Court Opinion

ID: 4482166
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:21.03633+00
Date Added: 2024-06-11T13:32:55.975148
License: Public Domain

Tannenwald, J., concurring: I start from the premise that it would be entirely proper for us to sustain respondent’s determination on alegal principle not asserted by him.1 In this context, the dissenters are clearly correct in their approach. The only difficulty is that the legal principles upon which their conclusions rest are not applicable to the issue presented herein. This becomes apparent when it is recognized that two different items are involved: (1) Cash for the embezzlement of which a deduction is claimed; and (2) nonexistent purchases which were erroneously taken into the computation of costs of goods sold in earlier years. The dissenters fail to take this crucial distinction into account and consequently inject statutory provisions and decided cases where the same item was involved in both the earlier and later yearsi. Because of my concern that such failure on the part of the dissenters will becloud the reasoning which should be applied herein, I am constrained to add my views. I deal first with Judge Quealy’s attempt to fit this case into the mold of inventory shortages. In such situations, there is nothing fictitious about tbe purchases; the goods have been acquired and are included in inventory. Thus, it is the same item that is the subject of the theft and the deduction. When closing inventory is determined at the end of the taxable year, thefts occurring during the year are automatically taken into account and the reduced amount of such inventory inevitably effects an increase in the cost of goods sold and a corresponding reduction in gross profit. The inventory, cost of goods sold, and gross profit have been correctly computed to reflect losses that occurred and were in fact discovered. Since the theft and the discovery occur in the same taxable year, respondent’s regulations properly specify that the provisions dealing with theft losses do not apply to such losses as are “reflected in the inventories of the taxpayer.” See sec. 1.165-8(e), Income Tax Regs. Obviously, in such a situation, allowance of a second theft loss in another taxable year when the “thief is caught” would run directly counter to the rule against double deductions. By way of contrast, purchases, although taken into account in computing cost of goods sold, are not “reflected” in inventory.2 Where purchases are fictitious there is no way in which the taxpayer can “discover” the loss in the same taxable year as he can where a theft of existing inventory occurs. When fictitious purchases are pumped into the computation of cost of goods sold, they serve to increase such cost and consequently to reduce gross profit, thereby effectuating a reduction in taxable income. But it is not the purchases which have been stolen, because, by hypothesis, they did not exist. Rather, the theft is of cash, which comes from sales that have been properly accrued and included in gross sales and therefore have increased taxable income. See p. 524 infra. What happens is that there are two different items — one, sales, which have been correctly accrued, and the other, the fictitious purchases, which have been erroneously utilized as an offsetting item. I turn now to Judge Simpson’s “reduction in basis” approach. All of the cases cited in his dissent, with one exception, involve the basis of property and the extent to which the basis of a given item of property should be reduced by virtue of deductions in a prior year. In several, the deductions in the prior year appear to have been proper; in the others, expenditures had been expensed rather than capitalized or excessive depreciation had been taken. The point is, however, that, unlike the situation herein, in each of the cases the deductions in the earlier barred years related to the same item of property. Equally significant is the fact that, again with one exception, all the cases involved expenditures in the nature of depreciation or depletion and consequently fell within the statutory mandate that basis should be adjusted to the extent that such expenditures are “allowed * * * but not less than the amount allowable.” See sec. 1016; e.g., Carloate Industries, Inc. v. United States, 354 F. 2d 814, 817 (C.A. 5, 1966); United States v. Koshland, 208 F. 2d 636, 639 (C.A. 9, 1953). The one exception is Waldheim Realty & Investment Co., 25 T.C. 1216, 1219 (1956), reversed on another issue 245 F. 2d 823 (C.A. 8, 1957). In that case, the taxpayer had deducted the entire amount of premiums on insurance for the protection of its properties in the year of payment even though the coverage obtained extended to subsequent years. This Court held in the first instance that the deduction had to be prorated over the years of coverage and then denied the taxpayer’s alternative claim for a deduction in respect of coverage for the year before the Court for premiums which had been fully deducted in prior barred years. The Eighth Circuit Court of Appeals reversed on the primary issue and expressly noted that it consequently did not reach the alternative issue. See 245 F. 2d at 828. Admittedly, this Court’s rationale (see 25 T.C. at 1219) seems to support Judge Simpson’s position, although the reversal on the primary issue leaves our decision on the alternative issue on less firm ground than otherwise might be the case (cf. Crosley Corporation v. United States, 229 F. 2d 376 (C.A. 6, 1956) (taxpayer was permitted to capitalize an item expensed in earlier barred years)). The significant fact, however, is that the case involved the same item in both the year at issue and the barred year. Here, by way of contrast, we have two different items — the fictitious purchases and the cash. There can be no escape from the premise that the basis of cash is its actual value. Nor is there any doubt but that the petitioner was required, in computing his gross income, to accrue the sales which produced the embezzled funds. Cf. Donohue v. Commissioner, 323 F. 2d 651 (C.A. 7, 1963), affirming 39 T.C. 91 (1962); Casy O’Brien, 36 T.C. 957, 962 (1961), affd. 321 F. 2d 227 (C.A. 9, 1963). See also Alsop v. Commissioner, 290 F. 2d 726, 728 (C.A. 2, 1961), affirming on other grounds 34 T.C. 606 (1960). It does not follow from the fact that fictitious purchases — a separate and distinct item — were erroneously included in cost of goods sold and served to reduce petitioner’s taxable income that they be accorded any different treatment from any other type of erroneous deduction in a prior year which produces a similar result. In view of the foregoing, the approaches of Judges Quealy and Simpson miss the mark and the majority properly and correctly focused on the applicability of the double-deduction principle within the governing boundaries of this case: (1) Whether there was a proper deduction in the prior year, in which event that principle would control; or (2) whether there was an erroneous deduction in the prior year, in which, event the respondent is remitted to whatever remedy he may have under sections 1311-1315. The majority focus is consequently not irrelevant but essential. Moreover, it is certainly not lacking in “commonsense” — a concept which, I might add, has a firm foundation in the underlying purpose of statutes of repose. FORRESTER and Hall, JJ., agree with this concurring opinion.   See Harold W. Smith, 56 T.C. 263, 291, fn. 17 (1971).    The classic computation of cost of goods sold is opening inventory plus purchases less closing inventory.