Alsop v. CIR
| Decision Date | 17 May 1961 |
| Docket Number | Docket 26679.,No. 273,273 |
| Citation | 290 F.2d 726 |
| Parties | Mary O'Hara ALSOP, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Second Circuit |
Holt S. McKinney, Lady Lake, Fla., for petitioner.
Miss Melva M. Graney (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Melva M. Graney, Earl J. Silbert, Attorneys, Department of Justice), Washington, D. C., for respondent.
Before MEDINA, MOORE and FRIENDLY, Circuit Judges.
Petitioner is a well-known author, residing in Connecticut. She kept her records and filed her tax returns on a cash basis. She had a literary agent, named — somewhat inappropriately as things turned out — Rowe Wright. From January 1, 1942 to June 6, 1952, Rowe Wright received royalties aggregating $65,623.58 for petitioner's account from various foreign publishers. In five of the years Wright reported and remitted nothing to petitioner; in the other six she reported and remitted sums aggregating $8,580.88. The balance, $57,042.70, she embezzled, without petitioner having known the payments had been received. None of the royalties so unreported and embezzled were ever returned by petitioner as taxable income.
In 1952, petitioner discovered that certain foreign royalties due her had not been received. She dismissed Wright and obtained a judgment against her for $46,962.98, representing embezzled royalties paid by an English firm. In 1953, petitioner obtained a second judgment for $10,079.72 against Wright; this represented royalties from publishers on the Continent that Wright had embezzled.
In petitioner's return for 1952, she deducted the 1952 judgment as a "Loss due to embezzlement and defalcation of funds by agent"; this resulted in a net loss for the year. In her 1953 return, as amended, she deducted the 1953 judgment, as well as a net operating loss carry-over from 1952. In her amended return for 1954, she claimed a further deduction of the net operating loss carry-over.
In 1954, petitioner recovered $10,879.54 on account of the judgments. She did not include this as 1954 income.
The Commissioner issued a notice of deficiencies for 1952, 1953 and 1954. He disallowed the amounts claimed as embezzlement losses and the net operating loss carry-overs resulting therefrom, as well as a carry-back claimed for 1951 not directly here in issue. He also determined that the amount received by petitioner in 1954 in partial satisfaction of the judgments was taxable income of that year.
The Tax Court, 34 T.C. 62, sustained the Commissioner's determinations. It approved his disallowance of the deductions for embezzlement losses on the basis of its consistent holding "that a taxpayer may not take a loss in connection with an income item as distinguished from a capital item unless the income item has been previously taken up as income in the appropriate tax return." — meaning, as the Court explained, that an unreported income item has no "cost" and therefore no "basis" under § 113(a), hence has no "adjusted basis" under § 113(b), and hence affords nothing to deduct under § 23(i).1 It sought to distinguish Bennet v. Helvering, 2 Cir., 1943, 137 F.2d 537, where this Court had reversed precisely such a holding of the Board of Tax Appeals, on the ground that "the court never considered the question whether the taxpayer there had any `basis' for loss under section 23 (h) of the Revenue Act of 1934, which section is substantially the same as section 23(i) of the 1939 Code, supra." It sustained the inclusion of the $10,879.54 received on account of the judgments in petitioner's income for 1954 on the ground that this "was a substitute for part of the royalties that had been embezzled during the years 1942 through 1952, no part of which had been reported by petitioner as income in those years."
Taxpayer's position is that Alison v. United States, 1952, 344 U.S. 167, 73 S.Ct. 191, 97 L.Ed. 186, sustains her right to deduct the embezzled royalties in 1952 when she discovered the embezzlement; and that the Tax Court's holding that she had a zero basis for these royalties defies this Court's decision in Bennet v. Helvering, supra. She concedes that if she is allowed to deduct the loss due to embezzlement, it would be proper to include the recovery of $10,879.54 in her income for 1954; on the other hand, she claims that if no deduction for the embezzlement is allowed, her partial recovery in 1954 of previous years' income cannot be so included.
The ground upon which the Tax Court placed its decision as to the embezzlement losses cannot be reconciled with Bennet v. Helvering, supra. The facts in that case, as found in the memorandum opinion of the Board of Tax Appeals, were that, in consideration of legal services in 1921, Bennet had received in that year stock having a value of $5,000, which, however, he failed to report as income. The stock having become worthless in 1935, he sought to take $5,000 as a deduction. The Board disallowed the deduction, citing as authority its statement in Ruth B. Rains, 1938, 38 B.T.A. 1189, 1196, that "a taxpayer can not take as a deduction a loss of a gain which has not been reflected in income," a rule which was said to prevail "irrespective of questions comparable to estoppel." In this Court taxpayer urged, as he had to the Board of Tax Appeals, (1) that in fact the stock had been reported as income for 1922; (2) that even if it had not been so reported, the stock had a basis equal to its value at the date of receipt, citing, among other cases, Salvage v. Commissioner, 2 Cir., 1935, 76 F.2d 112, affirmed Helvering v. Salvage, 1936, 297 U.S. 106, 56 S.Ct. 375, 80 L. Ed. 511; and (3) that he was not estopped to take the deduction. The brief for the Commissioner claimed the first contention to be disposed of by the Board's findings, of fact, discussed the second at length, and referred only obliquely to the third. This Court's opinion put the question as "May a taxpayer, who has received property, which was taxable as income when received, but on which he has innocently failed ever to pay any tax, deduct its loss in a later year when it becomes worthless?", 137 F.2d at page 538. By so stating the...
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