Hamilton et al v. United States of America

Filing 36

OPINION AND ORDER: GRANTING 23 MOTION for Summary Judgment by Defendant United States of America and DENYING 27 Cross MOTION for Partial Summary Judgment by Plaintiffs. The Hamiltons' claims are dismissed without prejudice for lack of juri sdiction to the extent they seek a deduction for partnership losses attributable to H-Cubed Enterprises. The Court grants judgment in favor of the United States as to the remainder of the claims. The Clerk is DIRECTED to enter judgment accordingly. Signed by Judge Jon E DeGuilio on 9/5/2017. (lhc)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
FORT WAYNE DIVISION
ROBERT A. HAMILTON and JOAN M.
HAMILTON,
Plaintiffs,
v.
UNITED STATES OF AMERICA,
Defendant.

)
)
)
)
)
)
)
)
)
)

Case No. 1:15-CV-303 JD

OPINION AND ORDER
Plaintiffs Robert and Joan Hamilton filed this action seeking a refund of federal income
taxes. They argue that they are entitled to take large deductions for theft losses arising out of real
estate investments they made in a development project that turned out to be fraudulent. They
made part of those investments through a partnership that they jointly owned with another
couple, and they made another investment directly, on their own behalf. Several years after the
fraud came to light, the Hamiltons filed amended tax returns seeking a total theft-loss deduction
of $464,472 for the year 2008, when they first learned of the fraud, and they also sought to carry
that deduction back to 2005. This would result in refunds of $21,157 for 2008 and $76,714 for
2005. The Internal Revenue Service disallowed those deductions and refused to issue the
requested refunds, precipitating this case.
The IRS has now moved for summary judgment, arguing that the Court lacks jurisdiction
to the extent the Hamiltons seek deductions attributable to the partnership’s losses, and that the
remaining deductions could not have been properly taken in the years in question, so the
Hamiltons are not entitled to any portion of the refunds they seek. The Hamiltons responded in
opposition to that motion and also filed a cross-motion for partial summary judgment, arguing

that they are entitled to the refunds attributable to the partnership. For the following reasons, the
Court grants the IRS’ motion and denies the Hamiltons’ motion.
I. FACTUAL BACKGROUND
In 2006, plaintiffs Robert and Joan Hamilton were approached with an investment
opportunity in a real estate development project in North Carolina known as the Grandfather
Vista Development. The investment was portrayed as the means by which the developers were
financing the development. For $500,000, investors could purchase a 10-acre lot within the
development site from the developers. They would also simultaneously execute a buy-back
agreement effective one year after the date of purchase, by which the developers would
repurchase the lot at a price of $625,000. The developers personally guaranteed the buy-back
agreements, and apparently represented to buyers that they had over $100 million in net worth,
meaning they portrayed the investment as nearly risk-free.1 In addition, the buyers would not
need to put substantial amounts of cash into the investment; instead, they would finance the
investment through bank loans secured by the lots they were purchasing. The developers also
agreed to pay the interest on those loans over the one-year period they would be outstanding.
Thus, for a small down payment, the investors believed they would receive large, guaranteed
returns after one year. As the Hamiltons explain it, they “understood that in exchange for using
[their] credit to procure loans from pre-arranged banks, [they] would be repaid within a year with
a significant return.” [DE 29 ¶ 3].
The Hamiltons took part in the investment, and purchased one of the 10-acre lots for
$500,000. They made a $25,000 down payment, and financed the rest through a bank, which
disbursed the proceeds to the developers. At closing, the developers also paid the Hamiltons

1

It is unclear how the developers explained their willingness to pay a twenty-five percent
interest rate if they had such substantial assets to offer as security.
2

