and financial burdens. In this case, the
Adkinses had the opportunity to name Freeman in their
arbitration claim but did not believe they had a good faith
basis to pursue a claim against him. The Adkinses ex-
plained that they did not believe he had a substantial role
in the MyTurn fraudulent scheme or recoverable assets.
See Adkins v. United States, No. 19-1356, Oral Arg. at
5:35–6:33. The 2004 indictments, which charged the
named principals but did not include Freeman, supported
the Adkinses’ assumption that Freeman was not a signifi-
cant player in the fraud. Adkins II, 140 Fed. Cl. at 305.
We reject the Claims Court’s reasoning that the Adkinses’
exercise of this discretion precludes a showing of “no rea-
sonable prospect of recovery.”
Nor were the Adkinses required to pursue an unlikely
restitution claim for their losses in the Elec and Classica
stocks to establish no reasonable prospect of recovery.
There is no dispute that the Adkinses could have filled out
an “Affidavit of Loss” in hopes that they might receive some
compensation for their smaller losses in the Elec and Clas-
sica stocks. But the Adkinses chose not to do so, not only
because the indictment did not mention MyTurn stock (the
vast majority of their losses), but also because they did not
believe there would be any restitution available after the
defendants forfeited their assets in accordance with their
guilty pleas. Even if the Adkinses might have recovered
some of their losses via restitution—in the unlikely event
that the government reneged on its declared intent to seize
Case: 19-1356 Document: 37 Page: 29 Filed: 05/29/2020
ADKINS v. UNITED STATES 29
all the defendants’ assets or the criminal defendants ob-
tained other funds that might satisfy a restitution order—
we see no basis for deeming the prospect of such a recovery
a reasonable one. A “remote possibility” of recovery is not
enough; there must be “a reasonable prospect of recovery
at the time the deduction was claimed . . . .” Rainbow Inn,
Inc. v. Comm’r,
433 F.2d 640, 644 (3d Cir. 1970).
For these reasons, we conclude that the Claims Court
clearly erred when it determined that the Adkinses failed
to demonstrate that they lacked a “reasonable prospect of
recovery” in 2004.
Because we agree with the Adkinses that the Claims
Court (1) misconstrued the governing statute and regula-
tion; and (2) erred when it concluded that the Adkinses
failed to establish a lack of a reasonable prospect of recov-
ery in 2004, we need not reach their alternative arguments
regarding the government’s affirmative defenses, Revenue
Procedure 2009-20, and their motion to compel.
III. CONCLUSION
For these reasons, the Claims Court’s opinion and or-
der dismissing the Adkinses’ complaint with prejudice is
reversed. We remand for a calculation of the Adkinses’ re-
funds for the tax years implicated by the 2004 loss claim.
REVERSED AND REMANDED
COSTS
Costs to appellants.
