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C. Lack of Reasonable Certainty No Recovery Can Be Made
Even if the embezzlement claim belonged to petitioners and
they proved that theft occurred, it could not be ascertained with
reasonable certainty that there was no reasonable prospect of
recovery from Mr. Kanz, as required by section 1.165-1(d)(3),
Income Tax Regs.
There is a reasonable prospect of recovery when the taxpayer
has bona fide claims for recoupment from third parties or
otherwise, and when there is a substantial possibility that such
claims will be decided in his favor. Estate of Scofield v.
Commissioner, 266 F.2d 154, 159 (6th Cir. 1959), affg. in part
and revg. in part 25 T.C. 774 (1956); Ramsey Scarlett & Co. v.
Commissioner, 61 T.C. 795, 811-812 (1974), affd. 521 F.2d 786
(4th Cir. 1975).
Mr. Kanz told petitioners he had no assets or inheritance to
pay the judgment, and they claim they believed the testimony of a
man who allegedly embezzled more than $186,000 from them.
Petitioners have not provided any independent evidence that Mr.
Kanz no longer has any assets, net worth, or opportunity for an
inheritance with which to pay the judgment. To this date, more
than 8 years after the collateral agreement was executed, Mr.
Kanz has not fulfilled his part of the bargain. Yet, petitioners
have not attempted to collect the judgment from Mr. Kanz.
Petitioners have not satisfied their burden of proving it could
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