$38,000 to pay for the first year’s interest on the loan. The Hamiltons were unconcerned with
which particular lot they received, as none of the 10-acre parcels could be developed on their
own—their value was that they were part of the greater development project and that they came
with buy-back agreements that promised significant returns. The lot the Hamiltons received was
referred to as Lot 86.
A short time after that transaction closed, the Hamiltons purchased a second, smaller
parcel in the development. This lot was represented to be a retail lot that would be developed
after the commercial development was completed. This time, the Hamiltons invested through a
company named H-Cubed Enterprises, LLC. The two members of that company were RJH of
Indiana, LLC, which the Hamiltons owned, and HomeHelper Enterprises, LLC, which was
owned by their in-laws, Gregory and Cynthia Hellmann. H-Cubed Enterprises purchased this lot,
known as Lot 135, for $275,000. This entire amount was financed, so they did not pay anything
at closing, but they signed notes personally guaranteeing the loan.
As it turned out, those investments were indeed too good to be true. When it came time to
close on the buy-back agreements, the developer failed to follow through. The developer never
actually developed the property either, so the lots, which could not be developed individually,
ended up being worth very little. Thus, the Hamiltons were left with large loans in their names,
secured by property of little value. They state that they discovered the fraudulent nature of the
project in 2008. In that same year, the state took action to shut down the Grandfather Vista
development and another development in which some of the same developers were involved.
Around that same time, the Hamiltons began joining lawsuits that sought recovery for these

3

investments from various parties.2 On December 16, 2008, they filed suit along with other
purchasers of the 10-acre lots against numerous individuals and entities, including the developers
and the banks that financed the loans. In 2009, they joined another lawsuit related to their
purchase of Lot 135, and they also joined at least two other adversary proceedings in bankruptcy
proceedings against some of the developers. Those various suits continued for several years.
Ultimately, however, the Hamiltons filed bankruptcy, through which they discharged their loan
obligations arising out of these investments. The lender as to Lot 86 released its security interest
in that property, so the Hamiltons now own it outright, while the Hamiltons transferred their
interest in Lot 135 to the Hellmanns.
In 2011, the Hamiltons met with an accountant to address the tax implications of these
investments and losses. They ended up filing amended tax returns for 2008, claiming that these
losses constituted theft losses that could be deducted against their income in that year. For the
amount of the deduction, they invoked a Revenue Procedure promulgated by the IRS applicable
to losses from certain Ponzi schemes. They thus calculated their total investments into the
properties (including the amounts that they borrowed but never had to pay back) and claimed
75% of those amounts as theft-loss deductions. That led to deductions in the amount of $361,347
relative to Lot 86, plus another $103,125 for their share of H-Cubed Enterprises’ losses from Lot
135. Those partnership losses were different from what the Hamiltons and H-Cubed Enterprises
had reported on their initial respective returns, and they filed amended returns to reflect those
changes, but they did not file an administrative adjustment request relative to those changes, as
discussed further below.

2

They had also previously sued the developers in early 2008 in connection with landscaping
obligations at Lot 135, and they settled that matter for $45,000, which they split equally with the
Hellmanns.
4

Adding those deductions to the Hamiltons’ return for 2008 would have reduced their tax
liability for that year by $21,157, so they sought a refund of that amount. They also sought to
carry those deductions back to their 2005 returns, which would have reduced their tax liability
for that year by another $76,714, for which they also sought a refund. However, the IRS
disallowed those deductions and denied their claim for refunds. Accordingly, the Hamiltons filed
this action seeking those refunds.
II. STANDARD OF REVIEW
Summary judgment is proper when the movant shows that there “is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). A “material” fact is one identified by the substantive law as affecting the outcome of the
suit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A “genuine issue” exists with
respect to any material fact when “the evidence is such that a reasonable jury could return a
verdict for the nonmoving party.” Id. Where a factual record taken as a whole could not lead a
rational trier of fact to find for the non-moving party, there is no genuine issue for trial, and
summary judgment should be granted. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
U.S. 574, 587 (1986) (citing Bank of Ariz. v. Cities Servs. Co., 391 U.S. 253, 289 (1968)). In
determining whether a genuine issue of material fact exists, this Court must construe all facts in
the light most favorable to the non-moving party and draw all reasonable and justifiable
inferences in that party’s favor. Jackson v. Kotter, 541 F.3d 688, 697 (7th Cir. 2008); King v.
Preferred Tech. Grp., 166 F.3d 887, 890 (7th Cir. 1999). Finally, the fact that the parties have
each moved for summary judgment does not change the standard of review; cross-motions are
treated separately under the standards applicable to each. McKinney v. Cadleway Props., Inc.,
548 F.3d 496, 504 n.4 (7th Cir. 2008).

