                        T.C. Memo. 2002-287



                      UNITED STATES TAX COURT



         PAUL A. AND MARILYN J. GROTHUES, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13475-99.           Filed November 25, 2002.


     J. Raymond Karam, for petitioners.

     Roberta L. Shumway, for respondent.



                        MEMORANDUM OPINION


     BEGHE, Judge:   This case is before the Court fully

stipulated under Rule 122.1   The stipulation of facts and the

attached exhibits are incorporated herein by this reference.



     1
      All rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the years at issue, unless otherwise
specified.
                                  - 2 -

     Respondent determined the following deficiencies, addition,

and penalties with respect to petitioners’ Federal income taxes:

                                                  Accuracy-Related
                               Addition to Tax        Penalty
     Year       Deficiency     Sec. 6651(a)(1)      Sec. 6662(a)

     1993       $28,559             ---                  $5,424
     1994        18,168             ---                   2,799
     1995        20,497           $3,017                  4,099

     After giving effect to various concessions,2 the issues

remaining for decision are:

     1.     Whether petitioners are entitled to a theft loss

deduction or deductions for corporate employment taxes allegedly

embezzled by Alan Kanz.      We hold petitioners are not entitled to

any such deduction.

     2.     Whether petitioners are entitled to deductions for

corporate employment taxes and interest thereon they paid the IRS

out of their own pockets.     We hold petitioners are not entitled

to any such deductions.

     3.     Whether petitioners are liable for the addition to tax

under section 6651(a)(1) for failure to timely file their 1995

tax return.     We hold petitioners are not so liable.




     2
      Petitioners have conceded, among other things, that they
are liable for accuracy-related penalties under sec. 6662(a) for
the years in issue on any underpayments that finally may be
determined.
                                - 3 -

Background

     Petitioners Paul A. and Marilyn J. Grothues (Mr. Grothues

and Mrs. Grothues) are husband and wife.   They resided in San

Antonio, Texas, when they filed the petition in this case.

     Between 1971 and 1987, petitioners owned and controlled the

following corporate entities:   (1) Southwest Oil Co. of

Jourdanton, Inc. (SWOJ), (2) Southwest Oil Co. of Eagle Pass,

Inc. (SWOEP), (3) Southwest Oil Co. of San Antonio, Inc., (4)

Southwest Propane Co., Inc., (5) Southwest Tire Co., Inc., (6)

P.A.G., Inc., (7) Bridges Petroleum, Inc., (8) End-User’s, Inc.,

and (9) Trux, Inc.

     Between 1971 and 1987, petitioners also owned one-third of

the shares of Southwest Slab & Excavation, Inc. (SSAE).     The

other shareholders of SSAE included Alan Kanz (Mr. Kanz).

     In 1984, petitioners formed Southwest Administrative

Services (SWAS) as a sole proprietorship in order to centralize

the payroll processing for their various corporations.     On March

7, 1984, the Internal Revenue Service (the IRS) issued SWAS

employer identification No. (EIN) XX-XXXXXXX.

     Instead of filing a separate Form 941, Employer’s Quarterly

Federal Tax Return, for each of their corporations, petitioners

combined all their corporations’ employment tax liabilities and

reported them on a single Form 941 under the EIN of SWAS.    SWAS

wrote and distributed bimonthly payroll checks to the
                               - 4 -

corporations’ employees and wrote checks for the corporations’

combined employment tax liabilities.   In exchange for these

services, petitioners’ corporations paid SWAS a handling fee.

Petitioners’ Federal income tax returns have never included a

Schedule C, Profit or Loss From Business, for a sole

proprietorship known as SWAS or a partnership return on Form

1065, U.S. Partnership Return of Income, for a partnership known

as SWAS.

     Mr. Kanz began working for petitioners and their

corporations in 1981.   At that time, Mr. Kanz had known

petitioners for approximately 10 years.   Mr. Kanz, then a

licensed public accountant, performed services as an independent

contractor for petitioners’ corporations.   His responsibilities

included preparation of payroll tax returns and financial

statements, the reconciliation of bank statements, and management

of petitioners’ corporations’ financial affairs.    He performed

these services for petitioners’ corporations and SWAS from 1981

to July 1990.   He billed each corporation for professional fees

based on his number of hours of service for that corporation.

     Initially, SWAS maintained a payroll checking account at

Brooks Field National Bank in San Antonio, Texas.    In March 1987,

SWAS opened another account at Trinity National Bank in San

Antonio, Texas.   Petitioners and Mr. Kanz were the only persons
                                - 5 -

who had authority to sign checks on the payroll and escrow

accounts at Brooks Field National Bank and Trinity National Bank.

     Although there was usually enough money in the SWAS accounts

to make payroll payments, petitioners’ corporations did not

regularly transfer enough money to SWAS to cover the corporate

employment tax deposits.    For this reason, neither petitioners

nor Mr. Kanz always immediately signed the corporate employment

tax deposit checks.   Mrs. Grothues stacked the unsigned corporate

employment tax deposit vouchers on her desk.

     On each of the Federal income tax returns filed by

petitioners’ corporations for the 1984-88 tax years, deductions

were claimed for each corporation’s employment tax liabilities

that were reported on the SWAS EIN account.

     Ernest Hooks (Mr. Hooks) was employed by petitioners’

corporations from 1983 through January 5, 1990.    He was

responsible for reconciling the corporations’ and SWAS’s bank

statements, and he assumed additional duties associated with

SWAS’s centralized payroll processing.    Mrs. Grothues also

participated in the reconciliation of the corporations’ and

SWAS’s bank statements.    Both Mrs. Grothues and Mr. Hooks knew

that many of the checks written to pay the corporate employment

taxes did not clear the bank.    Mr. Hooks became uncomfortable

with the practices he observed at petitioners’ offices, including

the delays in signing the corporate employment tax deposit checks
                                - 6 -

stacked on Mrs. Grothues’s desk and the failure of many of the

checks written to pay corporate employment taxes to clear the

Bank.   Mr. Hooks also knew that Mrs. Grothues altered fuel excise

tax returns.    She instructed him to create a second database and

reconstruct invoices to conform with the numbers that had been

reported on the State and Federal fuel excise tax returns.

