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instant case, if the alleged theft losses were proven and claimed
in the year of discovery, the partnerships would not have to
declare income in a previous year that was never actually
received. Petitioners are not seeking a departure from the year
of discovery requirement to rectify a situation where section
165(e) operates in an “inequitable and absurd” manner that would
unduly penalize the partnerships; petitioners merely are
attempting to reduce the amount of interest the partners, who are
not parties in this case, owe on tax underpayments.
A departure from the literal meaning of section 165(e) is
not warranted in the instant case to implement Congress’ intent.
Congress enacted section 165 to provide relief to taxpayers
victimized by theft or embezzlement. In Rod Warren Ink, the
literal application of section 165(e) would have subverted the
intent of Congress by allowing a theft loss deduction in the year
of discovery, but, at the same time, creating taxable income in
previous years. If petitioners were entitled to a theft loss
deduction, claiming that deduction in the year of discovery17
would provide relief from the thefts in the discovery year and
not unduly penalize the partnerships in any previous years.
By the partnerships strictly following the application of
section 165(e), the sheep partners would not receive the relief
from interest which petitioners seek for them. However, the
17 Petitioners concede that the alleged thefts were
discovered at the earliest in 1997. See supra p. 66.
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