Source: https://supreme.justia.com/cases/federal/us/288/156/
Timestamp: 2019-04-23 02:00:23+00:00

Document:
1. Under the Revenue Act of 1918, to permit deduction of loss incurred "in trade or business" or "in any transaction entered into for profit," the loss must have been "sustained during the taxable year" -- it must be actual and present in that year; the mere existence of a liability, afterwards liquidated, is not enough. P. 288 U. S. 159.
2. One of two partners, in 1920, embezzled money from a trust fund held by the firm, and paid it to the other (who was innocent) in discharge of the firm's indebtedness to him. The other discovered the theft that year, and, in the year following, when the firm ceased business and was settled up, he restored to the fund the full amount, paying part with the firm's remaining assets and the rest from his own pocket.
(1) That, under the Revenue Act of 1918, the amount so repaid was not deductible as a loss incurred by him in 1920. P. 288 U. S. 161.
(2) The amount due him from his firm was not deductible under § 214(a)(7), Revenue Act of 1921, a a debt "ascertained to be worthless" during the year 1920, since the result of the firm's business were not known prior to 1921, and no portion of the debt was previously ascertained to be worthless. P. 288 U. S. 162.
Certiorari, 286 U.S. 541, to review the reversal of a decision of the Board of Tax Appeals, 20 B.T.A. 516, which sustained the Commissioner's ruling against a deduction in an income tax return.
follow the Farish case, reversed the decision of the Board, 56 F.2d 788, and this Court granted certiorari.
that the note had been given or that the repayment to him had not been made from funds belonging to the firm. The unauthorized use of the trust fund was discovered, in the absence of Mabry, in December, 1920. On Mabry's return in January, 1921, he was removed as one of the managing attorneys, and the firm then discontinued business. Mabry promised to pay back the money he had taken, but did not do so, and a judgment against him would have been worthless. Huff was unable to determine the amount of the assets of the firm of Huff & Mabry before the close of 1920, and, in February, 1921, these assets, amounting to $3,228.65, were turned over by Huff to the association, together with $21,771.35 which he paid personally. He has not been reimbursed. Huff kept no regular books of account, and made up his income tax returns upon a cash receipts and disbursements basis.
First. The Revenue Act of 1918 (40 Stat. 1057, 1066, 1067) provided for the deduction of losses incurred "in trade or business" or "in any transaction entered into for profit," or arising from theft of property "not connected with the trade or business," when the losses were "sustained during the taxable year" and were "not compensated for by insurance or otherwise." §§ 214(a) (4-6).
that a different rule applies (at least where the taxpayer is on a cash basis) when the property stolen is not that of the taxpayer, but is held by him in trust, and the theft is not discovered until the following year, as, in that case, "the taxpayer, being nothing out of pocket, cannot be said to have sustained' the loss in the year of the theft." The Government also raises the question whether Huff, in the absence of a finding of negligence, or of improper delegation of the administration of the trust to Mabry, can be regarded as legally bound to make restitution. Respondents insist that Huff was "liable for the trust funds" from the moment they were received by his firm, and that the loss was sustained at the time of the embezzlement because it deprived him of assets with which he could have discharged his obligation.
or the liability of the taxpayer may be enforced only to a limited extent, or not at all. The requirement that losses be deducted in the year in which they are sustained calls for a practical test. The loss "must be actual and present." Weiss v. Wiener, 279 U. S. 333, 279 U. S. 335; Lucas v. American Code Co., supra; Eckert v. Burnet, 283 U. S. 140, 283 U. S. 141-142.
The instant case aptly illustrates the importance of this principle, and calls for its application. Huff himself received the entire amount embezzled. He received this amount in payment of notes given to him by his firm to cover his advances to the firm. If he was liable to restore the amount taken from the trust fund, he himself had the full sum that was to be restored. So far as his individual estate was concerned, he had lost nothing by the embezzlement. If Huff had learned of the embezzlement immediately upon the payment to him, and had at once restored the entire amount to the trust fund, he would have been in the same position as that in which he was before he received the money -- that is, he would have held the partnership notes, for his advances to the partnership, which had not been properly discharged. Huff's personal wealth would have remained the same as it was prior to the embezzlement, and his individual gains or losses would have turned not upon the embezzlement, but upon the result of the partnership business. When, in 1921, on the liquidation of that business, Huff turned over to the association the sum of $21,771.35, he was merely restoring part of what he himself had received of the misappropriated fund, and whatever loss he sustained was upon his investment in, or his advances to, his firm. That loss was determinable only through the winding up of the partnership business.
finding is explicit that "some collections from premiums were made in January and February, 1921," and "Huff was unable to determine the amount of Huff & Mabry's assets before the close of 1920." In February, 1921, the firm assets were found to amount to $3,228.65, and this sum was paid to the association, with the amount paid by Huff as above stated. Upon these facts, we find no basis for the conclusion that Huff sustained a deductible loss in 1920.
Second. The respondents make an alternative claim upon the ground that the amount due Huff by his firm was a debt "ascertained to be worthless," and hence deductible under § 214(a)(7) of the Revenue Act of 1921 (42 Stat. 240). This claim was not passed upon by the Circuit Court of Appeals, but it was considered and rejected, properly, as we think, by the Board of Tax Appeals. The facts as found show that the results of the firm's business were not known prior to 1921, and that no portion of the debt was ascertained to be worthless within the preceding taxable year.
"A loss from theft or embezzlement occurring in one year and discovered in another is deductible only for the year of its occurrence. . . . If, subsequently to its occurrence, however, a taxpayer first ascertains the amount of a loss sustained during a prior taxable year which has not been deducted from gross income, he may render an amended return for such preceding taxable year, including such amount of loss in the deductions from gross income, and may file a claim for refund of the excess tax paid by reason of the failure to deduct such loss in the original return."
See also Regulations No. 62, Art. 111; No. 65, Art. 112; No. 69, Art. 112; No. 74, Art. 342.

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 § 214
 Art. 111
 Art. 112
 Art. 112
 Art. 342