      On March 30, 1987, petitioners filed a petition for relief

under chapter 11 of the Bankruptcy Code in the U.S. District

Court for the Western District of Texas in case No. 87-50747-LC-

11.   Respondent filed proofs of claim in petitioners’ bankruptcy

proceedings that included claims for past-due corporate

employment taxes of petitioners’ corporations.    The bankruptcy

plan of reorganization for petitioners and their corporations,

confirmed on August 14, 1992, provided for payment by petitioners

of the corporate employment tax liabilities of their

corporations.

      On January 5, 1990, after several years had passed without

correction of the false fuel excise tax returns, Mr. Hooks

terminated his employment with petitioners’ corporations and

contacted the IRS.    Mr. Kanz tried to dissuade Mr. Hooks from

talking to the IRS.    When it became apparent that Mr. Hooks could

not be dissuaded, Mr. Kanz informed the IRS about petitioners’

practices with respect to reporting and paying their

corporations’ employment and fuel excise taxes.
                                - 7 -

     On June 21, 1990, acting upon information provided by Mr.

Hooks and Mr. Kanz concerning unpaid corporate employment and

fuel excise taxes, IRS special agents executed a Federal search

warrant at petitioners’ offices in San Antonio, Texas.

Subsequently, Mrs. Grothues was indicted and convicted of

wilfully failing to file required excise tax returns and to pay

excise taxes of SWOJ for the quarters ending June 30, 1986,

through September 30, 1988, and of SWOEP for the quarters ending

March 31, 1989, through December 31, 1990.    Mrs. Grothues was

incarcerated in a Federal prison camp from February 1, 1994, to

January 21, 1995.

     Shortly after June 21, 1990, when the IRS had served its

search warrant, petitioners hired Martha Simpson (Ms. Simpson), a

certified public accountant, to analyze the corporate employment

tax liabilities.    The purpose of Ms. Simpson’s analysis was to

compute SWAS’s underpayments of the corporate employment taxes.

     On April 23, 1991, two of petitioners’ corporations and SWAS

filed suit against Mr. Kanz and Mr. Hooks in Southwest Oil Co. v.

Kanz, No. 91-CI-05751 in the District Court, 57th Judicial

District, Bexar County, Texas (hereinafter, SWAS v. Kanz).    Ms.

Simpson prepared exhibits A, B, and C, which were attached to the

complaint in SWAS v. Kanz (exhibits A, B, and C).    Exhibits A, B,

and C listed checks written by SWAS in 1984, 1985, and 1986 to

pay the corporate employment tax liabilities to the IRS and the
                                 - 8 -

amount shown as applied to the SWAS account by the IRS.   On each

of exhibits A, B, and C the difference between the total dollar

amount of all checks written by SWAS and the total dollar amount

shown as applied to the SWAS account by the IRS is the amount

petitioners claim Mr. Kanz embezzled.    According to exhibits A,

B, and C, the missing amounts that petitioners claim Mr. Kanz

embezzled were $93,740.11 in 1984, $17,412.91 in 1985, and

$75,022.57 in 1986, for a total of $186,175.59.

     In April 1991, when the complaint in SWAS v. Kanz was filed,

petitioners believed there was a reasonable prospect of some

recovery from Mr. Kanz; they thought he was the only child of a

wealthy family with extensive land holdings.   He also had several

childless aunts and uncles.   Petitioners believed Mr. Kanz would

receive substantial inheritances when his parents and his aunts

and uncles died.

     SWAS v. Kanz was settled without trial.    On September 28,

1993, an agreed judgment (the agreed judgment) was entered.     The

agreed judgment provided that SWAS “is entitled to recover

judgment of and from Defendant [Alan Kanz] the sum of $186,175.59

for conversion of [Form] 941 payroll taxes intended to be paid to

the Internal Revenue Service.”

     At the time of the agreed judgment, Mr. Grothues and Mr.

Kanz executed a collateral agreement (the collateral agreement),

which provided that Mr. Grothues would not attempt to collect
                               - 9 -

the judgment against Mr. Kanz in exchange for Mr. Kanz’s promise

to cooperate and assist in any effort to reduce or eliminate

petitioners’ liabilities for the corporate employment taxes due

the IRS.   Both Mr. Grothues and Mr. Kanz contemplated the

simultaneous execution of the settlement upon which the agreed

judgment was based and the collateral agreement.

     At the time petitioners’ 1993, 1994, and 1995 tax years were

under examination, Mr. Kanz denied he had ever embezzled funds

from petitioners, SWAS, or petitioners’ corporations.   On January

25, 2002, Mr. Kanz admitted he had misappropriated money from the

SWAS bank accounts, but he denied he had misappropriated as much

as the amount stated in the agreed judgment.   On February 12,

2002, Mr. Kanz stated he did not deny any of the findings in the

agreed judgment and that he was unable to dispute any of the

findings in the agreed judgment insofar as they related to his

actions.   Mr. Kanz has not reported the alleged embezzlement

income on any returns he has filed since 1984.

     To date, Mr. Kanz has not cooperated with or assisted

petitioners, petitioners’ corporations, or SWAS in reducing or

eliminating petitioners’ liabilities for the corporate employment

taxes due the IRS.   To date, neither petitioners, petitioners’

corporations, nor SWAS have taken any steps to recover from Mr.

