Carroll J. Bellis and Mildred Bellis v. Commissioner of Internal Revenue

Appellants paid $52,000 for 18.18 shares of stock in New Pioneer Club, Inc. (NPC), a Nevada corporation. The transaction took place in California and was the direct result of appellants’ reliance on representations by Norbert Jansen, President of NPC that NPC was a profitable company and a sound investment opportunity. The sale violated California Corporations Code § 25500 which requires a company selling securities of its own issue to obtain a permit from the state corporations commissioner. Sixteen months after the purchase, NPC filed for bankruptcy and appellants were unable to recover any of their investment. Appellants deducted the $52,000 from their following year’s tax return as a theft loss. The Commissioner of Internal Revenue disallowed the deduction and issued a notice of deficiency in the amount of $36,052. Appellants contested this determination in Tax Court but were unable to persuade that Court that the investment loss was deductible as a theft under Internal Revenue Code § 165(e). See Beilis v. Commissioner, 61 U.S.T.C. 354.

It is fundamental that the law of the Jurisdiction where the loss is sustained determines whether a theft has occurred for purposes…