Abraham v. Comm'r of Internal Revenue

• Decision Date: 25 August 1947
• Docket Number: Docket No. 6431.
• Citation: 9 T.C. 222
• Parties: BENJAMIN ABRAHAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

9 T.C. 222

BENJAMIN ABRAHAM, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 6431.

Tax Court of the United States.

Promulgated August 25, 1947.

1. Petitioner left France in May 1940, at which time he owned certain real property, consisting of lands and buildings, and personal property, all of which in the latter part of June 1940 was in German occupation zone. On his return to France in 1946 petitioner found the land and improvements intact, with the exception of one small building. Part of the personal property was still on the premises, but the greater part of it was gone and petitioner does not know when it was seized or destroyed. Held, that petitioner is entitled to take a loss under section 127(a)(2), I.R.C., for the cost of his land and improvements after proper adjustment is made for depreciation on the improvements to the date of declaration of war with Germany and for the one small building which was gone; held, further, that petitioner has not proved that certain parts of his personal property were in existence December 11, 1941, when the United States declared war against Germany and, therefore, is not entitled to a war loss thereon; held, further, that as to certain other personal property petitioner has proved that it was in existence on December 11, 1941, and has proved sufficient facts to entitle him to take a war loss thereon under section 127(a)(2).

2. On the evidence, held, petitioner is entitled to a deduction of $500 in the taxable year 1941 for expenses incurred in entertaining clients of his firm, for which he was not reimbursed. Hyman L. Goldstein, Esq., for the petitioner.

J. Frost Walker, Jr., Esq., for the respondent.

This proceeding involves a deficiency in income tax for the calendar year 1941 in the amount of $5,405.19. In determining this deficiency the respondent made two adjustments to petitioner's net income as disclosed by his return for the year 1941. In a statement attached to the deficiency notice the respondent explains the adjustments as follows:

(a) The amount of $750.00 for alleged entertaining and traveling expenses claimed in your 1941 return does not constitute a deductible expense under the provisions of Section 23(a) of the Internal Revenue Code.

(b) The Bureau holds that the casualty loss of $10,000.00 deducted in your 1941 return, representing the estimated value of your residence located in the part of France, which was occupied by the German military forces in June 1940, does not constitute a proper deduction from gross income for the taxable year under the provisions of Section 23(e) or Section 127 of the Internal Revenue Code.

Petitioner contests these adjustments by the following assignments of error:

(a) The Commissioner of Internal Revenue erred in that he failed to allow the petitioner a deduction for war losses sustained by the petitioner during the calendar year 1941.

(b) The Commissioner of Internal Revenue erred in that he failed to allow the petitioner a deduction of $750.00 for business expenses incurred and paid for by the petitioner.

Petitioner in his brief contends that he is entitled to the loss deduction referred to in paragraph (b) of respondent's statement above solely under the provisions of section 127(a)(2) of the Internal Revenue Code.

FINDINGS OF FACT.

Petitioner is an individual, residing in New York, New York. His return for the calendar year 1941 was filed with the collector for the third district of New York. During the taxable year 1941 petitioner was a resident of the United States.

Issue No.1.— On December 11, 1941, petitioner owned real and personal property located at Courgent, France.

The United States declared war on Germany on December 11, 1941, and Courgent, France, was then within the area occupied and controlled by Germany.

The petitioner's real property in Courgent, France, on the above date, consisted of 10 acres of land which had on them one large 10-room house, one 3-room house, one 2-room house, a 3-car garage, and gardens.

Petitioner purchased the above real property in August 1932 for 120,000 francs, in addition to which he paid the required tax to the Government of 28,800 francs, making a total cost of 148,800 francs, or $5,841.88 in American currency at the then exchange rate. Between the date of purchase and 1937 petitioner made improvements to the real property at a total additional cost of 300,000 francs, or $11,760 at the above exchange rate.

Petitioner's personal property consisted of valuable oil paintings, books, and oriental rugs, which cost him 310,875 francs, or $12,186.30 at the same exchange rate used above, and furniture which cost $2,530.

Neither the real property nor any of the items of personal property was sold, conveyed or given away by petitioner prior to or in 1941.

