Quealy, Jvdge:
Respondent determined a deficiency in income tax against petitioners for the taxable year 1965 in the amount of $7,676.86. As a result of certain concessions by the parties, the sole question presented for decision is whether the petitioners are entitled to deduct a loss in the taxable year 1965 on account of being defrauded in a scheme to reproduce United States currency. Petitioners claim the deduction under section 165(c) (2)1 or section 165(c) (3).2
findings of fact
Some of the facts have been stipulated, and such facts and stipulated exhibits attached thereto are incorporated herein by this reference.
Petitioners Raymond Mazzei and Elizabeth E>. Mazzei are husband and wife. Their residence at the time they filed their petition herein was Hopewell, Va. Petitioners filed their joint Federal income tax return for the calendar year 1965 with the Internal Revenue Service Center in Philadelphia, Pa. As Elizabeth D. Mazzei is a party herein solely because she filed a joint income tax return with her husband, Raymond Mazzei will hereinafter be referred to as petitioner.
During the year at issue, and for some time prior thereto, petitioner operated a sheet metal company in Hopewell, Va., in partnership with his brother. Vernon Blick was an employee of the company in 1965 and had been an employee for 4 or 5 years.
In March 1965, Blick was told by a man named Cousins of a scheme for reproducing money. Blick accompanied Cousins to a hotel in Washington, D.C., where Cousins introduced Blick to two other men named Collins and Joe. At that time, Collins and Joe showed Blick a black box which they asserted was capable of reproducing money. The black box was approximately 15 inches long, 8 or 10 inches wide, and 6 inches deep, about the size of a shoebox. It was made of metal and had a handle on it.
Blick gave Collins a $10 bill which Collins took and placed between two pieces of white paper of about the same size. Collins put the money and the paper into the box and connected the box to an electric outlet. The black box began a buzzing sound which continued for about 10 minutes. Then Collins reached into the box and pulled out Blick’s $10 bill and what appeared to be a new $10 bill. Collins then told Blick that they could not reproduce any more money at that time because they did not have enough of the type of paper required. In addition, Collins indicated that they would rather not use small denomination bills, but instead they wanted larger denominations such as $100 bills. Blick then returned to Hopewell.
Blick having told Cousins about petitioner, Cousins requested Blick to have petitioner meet with-Cousins. In April or May of 1965, Blick recounted the events of the demonstration to petitioner. Thereafter, petitioner and Blick went to see Cousins in Hopewell and discussed a “deal” to reproduce money with Cousins, Collins, and Joe in Washington, D.C., and New York City. Petitioner was to provide money which Cousins, Collins, and Joe would reproduce and then return to petitioner.
After his first meeting with Cousins, petitioner was contacted several times concerning further arrangements for reproducing money.
In May 1965, Cousins took petitioner and Blick to New York City. Petitioner carried $10,000 in cash with him at Cousins’ request. They went to a hotel in Brooklyn where Cousins telephoned Collins and Joe who then came over with the black box. Petitioner gave Collins a $100 bill in order to demonstrate the reproduction box. Collins went through the “reproduction” process and returned to petitioner his bill and a new $100 bill. Petitioner requested that they reproduce more money, but was told that there was not enough of the right kind of paper, which was supposed to be a special type used by the Federal Government and obtained through a “friend” in Washington, D.C. Cousins then took petitioner and Blick back to Hopewell that afternoon.
Petitioner continued to inquire of Cousins about reproducing more money but again was told that tbe difficulty in obtaining tbe right kind of reproducing paper was bolding things up. However, petitioner did give $700 to Cousins who supposedly went to New York and reproduced it. Cousins returned petitioner’s $700 plus $300 more, supposedly reproduced. Once again, Cousins said that tbe reason be did not reproduce more was because of tbe lack of sufficient paper.
Approximately a week later, Joe telephoned petitioner from New York and stated that they would be ready in a few days to proceed with tbe deal. Joe requested petitioner to obtain $20,000 in large denominations, preferably $100 bills.
On June 1, 1965, petitioner cashed a check for $20,000 on his company’s account at a local bank, taking tbe proceeds in $100 bills. Blick obtained $5,000, borrowed from petitioner’s brother, also through a check on the company account. Several days later, J oe called petitioner, confirmed that petitioner had acquired the cash and requested petitioner and Blick to meet him in New York.