5

III. DISCUSSION
The IRS moved for summary judgment in full. First, the IRS argues that the Court lacks
subject matter jurisdiction over the Hamiltons’ claims to the extent their deductions are based on
H-Cubed Enterprises’ losses, as they did not fulfill the procedural prerequisites to confer
jurisdiction on district courts over refund suits for partnership items. As to the remainder of the
Hamiltons’ claims, which arise out of their investment in Lot 86, the IRS argues that, even
assuming the Hamiltons are eligible to take theft-loss deductions for those investments,3 2008
could not have been the proper year to take those deductions. That would mean that those
deductions could not have been carried back to 2005, either. The Hamiltons responded in
opposition to that motion, and (even though the deadline to file dispositive motions had passed
weeks earlier) also filed a cross-motion for partial summary judgment. In their cross-motion, the
Hamiltons argue that the Court not only has jurisdiction as to the partnership deductions, they are
entitled to refunds from those deductions as a matter of law because the IRS did not reject the
partnership’s amended return. The Court first addresses its jurisdiction over the partnership
deductions, after which it addresses the remaining claims on their merits.
A.

Partnership Deductions
The IRS first argues that the Court lacks subject matter jurisdiction to the extent the

Hamiltons seek a refund based on losses attributable to the partnership.4 Those losses arise out of
the purchase of Lot 135, which was made through H-Cubed Enterprises. H-Cubed Enterprises
claimed a theft-loss deduction of $206,250 in its amended return. The Hamiltons, as half-owners

3

The IRS believes otherwise, but does not seek summary judgment on that ground.
In the tax context, the term “partnership” includes entities like LLCs that are not taxed at the
entity level.
4

6

of H-Cubed Enterprises, claimed half of that amount as a theft-loss deduction in their amended
return, and that deduction forms part of their claim for a refund.
Partnerships pose unique issues as to federal income taxes, as they do not pay taxes
themselves. Instead, they “must file annual reports of the partners’ distributive shares of income,
gains, deductions, and credit; the partners are taxed in their individual capacities based on these
calculations.” Kaplan v. United States, 133 F.3d 469, 471 (7th Cir. 1998). In response to the
problems posed by the taxation of partnership activities, Congress enacted the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA), 26 U.S.C. §§ 6221–33. “Through TEFRA, Congress
sought to ensure equal treatment of partners by uniformly adjusting partners’ tax liabilities and
channeling any challenges to these adjustments into a single, unified proceeding.” Kaplan, 133
F.3d at 469. “This system has the additional advantage of abating the administrative burden that
would be wrought by multiple, duplicative audits and lawsuits involving numerous partners in a
single partnership.” Id.
One method by which TEFRA accomplishes those goals is by limiting the jurisdiction of
district courts to hear taxpayer actions brought for refunds attributable to partnership items,
which ensures that the IRS first has the opportunity to address those matters at the partnership
level. Acute Care Specialists II v. United States, 727 F.3d 802, 806, n.1 (7th Cir. 2013); Kaplan,
133 F.3d at 473. Pursuant to 26 U.S.C. § 7422(h), “No action may be brought for a refund
attributable to partnership items . . . except as provided in section 6228(b) or section 6230(c).”
The term “partnership items” includes a “partner’s proportionate share of the partnership’s
income and deductible losses.” Kaplan, 133 F.3d at 473; see 26 U.S.C. § 6231(a)(3); 26 C.F.R. §
301.6231(a)(3)-1(a)(1)(i). To file a refund action based on a partnership item, a taxpayer bears
the burden of establishing that one of the two exceptions identified in § 7422(h) is present. The

