Court Opinion

ID: 9650823
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:52:51.058819+00
Date Added: 2024-06-11T18:12:26.390091
License: Public Domain

• MAGRUDÉR, Circuit Judge
(concurring).
Analytically, it seems to me, the taxpayer did not sustain a loss at the time of the embezzlement from its cash account. The money in the embezzler’s hands still belonged to the taxpayer. If the embezzler later used the money to acquire other property, the taxpayer could follow the res and enforce a constructive trust upon the property so acquired; or the taxpayer at its option could enforce an equitable lien upon such property to secure its claim for reimbursement from the embezzler. American Law Institute Restatement of Restitution, *477discovered, the taxpayer recovered in specie a small amount of the cash, $2,599.15. According to the stipulation, it recovered “from beneficiaries $10,000.” This may mean, from the estate of the deceased embezzler, or it may mean from donees who received from the embezzler that amount of the stolen money; it does not matter which. The taxpayer was also reimbursed by a bonding company to the extent of $25,000. That left a balance of $61,539.94, which constituted a claim against the embezzler’s estate. Evidently this claim was ascertained to be worthless, because it was charged off on the taxpayer’s books in 1935. I agree with the court’s conclusion that this sum of $61,539.94 was properly claimed by the taxpayer as a deduction on its 1935 tax return. § 202. At most there had been only a change in the form of the taxpayer’s assets. In 1935, when the embezzlement was
In the recent case of McKnight v. Commissioner, 127 F.2d 572, decided by the. Circuit Court of Appeals for the Fifth Circuit, April 29, 1942, it was held that the embezzler of money, who is unable to restore it, does not make a taxable gain thereby. The court said: “By the taking the embezzler incurs an equivalent debt as surely as if he had borrowed with the consent of the owner. The first takings are, indeed, nearly always with the intention of repaying, a sort of unauthorized borrowing. It must be conceded that no gain is realized by borrowing, because of the offsetting obligation. This would be true even though at the time there was no intention to repay. It seems to us that the same thing is true of each act of embezzlement.” If at the time of the embezzlement the wrongdoer makes no gain, because of the offsetting obligation, it seems logical to hold that the person whose money is taken does not at that time sustain a loss. Cf. Douglas County Light & Water, Co. v. Commissioner, 9 Cir., 1930, 43 F.2d 904. Logic here coincides with practical convenience, because, as pointed out by Judge Woodbury, if the Government’s view is accepted, the wronged party will often be deprived unjustly of a tax deduction through inability to prove the specific amounts embezzled in any particular year. The same injustice would also result if the taxpayer did not discover an embezzlement until too late to file an amended return and to claim a refund for the year in which the money was taken.