The $70 Million Mirage: a scam victim’s 16-year fight over a $925,000 tax deduction

In 2008, a Texas businessman started wiring money into a deal his friend of 20 years brought him: a $70 million project, backed by a mysterious “Dubai Group.” The deal never existed. When the IRS denied his theft-loss deduction and added a penalty on top, the fight ran all the way to August 2026. This is Deutsch v. Commissioner — and the ending was a split decision: part win, part loss, and one question the court never resolved.

What was the $70 million deal that never existed?

It arrived the way these schemes usually do — through someone trusted. Aladar Deutsch’s friend of 20 years, Paul Visel, presented an opportunity tied to a $70 million development deal and a group of investors in Dubai. Deutsch started with what was described as a short-term loan. Then the pattern every fraud examiner dreads began: each time the deal was supposedly about to close, a new problem appeared, and one more payment was demanded to release the money.

Over roughly 18 months in 2008 and 2009, Deutsch wired $925,000 in four transfers. The promised funds, the court record shows, did not exist as represented. Money was directed into different accounts, the explanations kept changing, and property offered as security for the deal was not owned as claimed. There was no $70 million deal. There never had been.

Who took the money — the friend, or the “Dubai Group”?

Here is the twist at the center of the case: to this day, nobody knows for sure. The evidence never definitively resolved whether Visel — the friend of 20 years — was one of the conspirators or whether he was himself defrauded by the unidentifiable “Dubai Group” and simply passed the fiction along. The court found the evidence suggested Visel was likely defrauded himself — though it never definitively resolved whether he was a conspirator or another victim.

That mystery mattered for one pile of money in particular. Beyond the $925,000, Deutsch had advanced another $295,600 to cover Visel’s living expenses. Whether that money was “stolen” in the legal sense would decide whether it could ever be deducted.

What did the couple claim — and what did the IRS say?

On their 2010 joint return, Aladar and Sylvia Deutsch reported a theft loss of $1,552,777 on Schedule A. (During the litigation they conceded the correct amount at issue was $1,377,005.) The IRS disallowed the deduction and proposed additional tax plus an accuracy-related penalty under §6662.

The couple petitioned the U.S. Tax Court in November 2014. Their case was tried in San Antonio, Texas, in May 2016 before Judge Ashford. The opinion — Deutsch v. Commissioner, T.C. Memo. 2026-66 — was not filed until August 12, 2026: sixteen years after the tax year at the heart of the fight.

So who won?

Both sides did — and neither did. The court split the money:

• The $925,000: allowed. The court held the four transfers were a theft loss under §165, applying Texas law, which treats theft by deception as theft. The loss belonged in 2010 — the year Deutsch’s attorneys and investigators confirmed there was no reasonable prospect of getting any of it back.
• The $295,600: denied. The living-expense advances to Visel were not proven to have been stolen under Texas law — a plausible victim is not a proven thief.
• The penalty: thrown out. The court declined to sustain the §6662 accuracy-related penalty because the couple had reasonably relied on their CPA. (The IRS’s own penalty paperwork — the §6751(b) supervisory-approval form — became a fight of its own, with the court reopening the record after trial to admit it under the Fifth Circuit’s standard in Swift.)

And in a holding with real consequences for scam victims: the deduction survived even though the thief was never identified. The Deutsches did not have to prove who ended up with the money — they had to prove, by the weight of the evidence, that a theft is what happened.

Why did this scam loss survive when so many don’t?

Because of why the money was sent. Section 165 draws a bright line. A loss from a transaction entered into for profit (§165(c)(2)) follows one track. A purely personal loss (§165(c)(3)) follows another — and under §165(h)(5), personal theft losses are generally not deductible — a restriction in place since 2018, declared-disaster situations aside. Deutsch’s money went out as an investment, however fictional the investment turned out to be. That profit motive is what kept his deduction alive.

The IRS reads modern scams the same way. In Chief Counsel Advice 202511015, its own lawyers sorted today’s patterns — compromised-account scams, “pig butchering” crypto schemes, phishing — along exactly this line: money sent seeking profit can be a deductible theft loss; money lost in a personal context generally cannot, under the law as it stands today.

Scammed today? The checklist courts and the IRS look to

• Prove a theft under state law. A bad investment is not a theft. Deception with intent to deprive is the standard the court applied — the analysis was civil, not criminal.
• Document the profit motive. Agreements, projections, emails, account records — the paper trail showing the money was sent to make money.
• Nail the discovery year. A theft loss is claimed in the year you discover it, not necessarily the year the money left. Deutsch sent money in 2008–2009; his deduction year was 2010.
• Show recovery was hopeless. Attorneys, investigators, bank responses, demand letters — evidence that by year-end there was no reasonable prospect of recovery.
• Prove every payment separately. The $925,000 and the $295,600 were judged as different stories. The amount you sent is not automatically the amount you can deduct.

Alex Volkov, CPA is a New York-licensed CPA with over two decades in accounting, focused on resolving IRS tax problems — back taxes, liens, levies, garnishments, and audits — for individuals and businesses in all 50 states and around the world.