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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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