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legal status of petitioners’ corporations and petitioners cannot
be disregarded simply because petitioners own 100 percent of the
stock of their corporations. The corporate employment tax funds
were owned by petitioners’ corporations at the time of the
alleged embezzlement. Petitioners’ corporations did not transfer
ownership of the funds to SWAS. Rather, the funds were
transferred to SWAS for administrative convenience so that SWAS
could deposit the funds with the IRS. Accordingly, the corporate
employment tax funds belonged to petitioners’ corporations, not
petitioners or SWAS. Petitioners never acquired such ownership
of the corporate employment tax funds as would entitle them to a
theft loss deduction for the alleged embezzlement. Any theft
loss deduction can be claimed properly only by petitioners’
corporations.
By a parity of reasoning, petitioners are not entitled to a
deduction under section 162(a) for the corporate employment taxes
and interest thereon they paid the IRS out of their own pockets.
Business expenses deductible from gross income include the
ordinary and necessary expenditures directly connected with or
pertaining to the taxpayer’s trade or business. Sec. 1.162-1(a),
Income Tax Regs. The employees’ shares of the corporate
8(...continued)
I.R.B. 831. Petitioners, who are husband and wife, owned SWAS as
community property under the laws of Texas. Petitioners’
classification of SWAS as a sole proprietorship or disregarded
entity is consistent with Rev. Proc. 2002-69, supra.
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