On June 3, 1965, petitioner and Blick flew to New York City with the money. Once in New York, petitioner and Blick went to a designated hotel to meet Cousins, Collins, and Joe. Joe came by the hotel and met petitioner, confirming that petitioner and Blick had the money. The three then went outside where Collins was waiting with a taxicab. They proceeded to an apartment in Brooklyn, stopping on the way for Collins or Joe to purchase some liquor.
Once at the apartment, petitioner and Blick were again shown the black box. Collins then asked petitioner for the money. Petitioner handed Collins a packet of money containing $5,000. Collins removed the wrapper and placed the money into a pan of water. Collins then removed the money from the water and placed each $100 bill between two pieces of white paper which he then set aside. Collins continued the process until he finished with the series of bills in the $5,000 packet. Petitioner then handed Collins another $5,000 packet, and Collins repeated the same process. This continued until petitioner had given Collins the entire $20,000. Petitioner then informed Collins that Blick had $5,000, which Blick then gave to petitioner who in turn gave it to Collins.
Collins then informed petitioner and Blick that the black box was broken and would not work. Collins told them that they would have to use an oven, apparently to complete the reproduction process. Collins then turned on an ordinary electric oven which was in the apartment and put all of the money in the oven. At this point, two armed men broke into the room impersonating law enforcement officers making a counterfeiting raid. Petitioner and Blick were held at gunpoint while one of the men placed handcuffs on Joe. The two men representing themselves to be officers then removed the money from the oven. As the two intruders proceeded to the door of the apartment, petitioner broke away and ran up the street to seek the assistance of a police officer whom he saw. Petitioner reported the incident to the police officer, who told petitioner to wait until a squad car could arrive.
Meanwhile, Blick, who had remained with Collins, Joe, and the two intruders, requested them to return the money. Blick was told he would be shot if he attempted to retrieve the money.
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Quealy, Jvdge:
Respondent determined a deficiency in income tax against petitioners for the taxable year 1965 in the amount of $7,676.86. As a result of certain concessions by the parties, the sole question presented for decision is whether the petitioners are entitled to deduct a loss in the taxable year 1965 on account of being defrauded in a scheme to reproduce United States currency. Petitioners claim the deduction under section 165(c) (2)1 or section 165(c) (3).2
findings of fact
Some of the facts have been stipulated, and such facts and stipulated exhibits attached thereto are incorporated herein by this reference.
Petitioners Raymond Mazzei and Elizabeth E>. Mazzei are husband and wife. Their residence at the time they filed their petition herein was Hopewell, Va. Petitioners filed their joint Federal income tax return for the calendar year 1965 with the Internal Revenue Service Center in Philadelphia, Pa. As Elizabeth D. Mazzei is a party herein solely because she filed a joint income tax return with her husband, Raymond Mazzei will hereinafter be referred to as petitioner.
During the year at issue, and for some time prior thereto, petitioner operated a sheet metal company in Hopewell, Va., in partnership with his brother. Vernon Blick was an employee of the company in 1965 and had been an employee for 4 or 5 years.
In March 1965, Blick was told by a man named Cousins of a scheme for reproducing money. Blick accompanied Cousins to a hotel in Washington, D.C., where Cousins introduced Blick to two other men named Collins and Joe. At that time, Collins and Joe showed Blick a black box which they asserted was capable of reproducing money. The black box was approximately 15 inches long, 8 or 10 inches wide, and 6 inches deep, about the size of a shoebox. It was made of metal and had a handle on it.
Blick gave Collins a $10 bill which Collins took and placed between two pieces of white paper of about the same size. Collins put the money and the paper into the box and connected the box to an electric outlet. The black box began a buzzing sound which continued for about 10 minutes. Then Collins reached into the box and pulled out Blick’s $10 bill and what appeared to be a new $10 bill. Collins then told Blick that they could not reproduce any more money at that time because they did not have enough of the type of paper required. In addition, Collins indicated that they would rather not use small denomination bills, but instead they wanted larger denominations such as $100 bills. Blick then returned to Hopewell.
Blick having told Cousins about petitioner, Cousins requested Blick to have petitioner meet with-Cousins. In April or May of 1965, Blick recounted the events of the demonstration to petitioner. Thereafter, petitioner and Blick went to see Cousins in Hopewell and discussed a “deal” to reproduce money with Cousins, Collins, and Joe in Washington, D.C., and New York City. Petitioner was to provide money which Cousins, Collins, and Joe would reproduce and then return to petitioner.
After his first meeting with Cousins, petitioner was contacted several times concerning further arrangements for reproducing money.
