[00:01:01] Speaker 01: Okay, the next argued case is number 19, 1356, Atkins against the United States. [00:01:09] Speaker 01: Mr. Rogers. [00:01:12] Speaker 00: Thank you, Your Honor. [00:01:14] Speaker 00: Good morning, and may it please the Court, I present the appellants, Charles and Jane Atkins. [00:01:20] Speaker 00: This case involves a theft loss. [00:01:23] Speaker 00: of over $2.5 million from a pump and dump scheme. [00:01:28] Speaker 00: The government has conceded that this is a theft, but our main reason for being here is the year of loss. [00:01:34] Speaker 00: And I think at the outset, we probably want to talk about the standard of review. [00:01:39] Speaker 00: There's a disagreement between the parties on that. [00:01:42] Speaker 00: Our belief is that this is a de novo review of the trial court's determination because [00:01:49] Speaker 00: Its legal determination was the assignment of the burden of proof is what we believe is the error here. [00:01:57] Speaker 03: Certainly there's de novo review with respect to the legal standard that the court employed, but with respect to the totality of the circumstances and the fact findings that the court made relating to what could have reasonably been known at any given point in time. [00:02:15] Speaker 03: Those we have to review with deference, right? [00:02:18] Speaker 00: That's correct, Your Honor. [00:02:20] Speaker 00: And our view was that under 7491A of the Internal Revenue Code, once we put on credible evidence as to the issue, the burden shifts to the United States. [00:02:32] Speaker 00: And however, we don't think the court, the things the court seemed to rely upon in its final ruling as to, you know, what's unknowable were the things that we believe the government had the burden to show, to go forward with evidence on. [00:02:49] Speaker 00: And because what they did was they had a bunch of, why didn't you continue to pursue arbitration? [00:02:58] Speaker 00: Why didn't you pursue these two other parties, Mr. Kozak? [00:03:01] Speaker 03: So is it your point that by using the unknowable standard from the 10th Circuit that that's where the burden shifting effectively occurred? [00:03:10] Speaker 00: That's where the burden shifting effectively occurred. [00:03:13] Speaker 00: Because for a reasonable prospect of recovery to exist, the standard is that it has to lead to a substantial possibility that the plaintiff would succeed on the claim. [00:03:35] Speaker 00: And just succeeding on the claim, I think in this case, [00:03:39] Speaker 00: means getting money. [00:03:40] Speaker 00: And the government showed no evidence that these would ever lead to any money. [00:03:44] Speaker 03: And in fact, there are a couple of things that the court focused on a lot. [00:03:49] Speaker 03: One is the Odyssey Capital. [00:03:53] Speaker 00: Well, two things on Odyssey Capital. [00:03:54] Speaker 00: One is there was never any proof that there was any privity between our client and Odyssey Capital. [00:04:00] Speaker 00: Odyssey Capital is a third party who was not a party to who he never dealt with. [00:04:05] Speaker 00: And second of all, I don't think there's even any real evidence that he knew about Odyssey Capital in 2004, if we're saying what he knew or should have known in 2004. [00:04:14] Speaker 00: The only reference to Odyssey Capital was in the indictment, which did occur in 2004, which is also the year in which you had certain other things happen, like they pled guilty and they entered into plea agreements. [00:04:32] Speaker 03: Was the indictment sealed when it was first issued? [00:04:34] Speaker 00: It was, but Mr. Atkins was in contact in which the court did find that he knew about it in 2004 because of his contacts with Mr. Kozak, who shared with him the fact that the indictment. [00:04:47] Speaker 03: Right, so he knew about the indictments. [00:04:48] Speaker 03: He knew that there were forfeiture requests in the indictments seeking all property. [00:04:55] Speaker 03: And he knew that they were seeking to bar them from practicing, right? [00:04:59] Speaker 00: Correct. [00:05:00] Speaker 00: Those had already occurred in 2004. [00:05:02] Speaker 03: But he didn't know any of the other details of the indictment. [00:05:08] Speaker 00: He did say he saw the indictment in his testimony. [00:05:11] Speaker 00: And so I think he saw the indictment. [00:05:14] Speaker 00: And again, audits to capital was referred to in the indictment. [00:05:17] Speaker 00: But again, that's another item the government knew about. [00:05:19] Speaker 00: And if it was forfeiting assets and that sort of thing, it would have gone. [00:05:23] Speaker 03: Audits to capital was never listed as a co-conspirator. [00:05:26] Speaker 03: or an unindicted co-conspirator, anything like that? [00:05:29] Speaker 00: It was not. [00:05:30] Speaker 00: It was just that they were using it as a vehicle for part of their... What about Freeman? [00:05:36] Speaker 03: Why didn't he sue Freeman? [00:05:39] Speaker 00: I think there were two points in that, Your Honor. [00:05:43] Speaker 00: He didn't really... His name appeared on maybe a few trading slips, but he never really knew who he was, and he certainly wasn't a principal. [00:05:51] Speaker 00: of Donald and Company. [00:05:53] Speaker 00: He went after the principals of Donald and Company, Mr. Stetson, Mr. Antonelli, and Mr. He went after them and not the lesser players because his view was that Mr. Freeman was not a very important part of the scheme. [00:06:16] Speaker 00: Again, at the end of the day, he was also indicted. [00:06:19] Speaker 00: He was also convicted. [00:06:20] Speaker 00: He also had cooperation agreements in 2004. [00:06:24] Speaker 00: So there's no evidence that he had any assets, that there was any substantial possibility that pursuing him would have ever led to any assets in 2004. [00:06:33] Speaker 03: And the restitution fund, was that limited to the [00:06:40] Speaker 00: Elecant classicus stocks