Taxpayers Can't Claim Theft Loss for Bad Investment

(Parker Tax Publishing November 2025)

The Tax Court held that taxpayers who invested in a Turks and Caicos gaming company were not entitled to claim a $2 million theft loss deduction after the company failed to complete an airport casino project that was the primary purpose of the taxpayers' investment. The court found that the taxpayers failed to prove that a theft occurred under Turks and Caicos law, since the share purchase agreement did not specify that the proceeds for the sale of the shares would be used for the casino project and the taxpayers failed to show they were fraudulently induced to make the investment. Potts v. Comm'r, T.C. Memo. 2025-108.

Background

Craig Potts started his career providing check cashing services to Native American casinos. He expanded the business to provide cash management services, including ATMs and cash advances, to casinos across the United States, as well as gaming establishments in 23 countries.

In 2001, Potts and his wife made their first investment in the Turks and Caicos Islands (Turks and Caicos), purchasing Carib West, a beer distributor. They subsequently purchased Danny Buoy's, a Turks and Caicos bar that had slot machines. The Pottses did not own the slot machines; instead, under a routing agreement, Carib Gaming, Ltd. (Carib Gaming), owned and maintained the machines. The Pottses, as owners of Danny Buoy's, were entitled to a percentage of the machines' net revenue.

Craig Potts met Jack Tatum through the Danny Buoy's routing agreement. Tatum was the general manager of Carib Gaming. He and another investor, Rick Olson, were majority owners of VT Enterprises, Ltd. (VT Enterprises), which owned 75 shares of Carib Gaming, which was the router for 92 slot machines in 27 establishments. As a router, Carib Gaming entered into agreements with bars and other establishments to operate slot machines. Under the agreements, Carib Gaming remitted an agreed-upon percentage of the net revenue, less gaming taxes, to the establishment owners. In 2007, Carib Gaming recorded $20,913,449 in gross revenue.

Tatum approached Potts with an opportunity to invest in Carib Gaming. Tatum described a project to build a casino (casino project) in the Airport Hotel & Plaza. The Airport Hotel, owned by Hayden and Lillian Boyce, leased to Carib Gaming space on the hotel property for the casino. Carib Gaming had begun extensive renovations to the existing space, including excavating the floor to increase the interior's ceiling height.

In April 2008, the Pottses entered into a Memorandum of Understanding (MOU) to purchase shares of Carib Gaming from existing investors. The MOU stated that the Pottses would purchase 25 shares - 25 percent of Carib Gaming's issued and outstanding stock - for $2.5 million. In May 2008, the Pottses executed a Share Purchase Agreement with VT Enterprises. Under that agreement, the Pottses purchased 25 shares of Carib Gaming from VT Enterprises for $2.5 million. The 2008 Purchase Agreement stated that it represented the only agreement among the parties. Neither the MOU nor the Purchase Agreement specified how VT Enterprises would use the $2.5 million.

The Pottses received dividends from Carib Gaming on ten different occasions. They separately received distributions from Carib Gaming on account of Carib Gaming's routing agreements with the Pottses' other gambling establishments (e.g., Danny Buoy's). On personal financial statements for 2009 and 2010, the Pottses listed $500,000 and $200,000 of income from Carib Gaming, respectively. The statements also valued their interest in Carib Gaming at $6 million.

Construction on the casino never progressed beyond the partial demolition of the Airport Hotel space. At some point in 2014, Potts learned that Carib Gaming had failed to remit certain gaming taxes to the Turks and Caicos authorities. Carib Gaming also owed ongoing rent to the Boyces for the Airport Hotel space.

On their 2014 federal income tax return the Pottses claimed a $2 million theft loss deduction under Code Sec. 165 and reported no federal income tax liability. In 2018, the IRS mailed the Pottses a Notice of Deficiency disallowing the theft loss deduction and determining an accuracy-related penalty under Code Sec. 6662. The Pottses took their case to the Tax Court.

