Paul A. and Marilyn J. Grothues - Page 19




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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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