Russell W. and Rebecca A. Willey - Page 3

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          1995, Ms. Dugan received a bankruptcy discharge, and petitioners            
          did not receive any funds.                                                  
               In 1993, several trust fund representatives were indicted in           
          the U.S. District Court for the District of New Jersey for wire             
          fraud, money laundering, and tax evasion relating to the trust              
          fund's activities.  In 1995, two of these individuals pled guilty           
          and were convicted of the charged offenses.                                 
               On their 1993 joint Federal income tax returns, petitioners            
          claimed a theft loss of $769,800 (i.e., $470,000, less $100                 
          pursuant to section 165(h)(1), attributable to the loans to                 
          Casey, Treasures, and Electra and $300,000, less $100 pursuant to           
          section 165(h)(1), attributable to Treasures' stock).  On October           
          15, 1996, respondent issued a notice of deficiency to                       
          petitioners.  Respondent determined that petitioners were not               
          entitled to the theft loss but were entitled to a nonbusiness bad           
          debt subject to the $3,000 annual limitation.                               
               Section 165(c)(3) allows a deduction for any theft loss that           
          is not compensated by insurance or otherwise.  Whether a theft              
          has occurred is determined under State law.  Paine v.                       
          Commissioner, 63 T.C. 736, 740 (1975), affd. without published              
          opinion 523 F.2d 1053 (5th Cir. 1975).  The Delaware Code                   
          provides that a person commits theft when "the person takes,                
          exercises control over or obtains property of another person                

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