Court Opinion

ID: 4485199
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:14.385601+00
Date Added: 2024-06-11T15:03:43.262654
License: Public Domain

Hamblen, J., dissenting: I disagree with the majority opinion, both in its application of the "origin-of-the-claim” rule and in its resulting conclusion that we need not decide whether a taxpayer who is not the direct victim of a theft is entitled to dedpct a theft loss. Instead, for the reasons set forth below, I would not extend the origin-of-the-claim rule to encompass the instant situation. Furthermore, I would consider the principal question now sidestepped by the majority, and would resolve the victim proximity issue in favor of petitioner. The majority recognizes that the origin-of-the-claim rule has generally been applied in cases involving deductibility under section 162 or section 212. Almost cavalierly, the majority expands the purview of this judicial rule with the conclusion that "there is no reason why the test should not be applied to a deduction claimed under section 165.” I disagree, and I see several reasons to resist such expansion. First of all, the history of the doctrine itself does not support its inroad into section 165. The origin-of-the claim test originally developed under section 212 as a means to avoid the conversion of personal expenses into expenses incurred in connection with profit-oriented activities. See Bingham’s Trust v. Commissioner, 325 U.S. 365 (1945); Lykes v. Commissioner, 343 U.S. 118 (1952). Examining such cases and enunciating the origin-of-the-claim principle, the Supreme Court explained: The principle we derive from these cases is that the characterization, as "business” or "personal”, of the litigation costs of resisting a claim depends on whether of not the claim arises in connection with the taxpayer’s profit-seeking activities. It does not depend on the consequences that might result to a taxpayer’s income-producing property from a failure to defeat the claim, for, as Lykes teaches, that "would carry us too far” and would not be compatible with the basic lines of expense deductibility drawn by Congress. * * * [United States v. Gilmore, 372 U.S. 39, 48 (1963). Emphasis in original. Fn. ref. omitted.] Both Gilmore and its companion case, United States v. Patrick, 372 U.S. 53 (1963), involved legal expenses incurred in divorce proceedings wherein income-producing property might have been used to satisfy personal obligations arising from the division of marital rights and property. The Court sought to avoid a misclassification of personal expenses as business expenses under such circumstances. It reasoned: the fees were incurred not to resist a liability, but to arrange how it could be met without depriving the taxpayer of income-producing property, the loss of which would have destroyed his capacity to earn income. * * * [[Image here]] It would be unsound to make deductibility turn on the nature of the measures taken to forestall a claim rather than the source of the claim itself. [United States v. Patrick, supra at 56-57.] Theft loss deductions, under section 165(c)(3), are allowed to individuals without regard to whether the losses arise in connection with the taxpayer’s profit-seeking activities. Accordingly, the rationale for the origin-of-the-claim analysis, as expressed by the Supreme Court in Gilmore and Patrick, is irrelevant to the legal and factual setting of the instant case. The majority has confused the origin-of-the-claim test of Gilmore, Patrick, and their ilk with the "look-back” rule of Arrowsmith v. Commissioner, 344 U.S. 6 (1952). Similarly, theft loss deductions, under section 165(c)(3), are allowed to individuals without regard to whether what was stolen was a capital asset in the taxpayer’s hands. The Congress might have treated such losses as sales or exchanges, but it did not choose to do so. Rather, the Congress chose to allow an ordinary deduction for a theft loss, even if a sale of the stolen asset would have produced a capital loss deduction (or no deduction at all, if the transaction had not been entered into for profit). Accordingly, it is not relevant in the instant case to analyze whether petitioner’s expenditures are capital expenditures. Not only do the history and rationale of the origin-of-the-claim rule argue against our reliance thereon in this case, but standard canons of judicial construction require a contrary result. The intent of section 165 is clear in the language of the statute itself. Where this is so, judicial interpretive concepts are subordinate to legislative expression, and they must not be allowed to negate the unequivocal allowance and benefit provided by Congress. See United States v. American Trucking Associations, 310 U.S. 534 (1940), discussed infra. In the instant case, the majority plays a semantic game: Instead of wrestling with the meaning of "arising from” in section 165 (and resolving that question by reference to the statute itself), the majority chooses to consider the meaning of "resulting from” in the context of the inapplicable origin-of-the-claim rule. Such circuitous logic begs the basic question, the answer to which is apparent to me in the language of section 165. Examination of the statute supports my conclusion. Section 165(a)1 sets forth the general rule that any uncompensated loss shall be deductible. However, section 165(c) imposes limitations on deductibility in cases of losses sustained by individuals. It provides in relevant part: In the cáse of an individual, the deduction under subsection (a) shall be limited to— * * * * * * * (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. * * * Therefore, the deduction in the instant case can be allowed only if there was a theft and petitioner’s