In May 1965, Cousins took petitioner and Blick to New York City. Petitioner carried $10,000 in cash with him at Cousins’ request. They went to a hotel in Brooklyn where Cousins telephoned Collins and Joe who then came over with the black box. Petitioner gave Collins a $100 bill in order to demonstrate the reproduction box. Collins went through the “reproduction” process and returned to petitioner his bill and a new $100 bill. Petitioner requested that they reproduce more money, but was told that there was not enough of the right kind of paper, which was supposed to be a special type used by the Federal Government and obtained through a “friend” in Washington, D.C. Cousins then took petitioner and Blick back to Hopewell that afternoon.
Petitioner continued to inquire of Cousins about reproducing more money but again was told that tbe difficulty in obtaining tbe right kind of reproducing paper was bolding things up. However, petitioner did give $700 to Cousins who supposedly went to New York and reproduced it. Cousins returned petitioner’s $700 plus $300 more, supposedly reproduced. Once again, Cousins said that tbe reason be did not reproduce more was because of tbe lack of sufficient paper.
Approximately a week later, Joe telephoned petitioner from New York and stated that they would be ready in a few days to proceed with tbe deal. Joe requested petitioner to obtain $20,000 in large denominations, preferably $100 bills.
On June 1, 1965, petitioner cashed a check for $20,000 on his company’s account at a local bank, taking tbe proceeds in $100 bills. Blick obtained $5,000, borrowed from petitioner’s brother, also through a check on the company account. Several days later, J oe called petitioner, confirmed that petitioner had acquired the cash and requested petitioner and Blick to meet him in New York.
On June 3, 1965, petitioner and Blick flew to New York City with the money. Once in New York, petitioner and Blick went to a designated hotel to meet Cousins, Collins, and Joe. Joe came by the hotel and met petitioner, confirming that petitioner and Blick had the money. The three then went outside where Collins was waiting with a taxicab. They proceeded to an apartment in Brooklyn, stopping on the way for Collins or Joe to purchase some liquor.
Once at the apartment, petitioner and Blick were again shown the black box. Collins then asked petitioner for the money. Petitioner handed Collins a packet of money containing $5,000. Collins removed the wrapper and placed the money into a pan of water. Collins then removed the money from the water and placed each $100 bill between two pieces of white paper which he then set aside. Collins continued the process until he finished with the series of bills in the $5,000 packet. Petitioner then handed Collins another $5,000 packet, and Collins repeated the same process. This continued until petitioner had given Collins the entire $20,000. Petitioner then informed Collins that Blick had $5,000, which Blick then gave to petitioner who in turn gave it to Collins.
Collins then informed petitioner and Blick that the black box was broken and would not work. Collins told them that they would have to use an oven, apparently to complete the reproduction process. Collins then turned on an ordinary electric oven which was in the apartment and put all of the money in the oven. At this point, two armed men broke into the room impersonating law enforcement officers making a counterfeiting raid. Petitioner and Blick were held at gunpoint while one of the men placed handcuffs on Joe. The two men representing themselves to be officers then removed the money from the oven. As the two intruders proceeded to the door of the apartment, petitioner broke away and ran up the street to seek the assistance of a police officer whom he saw. Petitioner reported the incident to the police officer, who told petitioner to wait until a squad car could arrive.
Meanwhile, Blick, who had remained with Collins, Joe, and the two intruders, requested them to return the money. Blick was told he would be shot if he attempted to retrieve the money. Then Collins, Joe, and the two intruders went out of the apartment, got into a taxicab and left with the money.
Petitioner returned with the police and found Blick alone. The black box was examined and found to be nothing more than a tin box with a buzzer. It could not have reproduced any money. Petitioner and Blick accompanied the police to the police station and filed a report of the incident. The next day, petitioner and Blick returned to Hopewell and reported the incident to the police there. The incident was also discussed with the Federal Bureau of Investigation.
On his Federal income tax return for the calendar year 1965, petitioner claimed a theft loss in the amount of $20,000 and took a deduction therefor in the amount of $19,900.
In his statutory notice of deficiency, respondent disallowed the deduction for the loss under section 165 (c) (2) or (3) on the grounds of lack of adequate substantiation of the loss and, further, that allowance of the deduction would be contrary to public policy.