7

latter exception, under § 6230(c), allows a partner to seek a refund based on a computational
error.5 26 U.S.C. § 6230(c); Kaplan, 133 F.3d at 473. The former exception, under § 6228(b),
allows a partner to seek a refund if the partner’s administrative adjustment request (AAR) is
denied. 26 U.S.C. § 6228(b); Kaplan, 133 F.3d at 473. As relevant here, an AAR is the process
that a partnership or a partner must use if they wish to amend the reporting of partnership items
relative to a previous return. United States v. Stewart, 663 F. App’x 336, 338 (5th Cir. 2016) (“In
order for partnerships or partners to properly amend an income tax return, they must file an
Administrative Adjustment Request . . . .”), amended on denial of rehearing, 671 F. App’x 937;
Samueli v. C.I.R., 132 T.C. 336, 341 (T.C. 2009) (“An AAR must be filed in accordance with
section 6227 for a partner to change the treatment of a partnership item on the partner’s return.”).
There is no question here that the theft-loss deduction the Hamiltons seek through HCubed Enterprises’ investment is a partnership item, as they are seeking their proportionate share
of H-Cubed Enterprises’ deductible losses. Accordingly, the Hamiltons must show that one of
the two exceptions in § 7422(h) is present. However, they make no attempt to do so. Instead,
they argue first that their taxes would be the same whether these were partnership losses or
individual losses. They also argue that they are entitled to seek a refund without having filed an
AAR because the IRS did not reject H-Cubed Enterprises’ amended return that reflected the
losses at issue. The Hamiltons make no attempt to ground these arguments in the text of the
statute, though. They do not claim that the IRS simply made a computational error, so as to
invoke the exception as to § 6230(c). They also admit that they did not file an AAR, as would be
required for the exception as to § 6228(b) to apply. They argue that they should not have had to

5

This section also allows a partner to seek a refund for an overpayment in light of a final
partnership administrative adjustment, § 6230(c)(1)(B), but no such proceeding took place here.
8

file an AAR for the IRS to sustain their deduction in the first place, but that argument would only
go to the merits of their claim; it cannot alter the statute’s requirement that they file an AAR in
order for a district court to have jurisdiction to adjudicate that claim.
The Fifth Circuit recently addressed a similar situation in Rigas v. United States, 486 F.
App’x 491 (5th Cir. 2012). There, a partnership received a substantial payment, which it reported
in its initial return as ordinary income. The taxpayers accordingly reported their distributive
share of that ordinary income in their individual return. The partnership later filed an amended
return in which it re-characterized the payment as a long-term capital gain, which would have
been taxed at a lower rate. The taxpayers accordingly filed an amended return of their own in
which they re-characterized their share as a long-term capital gain, consistent with the
partnership’s amended return, and they sought the substantial tax refund that would have resulted
from that change. The IRS disallowed the taxpayers’ claim (even though it paid refunds to other
partners who made claims based on the same amended partnership return), so the taxpayers filed
a refund action in a district court.
However, the Fifth Circuit held that there was no jurisdiction over that aspect of their
claim. Rigas, 486 F. App’x at 500. The characterization of the income as ordinary income versus
capital gains constituted a partnership item, so the jurisdictional bar in § 7422(h) applied.6 Id. at
502. The taxpayers had not filed an AAR to amend their return, nor did they allege a
computational error, so neither exception to § 7422(h) was present. Accordingly, even though the
taxpayers were only asking for their return to be treated consistent with the partnership’s
amended return, and with the amended returns of the other partners who received refunds, the

6

The court held that a different aspect of the taxpayers’ claim was not a partnership item, and
was thus not subject to § 7422(h), Rigas, 486 F. App’x at 500, but the Hamiltons do not attempt
to raise a similar claim here.
9