Petitioner last saw the property in question prior to December 11, 1941, in May 1940, when he left Courgent with his family. The property was intact at that time.

Petitioner was in Courgent again in 1946. At that time there were in existence the real property, with the exception of one of the small houses; oil paintings, books, and rugs that cost petitioner 106,000 francs or $4,155.20, using the same rate of exchange as above, and furniture that cost him $300.

On May 19, 1940, petitioner left Courgent for Portugal, arriving there on June 22, 1940, where he remained for two months, and in September 1940 he came to the United States. Petitioner did not return to France until June 1946, as stated above.

Upon leaving France in May 1940 petitioner asked a neighbor to look after his property. About the end of June 1940 or the first part of July he received letters from the neighbor stating that everything was in perfect order. Petitioner had no contact with this neighbor after that time. Petitioner, however, in 1945 charged the neighbor with theft, as some of the items of personal property had been found in her house by his son when he was in France with the United States Army.

Issue No.2.— Petitioner in 1941 was vice president and a director of H. S. Cramer & Co., a firm located in New York City, which imported and exported raw materials, and, as such, he had, among other duties, the obligation to develop business, create new outlets, and see people from whom the company could buy merchandise and people to whom it could sell merchandise, and to establish contacts in order to develop the business.

H. S. Cramer & Co. di $5,500,000 of import and export business, and it paid petitioner $28,000 as his salary. The company did not reimburse petitioner for the sums of money he expended in the entertainment of the firm's customers.

Petitioner spent at least $500 of his own money during 1941 for the entertainment of customers and prospective customers of H. S. Cramer & Co.

OPINION.

BLACK, Judge:

The first issue we have to decide is whether petitioner is entitled to the deduction of a war loss from his 1941 income and, if so, how much he is entitled to deduct. It has been held by the decided cases of this Court that a taxpayer, to take a war loss deduction in 1941 under section 23(e) of the Internal Revenue Code, must prove that the property was in existence during that year; or, to take such loss under section 127, he must prove that it was in existence at the time the United States declared war on Germany. See Ernest Adler 8 T.C. 726; Eric H. Heckett, 8 T.C. 841. In the instant case petitioner does not claim any loss under section 23(e). Therefore, that section may be disregarded. He bases his claim entirely under section 127(a)(2) of the code, as added by section 156 of the Revenue Act of 1942, which reads in part as follows: ‘Property in Enemy Countries.— Property within any country at war with the United States, or within an area under the control of any such country on the date war with such country was declared by the United States, shall be deemed to have been destroyed or seized on the date war with such country was declared by the United States.‘

Petitioner made out his 1941 income tax return in March 1942, and it is his contention that he was permitted by the foregoing statute to assume that all of his property located in German occupied France on December 11, 1941, was lost or destroyed on December 11, 1941. He contends that the statute created a conclusive presumption for the benefit of the taxpayer, who had no way of determining the existence or condition of his property in an enemy occupied country. We think petitioner has correctly stated the general rule as laid down by the applicable statute. However, in cases where the Commissioner, in his determination of a deficiency, has disallowed the deduction of the claimed war loss, there are at least two things which the taxpayer must prove to establish his case: (1) That the property was in existence and owned by the taxpayer on the date war was declared; (2) the cost of such property, properly adjusted for depreciation to the basic date. Ernest Adler, supra; Eric H. Heckett, supra. Petitioner claims losses with reference to both real property and personal property, and the facts with reference thereto are set forth in our findings of fact.

We shall first take up the question of his real property loss. In contending that petitioner has failed to prove his real property loss under the applicable statute, respondent stresses Regulations 111, section 29.127(a)-1, and particularly the following protion thereof:

For property to be treated as resulting in a war loss, such property must be in existence on the date prescribed in section 127(a)(2) as the date it is deemed destroyed or seized * * * and for the taxpayer to claim a loss with respect to such property he must own such property or an interest therein at such time. If, before such time, the property was destroyed or confiscated, section 127 is not applicable with respect to such property. For example, a taxpayer owned property in an enemy country before war was declared on such enemy by...