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Respondent’s examination of petitioners’ 1993, 1994, and
1995 income tax returns began on January 8, 1996.
Discussion
Petitioners allege Mr. Kanz embezzled funds from the SWAS
bank accounts. Petitioners have claimed a theft loss deduction
of $186,175.59 for their 1993 income tax year or, in the
alternative, theft loss deductions of $90,069 on their 1993
income tax return and $30,000 on their 1994 income tax return.
Petitioners have also claimed deductions for the corporate
employment taxes and interest thereon paid out of their own
pockets to the IRS as required by the bankruptcy plan of
reorganization for petitioners and their corporations.3 Because
of the connection between petitioners’ alternative claims for
theft loss deductions and deductions for payments of corporate
employment taxes and interest thereon, we have combined
our discussion of these two issues. We hold against petitioners
on both their deduction claims.
Respondent also claims petitioners are liable for the
addition to tax under section 6651(a)(1) for failure to timely
file their 1995 return. We hold petitioners are not liable for
the addition to tax for failure to timely file their 1995 return.
3Respondent argues that this is a new issue not raised in
the pleadings or in petitioners’ trial memorandum. Because we
hold against petitioners on the merits of this issue, we will not
address respondent’s argument.
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