As to Mr. Burke's allegation that his employees embezzled funds from him
and his insurance agencies, we find that no such embezzlement took place. The
employees whom Mr. Burke accuses of embezzlement were credible witnesses at
trial. They explicitly denied receipt of any of the money in question. As we
have already stated in our findings of fact, these employees were operating
under Mr. Burke's instructions when they withdrew funds from the MPC premium
account and the accounts of the Burke Insurance Agencies. Such funds were
either given to Mr. Burke, transferred to Ard Rhei, or otherwise dispersed on
Mr. Burke's behalf. For example, on several occasions, funds were used to
satisfy Mr. Burke's gambling debts11 or to pay persons who supplied Mr. Burke
with illegal drugs.12
We conclude that Mr. Burke improperly diverted funds for his own
personal use without the consent of U.S. Life,13 and these funds are,
therefore, includable in his gross income. See James v. United States, supra
at 219. Accordingly, we sustain respondent's determination that Mr. Burke had
unreported income for the years in issue. We also conclude that respondent
has presented sufficient evidence to carry her burden of proof regarding the
increased deficiency for 1986. We note that the amounts, which should have
been paid to U.S. Life during the years in issue, actually exceed the income
amounts determined by respondent.
Embezzlement Losses
Mr. Burke argues that he is entitled to deductions for losses of $21,800
and $215,000 in 1985 and 1986, respectively, as a result of the embezzlement
11For instance, a check was drawn on the MPC premium account and made
payable for $6,000 to Lisa Tobin, the wife of a bookmaker with whom Mr. Burke
gambled.
12Another check was made payable for $4,000.51 to Don Balsamo. Mr. Burke
purchased cocaine from Mr. Balsamo during the years in issue.
13Sufficient evidence exists to explain petitioners' need for funds well
in excess of the income reported on the returns at issue. Petitioners lived
in an expensive house, incurred significant home improvement expenses, paid
for their son's college tuition and provided him with an automobile and
insurance coverage. Mr. Burke also purchased illegal narcotics and gambled
heavily.
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