court lacked jurisdiction over their claim under § 7422(h).7 Id. The same analysis applies here.
The Hamiltons did not file an AAR with their amended return, and do not assert a computational
error, so even though they only ask to treat their individual return consistent with the amended
return filed by H-Cubed Enterprises, the Court does not have jurisdiction over this aspect of their
claim.
Finally, in their reply brief in support of their cross-motion for summary judgment, which
is effectively a sur-reply to the IRS’ motion, the Hamiltons argue for the first time that H-Cubed
Enterprises’ amended return was functionally equivalent to an AAR, as it “substantially
complied” with the requirements for such a request. However, besides being waived for having
been raised for the first time in a reply (or sur-reply), this argument fails on its merits. An AAR
filed by a partnership does not satisfy the exception to § 7422(h), which applies only where the
IRS has rejected an AAR filed by a partner under “section 6228(b).” 26 U.S.C. § 7422(h); see
§ 6228(b) (pertaining only to requests made by partners under § 6227(d)); § 6228(a) (pertaining
to requests made by a tax matters partner on behalf of a partnership under § 6227(c)). Thus, an
AAR filed by H-Cubed Enterprises would not give rise to jurisdiction in this action. In addition,
the Hamiltons’ argument misunderstands the effect of the IRS’ failure to reject H-Cubed
Enterprises’ amended return. When a partnership files an AAR, the IRS has the option to “take
no action on the request,” § 6227(c)(2)(iii), in which case the partnership must file a “petition for
an adjustment” in federal court within two years after the date of the AAR, § 6228(a)(1), (a)(2).
Thus, the fact that the IRS did not reject H-Cubed Enterprises’ amended return does not mean
that the IRS accepted the return or conceded the validity of the deductions it claimed.

7

The IRS later recovered the amounts paid to some of the other partners in a separate
proceeding. United States v. Stewart, 663 F. App’x 336 (5th Cir. 2016).
10

For those reasons, the Court finds that it lacks subject matter jurisdiction over the
Hamiltons’ claims to the extent they seek a refund for losses attributable to H-Cubed Enterprises,
based on its purchase of Lot 135.8 Their claims are therefore dismissed without prejudice to that
extent, and their cross-motion for summary judgment is denied.
B.

Remaining Deductions
The Court next considers the Hamiltons’ request for a refund based on the remaining

deductions, arising out of their investment in Lot 86. Because they made that investment directly,
not through a partnership, the jurisdictional hurdles just discussed do not apply to this aspect of
their claims, so the Court has jurisdiction under 28 U.S.C. § 1346(a)(1) to evaluate the
Hamiltons’ request for a refund based on their losses from Lot 86. The Hamiltons seek refunds
for both 2005 and 2008, but their claim as to 2005 relies entirely on carrying back the deduction
from 2008, so the only question is whether the Hamiltons were entitled to take the theft-loss
deduction in their 2008 return. In seeking summary judgment, the IRS argues that 2008 could not
have been the proper year to deduct the claimed losses.
Section 165(a) allows a taxpayer to deduct “any loss sustained during the taxable year
and not compensated for by insurance or otherwise.” 26 U.S.C. § 165(a). The statute further
states that “any loss arising from theft shall be treated as sustained during the taxable year in
which the taxpayer discovers such loss.” § 165(e). The regulations provide further clarification
on that point:
A loss arising from theft shall be treated under section 165(a) as sustained during
the taxable year in which the taxpayer discovers the loss. . . . However, if in the
year of discovery there exists a claim for reimbursement with respect to which there
is a reasonable prospect of recovery, see paragraph (d) of § 1.165–1.

8

Even if jurisdiction did exist over this aspect of the claims, they would fail on their merits for
the same reasons as the deductions for Lot 86.
11