or could you have recovered from the restitution fund any losses relating to the my turn stack there is a possibility that he could have He was certainly included in the notices that he could participate in restitution that he was a victim But it was never really clear whether he could or could not well he was a he had small [00:07:03] Speaker 03: holdings in at least one of those two stocks. [00:07:06] Speaker 03: But my turn was never listed. [00:07:09] Speaker 00: My turn was not listed and I think that also gave him some, his feeling was that he should not be pursuing that. [00:07:15] Speaker 00: Also there's no evidence, the only evidence in the record which goes all the way through 2010, I mean 2014, was there was [00:07:27] Speaker 00: very little recovery on those restitution claims. [00:07:31] Speaker 00: I mean, it was minuscule. [00:07:32] Speaker 00: It was like 0.0001% of the total restitution order. [00:07:38] Speaker 00: So he would have gotten pennies on his dollars that he lost of $2.5 million because there was over $12 million of victims in that case. [00:07:50] Speaker 02: What kind of evidence, if any, is there in the record about what [00:07:55] Speaker 02: it would have cost your clients to inquire further in 2004 about, for example, Odyssey, Odyssey Capital, about the other things that were at least theoretically [00:08:15] Speaker 00: potential sources of monetary recovery. [00:08:19] Speaker 00: There was no evidence of what it would have cost. [00:08:21] Speaker 00: He just felt like he had spent a great deal of money up to that point in the arbitration, I think $25,000 or $30,000 at that point. [00:08:32] Speaker 00: And then he hears that these people were all indicted. [00:08:36] Speaker 00: And he said, you know, they're going to be [00:08:40] Speaker 00: and that they have these cooperation agreements and that they also lost, they also were having forfeitures and fines. [00:08:48] Speaker 00: And he was of the opinion, you know, there's nothing left here. [00:08:52] Speaker 00: And he'd been down that road before in 2001 with another case, which he did pursue all the way to judgment and discovered that he didn't get anything at that point. [00:09:02] Speaker 00: So I think his feeling was that after the indictment occurred and these cooperation agreements occurred, [00:09:09] Speaker 00: and the loss of basically where are these people insolvent for all intents and purposes. [00:09:18] Speaker 00: And a judgment is only good if there's money there. [00:09:26] Speaker 02: You agree, by the way, just on the regulatory interpretation point, that the question is not whether there was a substantial [00:09:35] Speaker 02: prospect of recovering the entirety of the loss, but just some non-trivial recovery. [00:09:43] Speaker 02: Because the regulation says about no portion. [00:09:46] Speaker 00: Right, it says no portion. [00:09:47] Speaker 00: The regulation says no portion, but it also, I think in this case, or in any case really, is that [00:09:56] Speaker 00: If it's de minimis or insignificant. [00:10:01] Speaker 00: Right, that's right. [00:10:02] Speaker 02: I was trying to exclude the truly insignificant. [00:10:06] Speaker 02: But you don't get to prevail if it were merely true that there was no chance that half or some large portion was going to be recovered. [00:10:18] Speaker 00: If there was a chance of a large recovery that he knew about in 2004, yes. [00:10:24] Speaker 00: or that came up later, and there's no evidence that any of these things ever was going to lead to money even later, even Odyssey Capital. [00:10:33] Speaker 00: And again, it would have required piercing of corporate veil and all kinds of other things to get to Odyssey Capital with whom he had no privity. [00:10:41] Speaker 00: So I think that was part of it. [00:10:48] Speaker 00: The other thing I think that's very important here is Mr. [00:10:56] Speaker 00: Kaplan's findings, the IRS appeals officer, his memo to the government when he transferred the case over, it was very clear that 2004, in his opinion, was the year of loss. [00:11:11] Speaker 00: And because Mr. Atkins had lost the money and there was no, he did not see any avenues of recovery. [00:11:21] Speaker 00: And I think that speaks volumes here. [00:11:26] Speaker 00: you know, as we said the last time we were here, that this is analogous to revenue procedure 2009-20 in which, in that case, which is a Ponzi scheme case, the government's revenue procedure says the year of indictment is the controlling year for the year of loss. [00:11:51] Speaker 03: The court simply said they're not the same thing. [00:11:53] Speaker 00: Correct. [00:11:54] Speaker 03: They're analogous. [00:11:56] Speaker 00: Ponzi scheme is not the same as a pump and dump, but it's analogous, I do believe. [00:12:01] Speaker 00: I mean, it's a securities crime in which he lost money. [00:12:08] Speaker 00: And the reg actually says another similar offenses in that procedure, but we believe it's analogous at the very least. [00:12:17] Speaker 00: And if you're doing that for Ponzi scheme victims, [00:12:20] Speaker 00: It seems fair and just to consider that for also victims of a pump and dump scheme, because the year of indictment is really clearly the year in which people have lost a great deal of money. [00:12:33] Speaker 00: And lastly, the last clear thing we want to mention is that the failure to turn over evidence, or I think was clear error by the court, [00:12:47] Speaker 00: in that if they're going to raise all these things about subsequent issues of things we didn't pursue, then not turning over the criminal files or the Donald & Company records made it very hard for us to pursue that line of appeal to them because there was no evidence of, you know, the records were with the government. [00:13:09] Speaker 00: And if they were going to raise it, they should have at least put on evidence [00:13:13] Speaker 00: that showed that yes, there was cash here, or yes, Odyssey Capital