Maurice D. and Elinor Taylor - Page 13

                                                    - 13 -13                                                      

             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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