Kanz the amounts set forth in the agreed judgement.
                               - 10 -

     In 1991, Mr. Kanz was indicted on money laundering charges

arising from a Drug Enforcement Agency investigation unrelated to

petitioners’ claims.   On April 9, 1992, Mr. Kanz was sentenced to

serve a term of 42 months in a Federal penitentiary.   In June

1993, he was released to a halfway house.   In December 1994, Mr.

Kanz was released subject to electronic monitoring and secured

employment at Texas Switch, where he earned approximately $200

per week.   From 1995 to 1998, Mr. Kanz worked for Landa

Automotive.   Since 1998, Mr. Kanz has been employed by New

Braunfels Cycle Country, where he earns $2,400 per month.     Mr.

Kanz’s wife operates a housekeeping business.   They have no

dependent children.    Mr. Kanz’s father died in the early 1990s,

and his mother died in January 2002.

     Petitioners claimed embezzlement loss deductions of $90,069

on their 1993 return and $30,000 on their 1994 return for their

payments of the corporate employment taxes allegedly embezzled by

Mr. Kanz.   These deductions are for amounts petitioners estimated

that they paid for the past due corporate employment taxes during

their bankruptcy.   The following chart identifies the quarterly

periods and the amounts of tax, penalties, interest, and fees

that petitioners actually paid through their bankruptcy on the

past due corporate employment tax liabilities during the 1993 and

1994 tax years:
                              - 11 -

                               1993

                    Tax       Penalties       Interest      Fees

3d-Q 1985      $22,987.26    $11,658.13      $15,345.61     $9
4th-Q 1984      11,695.00     18,540.11          ---        ---
4th-Q 1986      32,903.30      3,278.74          358.88     ---
   Total        67,585.56     33,476.98       15,704.49      9

                               1994

                    Tax       Penalties       Interest      Fees

3d-Q 1985           ---      ($7,540.66)     $9,943.35     ---
4th-Q 1984          ---        2,274.92       1,821.88     ---
4th-Q 1986      $27,597.31       ---            ---        ---
   Total         27,597.31    (5,265.74)     11,765.23     ---

The foregoing amounts total $116,776.03 for 1993 and $34,096.80

for 1994.

     On April 15, 1996, petitioners filed Form 4868, Application

for Automatic Extension of Time to File U.S. Individual Income

Tax Return, extending the due date of their 1995 tax return to

August 15, 1996.   Petitioners claim they timely filed Form 2688,

Application for Additional Extension of Time to File U.S.

Individual Income Tax Return, which extended the time to file

their 1995 tax return to October 15, 1996.    Petitioners mailed

their 1995 tax return to respondent on October 15, 1996, and

respondent received it on October 17, 1996.    Petitioners did not

attach a copy of Form 2688 to their 1995 tax return.      Exhibit 8-P

is a photocopy of the Form 2688 allegedly submitted by

petitioners.   Respondent claims his records do not show receipt

of a Form 2688 from petitioners.
                              - 12 -

     Respondent’s examination of petitioners’ 1993, 1994, and

1995 income tax returns began on January 8, 1996.

Discussion

     Petitioners allege Mr. Kanz embezzled funds from the SWAS

bank accounts.   Petitioners have claimed a theft loss deduction

of $186,175.59 for their 1993 income tax year or, in the

alternative, theft loss deductions of $90,069 on their 1993

income tax return and $30,000 on their 1994 income tax return.

Petitioners have also claimed deductions for the corporate

employment taxes and interest thereon paid out of their own

pockets to the IRS as required by the bankruptcy plan of

reorganization for petitioners and their corporations.3    Because

of the connection between petitioners’ alternative claims for

theft loss deductions and deductions for payments of corporate

employment taxes and interest thereon, we have combined

our discussion of these two issues.    We hold against petitioners

on both their deduction claims.

     Respondent also claims petitioners are liable for the

addition to tax under section 6651(a)(1) for failure to timely

file their 1995 return.   We hold petitioners are not liable for

the addition to tax for failure to timely file their 1995 return.


     3
      Respondent argues that this is a new issue not raised in
the pleadings or in petitioners’ trial memorandum. Because we
hold against petitioners on the merits of this issue, we will not
address respondent’s argument.
                                - 13 -

Issues 1 and 2. Theft Loss Deductions; Deductions for Payments
of Corporate Employment Taxes and Interest Thereon

     Petitioners bear the burden of proving their entitlement to

deductions for theft losses and for payment of the corporate

employment taxes and interest thereon.      Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).4      That this is a fully

stipulated case does not alter the burden of proof, or the

requirements otherwise applicable with respect to adducing proof,

or the effect of failure of proof.       Rule 122(b).

     Petitioners have claimed their theft loss deduction under

section 165(a) and their entitlement to deductions for paying the

corporate employment taxes and interest thereon under section

162(a).

     Section 165(a) allows a deduction for “any loss sustained

during the taxable year and not compensated for by insurance or

otherwise.”    Under section 165(a), a theft loss deduction is

allowable for the year “in which the taxpayer discovers such

loss.”    Sec. 165(e).   If in the year of discovery the taxpayer

has a claim for reimbursement on which there is a reasonable


     4
      Sec. 7491(a) places the burden of proof on the Commissioner
in certain circumstances in court proceedings arising from IRS
examinations beginning after July 22, 1998. See Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3001(c), 112 Stat. 727. By the same token, sec. 7491(c)
places the burden of production on the Commissioner with respect
to additions to tax. Sec. 7491(a) and (c) does not apply in this
case because the examination of petitioners’ 1993, 1994, and 1995
tax years began on Jan. 8, 1996.
                              - 14 -

prospect of recovery, a loss is not considered sustained until

the tax year in which it can be ascertained with reasonable

certainty whether such reimbursement will be received.     Secs.

1.165-1(d)(3), 1.165-8(a)(2), Income Tax Regs.   Only the taxpayer

who was the owner of the stolen property when it was criminally

appropriated is entitled to a theft loss deduction.   Draper v.

