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one account to another. Teichner v. Commissioner, 453 F.2d 944 (2d
Cir. 1972), revg. and remanding on other grounds T.C. Memo. 1970-
311; Forster v. Commissioner, T.C. Memo. 1961-281. However, when
the check-kiting scheme results in bounced checks of the taxpayer
and creates a loss to the financial institutions whose funds were
drawn upon in the scheme, income from the check-kiting scheme is
includable by the taxpayer. Romer v. Commissioner, T.C. Memo.
1996-287; Bradshaw v. Commissioner, T.C. Memo. 1996-123.
Petitioner concedes that he was engaged in a check-kiting
scheme through July 1988 when it collapsed due to Commercial &
Farmers' refusal to honor future checks presented by petitioner for
deposit. But petitioner contends that the check-kiting scheme was
converted to a loan arrangement in July 1988 when petitioners
executed promissory notes and mortgages in favor of Irvington
Federal. Hence, petitioners assert that the proceeds from the
check-kiting scheme do not constitute taxable income. Respondent
argues that the agreement reached between petitioner and Irvington
Federal in July 1988 cannot be characterized as a loan, but rather
as a plan of restitution. Alternatively, respondent argues that
even if the agreement between Irvington Federal and petitioner
could be characterized as a loan, that agreement cannot alter the
taxability of the diverted funds to petitioner, i.e., inclusion of
the amount of such funds as income, because the agreement was made
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