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In Nichols, the taxpayers alleged and proved numerous fraudulent
misrepresentations by the promoter which induced the individuals
to part with their money and which constituted theft under
applicable State and Federal law.
Although Jay Hoyt committed acts similar to the promoter in
Nichols, the critical difference is that Nichols was a deficiency
suit in which the petitioners were individual investors who
established they were the victims of a theft of their own out-of-
pocket expenditures. By contrast, the instant case is a TEFRA
proceeding brought on behalf of the partnerships seeking to
deduct as a theft loss from the partnerships the total amount of
cash fraudulently obtained from the investors.
As previously discussed, a theft from the partners is not a
theft from the partnerships, and Nichols cannot be cited as
authority to make this leap. The individual investors in Nichols
were allowed a theft loss deduction solely because they met all
the required elements of section 165. Nichols certainly does not
hold that a partnership is entitled to a theft loss deduction
when the individual investors are swindled by the promoter’s
fraud.
Likewise, the unpublished opinion in Cummin v. United
States, supra, does not support petitioners’ conclusion that the
sheep partnerships are entitled to a theft loss deduction.
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