Commissioner, 15 T.C. 135 (1950); Lupton v. Commissioner, 19

B.T.A. 166 (1930); Malik v. Commissioner, T.C. Memo. 1995-204.

     In order to be entitled to a theft loss deduction under

section 165, petitioners must satisfy the following three

requirements:   (1) That they were the owners of the allegedly

embezzled corporate employment tax funds, (2) that embezzlement

actually occurred, and (3) that during the year for which the

deduction is claimed, it could be ascertained with reasonable

certainty that no recovery could be made.   We hold that

petitioners are not entitled to any theft loss deduction under

section 165 because they satisfy none of the three requirements.5




     5
      Respondent advances two alternative arguments why
petitioners are not entitled to a theft loss deduction even if
they meet the requirements of sec. 165. First, respondent claims
that the collateral agreement executed by Mr. Grothues and Mr.
Kanz is equivalent in value to the judgment. Second, respondent
claims that petitioners did not include the allegedly embezzled
corporate employment tax funds in their income. Because we have
ruled that petitioners have not satisfied the requirements of
sec. 165 and secs. 1.165-1(d)(3) and 1.165-8(a)(2), Income Tax
Regs., we need not address respondent’s alternative arguments.
                              - 15 -

     Section 162(a) allows a deduction for all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business, including a reasonable

allowance for salaries or other compensation for personal

services actually rendered.   A deduction for salaries or other

compensation includes a deduction for corporate employment taxes.

Corporate employment taxes include the following:   (1) The

employees’ Federal income taxes, secs. 3401 and 3402, (2) the

employees’ shares of Federal Insurance Contributions Act (FICA)

taxes, sec. 3101, (3) the employer’s share of FICA taxes, sec.

3111, and (4) employer’s Federal Unemployment Tax Act (FUTA)

taxes, sec. 3301.   Employers are liable for deducting and

withholding from their employees’ salaries or wages the

employees’ shares of Federal income and FICA taxes.   Secs.

162(a), 3102(a), 3402(a), 3403.   In general, section 162 allows

petitioners’ corporations to deduct amounts paid as corporate

employment taxes (Federal income, FICA, and FUTA taxes).6     See

sec. 162(a); see also R.J. Nicoll Co. v. Commissioner, 59 T.C.

37, 45 (1972); sec. 1.164-2(a), (f), Income Tax Regs.; Rev. Rul.

80-164, 1980-1 C.B. 109.   (Section 164 does not apply to the

employer’s payment of FICA and FUTA taxes.)   The withheld Federal


     6
      Federal income and FICA taxes withheld by an employer from
an employee’s remuneration are considered to be part of that
remuneration and deductible as such by the employer under sec.
162(a).
                              - 16 -

income and FICA taxes are reported quarterly on Form 941.   Secs.

31.6011(a)-1(a)(1), 31.6011(a)-4(a)(1), Employment Tax Regs.

FUTA taxes are required to be reported annually on Form 940.

Sec. 31.6011(a)-3, Employment Tax Regs.   We hold petitioners are

not entitled to any deductions under section 162(a) for the

corporate employment taxes and interest thereon they paid the IRS

out of their own pockets.   We now address issues 1 and 2 in

detail.

     A.   Ownership of the Corporate Employment Tax Funds; Right
          to Deduction for the Corporate Employment Taxes and
          Interest Thereon Paid to the IRS

     Respondent argues the embezzlement claim does not belong to

petitioners or SWAS but rather to petitioners’ corporations.

Respondent also argues that petitioners are not entitled to

deduct their personal payments of the corporate employment taxes

because petitioners’ corporations had already deducted the same

amounts on their corporate returns.

     Petitioners assert the embezzlement claim belongs to them in

their individual capacities because the funds were stolen

directly from their sole proprietorship, SWAS.   Petitioners also

argue they are entitled to deduct their payments of the corporate

employment taxes out of their own pockets.

     Petitioners did not own the corporate employment tax funds

in the hands of SWAS and therefore cannot claim a theft loss

deduction.   On similar grounds, petitioners are not entitled to
                              - 17 -

deductions for their personal payments of the corporate

employment taxes and interest thereon; the separate legal status

of petitioners and their corporations requires that petitioners’

payments of the corporate employment tax expenses be treated as

capital contributions to the corporations rather than as

deductible payments by petitioners of their own expenses.7

     A corporation generally is a separate taxable entity even if

it has only one shareholder who exercises total control over its

affairs.   Moline Props., Inc. v. Commissioner, 319 U.S. 436, 439

(1943); Burnet v. Clark, 287 U.S. 410, 415 (1932).   The business

of a corporation is separate and distinct from the business of

its shareholders.   Deputy v. du Pont, 308 U.S. 488, 494 (1940);

Crook v. Commissioner, 80 T.C. 27, 33 (1983), affd. without

published opinion 747 F.2d 1463 (5th Cir. 1984).   A taxpayer is

free to adopt such organization for his affairs as he may choose;

having elected to do business as a corporation, he must accept

     7
      Under sec. 6672, the IRS can collect a portion of unpaid
corporate employment taxes, namely the employees’ shares of
Federal income and FICA taxes reported on Forms 941, from persons
responsible for the nonpayment of these taxes. A “responsible
person” has been deemed to include officers or employees of a
corporation who are under a duty to collect, account for, or pay
over the corporate employment taxes to the IRS. See Commonwealth
Natl. Bank v. United States, 665 F.2d 743, 748 (5th Cir. 1982).