had a lot of money in 2004. [00:13:19] Speaker 00: And there's no evidence of that on the record because they had the records. [00:13:25] Speaker 03: But the government concedes that it had no knowledge about Odyssey Capital. [00:13:34] Speaker 03: But the government is relying on this no knowledge. [00:13:36] Speaker 03: In other words, I don't know anything, so therefore you can't prove your case. [00:13:43] Speaker 00: Well, if they're going to raise it, they had Donald and company's records. [00:13:48] Speaker 00: They had all these criminal dependence records, financial records, I would assume. [00:13:53] Speaker 00: We don't know what they have because they never produced it. [00:13:56] Speaker 00: But we did ask for all their criminal files in this case. [00:13:59] Speaker 00: So it's our view that clearly that's the case. [00:14:04] Speaker 00: We would ask the court to reverse [00:14:07] Speaker 00: and find that the year of loss is 2004 and that the amount was the requested amount of 2.57595819 million. [00:14:17] Speaker 00: I reserve the rest of my time for revival. [00:14:22] Speaker 01: Thank you. [00:14:22] Speaker 01: Thank you. [00:14:25] Speaker 01: Ms. [00:14:25] Speaker 01: Brainard? [00:14:26] Speaker 01: Thank you. [00:14:27] Speaker 01: So tell us when the government thinks this loss was incurred. [00:14:32] Speaker 04: Your honor, that's an excellent question. [00:14:34] Speaker 04: The last time the government was before this court on appeal, we were focused on the year in which the taxpayers abandoned their arbitration claim, 2008. [00:14:46] Speaker 04: Now, this court instructed the Court of Federal Claims and us that on remand, the analysis should be a holistic analysis based on all the facts and circumstances. [00:14:58] Speaker 04: I know that this is not the answer that you want to hear. [00:15:02] Speaker 04: But on this record, which focuses on 2004, because that is the year the taxpayers claimed their loss in, it's difficult to say at exactly which point there was no reasonable prospect of recovery. [00:15:17] Speaker 04: The facts simply haven't been developed. [00:15:20] Speaker 04: for the other years because the taxpayers chose to put all of their eggs in the basket of 2004. [00:15:26] Speaker 04: They could have, of course, filed claims for alternative years. [00:15:31] Speaker 04: They chose not to do that. [00:15:33] Speaker 04: In fact, with respect to 2008, they could have filed a timely refund claim nearly a year and a half into this litigation, and they chose not to do so. [00:15:45] Speaker 04: So unfortunately, it's difficult to say, looking at the holistic analysis, what particular year is the right year? [00:15:53] Speaker 04: And importantly, it's the taxpayer's burden to show what year is the right year. [00:15:58] Speaker 03: But we also instructed the last time around, not just that abandonment was not a prerequisite, but that the test is essentially one test that is the reasonable certainty of [00:16:13] Speaker 03: a reasonable prospect of recovery. [00:16:16] Speaker 03: And yet, if you go through the claim court's decision, you almost never see that standard discussed. [00:16:23] Speaker 03: She goes on and on and on about this unknowability that it comes out of a 10th Circuit case that arguably wasn't even important to the ultimate decision in that case because the facts were so much different from the facts here. [00:16:39] Speaker 03: And so what are we supposed to do with the fact that we said what the standard is? [00:16:43] Speaker 03: And now we've got the court below telling us they used a different standard, that they said that if it's unknowable, you therefore can never satisfy your burden. [00:16:54] Speaker 04: So Your Honor, one of the formulations, this court gave two alternate formulations, as I'm sure you remember in its prior opinion. [00:17:00] Speaker 04: And one of those formulations of the test is that the taxpayer must show that it can be ascertained with reasonable certainty [00:17:08] Speaker 04: that there will be no recovery and that starting with the year of discovery there's no reasonable prospect of recovery. [00:17:15] Speaker 04: Well, no, Your Honor, this is, I apologize, but it's at 917 note 4 of the prior opinion. [00:17:21] Speaker 04: That is the word for word formulation of the test. [00:17:27] Speaker 04: The alternative to the two tests that the court gave in the prior opinion were the first year in which no reasonable prospect of recovery exists anymore, starting with the year of discovery, which is what you're thinking of. [00:17:38] Speaker 04: And then in a footnote, this court said that the test would be alternatively stated [00:17:44] Speaker 04: as the year in which it can be ascertained with reasonable certainty that there will be no recovery. [00:17:49] Speaker 04: But either way, the key is that the taxpayer has to show that in this particular year, in this case in 2004, that there was no reasonable prospect of recovery. [00:18:01] Speaker 04: The alternative standard with reasonable certainty that there will be no recovery. [00:18:05] Speaker 04: And so as the Court of Federal Claims explained, if it's the case that in the year the taxpayer has chosen, [00:18:13] Speaker 04: things have not crystallized sufficiently to know with reasonable certainty that there will be no recovery or to know that there's no reasonable prospect of recovery, the taxpayer has to wait until the facts have settled more. [00:18:26] Speaker 03: The things that the court focused on in terms of crystallization, that's part of my problem. [00:18:33] Speaker 03: Essentially, the court and the government concede that the main bad guys [00:18:42] Speaker 03: the main wrongdoers, and all of their assets were not going to be reachable. [00:18:50] Speaker 03: And so that the court goes and looks at things around the margin, that perhaps you could have brought a claim against this Odyssey Capital. [00:18:58] Speaker 03: But there's no evidence anywhere that