OPINION
Petitioner contends that the fact that he incurred a loss is substantiated by the evidence and that such loss is deductible under section 165(c) (2) or section 165(c) (3). Bespondent contends initially that petitioner has failed to prove that a loss was in fact suffered, and, further, that even if a loss were proven in fact, a deduction for such loss would not be allowed under section 165 (c) (2) or section 165 (c) (3) on the grounds that allowance of such a deduction would be contrary to public policy. As our findings of fact indicate, the Court is convinced that petitioner, in fact, incurred a loss in the sum of $20,000, as the result of being defrauded. However, the deductibility of such loss is precluded by our decision in Luther M. Richey, Jr., 33 T.C. 272 (1959).
In the Richey case, the taxpayer became involved with two other men in a scheme to counterfeit United States currency. The taxpayer observed a reproduction process involving the bleaching out of $1 bills and the transferring of the excess ink from $100 bills onto the bleached-out bills. Upon observing this demonstration, tbe taxpayer became convinced that tbe process could reproduce money. Wben tbe taxpayer later met with tbe other men in a hotel room to carry out the scheme, tbe taxpayer turned over to one of the other men $15,000 which was to be used in the duplication process. Before the process was completed, one of the other men to whom the taxpayer had given the $15,000 left the room under the pretext of going to get something and never returned. The taxpayer later discovered that his money was gone and was not able to recover it. We disallowed the taxpayer’s claimed loss deduction under section 165(c)(2) and section 165(c)(3), on the grounds that to allow the loss deduction would constitute an immediate and severe frustration of the clearly defined policy against counterfeiting obligations of the United States as enunciated by title 18, U.S.C., sec. 471.3 This Court said:
The record establishes that petitioner’s conduct constituted an attempt to counterfeit, an actual start in the counterfeiting activity, and overt acts looking to consummation of the counterfeiting scheme. Petitioner actively participated in the venture. He withdrew money from the bank and changed it into high denomination bills with the full knowledge and intention that the money would be used to duplicate other bills. He was physically present at the place of alteration, and assisted in the process by washing the bills and otherwise aiding Randall and Johnson in their chores. He was part and parcel of the attempt to duplicate the money. Petitioner’s actions are no less a violation of public policy because there was another scheme involved, namely, that of swindling the petitioner. From the facts, we hold that to allow the loss deduction in the instant case would constitute a severe and immediate frustration of the clearly defined policy against counterfeiting obligations of the United States. [33 T.C. at 276-277.]
Petitioner would distinguish the Richey case on the grounds that there the taxpayer was involved in an actual scheme to duplicate money where the process was actually 'begun, only to have the taxpayer swindled when his cohorts made off with his money, whereas in the instant case there never was any real plan to counterfeit money, it being impossible to duplicate currency with the black box. Petitioner contends that, from the inception, the only actual illegal scheme was the scheme to relieve petitioner of his money, and petitioner was a victim and not a perpetrator of the scheme.
In our opinion, the fact that the petitioner was victimized in what he thought was a plan or conspiracy to produce counterfeit currency does not make his participation in what he considered to be a criminal act any less violative of a clearly declared public policy. Not only was the result sought by the petitioner contrary to such policy, but the conspiracy itself constituted a violation of law.4 The petitioner conspired with his covictim to commit a criminal act, namely, the counterfeiting of United States currency and his theft loss was directly related to that act. If there was a transaction entered into for profit, as petitioner argues, it was a conspiracy to counterfeit.5
While it is also recognized that the Supreme Court in Commissioner v. Tellier, 383 U.S. 687 (1966), may have redefined the criteria for the disallowance on grounds of public policy of an otherwise deductible business expense under section 162(a), we do not have that type of case. The loss claimed by the petitioner here had a direct relationship to the purported illegal act which the petitioner conspired to commit. Compare Commissioner v. Heininger, 320 U.S. 467 (1943).
We also do not feel constrained to follow Edwards v. Bromberg, 232 F. 2d 107 (C.A. 5, 1956), wherein the court allowed a deduction for a loss incurred by the taxpayer when money, which he thought was being bet on a “fixed” race, was stolen from him. The taxpayer never intended to participate in “fixing” the race.
The ultimate question for decision in this case is whether considerations of public policy should enter into the allowance of a theft loss under section 165(c) (3) where there is a “theft” — and the loss by the petitioner of his money would certainly qualify as such — the statute imposes no limitation on the deductibility of the loss. Neverthless, in Luther M. Richey, Jr., supra, this Court held that the deduction of an admitted theft was properly disallowed on grounds of public policy in a factual situation which we find indistinguishable. We would follow that case.
Reviewed by the Court.
Decision will be entered for the respondent.