     There is no evidence in the record that respondent has made
a claim of sec. 6672 liability against petitioners or that
petitioners made payments of corporate employment taxes under
sec. 6672. In any event we would have no jurisdiction to
consider respondent’s assertion of any such claim. See Wilt v.
Commissioner, 60 T.C. 977, 978 (1973).
                              - 18 -

the tax disadvantages.   Higgins v. Smith, 308 U.S. 473, 477

(1940); see also Moline Props., Inc. v. Commissioner, supra.      A

corporation and its stockholders are separate entities, and the

title to corporate property is vested in the corporation and not

in the owners of the corporate stock.   Sun Towers, Inc. v.

Heckler, 725 F.2d. 315, 331 (5th Cir. 1984) (citing Moline

Props., Inc. v. Commissioner, supra). Petitioners have made no

claim in this proceeding that the separate legal status of their

corporations should be disregarded.

     In Vaughan v. Commissioner, 17 B.T.A. 620 (1929), the Board

of Tax Appeals refused to disregard the separate entity and

disallowed a corporate loss claimed by a stockholder on his own

return.   The assistant cashier of a bank embezzled large amounts

from the bank.   In order to keep the bank open, the taxpayer,

president of the bank and a large stockholder, had to give the

bank securities worth $63,336 within 24 hours.   The Board held

the taxpayer could not deduct the contribution of $63,336 as a

loss, since the bank had suffered the loss, and the bank’s loss

was not the stockholder’s loss.

     Petitioners’ corporations are entities separate from

petitioners and their sole proprietorship, SWAS.8   The separate

     8
      With respect to entities solely owned by husband and wife
as community property under the laws of a State, the IRS will
respect a taxpayer’s treatment of the entity as either a
partnership or a disregarded entity. Rev. Proc. 2002-69, 2002-45
                                                   (continued...)
                               - 19 -

legal status of petitioners’ corporations and petitioners cannot

be disregarded simply because petitioners own 100 percent of the

stock of their corporations.   The corporate employment tax funds

were owned by petitioners’ corporations at the time of the

alleged embezzlement.   Petitioners’ corporations did not transfer

ownership of the funds to SWAS.   Rather, the funds were

transferred to SWAS for administrative convenience so that SWAS

could deposit the funds with the IRS.   Accordingly, the corporate

employment tax funds belonged to petitioners’ corporations, not

petitioners or SWAS.    Petitioners never acquired such ownership

of the corporate employment tax funds as would entitle them to a

theft loss deduction for the alleged embezzlement.   Any theft

loss deduction can be claimed properly only by petitioners’

corporations.

     By a parity of reasoning, petitioners are not entitled to a

deduction under section 162(a) for the corporate employment taxes

and interest thereon they paid the IRS out of their own pockets.

Business expenses deductible from gross income include the

ordinary and necessary expenditures directly connected with or

pertaining to the taxpayer’s trade or business.    Sec. 1.162-1(a),

Income Tax Regs.   The employees’ shares of the corporate

     8
      (...continued)
I.R.B. 831. Petitioners, who are husband and wife, owned SWAS as
community property under the laws of Texas. Petitioners’
classification of SWAS as a sole proprietorship or disregarded
entity is consistent with Rev. Proc. 2002-69, supra.
                              - 20 -

employment taxes were paid out of, and as part of, the salaries

of the employees of petitioners’ corporations and were an

ordinary and necessary expense directly connected with the

businesses of petitioners’ corporations.   The corporations’

shares of the corporate employment taxes were also ordinary and

necessary expenses directly connected with the businesses of

petitioners’ corporations.   Petitioners’ corporations are legal

entities separate and distinct from petitioners.   Petitioners’

corporations, not petitioners, were the taxpayers entitled to any

section 162(a) deduction for the corporate employment tax

payments.

     Furthermore, the trade or business of a corporation is not

that of its shareholders; shareholders do not generally engage in

a trade or business when they invest in the stock of a

corporation.   Whipple v. Commissioner, 373 U.S. 193, 202 (1963);

Betson v. Commissioner, 802 F.2d 365, 368 (9th Cir. 1986), affg.

T.C. Memo. 1984-264.   A shareholder cannot convert a business

expense of his corporation into a business expense of his own

simply by agreeing to bear such an expense, Harding v.

Commissioner, T.C. Memo. 1970-179, or by failing to seek

reimbursement, Podems v. Commissioner, 24 T.C. 21 (1955).

Consequently, petitioners’ payments of the obligations of their

corporations are not ordinary and necessary as required by

section 162(a).   See Deputy v. du Pont, supra; Betson v.
                             - 21 -

Commissioner, supra; Gantner v. Commissioner, 91 T.C. 713, 725

(1988); Lohrke v. Commissioner, 48 T.C. 679, 684 (1967).9

     The facts of this case indicate that petitioners made the

corporate employment tax payments out of their own pockets in

their capacities as stockholders of their corporations.     They did

so with the purpose of keeping their corporations in business

without incurring Federal tax penalties.   There is no evidence in

the record that petitioners promoted their own separate

businesses when they paid their corporations’ employment taxes.

Petitioners do not qualify for any of the exceptions to the

general rule that payments by stockholders of the obligations of

their corporations are not ordinary and necessary expenses of the

stockholders as required by section 162(a).

     Finally, a payment by a taxpayer of interest on another’s

obligation generally is not deductible by the taxpayer.     Williams

v. Commissioner, 3 T.C. 200, 202 (1944); Automatic Sprinkler Co.

of Am. v. Commissioner, 27 B.T.A. 160, 161 (1932).   Therefore,


     9
      Petitioners may deduct a payment they made on behalf of a
corporation if it is an ordinary and necessary expense of a trade
or business they own. Betson v. Commissioner, 802 F.2d 365 (9th
Cir. 1963), affg. T.C. Memo. 1984-264; Gould v. Commissioner, 64
T.C. 132, 134-135 (1975); Lohrke v. Commissioner, 48 T.C. 679,
688-689 (1967). If the expenditure is appropriate to protect or
promote that trade or business, the expense may be deductible by
the individual paying it. Gould v. Commissioner, supra; Lohrke
v. Commissioner, supra. However, a taxpayer may not deduct
payments made with the purpose of keeping in business a
corporation in which the taxpayer holds an ownership interest.
Betson v. Commissioner, supra; Lohrke v. Commissioner, supra.
                               - 22 -

petitioners are not entitled to deductions for payments on behalf

of their corporations of interest on the unpaid corporate

employment taxes.