Odyssey Capital was somebody that a claim could have been brought against. [00:19:06] Speaker 03: And then they say perhaps you could have gotten restitution even though your stock [00:19:11] Speaker 03: wasn't in the scope of the restitution order. [00:19:17] Speaker 03: These are just, OK, maybe you could have taken a flyer. [00:19:21] Speaker 03: You could have thrown a Hail Mary pass and spent a ton of money to grab some little bits around the edges. [00:19:29] Speaker 03: This goes back to what Judge Toronto was talking about, which is it's not a question of is there a reasonable prospect of a big recovery [00:19:39] Speaker 03: I mean, the court simply focused on, could you get a pittance and spend a ton of money and time to get to a pittance? [00:19:45] Speaker 03: Is that enough to be a reasonable prospect of recovery? [00:19:49] Speaker 04: Your Honor, the court focused on the fact, and this comes from the Supreme Court's decision in Boehm in 1945, that while the taxpayer's subjective belief about what will happen may be considered, that it's the objective evidence and the record that must govern. [00:20:08] Speaker 04: And in 2004, three of the four Donald & Company principals, I'd like to talk about Mr. Freeman in a moment, but three of the four Donald & Company principals, Stetson, Bowman, and Ingrassia, had been indicted. [00:20:24] Speaker 04: And Mr. Adkins testified and the court found that he was aware that they intended to plead guilty. [00:20:31] Speaker 04: But in 2004, Mr. Adkins did not know anything [00:20:35] Speaker 04: about the assets that could be available for recovery and could not have known about the financial obligations that the defendants had made in their cooperation agreements and their plea agreements. [00:20:49] Speaker 04: They could not have known in 2004 how many victims there were, the extent of the losses in the case. [00:20:55] Speaker 04: They knew their own, of course, but they didn't have the information about the rest of the picture. [00:21:02] Speaker 04: And so in 2004, [00:21:05] Speaker 04: It was simply not possible to know the likelihood of recovery from Stetson, Volman, and Ingrasio, those three of the four principals that they named. [00:21:16] Speaker 03: But the indictments did seek full forfeiture of all of their assets. [00:21:21] Speaker 04: The indictments did have forfeiture counts in them, yes. [00:21:25] Speaker 04: But the indictments also included [00:21:28] Speaker 04: securities fraud charges, which require restitution to victims. [00:21:32] Speaker 04: And that's, of course, a third independent avenue of recovery that the Court of Federal Claims found was unknowable in 2004. [00:21:41] Speaker 03: I'd like to say... I presided over a lot of trials having to do with securities fraud and other forms of fraud. [00:21:49] Speaker 03: I never saw any where more than a few pennies were ever recoverable. [00:21:56] Speaker 03: from those whose assets the government seized. [00:22:00] Speaker 03: I mean, the whole point is that this was a fraud and that they couldn't maintain it anymore, which is how they get caught. [00:22:07] Speaker 04: Your Honor, the pump-and-dump scheme may be a little bit different from other kinds of fraud in that the people presiding over the fraud, in this case, the Donnellan Company principals, do often make actual money, which they cash out of the fraud. [00:22:27] Speaker 04: In this case, in fact, Mr. Edkins knew about Odyssey Capital, [00:22:32] Speaker 04: He testified at page 1739 of the appendix that he knew about Odyssey Capital as early as 2003 or 2004. [00:22:39] Speaker 04: And that company was a holding company for the stocks that Donald & Company itself owned, and also the profits of the pump and dump scheme accumulated in that company. [00:22:52] Speaker 03: In addition... The government never produced any evidence that there were any profits or that there were any assets in Odyssey Capital. [00:23:01] Speaker 04: Well, Your Honor, I think there are a couple of things to talk about with respect to whether the government produced evidence. [00:23:07] Speaker 04: First, the taxpayers have the burden of proof in this case. [00:23:12] Speaker 04: Taxpayers always have the burden of proof to show entitlement to induction. [00:23:15] Speaker 04: Yeah, but the government's supposed to produce documents in response to document requests. [00:23:19] Speaker 04: Sure, Your Honor. [00:23:19] Speaker 04: I'd be happy to talk about the motion to compel. [00:23:25] Speaker 04: Taxpayers filed a motion to compel in the discovery process. [00:23:29] Speaker 04: That motion to compel sought an enormous range of documents, many of which were protected by, for example, taxpayer privacy in section 6103 of the Internal Revenue Code. [00:23:40] Speaker 04: They asked for, with respect to that issue, the tax treatment of every other victim in this scheme, which clearly the government is not able to turn over. [00:23:49] Speaker 04: That's protected information. [00:23:50] Speaker 04: They asked for the entire criminal investigation files of the related criminal cases here. [00:23:58] Speaker 04: The FBI determined that, unsurprisingly, many of those documents are protected by, for example, grand jury privilege and other issues. [00:24:07] Speaker 04: Now, the parties told the court that they thought the issue could be resolved through stipulation. [00:24:16] Speaker 04: This is reflected in the court's order. [00:24:18] Speaker 04: Right. [00:24:19] Speaker 03: And then that didn't work. [00:24:20] Speaker 03: And then the court said, well, you could use 5060, even though he had the right to seek discovery. [00:24:25] Speaker 03: And then the court ultimately just said, you don't get anything. [00:24:28] Speaker 04: So importantly, the court did not tell them to use 5060. [00:24:33] Speaker 04: The taxpayers never renewed their motion to compel after they and the government agreed together that they thought they could resolve the issue. [00:24:42] Speaker 