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a partner; (2) the taxpayer in Harrell failed to prove that his
partner embezzled any partnership funds, so the Court allowed the
taxpayer an ordinary loss, not a theft loss, for his distributive
share of partnership loss in an amount equal to his investment
because all partnership assets had been irretrievably lost; and
(3) neither of the partners in Girgis or Harrell was fraudulently
induced into investing or becoming a partner in his respective
partnership.
Both Girgis and Harrell indicate that a partner’s
embezzlement of partnership funds gives rise to a partnership
level deduction. Embezzlement of funds from the sheep
partnerships, if proven, could be a theft within the purview of
section 165 for which the partnerships would be entitled a
deduction. See Marine v. Commissioner, 92 T.C. 958, 976-977
(1989). However, petitioners in the instant case have failed to
prove that an embezzlement of partnership property occurred
during any of the years in issue. Jay Hoyt was never charged
with such an embezzlement, and the record does not support such a
finding. Neither Girgis or Harrell supports petitioners’
argument that the sheep partnerships are entitled to theft loss
deductions for any of the years at issue.
b. The Year of Discovery Requirement
The year of discovery requirement would be relevant in this
case only if the petitioners had established a theft loss at the
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