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checks and rent checks that Edgar diverted to petitioner’s
personal Big Bear bank account and their failure to report
distributions from the Anis partnership in 1998 and 1999.
2. Petitioners’ Unreported Income for the Years in Issue
Petitioners deducted theft losses based on Edgar’s
unauthorized use of petitioner’s funds deposited in the Big Bear
account. To support their theft loss deduction, petitioners
admitted that they had failed to report legal fees and rental
income of $67,437 for 1995 and $87,942.76 for 1998 which had been
deposited by Edgar in petitioners’ Big Bear account but not
deposited in petitioner’s law firm account, recorded in his
client billings records, or reported on their returns for 1993-
98. Respondent contends that petitioners are liable for tax on
(a) those amounts, and (b) distributions from the Anis
partnership consisting of an ordinary loss of $2,240 for 1995, a
capital gain of $5,594 for 1998, and income of $9,127 for 1999.
These amounts were not taken into account in the notice of
deficiency.
3. Whether To Allow Respondent To Amend the Answer
After trial, respondent filed a motion for leave to file
amendment to answer asserting increased deficiencies and
additions to tax as a result of respondent’s allegation that
petitioners failed to report $67,437 for 1995 and $87,942.76 for
1998. The parties may amend their pleadings only by leave of the
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