Source: https://www.legalcrystal.com/case/95830/burnet-vs-huff
Timestamp: 2017-07-28 01:01:46
Document Index: 767228172

Matched Legal Cases: ['§ 214', '§ 214', '§ 214', 'Art. 111', 'Art. 111', 'Art. 112', 'Art. 112', 'Art. 342']

Burnet Vs Huff - Citation 95830 - Court Judgment | LegalCrystal
Save as PDF Add a Tag Add a Note Semantics Visualize Burnet Vs. Huff - Court Judgment	LegalCrystal Citationlegalcrystal.com/95830CourtUS Supreme CourtDecided OnFeb-06-1933Case Number288 U.S. 156AppellantBurnetRespondentHuffExcerpt:.....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.
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.
Burnet v. Huff - 288 U.S. 156 (1933)
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
(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.
In computing net income for 1920, the respondents, R. E. Huff, and his wife, E. B. Huff (now deceased), sought deduction of a loss alleged to have been sustained in that year, in relation to community property, through the embezzlement of trust funds. The funds were held by a partnership of which R. E. Huff was a member, and were embezzled by his copartner. The Commissioner disallowed the deduction, holding that, as the funds were not the property of the petitioners, and they were not called upon to make good the amount embezzled until 1921, they sustained no loss in 1920. The Board of Tax Appeals, upon the authority of
Farish v. Commissioner,
31 F.2d 79, upheld this ruling. An alternative claim, for the deduction of the amount in question as a worthless debt was also disallowed. 20 B.T.A. 516. The Circuit Court of Appeals, declining to
case, reversed the decision of the Board, 56 F.2d 788, and this Court granted certiorari.
The pertinent facts as found by the Board of Tax Appeals are these: R. E. Huff, a lawyer and banker in Wichita Falls, Texas, and J. S. Mabry were copartners engaged in managing the business of a reciprocal fire insurance association known as Wichita Great Western Underwriters. Under the plan of organization, 25 percent of the gross premium income of the association was allotted to expenses and profits, and the remaining 75 percent was to be set apart as a reserve to pay fire losses. Any person might become an "underwriter" by subscribing to the association such amount as he wished to invest, paying one-fourth in cash. Ten percent of the cash payment was allowed to the managing attorneys, and the rest constituted a reserve or trust fund which was to remain the property of the underwriters and to be used only for the payment of fire losses in excess of the association's reserve. An advisory board was created from safeguarding the interests of the subscribers, but undertook no active supervision until about the end of 1920. The board looked to Huff for the proper conduct of the affairs of the association, but the management was left almost entirely to Mabry. Early in 1920, on Mabry's representation that the sum of $25,000 was needed for working capital, Huff advanced this amount to the partnership upon partnership notes payable in six months. The entire amount was repaid to Huff in the autumn of 1920 by checks drawn by Mabry, the money being taken from the trust fund of the association held in reserve for the subscribing underwriters. Huff and Mabry were not the owners of that fund, and neither of them had authority to use it for any purpose other than the payment of fire losses. To cover the checks, given to repay Huff, Mabry gave a demand note signed in the firm name in favor of the reserve fund. Mabry had no authority to execute the note, and Huff did not know until near the end of 1920
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).
The Government concedes that, if assets of the taxpayer used in trade or business, or "in any transaction entered into for profit," are stolen in any year, the taxpayer sustains the loss in that year, and the deduction must then be taken even though the theft is not discovered or the amount ascertained until the following year. This is said to be the import of the regulation adopted by the Treasury Department under the Revenue Act of 1921. Regulations No. 45, Art. 111.
But the Government contends
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.
We find it unnecessary to discuss the question whether Huff was bound to make good the amount taken from the funds of the association by his copartner. We may assume that he was. But the mere existence of liability is not enough to establish a deductible loss. There is liability in the case of a breach of contract, but, as the Court said in
, "even an unquestionable breach does not result in loss if the injured party forgives or refrains from prosecuting his claim." And whether a taxpayer will actually sustain a loss through embezzlement of trust funds of which he is trustee will depend upon a variety of circumstances. If there is liability on his part for the misappropriation, it does not create a certainty of loss, as the defalcation may be made good by the one who caused it,
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."
Lucas v. American Code Co., supra; Eckert v. Burnet,
The result of the partnership transactions was not known and could not be ascertained in 1920. The firm did not discontinue business until January, 1921. The
Regulations No. 62, Art. 111; No. 65, Art. 112; No. 69, Art. 112; No. 74, Art. 342.