388 F.2d 358 (9th Cir. 1967), 20112, Curtis Gallery & Library, Inc. v. United States

Docket Nº:20112.
Citation:388 F.2d 358
Party Name:CURTIS GALLERY & LIBRARY, INC., Appellant, v. UNITED STATES of America, Appellee.
Case Date:October 26, 1967
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 358

388 F.2d 358 (9th Cir. 1967)



UNITED STATES of America, Appellee.

No. 20112.

United States Court of Appeals, Ninth Circuit.

October 26, 1967

Rehearing Denied March 6, 1968.

Page 359

H. T. Curtis, Pasadena, Cal., for appellant.

Mitchell Rogovin, Asst. Atty. Gen., Karl Schmeidler, Atty., Tax Division, Dept. of Justice, Washington, D.C., Wm. M. Byrne, Jr., U.S. Atty., Los Angeles, Cal., for appellee.

Before BARNES, DUNIWAY, Circuit Judges, and TAYLOR, 1 District Judge.

DUNIWAY, Circuit Judge:

The appellants in this case are H. T. Curtis, Sr., Ariette R. Curtis, his wife, Elizabeth J. Curtis and H. T. Curtis, Jr. The action is one to recover income taxes claimed to have been illegally collected. The final judgment awards to Elizabeth J. Curtis the principal sum of $80.46 and to H. T. Curtis, Sr., the principal sum of $262.97. The United States has also appealed. It attacks only the award to Elizabeth. The opinion of the trial court is reported at 241 F.Supp. 312.

The Curtis Gallery & Library, a family partnership in which appellants were partners, employed the services of a Mr. Cusac from 1944 to 1955 to keep the partnership books and prepare the annual partnership tax returns. During this period he improperly treated amounts withdrawn by one of the partners as income rather than withdrawals from capital. This error resulted in overstatement of partnership income and accordingly overstatement of each partner's distributive share of such income for each of the years in question, 1944-55. The error was discovered in 1959 during the preparation of the final partnership return for 1956, the year in which the partnership was dissolved.

In its return for 1956, the partnership likened the total amount of the foregoing overstated income, $31,167.52, to an embezzlement, and claimed it as a deduction in 1956, the year in which the 'loss' was discovered, pursuant to section 165(e) of the Internal Revenue Code of 1954. Employing the carry-back and carry-forward provisions of the same code, each of the partners claimed refunds for several other years. The Commissioner of Internal Revenue ultimately disallowed the deduction, although he did allow as a deduction for 1956 the amount that the partnership had actually lost in the course of its business operations for that year, and he did allow carry-back and carry-forward use of that loss. Following disallowance of the claimed deduction, the taxpayers filed this suit, alleging: 1) The deduction should have been allowed as a theft loss in 1956; 2) Disallowance of the deduction entitled the taxpayers to refunds for the years 1944-1955 under the provisions of sections 1311-1314 of the Internal Revenue Code of 1954; and 3) The taxpayers suffered $150 damage from the wrongful refusal of the Internal Revenue Service to...

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