     Petitioners’ payments of the corporate employment taxes and

interest thereon in their capacities as shareholders were

actually capital contributions to their corporations.    Payments

of the expenses of a corporation by a shareholder generally

“constitute either a loan or a contribution to the capital of the

corporation and are deductible, if at all, by the corporation.”

Rink v. Commissioner, 51 T.C. 746, 751 (1969); see also sec. 263;

Betson v. Commissioner, supra at 368; Gould v. Commissioner, 64

T.C. 132, 134 (1975); Koree v. Commissioner, 40 T.C. 961, 966

(1963); Jenkins v. Commissioner, T.C. Memo. 1983-667; sec.

1.263(a)-2(f), Income Tax Regs. (voluntary contributions by

shareholders for any corporate purpose are nondeductible capital

expenditures).    Petitioners’ capital contributions did not

thereby entitle them to step into the shoes of their corporations

to claim ownership of the corporate employment tax funds for

purposes of a corporate deduction for a theft loss or to claim

deductions of corporate employment taxes reserved only for their

corporations.10

     10
      On their 1993 and 1994 individual income tax returns,
petitioners claimed theft loss deductions for the embezzlement of
corporate employment taxes they “held as trustees” on behalf of
their corporations. In their briefs, petitioners did not explain
                                                   (continued...)
                              - 23 -

     B.   Whether Embezzlement Actually Occurred

     In their answering brief, petitioners claim they were

obligated to their corporations for unpaid corporate employment

taxes; they deny respondent’s argument that the corporate

employment tax funds belonged to petitioners’ corporations.

Respondent argues that even if petitioners owned the corporate

employment tax funds, they have not proven the alleged theft.11

     Petitioners argue that the following evidence they

introduced proves theft:   (1) The agreed judgment, (2) Mr. Kanz’s

admission of the crime, (3) Ms. Simpson’s analysis, and (4)

petitioners’ claim that they obtained some of Mr. Kanz’s bank

statements and copies of cashier’s checks made payable to Mr.

Kanz that correspond in time and amount with some of the checks

that were allegedly embezzled.

     Petitioners bear the burden of proving that theft occurred.

Rule 142(a); Welch v. Helvering, 290 U.S. at 115.   For tax

purposes, whether a theft loss has been sustained depends upon

     10
      (...continued)
the legal theory behind their claim that they held the corporate
employment taxes as “trustees”. Inasmuch as petitioners have not
addressed this issue in their briefs, they have conceded any
arguments they could have made; we have no obligation to
speculate what arguments they might have made.
     11
      Respondent has made this alternative argument in response
to petitioners’ argument that their corporations did not own the
corporate employment tax funds. Although we have already decided
that petitioners’ corporations did in fact own the funds for
purposes of taking a theft loss deduction, we shall consider this
issue for purposes of completeness.
                              - 24 -

the law of the jurisdiction in which the loss occurred.     Edwards

v. Bromberg, 232 F.2d 107, 111 (5th Cir. 1956); Monteleone v.

Commissioner, 34 T.C. 688, 692 (1960).   The exact nature of a

theft, whether it be larceny, embezzlement, obtaining money by

false pretenses, or other wrongful misappropriation of property

of another, is of little importance provided it constitutes a

theft.   Edwards v. Bromberg, supra; see also sec. 1.165-8(d),

Income Tax Regs.   Petitioners’ alleged theft loss occurred in

Texas.   The Texas Penal Code provides the following definition of

theft:   “A person commits an offense if he unlawfully

appropriates property with intent to deprive the owner of

property. * * * Appropriation of property is unlawful if:     (1) it

is without the owner’s effective consent”.   Tex. Penal Code Ann.

sec. 31.03 (Vernon 2002).

     A number of tax cases have addressed this specific issue and

isolated the relevant factors to employ in deciding whether a

taxpayer has proved that theft actually occurred.   In Monteleone

v. Commissioner, supra, we held the taxpayer was entitled to a

theft loss deduction.   In that case, the taxpayer lent money to

an individual who defrauded her.   The taxpayer filed a civil suit

and pressed criminal charges against the individual.     In the

civil action, the individual admitted the fraud and agreed to

make restitution to the taxpayer in monthly installments that he

actually paid for 3 months.   The criminal action was dismissed
                                - 25 -

for lack of reasonable or probable cause to indict.     We found the

individual’s admission of theft was sufficient proof, under the

circumstances of the case, that the taxpayer had sustained a

theft loss.

     In Qualley v. Commissioner, T.C. Memo. 1976-208, we decided

the taxpayer had not proven that theft occurred.     The taxpayer

corporation claimed a theft loss deduction for money diverted to

a separate bank account by its accountant.     To prove theft had

occurred, the taxpayer submitted the testimony of its president

and two State court judgments entered in its favor pursuant to

settlement agreements between the parties.     The president claimed

he had not authorized certain checks.     The president asserted the

“unauthorized” checks were written for the accountant’s personal

benefit.    We ruled the taxpayer had not provided sufficient proof

of theft.     The president’s testimony alone was not sufficient.

The lack of commencement of any criminal proceeding against the

accountant cast doubt on the reality of the alleged theft.     The

taxpayer failed to show any proof the monetary amount of the

alleged theft loss was the same as the amount claimed.     We found

the two State court judgments were not sufficient proof that a

theft occurred because the cases had been settled.

