Court rules theft claim was actually bad investment

The Tax Court has refused to allow a theft loss deduction to a senior citizen who claimed he was swindled out of his retirement savings.

Oscar C. Hawaii owned and operated a small trucking business. By early 2005, he had accumulated retirement savings of approximately $300,000 in his IRA. In January 2005, a member of his church approached Hawaii about making an investment in ProCore Group, Inc. After withdrawing $100,000 from his IRA, Hawaii told ProCore that he needed to receive either stock certificates or a return of his funds within 60 days so he could avoid paying tax on the withdrawal from his retirement account.

Hawaii became increasingly concerned that his investment was in jeopardy. He hired an attorney to help him recover the money he had invested. On March 17, 2005, Hawaii, through his attorney, sent ProCore a letter demanding the return of his investment. In response, ProCore presented him with stock certificates for 3,333,333 restricted and unregistered shares in the company.

In May 2005, Hawaii instructed his attorney to file suit against various individuals involved with ProCore in an effort to recover his money. The attorney sent a letter to ProCore dated May 26, 2005, demanding the return of Hawaii's funds. The attorney also drafted a complaint alleging that ProCore and its officers had committed securities fraud and negligence and breached their fiduciary duties, but the complaint was never filed. On his 2005 federal income tax return, Hawaii claimed a $100,000 theft loss. The IRS denied the deduction.

In 2008, Hawaii filed a complaint with the Ohio Department of Commerce Division of Securities, requesting that ProCore's officers be investigated and criminally prosecuted for defrauding him. The Division of Securities declined to pursue the complaint.

On March 10, 2009, a new attorney hired by Hawaii filed a complaint in the U.S. District Court for the Northern District of Ohio alleging that his client was the victim of securities fraud, breaches of fiduciary duties, negligence, fraud and breach of contract. After filing the complaint, Hawaii's counsel informed him that most of the claims in the complaint were barred by the statute of limitations in Ohio and that he was uncertain as to whether Hawaii's money could be retrieved even if his case was favorably adjudicated.

The Tax Court was unable to conclude that a theft had actually occurred. From the evidence presented, the court concluded that Hawaii had purchased shares of stock. There was no evidence that the stock was worthless when he acquired it or that it later became worthless. The fact that Hawaii continued to pursue claims to recover his money indicated to the court that Hawaii's investment may still have some value (Hawaii v. Commissioner, June 15, 2011).

In the absence of criminal charges being brought against the promoter, it is difficult to distinguish between a bad investment and a theft. If he sells his stock at a loss, Hawaii may ultimately secure a capital loss deduction.

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