Code Sec. 165(a) permits a deduction for losses sustained during the tax year and not compensated for by insurance or otherwise. Under Code Sec. 165(c), a loss is deductible under Code Sec. 165(a) only if the loss (1) is incurred in a trade or business, (2) is incurred in a transaction entered into for profit, or (3) arises from fire, storm, shipwreck, or other casualty, or from theft. To establish a theft loss, a taxpayer first must prove that a theft occurred under the law of the relevant jurisdiction. Under the Turks and Caicos theft ordinance, both theft and theft by deception require three basic elements: (1) the appropriation of property belonging to another, (2) through dishonesty or deception, (3) with the intention to permanently deprive the other of it.

The Pottses alleged that in 2008, Tatum and Olson misappropriated $2 million of the $2.5 million paid to VT Enterprises in exchange for 25 shares in Carib Gaming. They contended that none of that money was used as represented to inject additional capital into Carib Gaming in order to complete the casino project. They primarily relied on the testimony of their attorney, Peter Karam. Karam testified that, during due diligence for a potential investment by an unrelated third party, Tatum purportedly admitted to Karam that he transferred $2 million of the Pottses' investment to his and Olson's personal bank accounts.

Analysis

The Tax Court held that the Pottses were not entitled to claim a theft loss because they failed to establish that a theft occurred under Turks and Caicos law.

The court struggled to see how, given the structure of the 2008 Purchase Agreement, Tatum and Olson misappropriated the $2 million. The court noted that the Pottses did not invest directly in Carib Gaming, either by way of a contribution to its capital or through the purchase of newly issued shares directly from it. Instead, they purchased existing shares from another shareholder, VT Enterprises, which was controlled by Tatum and Olson. The court also found that nothing in 2008 Purchase Agreement or the Shareholder Agreement required VT Enterprises to use in any particular way the proceeds from the Pottses' purchase of Carib Gaming shares. That is, none of these agreements imposed a legal obligation on VT Enterprises to reinvest or contribute the sale proceeds towards the casino project (nor did they create any other restrictions on VT Enterprises' use of the sale proceeds). The court noted that the Pottses never held an interest in VT Enterprises and had no say in how it, as the seller, used the sale proceeds, either.

While the Pottses maintained that the casino project was the primary purpose for their investment in Carib Gaming, and that Tatum promise that the 2008 sale proceeds would be used to inject additional capital into Carib Gaming, the court saw no evidence of this purported intent other than Craig Potts' testimony that Tatum orally promised that the proceeds would be reinvested in the casino project. The court found that, even if it accepted that these oral promises were made, they were not memorialized in the 2008 Purchase Agreement. And that Agreement specified that the represented "the only agreement among the parties."

The court further found that the Pottses failed to satisfy the dishonesty or deception element of the theft offense. In the court's view, there was no evidence that the Pottses were fraudulently induced to invest in Carib Gaming. Instead, the court found that they relied on Tatum's alleged promises that in in the future he would inject sale proceeds into Carib Gaming and complete the casino project. The Pottses failed to persuade the court that a theft by deception could be based on promised future intentions.

In addition, the court questioned whether the Pottses were the proper parties to claim any theft loss deduction. The court observed that the Pottses transferred the $2.5 million purchase price to the trust account of VT Enterprises' counsel. Any theft or embezzlement, the court found, was of funds held by VT Enterprises. The court concluded that any purported embezzlement by Tatum and Olson did not deprive the Pottses of their property, but instead deprived VT Enterprises of funds belonging to it.

The court noted in conclusion that the disallowance of a theft loss deduction did not necessarily foreclose eventual recognition of a loss. The court pointed out that the Pottses presumably had a basis in the Carib Gaming shares, and to the extent the shares indeed diminished in value, the Pottses could be entitled to claim a loss deduction upon their disposition.

For a discussion of the theft loss deduction, see Parker Tax ¶84,510.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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