04: It was perfectly within reason for the Court of Federal Claims at that point to deny the motion to compel. [00:24:46] Speaker 04: All the parties say they can resolve it, so I'm going to deny the motion. [00:24:50] Speaker 04: And then later, the taxpayers never raised the issue again except for this brief mention of 56D in their summary judgment briefing, which the applicable part is in page 2055 of the appendix. [00:25:06] Speaker 04: And there, they briefly suggested the court should entertain a motion under rule 56D. [00:25:12] Speaker 04: They did not make a motion, and they did not meet the requirements of rule 56D. [00:25:16] Speaker 04: So again, the Court of Federal Claims, to the extent that could even be considered a request under Rule 50-60, properly denied any requests that they might have been making because they didn't make the showing for that relief. [00:25:31] Speaker 02: Can I turn back toward not the documents, but the substance of what do you think [00:25:41] Speaker 02: the Atkins should have done before December 31, 2004 to seek greater information that would provide a firmer foundation for a determination about the prospects of recovery. [00:26:03] Speaker 04: Well, your honor, I certainly the Adkins's or their attorneys could have made some efforts to determine the assets that these folks had. [00:26:12] Speaker 02: What I'm trying to understand what those assets are, what those measures, was that the word you used? [00:26:18] Speaker 02: What steps they actually could have taken to do that? [00:26:21] Speaker 02: Call up Mr. Freeman, say what's in your bank account. [00:26:25] Speaker 04: Well, they could have tried that, Your Honor, but it's unlikely it would have been successful. [00:26:28] Speaker 04: It seems unlikely, doesn't it? [00:26:29] Speaker 04: Certainly, lawyers are well-versed in doing property and asset searches. [00:26:34] Speaker 04: They could have looked for other liabilities that these folks may have had, whether there were judgments against those assets. [00:26:40] Speaker 03: But they're not allowed to do any discovery while the criminal proceedings are pending. [00:26:48] Speaker 04: Are you referring to the state of the arbitration? [00:26:50] Speaker 03: They couldn't do any civil discovery to get [00:26:53] Speaker 03: information relating to the criminal defendants, because the FBI wouldn't have allowed it. [00:26:58] Speaker 04: That very well may be true, Your Honor, but during the pendency of the criminal proceedings and before the criminal proceedings started, there were other victims of this scheme who were able to secure arbitration judgments against Donald and Hillary. [00:27:17] Speaker 02: Were any of them ever paid? [00:27:19] Speaker 02: Judgment is just a piece of paper. [00:27:21] Speaker 04: I don't know, Your Honor. [00:27:22] Speaker 02: That information is not in the record. [00:27:22] Speaker 02: So that's really not that informative. [00:27:25] Speaker 03: And it wasn't just a pump and dump scheme that the government went after for the whole money laundering thing, too. [00:27:30] Speaker 04: Yes, Your Honor. [00:27:31] Speaker 04: That's true. [00:27:31] Speaker 04: There are also money laundering charges in the indictment. [00:27:34] Speaker 04: But the important thing is what was known or knowable in 2004. [00:27:38] Speaker 04: And what was known or knowable in 2004 is that three of the four Donnelly Company principals had been indicted. [00:27:48] Speaker 04: and that they intended to plead guilty. [00:27:50] Speaker 04: And they simply didn't have the other pieces of information and apparently made no efforts to get any of the other pieces of information that they could have gotten. [00:27:58] Speaker 04: And I'd like to talk for a moment about Mr. Freeman, if I may. [00:28:01] Speaker 02: Suppose it were the case that any additional efforts would have been exceedingly unlikely to turn up anything and or exceedingly expensive. [00:28:12] Speaker 02: Would that play any role in the conclusion [00:28:17] Speaker 04: that we're presented with here. [00:28:28] Speaker 04: hypothetically, factors that could be considered. [00:28:31] Speaker 04: But here, there's no evidence of how expensive it would be or what kind of efforts they looked at. [00:28:36] Speaker 04: And indeed, quite frankly, I think it might have been difficult under even the best circumstances with some effort or the best effort from the taxpayers here in 2004, simply because things were so unsettled with respect to the criminal defendants. [00:28:53] Speaker 04: Now, Mr. Freeman. [00:28:54] Speaker 02: So your case really does come down to this idea that [00:28:58] Speaker 02: if it's as a practical matter impossible to know that this standard cannot be met, even if general knowledge would be such that recovery is exceedingly unlikely. [00:29:20] Speaker 04: General knowledge in the sense of? [00:29:21] Speaker 02: General knowledge that restitution [00:29:24] Speaker 02: is unlikely to produce much money. [00:29:27] Speaker 02: Future income of felons is not likely to produce much money. [00:29:35] Speaker 04: Your Honor, I think the Supreme Court has instructed, and many courts have held, that this is a fact-specific inquiry. [00:29:43] Speaker 04: So I think it's important. [00:29:45] Speaker 03: But it's also said that the taxpayer doesn't have to be an eternal optimist. [00:29:48] Speaker 04: Yes. [00:29:49] Speaker 04: Yes, indeed, Your Honor. [00:29:50] Speaker 04: That is what they said. [00:29:51] Speaker 04: But the court also said that the controlling factors are objective evidence and not the taxpayer's subjective belief about what was going to happen here. [00:30:02] Speaker 04: And here in 2004, Mr. Adkins read the indictment and made a lot of conclusions. [00:30:10] Speaker 04: that were not supported by the objective evidence. [00:30:12] Speaker 04: And I'd like, if I may, to move off of the folks who were indicted in 2004 and talk for a moment about