Pascucci v. Commissioner of Internal Revenue

• Court: Court of Appeals for the Second Circuit
• Decided: November 12, 2025
• Docket: 24-2429
• Status: Unpublished

Opinion

24-2429 Pascucci v. Commissioner of Internal Revenue

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 12th day of November, two thousand twenty-five.

Present: DEBRA ANN LIVINGSTON, Chief Judge, RICHARD C. WESLEY, Circuit Judge, Elizabeth A. Wolford, District Judge. * _____________________________________ CHRISTOPHER S. PASCUCCI, SILVANA B. PASCUCCI,

Petitioners-Appellants,

v. 24-2429

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee. _____________________________________

For Petitioners-Appellants: KENDALL C. JONES, Mary E. Monahan, Eversheds Sutherland (US) LLP, Washington, DC.

For Defendant-Appellee: ROBERT J. BRANMAN, Jacob Earl Christensen, Tax Division, Department of Justice, Washington, DC.

* Chief Judge Elizabeth A. Wolford, of the United States District Court for the Western District of New York, sitting by designation. Appeal from the July 9, 2024 decision of the United States Tax Court (Gustafson, J.)

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND

DECREED that the decision of the Tax Court is AFFIRMED.

Petitioners-Appellants Christopher S. Pascucci (“Mr. Pascucci”) and Silvana B. Pascucci

(“Petitioners”) appeal from a July 9, 2024 decision of the United States Tax Court (Gustafson, J.),

upholding a deficiency determination by the Commissioner of Internal Revenue

(“Commissioner”). At issue was a claimed theft loss deduction of $8,238,674, the amount of the

decline in value of sixteen variable life insurance policies owned by Mr. Pascucci (“the policies”)

following the exposure of the Ponzi scheme orchestrated by Bernard L. Madoff (“Madoff”).

The assets in the separate accounts supporting the policies were invested in a fund managed

by Tremont Partners, Inc. (“Tremont”). Tremont invested portions of that fund in the Rye Select

Broad Market Series of funds (“Rye Broad funds”), which in turn invested in an account managed

by Bernard L. Madoff Investment Securities LLC (“BLMIS”). In 2008, it became clear that the

investment advisory business of BLMIS was a Ponzi scheme and that Tremont’s investments in

the Rye Broad funds were worthless. Petitioners then sought a theft loss deduction for the decline

in the value of the policies attributable to Tremont’s worthless investments. In 2018, the Internal

Revenue Service determined Petitioners were not entitled to this deduction and issued a notice of

deficiency in 2018. In 2024, the Tax Court agreed with the IRS’s determination. We assume

the parties’ familiarity with the underlying facts, the procedural history of the case, and the issues

on appeal, to which we refer only as necessary to explain our decision.

* * *

“We ‘review the decisions of the Tax Court . . . in the same manner and to the same extent

as decisions of the district courts in civil actions tried without a jury.’” Alphonso v. Comm’r, 708

2 F.3d 344, 350 (2d Cir. 2013) (quoting 26 U.S.C. § 7482(a)(1)). “We thus review its ‘legal rulings

. . . de novo,’ and we ‘owe no deference to the Tax Court’s statutory interpretations.’” Id.

(alterations accepted) (first quoting Scheidelman v. Comm’r, 682 F.3d 189, 193 (2d Cir. 2012);

then quoting Madison Recycling Associates v. Comm’r, 295 F.3d 280, 285 (2d Cir. 2002)).

Section 165(c)(3) of the tax code provides a deduction for “losses of property not

connected with a trade or business or a transaction entered into for profit, if such losses arise from

fire, storm, shipwreck, or other casualty, or from theft.” 26 U.S.C. § 165(c)(3) (2008). In

Alphonso, this Court noted that in order to claim a § 165(c)(3) deduction, a taxpayer must have a

property interest in the property lost to casualty or theft. See 708 F.3d 344, 350–51 (2d Cir.

2013). On appeal, Petitioners argue that Mr. Pascucci possessed a sufficient property interest in

funds stolen by Madoff. We disagree.

“In the application of a federal revenue act, state law controls in determining the nature of

the legal interest which the taxpayer had in the property.” Id. at 351 (alterations and internal

quotation marks omitted) (quoting United States v. National Bank of Commerce, 472 U.S. 713,

722 (1985)). Petitioners fail to argue that the policies gave them a cognizable property interest

in the assets held in the separate accounts under applicable state law, which suggests the opposite.

E.g., N.Y. Ins. Law § 4240(a)(12). Even assuming arguendo that Mr. Pascucci possessed a

sufficient property interest in the assets held in the separate accounts supporting the policies, he

had no property interest in any funds ultimately stolen by Madoff. In In Re Bernard L. Madoff

Inv. Securities LLC (“Madoff”), we held that “limited partnership interests” in funds that invested

in BLMIS, including the Rye Broad funds, “did not confer an ownership interest in money that

[those funds] ultimately invested in BLMIS.” 708 F.3d 422, 427 (2d Cir. 2013) (citing 6 Del. C.

3 § 17–701). Here, the separate accounts supporting the policies contained limited partnership

interests in the Tremont fund, which in turn invested in the Rye Broad funds.

To be sure, as Petitioners point out, the Court in Madoff was considering whether indirect

investors in BLMIS qualified as “customers” under the Securities Investor Protection Act. Id. at

424; see also 15 U.S.C. § 78lll(2). But though the case did not involve § 165(c)(3), its reasoning

is instructive. Like the limited partnerships at issue there, the Tremont fund was organized under

Delaware law. “Section 17-701 of the Delaware Revised Uniform Limited Partnership Act,

states: ‘A partner has no interest in specific limited partnership property,’ and has been interpreted

to preclude the attempt to equate ownership interests in a partnership with ownership of partnership

property.” In re Marriott Hotel Props. II Ltd. P’ship, 2000 WL 128875, at *15 (Del. Ch. Jan. 24,

2000). Accordingly, Petitioners had no property interest in the money Tremont invested in the

Rye Broad funds, let alone in money Madoff ultimately stole from those funds. The Tax Court

thus rightly concluded Petitioners could not claim the theft loss deduction.

We have considered Petitioners’ remaining arguments and find them to be without merit.

Accordingly, we AFFIRM the judgment of the Tax Court.

FOR THE COURT: Catherine O’Hagan Wolfe, Clerk