Sections 23(e) and (f) of the Internal Revenue Code provide
that, in computing net income for the purpose of the federal income
tax, there shall be allowed as deductions "losses sustained during
the taxable year." Treasury Regulations provide that "A loss from
theft or embezzlement occurring in one year and discovered in
another is ordinarily deductible for the year in which
sustained."
Held:
1. Whether and when a deductible loss results from an
embezzlement is a factual question, a practical one to be decided
according to surrounding circumstances. Pp.
344 U. S.
169-170.
2. Under the special factual circumstances found by the District
Courts in the two cases here involved, the taxpayers were entitled,
under the Code provisions and the Treasury Regulations, to
deductions for the year in which the embezzlement losses were
discovered and their amounts ascertained. Pp.
344 U. S.
168-170.
97 F. Supp. 959, reversed; 98 F. Supp. 252, affirmed.
No. 79. In an action for a refund of income taxes, the District
Court gave judgment against the taxpayer. 97 F. Supp. 959. The
Court of Appeals certified a question to this Court, which ordered
the entire record sent up.
Reversed, p.
344 U. S.
170.
No. 80. In an action for a refund of income taxes, the District
Court gave judgment for the taxpayer. 98 F. Supp. 252. The Court of
Appeals certified a question to this Court, which ordered the
entire record sent up.
Affirmed., p.
344 U. S.
170.
Page 344 U. S. 168
MR. JUSTICE BLACK delivered the opinion of the Court.
The questions in these two income tax cases are so much alike
that they can be treated in one opinion. Both taxpayers had moneys
embezzled by trusted agents and employees. As usual, the
defalcations had been going on for many years before they were
discovered. On discovery, efforts were made immediately to identify
the takers and fix the dates and amounts of the thefts. In the
Alison case, No. 79, the books revealed the thief and the
precise amounts taken each year from 1931 to 1940. In No. 80,
Stevenson-hislett, Inc., the cover-p had been so
successful that painstaking investigation failed to reveal who took
the funds or the time when the unascertained person or persons took
them. Each taxpayer claimed a tax deduction for the year the losses
were discovered and their amounts ascertained. The Government
objected, claiming that the deduction should have been taken in
each of the prior years during which the moneys were being
surreptitiously taken. In the
Stevenson-hislett case, the
District Court held that the uncertain circumstances of the
embezzlement entitled the taxpayer to take its losses the year the
loss was discovered and the amount ascertained. 98 F.Supp 252. The
District Judge decided the other way in the
Alison case,
and denied her declarations. 97 F. Supp. 959. His holding, however,
was not in accord with his own views, but was compelled, he
thought, by the Third Circuit's decision in
Page 344 U. S. 169
First National Bank of Sharon, Pa. v. Heiner, 66 F.2d
925. The Court of Appeals for the Third Circuit certified to us the
question of deductibility in both cases. Pursuant to 28 U.S.C. §
1254(3), we ordered the complete records sent up so that we might
decide the entire matters in controversy.
Internal Revenue Code, § 23(e) and (f), authorize deductions for
" . . . losses sustained during the taxable year. . . ." The
Government reads this section as requiring a taxpayer to take a
deduction for loss from embezzlement in the year in which the theft
occurs, even though inability to discover in time might completely
deprive the taxpayer of the benefit of this statutory deduction.
Only at the time the money is stolen, so it is argued, is a loss
"sustained." But Treasury practice itself belies this rigid
construction. For more than thirty years, the Regulations have
provided that "A loss from theft or embezzlement occurring in one
year and discovered in another is
ordinarily deductible
for the year in which sustained." 26 CFR § 29.43-2. (Emphasis
supplied.) Information contained in a letter from the Commissioner
attached as an appendix to the Government's brief cites many
instances in which the Treasury has allowed deductions for
embezzlement losses in years subsequent to those in which the
thefts occurred. Apparently the Department has felt constrained to
do this in order to prevent hardships and injustice. These have
been departures from the "ordinary" rule of attributing
embezzlement losses to the year of theft.
This Treasury practice evidently stems at least in part from the
special nature of the crime of embezzlement. Its essence is
secrecy. Taxpayers are usually well aware of all the circumstances
of financial losses for which tax deductions are allowed. Not so
when a trusted adviser or employee steals. For years, his crime may
be known only to himself. He may take money planning to return
Page 344 U. S. 170
it and he may return it before there is discovery. Furthermore,
the terms embezzlement and loss are not synonymous. The theft
occurs, but whether there is a loss may remain uncertain. One whose
funds have been embezzled may pursue the wrongdoer and recover his
property wholly or in part.
See Commissioner v. Wilcox,
327 U. S. 404.
Events in the
Alison case show the practical value of this
right of recovery. A substantial proportion of the embezzled funds
was recovered in 1941, ten years after the first embezzlement
occurred. This recovery alone is ample refutation of the view that
a loss is inevitably "sustained" at the very time an embezzlement
is committed.
Whether and when a deductible loss results from an embezzlement
is a factual question, a practical one to be decided according to
surrounding circumstances.
See Boehm v. Commissioner,
326 U. S. 287. An
inflexible rule is not needed; the statute does not compel it. For
years, the Treasury has administered the tax law under regulations
saying that deductions shall "ordinarily" be taken in the year of
embezzlement. Ordinarily does not mean always.
We hold that the special factual circumstances found by the
District Courts in both these cases justify deductions under I.R.C.
§ 23(e) and (f) and the longstanding Treasury Regulations
applicable to embezzlement losses.
See Boston Consolidated Gas
Co. v. Commissioner, 128 F.2d 473;
Gwinn Bros. & Co.
v. Commissioner, 7 T.C. 320. Accordingly, the judgment in No.
79 is reversed, and the judgment in No. 80 is affirmed.
It is so ordered.
MR. JUSTICE DOUGLAS and MR. JUSTICE BURTON dissent.
|
344
U.S. 167|
* Together with No. 80,
United States v. Stevenson-Chislett,
Inc., also on certificate from the same court.