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informed the Texas Rangers of their suspicion that Wheeler had
stolen money from PEC. By the end of 1987, petitioner believed
he knew how much Wheeler had stolen from either him or PEC.
Wheeler died in 1989.
Petitioners did not claim a theft loss deduction on their
1985, 1986, 1987, or 1989 income tax return. On or about October
15, 1992, petitioners timely filed an amended tax return and a
claim for refund for the 1988 taxable year. Petitioners based
their claim for refund upon a theft loss deduction in the amount
of $374,922.45 which they allege Wheeler stole from petitioner.
On July 21, 1995, the Internal Revenue Service denied
petitioners' claim for refund for the 1988 taxable year.
Default on Bank Loan by PEC
In 1988, PEC was unable to make payments due under the note.
In August 1988, the bank turned to petitioner to perform on his
guarantor agreement. On January 11, 1989, the bank obtained a
default judgment against petitioner (the default judgment) in the
amount of $1,105,552.75 with respect to petitioner's guaranty on
the note. On April 13, 1989, the bank obtained from the Texas
State District Court a temporary restraining order to enjoin
petitioner from conveying, encumbering, or disposing of any of
his assets.
On April 21, 1989, petitioner filed for protection under
chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court
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