Dennis W. Stark - Page 10



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          income for those years totaling $189,098, based upon his                    
          accountant's estimate of Lakeview's cash sales during the period.           
          Petitioner contends that although he repaid to Lakeview his share           
          of the diverted cash, William did not, and thus remained                    
          obligated to the corporation for the diverted amounts.  The                 
          $134,116 "forgiveness of debt" deduction claimed by Lakeview in             
          1992 represents the sum of what petitioner contends is William's            
          share of the skimmed cash, plus the price of an automobile                  
          purchased for William with corporate funds, along with the $9,000           
          check issued to Lakeview for a traded-in car that William                   
          converted to personal use.5                                                 
               a. Theft Loss                                                          
               Notwithstanding Lakeview's return position that it was                 
          entitled to a $134,116 deduction for the "forgiveness of debt",             
          petitioner on brief first argues that Lakeview is entitled to               
          deduct this amount as a theft loss under section 165.  Petitioner           
          contends that William's actions amounted to embezzlement under              
          Michigan law, and Lakeview is therefore entitled to a deduction             
          because section 1.165-8(d), Income Tax Regs., identifies a                  
          "theft" as including embezzlement.  However, even if we accept              
          petitioner's contentions regarding the cash diversions, it is               
          well established that a diversion of corporate funds by                     


               5  We note that the sum of (i) one-half of the additional              
          income of $189,098 reported on Lakeview's amended returns for               
          1984 through 1990 (i.e., $94,549), plus (ii) the $31,878 purchase           
          price for the automobile provided William, plus (iii) the $9,000            
          converted check, equals $135,427, not $134,116.  Petitioner                 
          offers no explanation for this discrepancy.                                 



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