loss arose therefrom within the meaning of the statute. Resolution of the preliminary question of whether there was a theft is a relatively simple matter.2 Section 1.165-8(d), Income Tax Regs., provides that: For purposes of this section the term "theft” shall be deemed to include, but shall not necessarily be limited to, larceny, embezzlement, and robbery. Thus, the statute does not use "theft” as a technical term, but rather in its broader context encompassing any criminal appropriation of the property of another. See Edwards v. Bromberg, 232 F.2d 107, 110 (5th Cir. 1956), and cases cited thereat. While Federal law determines Federal tax consequences, local law determines the underlying substance upon which those consequences fall. See Morgan v. Commissioner, 309 U.S. 78 (1940); Lyeth v. Hoey, 305 U.S. 188 (1938). Thus, whether or not a theft occurred must be determined by reference to the law of the jurisdiction in which events giving rise to the claim of theft occurred. Edwards v. Bromberg, supra at 111. In the case now before us, petitioner’s assertion of theft stems from the invalid second sale of rights by Dooley to Mason in Arkansas in 1916. The applicable law of the State of Arkansas in effect at that time provided:3  Sec. 1689. Every person who, with intent to defraud or cheat another, shall designedly, by color or any false token or writing, or by any other false pretense, obtain a signature of any person to any written instrument, or obtain from any person any money, personal property, right in action, or other valuable thing or effects whatever, upon conviction thereof shall be deemed guilty of larceny and punished accordingly. [[Image here]] Sec. 1691. If, upon the trial of any person indicted for any offense prohibited in * * * [Sec. 1689 or unrelated sec. 1690], it shall be proved that he obtained the property or thing in question in such manner as to amount to larceny, he shall not, by reason thereof, be entitled to an acquittal, but he shall be convicted and punished as if the offense had been proved as charged. [Emphasis added.] Upon sale of his rights to Mason in 1916, Dooley was aware that he had previously assigned the same rights to Black in 1898. Thus, his acceptance of consideration from Mason was a fraudulent taking under false pretenses. Analysis of the applicable statutes and the facts as found support our conclusion that Dooley’s sale of rights to Mason constituted larceny and, hence, theft under Arkansas law. Having found that there was a theft,4 we turn to the question of whether petitioner’s loss arose therefrom within the meaning of the statute. The parties to this case offer widely different interpretations of the language of section 165. Under petitioner’s reasoning, section 165(a) permits a deduction where loss has occurred, and section 165(c)(3) merely describes the type of required loss. In other words, "theft” is an adjective modifying the operative noun "loss,” but "theft” itself is not the subject of the deduction. Thus, in order to avail himself of section 165(a), petitioner must suffer a "loss”; he need not, however, suffer a "theft.” By contrast, respondent urges us to read section 165(c) as the statutory object of section 165, not as a mere modifier of section 165(a). Under this view, petitioner must be the victim of a theft from which arises a loss, and not merely the victim of a loss which arises from a theft. Therefore, respondent would deny the benefit of section 165(a) where there is no direct victim relationship between petitioner and the act of theft. The language of section 165(c)(3) itself requires that "losses arise * * * from theft.” In the absence of any compelling reason to disregard the plain language of the statute or its logical result, the legislative mandate of Congress must be taken at its word. This canon of judicial construction was well expressed by the Supreme Court in its opinion in United States v. American Trucking Associations, supra at 543. The Court explained: There is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes. Often these words are sufficient in and of themselves to determine the purpose of the legislation. In such cases we have followed their plain meaning. When that meaning has led to absurd or futile results, however, this Court has looked beyond the words to the purpose of the act. Frequently, however, even when the plain meaning did not produce absurd results but merely an unreasonable one "plainly at variance with the policy of the legislation as a whole” this Court has followed that purpose, rather than the literal words. * * * [Fn. refs, omitted.] In the instant case, the plain meaning of the statute itself is clear. The result produced is not "absurd or futile,” but rather is congruent with the legislative intent of allowing taxpayers to recoup uncompensated losses through tax deductions. It is true, of course, that in the overwhelming majority of cases, a taxpayer who suffers a theft loss will simultaneously be the victim of the theft from which the loss arises. In unusual circumstances, however, such as those which confront petitioner in this instance, dual victimization will not result. Where this is so, it must be borne in mind that the target of section 165 is treatment of losses, not treatment of thefts. The intended direct connection between the taxpayer and the loss is clearly expressed in the requirements of section 165(a). Section 165(c)(3) modifies section 165(a) only by requiring that there be a causal connection between the loss and the theft. There is, however, no legislative expression of any similar connection between the taxpayer and the theft, and we find no reason to infer such requirement. Therefore, petitioner need only prove that he has suffered a