Mr. Freeman. [00:30:19] Speaker 04: Mr. Freeman was one of the four principals of Donald & Company. [00:30:23] Speaker 04: That's a factual finding the Court of Federal Claims made that the taxpayers have not challenged on appeal until just a few moments ago. [00:30:32] Speaker 04: And Mr. Freeman [00:30:35] Speaker 04: Mr. Freeman's status as a principal was reported by Mr. Edkins to the FBI in 2003. [00:30:41] Speaker 04: The interview notes both acknowledge that Mr. Edkins dealt with Mr. Freeman and that Mr. Freeman was a principal at Donald & Company. [00:30:51] Speaker 04: Mr. Freeman was the only of the four principals with a personal connection to the taxpayers' accounts. [00:30:57] Speaker 04: In 2001 and 2002, which are important years for the fraud that occurred here, Mr. Freeman was listed as the account executive or the investment representative on numerous joint and single held accounts by the taxpayers here. [00:31:13] Speaker 04: At trial, Mr. Adkins unprompted recognized Mr. Freeman's name on a document. [00:31:20] Speaker 04: And then the next day at trial, he said, oh no, I don't know that person. [00:31:23] Speaker 04: And then upon further questioning, admitted that he had dealt with Mr. Freeman. [00:31:28] Speaker 04: So the Court of Federal Claims finding that Mr. Adkins had dealt with Mr. Freeman, unlike the other three principals who were included in the arbitration claim, [00:31:37] Speaker 04: rests on solid evidence in the record. [00:31:39] Speaker 04: Now, in an important distinction with the other three principles of Donald & Company, Mr. Freeman was indicted in 2005. [00:31:48] Speaker 04: So whatever concerns the taxpayer may have had in 2004 regarding the three Donald & Company principles that were indicted in 2004 could not have applied to Mr. Freeman. [00:32:01] Speaker 04: The taxpayers are required to reasonably exhaust avenues of recovery [00:32:05] Speaker 04: before benefiting from a tax deduction, before essentially benefiting from the government subsidy of their loss. [00:32:12] Speaker 04: The concept is to show with reasonable certainty that there will be no recovery. [00:32:18] Speaker 04: The taxpayers must explore the reasonable claims that are available to them. [00:32:22] Speaker 04: Here against Mr. Freeman. [00:32:23] Speaker 02: Can I ask you a question about the Ponzi scheme? [00:32:26] Speaker 02: Was it a revenue procedure? [00:32:27] Speaker 02: Yes. [00:32:29] Speaker 02: That says that in some circumstances, [00:32:33] Speaker 02: the year of indictment will be treated as the year of theft loss. [00:32:38] Speaker 02: Is that right? [00:32:38] Speaker 04: That's correct, yes. [00:32:39] Speaker 02: So what's the underlying rationale why that might make sense in that context, but not either more generally or at least not in the current context? [00:32:51] Speaker 04: So there are a couple of things that distinguish Ponzi schemes from a pump and dump scheme for tax purposes. [00:32:58] Speaker 04: One of them, and maybe this isn't for tax purposes, but just as a practical matter, [00:33:02] Speaker 04: The victims of a Ponzi scheme receive falsified statements. [00:33:07] Speaker 04: That's one of the classic hallmarks of a Ponzi scheme. [00:33:09] Speaker 04: They claim that their accounts have more in them than they actually do. [00:33:12] Speaker 04: And so it is very difficult for a victim of a Ponzi scheme to know that they have a loss or to discover that loss in any year except for the year of the indictment. [00:33:24] Speaker 04: That's often when the news breaks is when those victims find out. [00:33:28] Speaker 02: As I understand what you just said, that would explain why they shouldn't know about it before. [00:33:34] Speaker 02: This case is fundamentally about why, in this case, you think they had to wait later. [00:33:42] Speaker 02: until later. [00:33:43] Speaker 02: So why if the year of indictment in the Ponzi scheme context essentially makes it sufficiently clear that you're getting a pittance or less, why would that not be true here once there's an indictment? [00:34:00] Speaker 02: Put aside, Mr. Freeman. [00:34:02] Speaker 04: So, well, Your Honor, the other reason that the IRS chose to make a special rule for Ponzi schemes [00:34:09] Speaker 04: It has to do with the details of tax administration. [00:34:14] Speaker 04: But it's difficult in a Ponzi scheme, again, because of the falsified amounts that people are reporting on their tax returns. [00:34:23] Speaker 04: Here, the taxpayers received monthly statements. [00:34:26] Speaker 04: They never claimed the statements themselves were false. [00:34:28] Speaker 04: Of course, they claim the, and we acknowledge that the price of the stock was pumped up in the pump and dump scheme. [00:34:37] Speaker 04: But in a Ponzi scheme, [00:34:39] Speaker 04: They're sometimes receiving small payouts to sort of keep them in the game. [00:34:43] Speaker 04: And trying to figure out the tax treatment for all of those small things is quite difficult. [00:34:51] Speaker 04: And so as these schemes became prevalent, unfortunately, in the mid-2000s, the IRS made a decision about administering it. [00:35:02] Speaker 02: I'm not sure I'm communicating what's in my mind, because I don't think I understand this well enough. [00:35:07] Speaker 02: But I guess the thought that I'm [00:35:09] Speaker 02: wondering about is the Ponzi scheme revenue procedure appears to say once the bad guys are indicted, it's really quite clear that the victims are not going to get anything. [00:35:26] Speaker 02: Doesn't that tell one something about whether the indictment of the bad guys here is, in the absence of other information, a really quite good reason to have a [00:35:40] Speaker 02: reasonable ascertainment that there's not going to be any money? [00:35:44] Speaker 04: No, Your Honor. [00:35:46] Speaker 04: So the focus of the IRS revenue procedure is not on this issue of a reasonable prospect of recovery. [00:35:54] Speaker 04: It's on the