     We now evaluate the evidence petitioners introduced in

support of the alleged theft.
                                   - 26 -

            1.   Agreed Judgment

     Petitioners claim the agreed judgment is evidence that theft

occurred.    As a result of the agreed judgment, SWAS was entitled

to recover from Mr. Kanz for what he admitted were embezzlement

losses.   In Qualley v. Commissioner, supra, we held the

introduction of lower court cases on the issue of theft was not

sufficient proof of theft because the cases were settled.

Similarly, in this case, the agreed judgment was entered as a

result of a settlement between petitioners and Mr. Kanz and does

not prove theft actually occurred.12

            2.   Mr. Kanz’s Admissions

     Petitioners argue Mr. Kanz’s admissions prove theft

occurred.    Even though an admission was sufficient to prove theft

in Monteleone v. Commissioner, supra, the facts and circumstances

in this case are distinguishable.       The circumstances of Mr.

Kanz’s admissions indicate he was not forthright.       Mr. Kanz

settled SWAS v. Kanz in 1993.       At about the same time, he and Mr.

Grothues executed the collateral agreement in which Mr. Grothues

agreed not to attempt collection in exchange for Mr. Kanz’s

assistance in resolving petitioners’ tax problems.13      Both Mr.

     12
      Petitioners did not argue that collateral estoppel could
prohibit respondent from seeking another determination of the
litigated issue in this subsequent action.
     13
      Even though the collateral agreement was not dated,
according to the stipulation of facts submitted by the parties,
                                                   (continued...)
                                - 27 -

Grothues and Mr. Kanz contemplated the simultaneous execution of

the settlement upon which the agreed judgment was entered and the

collateral agreement.    These facts indicate that at the time Mr.

Kanz admitted the theft, he knew that he would not be liable to

pay the judgment.

     Also, Mr. Kanz’s admissions are a moving feast of

inconsistencies.    From 1993 to 1995, Mr. Kanz denied he

misappropriated any funds.    In January 2002, Mr. Kanz admitted to

misappropriating some of the money but not as much as stated in

the agreed judgment.    Then in February 2002, Mr. Kanz admitted

all the findings in the agreed judgment.    These inconsistencies

undermine the credibility of Mr. Kanz’s admissions.

     Even though Mr. Kanz has not helped petitioners solve their

tax problems, petitioners have not filed a claim for breach of

contract by Mr. Kanz in order to collect on the judgment.    These

are all acts a reasonable person might do in efforts to recover

stolen property from a thief.    Although it is improbable Mr. Kanz

would admit to an act which would lead to civil liability, his

friendship with petitioners and his belief that the collateral

agreement protected him from collection suggest he made his

admissions in an effort to help petitioners with their tax

problems.   His admissions do not prove theft occurred.

     13
      (...continued)
the collateral agreement was executed at the time of the agreed
judgment.
                               - 28 -

          3.   Ms. Simpson’s Analysis

     Ms. Simpson’s analysis of petitioners’ accounts does not

prove theft.   Ms. Simpson’s analysis merely shows the missing

amounts of the corporate employment tax funds.    Her analysis does

not set forth any conclusions with regard to whether funds were

in fact embezzled by anyone.   Therefore, Ms. Simpson’s testimony

does not prove embezzlement occurred.

          4.   Missing Evidence

     Both petitioners and Ms. Simpson claim that, during Ms.

Simpson’s engagement, petitioners obtained some of Mr. Kanz’s

bank statements and copies of cashier’s checks payable to Mr.

Kanz that correspond in time and amount with some of the checks

that were allegedly embezzled.

     Petitioners have the burden of proof.   Petitioners have not

introduced any evidence, documentary or otherwise, such as copies

of Mr. Kanz’s bank statements or copies of cashier’s checks made

payable to him.   Petitioners claim the documentary evidence was

taken and retained by Mrs. Grothues’s criminal and civil lawyers.

There is nothing in the record and no other evidence to

substantiate petitioners’ claim to this effect.

     Petitioners have failed to meet their burden of proving that

theft occurred.
                             - 29 -

     C.   Lack of Reasonable Certainty No Recovery Can Be Made

     Even if the embezzlement claim belonged to petitioners and

they proved that theft occurred, it could not be ascertained with

reasonable certainty that there was no reasonable prospect of

recovery from Mr. Kanz, as required by section 1.165-1(d)(3),

Income Tax Regs.

     There is a reasonable prospect of recovery when the taxpayer

has bona fide claims for recoupment from third parties or

otherwise, and when there is a substantial possibility that such

claims will be decided in his favor.   Estate of Scofield v.

Commissioner, 266 F.2d 154, 159 (6th Cir. 1959), affg. in part

and revg. in part 25 T.C. 774 (1956); Ramsey Scarlett & Co. v.

Commissioner, 61 T.C. 795, 811-812 (1974), affd. 521 F.2d 786

(4th Cir. 1975).

     Mr. Kanz told petitioners he had no assets or inheritance to

pay the judgment, and they claim they believed the testimony of a

man who allegedly embezzled more than $186,000 from them.

Petitioners have not provided any independent evidence that Mr.

Kanz no longer has any assets, net worth, or opportunity for an

inheritance with which to pay the judgment.   To this date, more

than 8 years after the collateral agreement was executed, Mr.

Kanz has not fulfilled his part of the bargain.   Yet, petitioners

have not attempted to collect the judgment from Mr. Kanz.

Petitioners have not satisfied their burden of proving it could
                              - 30 -

be ascertained with reasonable certainty they could recover

nothing from Mr. Kanz.

     For all the foregoing reasons, petitioners are not entitled

to a theft loss deduction under section 165:    Petitioners are not

the owners of the allegedly embezzled funds, petitioners have

failed to prove that theft occurred, and petitioners have failed

to prove there was no reasonable prospect of recovery.

