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Robert and Suzette were evicted from their residence in June 1984,
and at that time they were unemployed. By November 1984, their
only asset was a 1973 Chevrolet automobile, and their only source
of funds came from family members. By the end of 1984, petitioners
had been informed by Robert that he and Suzette had no money and
petitioners had no reason to believe that Robert would be able to
repay them.
Accountant’s Advice
Clyde N. Freeman, a certified public accountant, prepared
petitioners’ tax returns from 1983 through 1987. Mrs. Leonard
typically reviewed major items in the returns for errors and
personally typed the returns. Freeman knew about the transactions
with Robert. Petitioners presented all information about the
transactions with Robert to Freeman when their 1985 return was
being prepared. Freeman advised petitioners that a loss with
respect to those transactions should not be claimed, and that he
believed if a deduction for the losses incurred were to be taken,
the deduction would be disallowed because of the family
relationships involved. Petitioners did not claim a loss with
respect to their transactions with Robert on their 1983, 1984, or
1985 returns.
In April 1989, just before the period of limitations for 1985
was to expire, petitioners filed an amended return for 1985
claiming a $650,000 "embezzlement loss" arising from their
transactions with Robert in 1983. The amended return was prepared
by Betty White, another accountant, with Freeman’s assistance.
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