- 18 -18
Mr. Ottey's testimony failed to persuade us that Irvington
Federal suffered a $280,000 loss. Based on the record, we find
that the bank's loss from petitioner's check-kiting scheme was
$183,229. This amount represents the total Irvington Federal
checks that Commercial & Farmers dishonored on July 13, 1988.
After reducing the $183,229 by $20,000 to reflect attorneys' fees
conceded by respondent, we hold that petitioners had unreported
income of $163,229 in 1988 from petitioner's check-kiting scheme.
Petitioners are entitled to relief for repayments to Irvington
Federal with regard to the dishonored checks. See James v. United
States, 366 U.S. at 219-220. Taxpayers are permitted to deduct
from income the amount of actual repayments made to the embezzled
party in the year of repayment. Ianniello v. Commissioner, 98 T.C.
165, 174 (1992).6 The character of the repayments as a loan or
restitution here is irrelevant. If the taxpayer proves the actual
repayment of the embezzled funds, he is entitled to treat those
repayments as losses under section 165(c)(2).7 Mais v.
6 There is no evidence to suggest that petitioners were
not cash basis taxpayers. Consequently, any amount repaid is
deductible in the year of repayment. See Whitaker v.
Commissioner, 259 F.2d 379, 382 (5th Cir. 1958), affg. 27 T.C.
399 (1956).
7 SEC. 165. LOSSES.
(a) General Rule.--There shall be
allowed as a deduction any loss sustained
during the taxable year and not compensated
for by insurance or otherwise.
(continued...)
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