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not include them in income. According to respondent, petitioner
therefore has no basis in those funds and, consequently, is not
entitled to the deduction claimed under section 165.2
Section 165 provides in pertinent part:
(a) General Rule.--There shall be allowed as a
deduction any loss sustained during the taxable year
and not compensated for by insurance or otherwise.
(b) Amount of Deduction.--For purposes of subsec-
tion (a), the basis for determining the amount of the
deduction for any loss shall be the adjusted basis
provided in section 1011 for determining the loss from
the sale or other disposition of property.
* * * * * * *
(e) Theft Losses.--For purposes of subsection (a),
any loss arising from theft shall be treated as sus-
tained during the taxable year in which the taxpayer
discovers such loss.
Thus, the amount of the deduction allowable under section 165(a)
is the amount prescribed by section 1011 as the adjusted basis
for determining the loss from the sale or other disposition of
property. See also sec. 1.165-1(c)(1), Income Tax Regs. As
pertinent here, section 1011(a) defines the term "adjusted basis"
as the basis determined under section 1012, adjusted as provided
in section 1016, and section 1012 provides that the basis of
property is its cost.
2 Petitioner claims that respondent's position in effect re-
quires him to report the escrowed funds as income, even though he
never received them. We disagree. Respondent does not contend
that petitioner is required to include the escrowed funds in
income. To the contrary, respondent agrees that those funds are
not includible in petitioner's income because he never received
them.
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