year of the discovery of the loss. [00:35:57] Speaker 04: And this is why the difference between a Ponzi scheme and a pump and dump scheme matters, because the Ponzi scheme victims don't know they have a loss very often until that loss is made known through the news or indictment or other such things. [00:36:13] Speaker 02: The revenue procedure on the Ponzi scheme does not say that this is the year you can claim the loss? [00:36:20] Speaker 02: No, you're right. [00:36:20] Speaker 02: This is a question I don't. [00:36:22] Speaker 04: Sure. [00:36:22] Speaker 02: My question's in the last few minutes, [00:36:24] Speaker 02: were premised on the assumption it did. [00:36:26] Speaker 02: So that may be an incorrect assumption. [00:36:28] Speaker 04: Yes, Your Honor. [00:36:29] Speaker 04: No, it identifies the year of the indictment as the year of the loss. [00:36:31] Speaker 02: But the point that I'm failing to get across is that- And the regulation about reasonable prospect still governs that, right? [00:36:41] Speaker 02: The revenue procedure doesn't repeal the regulation, or it's just a, I don't know, a sub-regulation that gives an application of that regulation? [00:36:51] Speaker 04: No, Your Honor. [00:36:52] Speaker 04: that it does not repeal the regulation. [00:36:54] Speaker 02: So I think my question then stands. [00:36:57] Speaker 02: Why does, if the indictment there [00:37:01] Speaker 02: means, must mean there is no reasonable prospect of recovery, why should it not mean the same thing here? [00:37:07] Speaker 02: Again, putting aside Mr. Freeman. [00:37:09] Speaker 04: So the IRS is allowed and does in certain circumstances, such as here for Ponzi schemes, is allowed to provide more generous terms for [00:37:31] Speaker 04: for deductions than may be generally applicable. [00:37:35] Speaker 04: And here the IRS revenue procedure was put out as it says as an optional safe harbor method for Ponzi scheme victims to determine the year of the law. [00:37:49] Speaker 02: Is there some theory along the following lines that the bad guys in Ponzi schemes often haven't pocketed anything and therefore those kinds of [00:37:59] Speaker 02: bad guys once indicted we can assume will be deadbeats, whereas that's not true for this kind of bad guy. [00:38:06] Speaker 04: Your Honor, that very may well have been part of the background thinking of the IRS and creating a special carve out safe harbor for Ponzi schemes. [00:38:15] Speaker 04: As we were discussing earlier, one of the differences with the pump and dump scheme is that very often those who perpetrate the scheme do cash out [00:38:23] Speaker 04: real money from the scheme. [00:38:25] Speaker 04: That's the whole point, is to allow them to cash out their own stocks. [00:38:27] Speaker 03: I've never seen a Ponzi scheme where they didn't make money. [00:38:29] Speaker 03: I mean, that's the whole point of the Ponzi scheme, right? [00:38:31] Speaker 03: Is to make money. [00:38:33] Speaker 04: Yes, Your Honor. [00:38:33] Speaker 03: Of course they make money in a Ponzi scheme, but they do so in a... But the point is, you're saying, I mean, you're trying to argue that they're not analogous. [00:38:41] Speaker 03: The point is that they are analogous. [00:38:44] Speaker 03: The only difference is you're saying the government has the right to be nicer to certain victims than it is to other victims. [00:38:49] Speaker 03: And, you know, that's a fair argument. [00:38:52] Speaker 03: But it's kind of difficult for you to say that Ponzi schemes and these types of schemes aren't at least analogous for purposes of how easy it is to go after people who have been indicted and where the government is seizing all of their assets. [00:39:05] Speaker 04: Your Honor, of course there are some similarities, yes, between the two fraud schemes. [00:39:09] Speaker 04: But there are differences between the two kinds of schemes that help to explain why the IRS has provided the special treatment for Ponzi schemes [00:39:20] Speaker 04: and the general rule applies outside of that special provision. [00:39:25] Speaker 01: So you're saying nothing is deductible even now? [00:39:27] Speaker 04: No, Your Honor, that's not what I'm saying. [00:39:33] Speaker 01: What I'm saying is that... All right, so when? [00:39:36] Speaker 01: What is the day? [00:39:37] Speaker 01: We need to come to some kind of closure. [00:39:40] Speaker 01: It's clear this is not recoverable. [00:39:43] Speaker 04: So, Your Honor, the... [00:39:49] Speaker 04: The taxpayers in this case chose when they filed their refund claim, all of the refund claims which were signed by attorneys, so they had professional help in filing these refund claims. [00:40:01] Speaker 04: And the taxpayers chose to identify 2004 as the sole year of their loss. [00:40:07] Speaker 04: The variance doctrine limits them to 2004 as the year of the loss in a subsequent tax refund litigation like this. [00:40:19] Speaker 04: And as a result, the evidence in this case has focused on the only year that the taxpayers could look to because that's how they chose to frame their refund claim, which is 2004. [00:40:30] Speaker 04: And I'm sorry, Your Honor, but the record here simply does not give enough information regarding the other years because it was focused on 2004 to answer your question with any certainty. [00:40:42] Speaker 04: And I apologize for that. [00:40:43] Speaker 02: Is it still possible or has time run out of the possibility of seeking [00:40:48] Speaker 02: refunds for later tax years. [00:40:52] Speaker 02: It's a long time ago now. [00:40:54] Speaker 04: It is a long time ago now, yes. [00:40:56] Speaker 04: The general rule is that a refund claim can be filed within three years of when the return was filed. [00:41:05] Speaker 04: And at this point, we're quite a distance from the years that we're talking about. [00:41:09] Speaker 04: But as I mentioned earlier, when this case began in 2010, there was still time, still nearly another