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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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