Maurice D. and Elinor Taylor - Page 18

                                                    - 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.                                                          

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