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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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