26 C.F.R. § 1.165-8(a)(2). In turn, section 1.165-1(d) states:
[I]f in the year of discovery there exists a claim for reimbursement with respect to
which there is a reasonable prospect of recovery, no portion of the loss with respect
to which reimbursement may be received is sustained, for purposes of section 165,
until the taxable year in which it can be ascertained with reasonable certainty
whether or not such reimbursement will be received.
26 C.F.R. § 1.165-1(d)(3). A plaintiff seeking a deduction on this ground bears the burden of
proving that the loss was suffered and in what year it occurred. Boehm v. C.I.R., 326 U.S. 287,
294 (1945); Vincentini v. C.I.R., 429 F. App’x 560, 564 (6th Cir. 2011); Howard v. United
States, 497 F.2d 1270, 1272 n.4 (7th Cir. 1974).
Rather than attempting to prove directly that they both discovered the loss and had no
reasonable prospect of recovery in 2008, the Hamiltons attempt to invoke a Revenue Procedure
that the IRS developed for handling losses from certain Ponzi schemes. Recognizing the
difficulties in determining when theft losses can be taken for investments lost in a Ponzi scheme,
Revenue Procedure 2009-20 established an optional safe-harbor procedure that allows “qualified
investors” to take a theft-loss deduction based on a “qualified loss” from a “qualified
investment.” Rev. Proc. 2009-20 §§ 2, 5. This procedure generally allows such an investor to
take a theft-loss deduction in the year that criminal charges are brought for the fraudulent
scheme, and permits a deduction in the amount of seventy-five percent of the investment if the
investor is seeking recovery from third parties, or ninety-five percent of the investment if the
investor is not seeking recovery from third parties. Rev. Proc. 2009-20 § 5.01, .02. The
Hamiltons argue that they followed this procedure by taking a deduction for seventy-five percent
of their investment.
However, the Hamiltons entirely assume away the question of whether they are entitled
to utilize this procedure in the first place. Again, as taxpayers seeking a deduction, the Hamiltons
have the burden of submitting evidence showing that they are entitled to that deduction; it is not
12

enough for their claim to have been reasonable, they must prove that it was correct. See
Greenberger v. United States, No. 1:14-cv-1041, 2015 WL 4076976, at *11 (N.D. Ohio June 19,
2015) (holding that the plaintiffs could not rely on Revenue Procedure 2009-20 because they
failed to show that they were a “qualified investor” who suffered a “qualified loss” as defined
under that procedure). Revenue Procedure 2009-20 is not universally applicable to any theft
losses. As just noted, it applies only to a “qualified loss” from a “qualified investment.” Rev.
Proc. 2009-20 § 4.02, .06. The Hamiltons must therefore show that they met those requirements.
First, a “qualified loss” is “a loss resulting from a specified fraudulent arrangement in
which, as a result of the conduct that caused the loss[,] . . the lead figure . . . was charged by
indictment or information . . . under state or federal law with the commission of fraud [or]
embezzlement” or “was the subject of a state or federal criminal complaint” alleging such a
crime. Rev. Proc. 2009-20 § 4.02. Here, the Hamiltons do not provide any evidence that criminal
charges were brought as a result of the conduct that caused their loss. Mr. Hamilton stated in his
affidavit that “numerous actions were taken in 2008 by state authorities that either shut down the
Grandfather Vista Project or related project, the Villages of Penland,” [DE 29 ¶ 13],9 but that
falls short of establishing that criminal charges were brought relative to the conduct that caused
their loss, as required by the Revenue Procedure. Perhaps conceding that point, the Hamiltons
note in their statement of facts (though not in their argument, which does not address this
requirement) that a subsequent Revenue Procedure stated that this requirement could also be met
when civil or administrative proceedings are initiated. Rev. Proc. 2011-58 § 4.01 (adding a third

9

Mr. Hamilton’s affidavit also attached several news articles he printed from the internet, but
those hearsay materials have no evidentiary value, Eisenstadt v. Centel Corp., 113 F.3d 738, 742
(7th Cir. 1997), and in any event, they do not show that any charges were brought relative to the
Hamiltons’ investment; they mention only a separate development project.
13