Issue 3. Addition to Tax Under Section 6651(a)(1) for Failure To
Timely File the 1995 Return

     On April 15, 1996, petitioners filed Form 4868 extending the

due date of their 1995 tax return to August 15, 1996.

Petitioners claim they filed a Form 2688 which extended the time

to file their 1995 tax return to October 15, 1996.    They then

mailed their 1995 tax return on October 15, 1996, and respondent

received it on October 17, 1996.   Petitioners did not attach a

copy of Form 2688 to their 1995 tax return, which they claim was

an “oversight”.   Exhibit 8-P is a photocopy of the Form 2688

allegedly submitted by petitioners.    Respondent claims his

records do not indicate receipt of a Form 2688 from petitioners.

Consequently, respondent claims that petitioners are liable for

an addition to tax under section 6651(a)(1) because they did not

timely file their 1995 tax return, which was due on August 15,

1996.

     Petitioners contend that Form 2688 was timely mailed by

August 15, 1996, and that it was approved by the IRS.    They point
                                 - 31 -

to the fact that Exhibit 8-P has a receipt stamped “August 22,

1996” and a circle around the stamp which they claim is a

circular “quick-type” signature.     They also point out a mark in

the top check box on the lower left, which they claim is a check

mark by the IRS indicating that the Form 2688 was approved.

Respondent argues that the Form 2688 which petitioners claim to

have filed is questionable because the circular mark is not a

signature and respondent’s records do not indicate receipt of the

Form 2688.

     When a return is required to be filed on or before a

prescribed date and the return is delivered by the U.S. mail

after that date, the date of the U.S. postmark is deemed the date

of delivery.     Sec. 7502.   One requirement imposed by section 7502

is, in essence, that a return will be deemed delivered on the

postmark date only if the return is mailed on or before its due

date.     In other words, timely mailing is timely filing.   See

Emmons v. Commissioner, 92 T.C. 342, 346 (1989), affd. 898 F.2d

50 (5th Cir. 1990).

        “Filing, generally, ‘is not complete until the document is

delivered and received.’”      Carroll v. Commissioner, T.C. Memo.

1994-229 (quoting United States v. Lombardo, 241 U.S. 73, 76

(1916)), affd. 71 F.3d 1228 (6th Cir. 1995).     Proof that a

document has been sent by registered mail or certified mail and

that the envelope was properly addressed would have constituted
                                - 32 -

prima facie evidence that the document was delivered.    See sec.

301.7502-1(d)(1), Proced. & Admin. Regs.    Petitioners, however,

did not send the Form 2688 by certified or registered mail.

     Notwithstanding a taxpayer’s failure to use certified or

registered mail, “proof that a document was properly mailed will

create a ‘presumption that the document was delivered and “was

actually received by the person to whom it was addressed.”’”

Carroll v. Commissioner, supra (quoting Estate of Wood v.

Commissioner, 92 T.C. 793, 798 (1989) (quoting Hagner v. United

States, 285 U.S. 427, 430 (1932)), affd. 909 F.2d 1155 (8th Cir.

1990)).

     When a taxpayer does not have documentary evidence that a

form was mailed, we have in some circumstances allowed indirect

evidence to prove that the form was mailed.    See Estate of Wood

v. Commissioner, supra; Mitchell Offset Plate Serv., Inc. v.

Commissioner, 53 T.C. 235, 240 (1969); Hiner v. Commissioner,

T.C. Memo. 1993-608; Shuford v. Commissioner, T.C. Memo. 1990-422

(Commissioner can submit extrinsic evidence to prove timely

mailing of notice of deficiency), affd. without published opinion

937 F.2d 609 (6th Cir. 1991).    Direct testimony a postmark was

affixed may be sufficient to prove mailing.    Estate of Wood v.

Commissioner, supra.

     Standard operating procedures require stamping the

“received” date on the face of Form 2688.    See Internal Revenue
                               - 33 -

Manual sec. 20.1.2.1.2.3 (RIA 2002).    Petitioners have provided

indirect evidence the Form 2688 was mailed and received by

respondent.   First, both petitioners and respondent agreed

petitioners would testify Form 2688 was timely mailed.    Second,

the Form 2688 submitted as Exhibit 8-P is stamped “Received

08/22/96".    Notwithstanding that Exhibit 8-P is a photocopy and

the date stamp is not completely legible, the date stamp on the

Form 2688 is almost identical to the stamps on petitioners’ 1993

and 1994 Forms 1040, U.S. Individual Income Tax Return.    Contrary

to respondent’s argument, the circular “quick-type” signature

neither proves nor disproves that respondent has received a

document; the 1993 and 1994 Forms 1040 were date stamped without

any signature or mark.   Finally, respondent did make a mark in

the top check box on the lower left which is a check mark by the

IRS indicating that the Form 2688 was approved.    The IRS has been

known, on occasion, to make illegible postmark date notations on

tax returns, misplace the mailing envelope bearing the postmark,

and even lose returns.    Columbia Gas Sys., Inc. v. United States,

70 F.3d 1244, 1247 (Fed. Cir. 1995) (return lost); Borsody v.

Commissioner, T.C. Memo. 1993-534 (illegible date and envelope

lost), affd. 78 AFTR 2d 6045, 96-2 USTC par. 50415 (4th Cir.

1996); Collins v. Commissioner, T.C. Memo. 1993-168 (envelope

lost).   Respondent’s records may not show receipt of the Form

2688 because the IRS Service Center lost or misplaced
                             - 34 -

petitioners’ Form 2688 before its receipt was logged into the

records of the Service Center.

     We find petitioners are not liable for the addition to tax

under section 6651(a)(1) for failure to timely file their 1995

return.

     To give effect to the foregoing,

                                        Decision will be entered

                                   under Rule 155.
