Maurice D. and Elinor Taylor - Page 15

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             Federal with respect to the check-kiting scheme before July 1988.                                    
             And at that time, it was apparent that Irvington Federal would                                       
             suffer a loss as a result of petitioner's check-kiting scheme.                                       
                    In Buff v. Commissioner, 58 T.C. 224, 232 (1972), revd. 496                                   
             F.2d 847 (2d Cir. 1974), we held that where a taxpayer embezzled                                     
             funds and "there is a 'consensual recognition' of indebtedness                                       
             within the same taxable year, formalized by a confession of                                          
             judgment," the embezzled funds are not included in income.  The                                      
             facts in Buff were as follows:  The taxpayer embezzled funds from                                    
             his employer.  Upon discovery of the embezzlement, the taxpayer                                      
             immediately admitted the embezzlement. He signed confessed                                           
             judgments "for a debt justly due to the plaintiff [employer]".  Id.                                  
             at 225.  The taxpayer further agreed to continue working for the                                     
             employer and to pay $25 per week for repayment of the debt.  He                                      
             also borrowed $1,000 which he used to repay part of the debt.                                        
                    We recognized in Buff that parties to a transaction, dealing                                  
             at arm's length, may alter, amend, or revoke a transaction so as to                                  
             change its character for tax purposes if their action takes place                                    
             within the same taxable year. We thus held therein that a                                            
             consensual recognition of indebtedness existed such that the                                         
             embezzled funds were not includable in the taxpayer's income.                                        
                    The facts in Buff are distinguishable from those herein.                                      
             First, Irvington Federal never agreed to treat the repayment of the                                  
             check-kiting scheme losses as a debt.  Mr. Ottey testified that he                                   

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