This case thus becomes indistinguishable from United States v. Merrill, supra, and from J. W. Gaddy, supra. The case of Norman v. Commissioner, 407 F.2d 1337 (C.A. 3, 1969), affirming a Memorandum Opinion of this Court, is clearly distinguishable on its facts from the instant case. In that case, the funds of the employer were diverted by the taxpayer to his own use in the taxable years 1958 through 1962.

Thus, taxpayers who repay embezzled funds are ordinarily entitled to a deduction in the year in which the funds are repaid. See Norman v. Commissioner, 407 F.2d 1337, 1338 (3d Cir.), cert. denied, 395 U.S. 947, 89 S.Ct. 2021, 23 L.Ed.2d 465 (1969); Foster v. Commissioner, 57 T.C.M. (CCH) 661, 665 n. 5 (1989); Yerkie v. Commissioner, 67 T.C. 388, 392-94 (1976); Fox v. Commissioner, 61 T.C. 704, 715 (1974); Mais v. Commissioner, 51 T.C. 494, 499 (1968). Clearly, no public policy would be frustrated if a restitution payment unrelated to a criminal prosecution were at issue; Stephens would be entitled to a deduction for repaying the embezzled funds to Raytheon.

See James v. United States, 366 U.S. 213 (1961); Fed. Tax Coordinator 2d ¶ J-1603.See also Norman v. Comm'r, 407 F.2d 1337 (3d Cir. 1969) (holding that taxpayers who repay embezzled funds are ordinarily entitled to a deduction in the year of repayment). Criminal restitution obligations, however, fall within a grey area between punitive criminal fines and penalties, which are not deductible for income tax purposes, and compensatory civil restitution obligations, which are.

To the contrary, their alleged losses would have occurred (if at all) after 2006, when assets were allegedly "forfeited pursuant to [Greg's] guilty plea" or when restitution ordered by the sentencing court was allegedly paid. See Stephens v. Commissioner, 905 F.2d 667, 671 (2d Cir. 1990) (noting that taxpayers who repay embezzled funds might be "entitled to a deduction in the year in which the funds are repaid"), rev'g 93 T.C. 108 (1989); Norman v. Commissioner, 407 F.2d 1337, 1338 (3d Cir. 1969) (per curiam) (noting that "restitution [paid] in a subsequent year might provide a proper basis for a deduction allowable in that year"), aff'g T.C. Memo. 1968-40; Treas. Reg. § 1.6001-1(a) (requiring taxpayers to identify the deduction, show that they have met all relevant requirements, and keep books or records to substantiate the amounts claimed). II. Fraud Penalties

We hold, therefore, that a deduction for repayment of embezzlement proceeds is permitted within the limitations of section 165(c)(2) as a nonbusiness loss. Blaine S. Fox, 61 T.C. 704 (1974); Norman v. Commissioner, 407 F.2d 1337 (3d Cir. 1969), affg. per curiam a Memorandum Opinion of this Court, cert. denied 395 U.S. 947 (1969). As a result petitioner has no excess business deductions over gross income to compute the net operating loss within section 172(c).

We hold, therefore, that a deduction for repayment of embezzlement proceeds is permitted within the limitations of section 165(c)(2) as a nonbusiness loss. Blaine S. Fox, 61 T.C. 704 (1974); Norman v. Commissioner, 407 F.2d 1337 (3d Cir. 1969), affg. per curiam a Memorandum Opinion of this Court, cert. denied 395 U.S. 947 (1969). As a result petitioner has no excess business deductions over gross income to compute the net operating loss within section 172(c).