year and a half for the taxpayers [00:41:18] Speaker 04: to file a claim, for example, that the loss was in 2008. [00:41:21] Speaker 04: At that point, the taxpayers were on ample notice that the government's position was that 2004 was not the right year. [00:41:28] Speaker 03: But then they would still be facing this unknowability. [00:41:32] Speaker 03: I don't know, because we don't know what anyone had. [00:41:35] Speaker 03: And the government didn't produce the documents, so who knows what assets anyone had, right? [00:41:39] Speaker 04: Your Honor, the government did produce a number of documents to the taxpayers. [00:41:43] Speaker 04: The government, as I understand it, produced the entire administrative files [00:41:47] Speaker 04: from the examination of the taxpayers. [00:41:49] Speaker 03: What would have been more knowable in 2008 than what was knowable in 2004? [00:41:55] Speaker 04: Your Honor, the record simply isn't developed on 2008. [00:41:59] Speaker 04: But my point is that, at least as the government stood here before you last time, under the Court of Federal Claims's interpretation of the regulation, which this court reversed, our position at that point was that 2008 was the right year. [00:42:16] Speaker 04: Within the time frame of this litigation, they still could have filed a timely refund claim. [00:42:21] Speaker 04: And nonetheless, they chose to leave. [00:42:24] Speaker 03: The IRS originally agreed, or at least the representative of the IRS, originally agreed that 2004 was the correct year. [00:42:30] Speaker 03: But because of the statute of limitations, they had no choice but to go to the Court of Claims. [00:42:35] Speaker 04: Well, an IRS appeals officer, who is an IRS employee with no settlement authority, wrote a memo. [00:42:41] Speaker 04: stating that in his view, 2004 was the right year. [00:42:44] Speaker 04: Now, the IRS appeals process doesn't have anywhere near the kinds of discovery procedures and such that litigation does. [00:42:54] Speaker 04: And so did the IRS appeals officer have all the facts at his disposal? [00:43:00] Speaker 04: How much follow-up did he do? [00:43:01] Speaker 04: How much questioning did he do of the information the taxpayers provided? [00:43:04] Speaker 04: That's an entirely very different process from litigation. [00:43:11] Speaker 01: Thank you very much. [00:43:23] Speaker 01: Mr. Rogers. [00:43:25] Speaker 00: Thank you, Your Honors. [00:43:26] Speaker 00: A couple of things. [00:43:28] Speaker 00: I think the point on the standard for recovery of [00:43:37] Speaker 00: the reasonable certainty standard and the reasonable possibility of recovery standard, as this court pointed out, were the flip side of the same coin. [00:43:47] Speaker 00: They aren't a different coin. [00:43:48] Speaker 00: And certainly when it becomes reasonable, certainly no reasonable likelihood of recovery is there, is what the court was saying, is that clearly in this case, you have to have some certainty that you think that it's not going to lead anywhere. [00:44:06] Speaker 00: Second of all, there was some question about discovery of their assets. [00:44:12] Speaker 00: Throughout the arbitration proceeding, discovery was produced against these defendants, the criminal defendants as well as Donald and company. [00:44:22] Speaker 00: And nothing was ever produced by them to Mr. Atkins' attorneys throughout the record and testimony. [00:44:34] Speaker 00: I think the court asked a good question as to when is the deduction recoverable. [00:44:38] Speaker 00: We've asked that question throughout the whole trial and that answer has never been made by the government. [00:44:45] Speaker 02: Did the government last time a couple of years ago when they were here, say 2008 was the right year? [00:44:52] Speaker 00: They said that's what the court found. [00:44:54] Speaker 00: They never really pinned themselves down even to that, I don't believe, but I could be wrong. [00:44:59] Speaker 00: I don't remember every word they said back then, but I don't believe so. [00:45:04] Speaker 00: As to where the money went, you know, I think there's several points in the record [00:45:11] Speaker 00: that made it kind of clear where the money went. [00:45:16] Speaker 00: There was a JX 76, which was a long article that got into the record by an investigative reporter that said that the money went to organized crime and that's also shown by the charge of money laundering in the indictment, we believe, and the fact that the record was sealed for a period of time. [00:45:38] Speaker 00: that all these defendants agreed to cooperate. [00:45:40] Speaker 00: Well, who were they cooperating with? [00:45:42] Speaker 00: Why were they cooperating if they were all part of the same scheme? [00:45:45] Speaker 00: Obviously, they were cooperating for something. [00:45:47] Speaker 00: So I think there's some of that. [00:45:49] Speaker 00: Also, obviously, the tech boom ended around that time. [00:45:52] Speaker 00: And I think if they were invested in tech stocks, other monies would have gone. [00:46:00] Speaker 00: So I think we have some idea where the monies went in that regard. [00:46:08] Speaker 00: In closing, I think also as to Mr. Freeman, yes, he was indicted in 2005. [00:46:17] Speaker 00: But again, Mr. Atkins, I think, believed he was in 2004 from his information. [00:46:26] Speaker 00: As I said, he recognized the name, but they never went after him in arbitration. [00:46:34] Speaker 00: And they would have if they thought he was another part of it. [00:46:38] Speaker 00: So again that was not done and but clearly in 2004 was really when the roof caved in on these people and we believe that that was when the loss was fixed. [00:46:56] Speaker 00: If the court has any more, no further questions we thank the court for its time and appreciate your consideration. [00:47:03] Speaker 01: Thank you. [00:47:04] Speaker 01: Thank you both. [00:47:04] Speaker 01: The case is seconded under submission.