subpart to Rev. Proc. 2009-20 § 4.02). However, that exception would only apply when the
“death of the lead figure precludes a charge by indictment, information, or criminal complaint.”
Id. (adding Rev. Proc. 2009-20 § 4.02(3)(b)). The Hamiltons do not suggest that anyone’s death
precluded criminal charges relative to their investment, so they cannot invoke this exception.
Accordingly, the Hamiltons have not provided any evidence showing that they suffered a
“qualified loss,” as required to invoke Revenue Procedure 2009-20.
Second, Revenue Procedure 2009-20 applies only to a “qualified investment,” and states
that a qualified investment “does not include” any “[a]mounts borrowed from the responsible
group and invested in the specified fraudulent arrangement, to the extent the borrowed amounts
were not repaid at the time the theft was discovered.” Rev. Proc. 2009-20 § 4.06(2)(A). Here, the
vast majority of the Hamiltons’ investment was borrowed and was not repaid, so they would
have to show that they did not borrow those amounts “from the responsible group”—in other
words, that the bank was not part of the fraud. However, they do not address this requirement at
all, and thus fail to meet this requirement either. Accordingly, the Hamiltons have failed to meet
their burden of showing that they are entitled to rely on Revenue Procedure 2009-20 to claim
their theft-loss deduction in 2008.
Without being able to rely on the safe-harbor under that Revenue Procedure, the
Hamiltons must establish that it could “be ascertained with reasonable certainty” in 2008 that
they would not receive reimbursements for the amounts in question, in order to claim them as
theft-loss deductions in that year. 26 C.F.R. § 1.165-1(d)(3); Adkins v. United States, 856 F.3d
914, 917 (Fed. Cir. 2017) (“[T]he 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.”). “Goodfaith efforts to recover losses—such as lawsuits and arbitration—will tend to push the claim year

14

later than the year of discovery by creating a probability of recovery.” Adkins, 856 F.3d at 918;
see also Jeppsen v. C.I.R., 128 F.3d 1410, 1414 (10th Cir. 1997) (“[E]ven after a theft loss is
discovered, if a claim for reimbursement exists during the year of the loss with respect to which
there is a reasonable prospect of recovery, then a theft loss is treated as ‘sustained’ only when ‘it
can be ascertained with reasonable certainty whether or not such reimbursement for the loss will
be obtained.” (quoting 26 C.F.R. § 1.165-1(d)(2)(i), 1.165-1(d)(3))).
The Hamiltons filed suit in December 2008 against developers and banks involved in
their purchase of Lot 86, and they continued to pursue that and other actions for several years.
The pendency of such actions would not necessarily preclude a finding that they nonetheless had
no reasonable prospect of recovery, see Adkins, 856 F.3d at 919–20, but the Hamiltons make no
attempt to show that their suits offered no reasonable prospect of recovery. Mr. Hamilton states
in his affidavit that, “[w]hile hopeful for some recovery, I could not determine if any reasonable
prospect of recovery against any party existed.” [DE 29 ¶ 14]. As multiple courts have held,
though, “in a year where the prospect of recovery is simply unknowable, a theft-loss deduction
under section 165 is inappropriate.” Vincentini, 429 F. App’x at 654; Jeppsen, 128 F.3d at 1418
(“[I]f [the taxpayer’s] prospect of recovery was simply unknowable as of December 31, 1987,
then [he] would not be entitled to take the theft loss deduction in 1987.”). Thus, without evidence
that, as of 2008, their claims had no reasonable prospect of success or would not lead to a
recovery,10 the Hamiltons have not shown that they were entitled to take a theft-loss deduction in
that year.

10

The prospect of collecting a judgment from the developers themselves may have been remote,
but the Hamiltons also asserted claims against the bank and contended that they did not have to
repay the loan. [DE 24-1]; see Fazzari v. Infinity Partners, LLC, 762 S.E.2d 237 (N.C. Ct. App.
2014). If successful in that argument, their actual losses would have been much less than the
theft-losses they now claim, given the comparatively small amount of cash they invested.
15

Accordingly, the Court finds that the Hamiltons were not entitled to take the theft-loss
deductions at issue in 2008, meaning they were not entitled to carry them back to 2005, either.
They are therefore not entitled to the refunds they seek for those years, so the Court grants the
IRS’ motion for summary judgment.
IV. CONCLUSION
For those reasons, the Court GRANTS the United States’ motion for summary judgment
[DE 23] and DENIES the Hamiltons’ cross-motion for summary judgment [DE 27]. The
Hamiltons’ claims are dismissed without prejudice for lack of jurisdiction to the extent they seek
a deduction for partnership losses attributable to H-Cubed Enterprises. The Court grants
judgment in favor of the United States as to the remainder of the claims. The Clerk is
DIRECTED to enter judgment accordingly.
SO ORDERED.
ENTERED: September 5, 2017

/s/ JON E. DEGUILIO
Judge
United States District Court

16