Maurice D. and Elinor Taylor - Page 12

                                                    - 12 -12                                                      

             respondent determined that petitioners were liable for the fraud                                     
             penalties, and in the event respondent's fraud determinations are                                    
             not sustained, accuracy-related penalties pursuant to section 6662                                   
             for negligence or disregard of rules or regulations or substantial                                   
             understatement of tax.                                                                               
                                                    OPINION                                                       
             Issue 1.  1988 Check-Kiting Income                                                                   
                    The first issue for decision is whether petitioners must                                      
             recognize $280,698 (or any lesser amount) of income for 1988 as a                                    
             result of petitioner's check-kiting scheme.  Petitioners assert                                      
             that Irvington Federal's shortfall from the check-kiting scheme was                                  
             $170,000, not $280,698, and that because the shortfall was                                           
             converted to a loan upon the execution of the confessed judgment                                     
             promissory notes and mortgages in July 1988, the proceeds from the                                   
             scheme are not taxable.  Respondent counters that the notes and                                      
             mortgages represented restitution, not a loan.                                                       
                    Gross income means income from whatever source derived,                                       
             including income from illegal sources.  Sec. 61; James v. United                                     
             States,  366 U.S. 213 (1961); Rutkin v. United States, 343 U.S. 130                                  
             (1952); United States v. Rosenthal, 470 F.2d 837 (2d Cir. 1972);                                     
             Moore v. United States, 412 F.2d 974 (5th Cir. 1969); Peters v.                                      
             Commissioner, 51 T.C. 226 (1968); McSpadden v. Commissioner, 50                                      
             T.C. 478 (1968).  Generally, check kiting does not produce taxable                                   
             income because it merely involves a "merry-go-round" of funds from                                   





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