Diane S. Blodgett - Page 14

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          to include, but shall not necessarily be limited to, larceny,               
          embezzlement, and robbery”); Whiteman v. Commissioner, supra,               
          (taxpayer denied theft loss deduction as to jewelry and furs                
          because he failed to establish both their value and ownership).             
          Further, theft losses are treated as sustained during the taxable           
          year in which the taxpayer discovers the loss.  Sec. 165(e).                
          Notwithstanding the fact that petitioner’s claims of theft by               
          Government officials in the bankruptcy case, the FTC case, and              
          the IRS audit are meritless, petitioner “discovered” these events           
          well before 1998, the year at issue.  She is not entitled to a              
          theft loss deduction in 1998.  Respondent is sustained on this              
          issue.                                                                      
               Next, petitioner claimed entitlement to a deduction of                 
          $225,000 as carryforward legal expenses.  To the extent this                
          deduction is related to the legal expenses of the business, such            
          expenses would be reflected in the net income or loss of the                
          business that would flow through to the individual shareholders.            
          As noted earlier, petitioner had no basis in the S corporation              
          entitling her to deduct losses from the business.  Moreover,                
          petitioner advanced no other convincing evidence or argument that           
          would entitle her to deduct the legal expenses.  She has failed             
          to prove that her costs, if any, for defending herself and Mr.              
          Blodgett from civil or criminal liability connected with the                
          business were other than nondeductible personal expenses.  Matula           





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