loss and that said loss arose from theft. Having carried this burden of proof, he need not demonstrate any direct relationship between himself and the act of theft. In the instant case, petitioner has shown that his loss arose as a result of theft. The litigation between petitioner and Spoo was the mechanism through which petitioner became liable for payment; the fact of loss itself, however, stemmed from the earlier theft by Dooley. The loss arose from theft in a substantive, plain-language sense. The fact that petitioner’s liability for payment occasioned by the theft was established through litigation should not be used to becloud the clear origin of the loss. For the reasons discussed above, I would find that petitioner sustained a loss as required by section 165(a) of the type defined in section 165(c)(3). Therefore, he is entitled to his claimed deduction. The timing of the deduction is governed by section 165(e) which provides that: For purposes of subsection (a), any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss. In the instant case, there is no evidence that petitioner was aware of any defect in the rights when he purchased them from Wood in 1959. To the contrary, petitioner submitted his Washington application sometime after April of 1959 but before July of 1960. In rejecting that application, the BLM cited unavailability of entitled lands, but not any invalidity of rights. Petitioner’s failure to exercise his right of contractual recision prior to its expiration on December 31, 1959, supports the conclusion that he believed his rights to be valid and, therefore, had not yet discovered the earlier theft. The BLM’s validation of rights of petitioner’s successor in connection with Douglas’ Nevada application confirms the fact that the theft remained undiscovered. Knowledge of the theft became available only after the BLM’s denial of Douglas’ Oregon application and the resulting litigation. The 1916 theft was not determined until 1977 when the Court of Appeals affirmed the judgment against petitioner. Prior to this determination, petitioner was not aware of the duplicate chain of title and the corresponding invalidity of his rights; hence, petitioner discovered his loss only upon receiving the pronouncement of the court in 1977. Therefore, 1977 is the proper taxable year in which petitioner may deduct his loss. For the reasons discussed above, I would allow petitioner to deduct his loss under section 165. Perhaps the correctness of this result appears more clear in examples less complicated than the situation in the instant case. Consider, instead, the tax consequences to taxpayers A and B in the following hypothetical situations. (1) A buys a used car for $1,000. One year and one day later, the car is stolen from A. Assume that the value of the car on the day it is stolen is still $1,000, and assume further that there are no adjustments to A’s basis in the car. (2) B buys a used car from X for $1,000. One year and one day later, B sells the car to C for $1,000. B reports no gain or loss on the sale. It is then determined that X had stolen the car from Y. Y succeeds in requiring C to give the car back to Y. C succeeds in requiring B to refund the $1,000 to C. Under the reasoning of the majority, A would be entitled to a theft loss under section 165. B, however, would instead be required to capitalize his loss on the theory that it arose from an obligation incurred through the sale by B to C, rather than from the theft by X. Both A and B have sustained the same economic loss of $1,000, and the loss of each has arisen from an act of theft. However, the majority would allow a theft loss to A only, thus affording disparate treatment to similarly situated taxpayers and depriving B of the opportunity to avail himself of the relief intended by the plain language of section 165. My resolution of the instant case would avoid this unwarranted and unfair result. The misguided result of the majority’s approach can be seen in the figures involved in this case. In round numbers, petitioner paid $4,000 for the stolen property, sold it for $8,000, and was sued and held liable for $20,000, exclusive of costs. Petitioner expended a total of $24,000, against which he had a receipt of only $8,000. This produced a net loss of $16,000 beyond that for which basis can be found. While in my opinion the entire $20,000 paid in damages is an ordinary loss, it would seem that, even if this view is not shared, at least the $16,000 paid by petitioner in excess of his receipt of $8,000 ought to be treated as a loss which arose from theft. Fay, Wilbur, Chabot, Nims, and Clapp, JJ., agree with this dissent.   Sec. 165(a) provides: "There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.”    The parties have stipulated as to the fact of theft under the described circumstances. However, because the stipulation was only for purposes of respondent’s motion for summary judgment, we are not bound thereby, and we consider the issue independently of the stipulation.    The quoted statutes are from Kirby & Castle’s Digest of the Statutes of Arkansas, 1904. The same provisions were recodified as secs. 1784 and 1786 in King & Castle’s Digest of the Statutes of Arkansas, 1916.    We note that our finding of theft is only for purposes of determination of petitioner’s tax liability and is not intended as a finding of criminal liability of Dooley, an issue which is beyond the purview of this Court. The evidentiary problems confronting the 1984 proving of an alleged 1916 larceny are undoubtedly numerous. Petitioner, however, need not offer sufficient evidence for a successful civil or criminal lawsuit in order to be entitled to a loss deduction. See Jacobson v. Commissioner, 73 T.C. 610, 613 (1979).