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absurd tax result stated above and to effectuate Congress’ intent
to provide relief to taxpayers victimized by theft or
embezzlement. Id. at 327. The Court of Appeals determined that
“Forcing the taxpayer to report the loss only in the year of
discovery for PHC purposes is contrary to the purposes and spirt
of both section 165(e) and the PHC tax scheme,” id. at 327, and
that “a literal application of section 165(e) would unduly
penalize the taxpayer.” Id. at 328. The Court of Appeals went
on to state that “Clearly, Congress did not intend for section
165(e) and the PHC tax scheme to function in such an inequitable
and absurd manner.” Id.
Petitioners’ reliance on Rod Warren Ink is misplaced. The
unique facts in Rod Warren Ink are distinguishable from the facts
in the instant case.
A major distinction between Rod Warren Ink and the instant
case is that the sheep partnerships are not personal holding
companies. See Willoughby v. Commissioner, T.C. Memo. 1994-398.
In addition, petitioners have not presented a persuasive
argument that a departure from the literal meaning of section
165(e) is warranted in order to avoid an “inequitable and absurd”
result. Petitioners assert that an absurd tax consequence will
result if the year of discovery requirement under section 165(e)
is applied, because the partnerships’ inability to discover Jay
Hoyt’s fraud at a sooner date caused the partners to accrue
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