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As indicated, funds received by a taxpayer through
misappropriation or embezzlement are to be treated as taxable
income. James v. United States, 366 U.S. 213, 219 (1961). Funds
received as loans, however, are not to be treated as taxable
income. See Collins v. Commissioner, 3 F.3d at 631.
Respondent determined that for 1987, the total managed
account funds deposited into the bank accounts in petitioner’s
name should be treated as income to petitioner, not as loan funds
invested by managed account investors that had to be repaid, nor
as loans from GSC to petitioner. Respondent argues that
petitioner misappropriated the managed account funds deposited
into the bank accounts in his name from either GSC or from
managed account investors.
Petitioner argues that all managed account funds, including
those deposited into the bank accounts in his name, constituted
loans and were not misappropriated by him from GSC or from
managed account investors. Petitioner argues that these funds
were used and were intended to be used by him to pay expenses and
to make purchases of securities for and on behalf of GSC and to
make repayments of principal and interest to managed account
investors.
During 1987, with funds from the bank accounts in his name,
petitioner paid $83,590 for GSC’s benefit, of which $45,865 was
paid for principal and interest on managed accounts and $37,725
was paid for gold Krugerrands. Also during 1987 and with funds
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