B.C. Cook & Sons, Inc. v. Comm'r of Internal Revenue, Docket No. 692-71.
| Decision Date | 29 December 1972 |
| Docket Number | Docket No. 692-71. |
| Citation | 59 T.C. 516 |
| Parties | B. C. COOK & SONS, INC., PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Michel G. Emmanuel and Michael D. Annis, for the petitioners.
Donald W. Williamson, Jr., for the respondent.
During its taxable year ended Sept. 30, 1965, petitioner corporation discovered that an employee-bookkeeper, through a series of fictitious fruit purchases had embezzled $872,212.50 from it over an 8-year period. The amounts embezzled were shown on petitioner's books as additional fruit purchases and included in cost of goods sold. Thus petitioner's gross income for each of the taxable years ended Sept. 30, 1958, through Sept. 30, 1965, was reduced and its taxable income decreased by amounts corresponding to the amounts embezzled in each taxable year. In 1965 petitioner recovered $254,595.98 of the total amount embezzled and claimed a loss deduction of $605,116.52 in its Federal income tax return for the taxable year ended Sept. 30, 1965. Respondent disallowed the claimed embezzlement loss to the extent of $388,900. Held: That petitioner is entitled to an embezzlement loss deduction under sec. 165, I.R.C. 1954, in its taxable year ended Sept. 30, 1965, for the full amount claimed. Respondent is left to his remedy under the mitigation provisions of secs. 1311-1315 in a separate proceeding to recover the prior tax benefits which resulted from the erroneous increases in cost of goods sold in the taxable years ended Sept. 30, 1958 through 1961. Kenosha Auto Transport Corporation, 28 T.C. 421 (1957), followed.
Respondent determined the following Federal income tax deficiencies against the petitioner:
+---------------------------------+
¦Taxable year ended ¦Deficiency ¦
+--------------------+------------¦
¦Sept. 30, 1962 ¦$5,270.00 ¦
+--------------------+------------¦
¦Sept. 30, 1963 ¦56,115.00 ¦
+--------------------+------------¦
¦Sept. 30, 1964 ¦124,250.00 ¦
+--------------------+------------¦
¦Sept. 30, 1965 ¦5,309.50 ¦
+---------------------------------+
Two adjustments made in respondent's notice of deficiency have been conceded by petitioner. The only issue presented for our decision is whether the petitioner is entitled to deduct under section 165, I.R.C. 1954,1 its total embezzlement loss of $605,116.52 in its taxable year ended September 30, 1965, the year it discovered the loss, or whether the loss should be limited to $216,216.52 by disallowing the amounts ($388,900) attributable to the taxable years ended September 30, 1958 through 1961, with respect to which respondent is barred by the statute of limitations from adjusting the tax and for which the petitioner has derived a tax benefit or advantage.
All of the facts have been stipulated, are so found, and are incorporated herein by this reference.
B. C. Cook & Sons, Inc. (herein called petitioner), is a Florida corporation having its principal office in Haines City, Fla., when it filed its petition in this proceeding. Its U.S. corporation income tax returns for the taxable years in question were filed with the district director of internal revenue at Jacksonville, Fla.
At all times pertinent to this proceeding the petitioner was engaged in the business of acquiring citrus fruit for distribution to processing plants.
During its taxable year ended September 30, 1965, the petitioner discovered that an employee, through a series of fictitious purchases, had embezzled from it substantial sums of money over an 8-year period extending from 1958 through 1965. The amounts embezzled in each of the petitioner's taxable years ended (FYE) September 30, 1958, through September 30, 1965, are as follows:
+------------------------------+
¦ ¦Amount ¦
+------------------+-----------¦
¦FYE Sept. 30— ¦embezzled ¦
+------------------+-----------¦
¦1958 ¦$49,750.00 ¦
+------------------+-----------¦
¦1959 ¦107,150.00 ¦
+------------------+-----------¦
¦1960 ¦111,750.00 ¦
+------------------+-----------¦
¦1961 ¦132,750.00 ¦
+------------------+-----------¦
¦1962 ¦103,250.00 ¦
+------------------+-----------¦
¦1963 ¦100,087.50 ¦
+------------------+-----------¦
¦1964 ¦165,625.00 ¦
+------------------+-----------¦
¦1965 ¦101,850.00 ¦
+------------------+-----------¦
¦Total ¦872,212.50 ¦
+------------------------------+
The employee had been employed by petitioner as a bookkeeper at the time it was organized in November 1956. Among other things, he was authorized to write checks, place them before a corporate officer for signature, and enter the expenditure in the corporate books of accounts.
Commencing with a check dated January 20, 1958, and continuing through January 11, 1965, the employee caused checks to be drawn on the petitioner's bank account and issued to ‘J. C. Jackson,‘ a fictitious name used by the employee. The checks were in turn deposited by the employee in a local bank to an account styled ‘J. C. Jackson,‘ which was in reality owned by the employee who ultimately received the proceeds of the checks.
The checks so drawn were purportedly in payment of fruit purchases. Accordingly, the petitioner's books reflected these amounts as additional fruit purchases although no fruit was actually received, with the result that the petitioner's cost of goods sold was increased by a corresponding amount. The petitioner's gross income for each taxable year involved was in this manner similarly reduced and hence its taxable income decreased by an amount which corresponded with the amounts embezzled in each of those taxable years.
Of the total amount of $872,212.50 embezzled, the petitioner recovered from the employee the amount of $254,595,98 during its taxable year ended September 30, 1965.
On its Federal corporation income tax return filed for the taxable year ended September 30, 1965, the petitioner claimed as a deduction for embezzlement loss the amount of $605,116.52, computed as follows:
+----------------------------------+
¦FYE Sept. 30— ¦Amount of loss ¦
+-----------------+----------------¦
¦1958 ¦$37,250.00 ¦
+-----------------+----------------¦
¦1959 ¦107,150.00 ¦
+-----------------+----------------¦
¦1960 ¦111,750.00 ¦
+-----------------+----------------¦
¦1961 ¦132,750.00 ¦
+-----------------+----------------¦
¦1962 ¦103,250.00 ¦
+-----------------+----------------¦
¦1963 ¦100,087.50 ¦
+-----------------+----------------¦
¦1964 ¦165,625.00 ¦
+-----------------+----------------¦
¦1965 ¦101,850.00 ¦
+-----------------+----------------¦
¦Total ¦859,712.50 ¦
+-----------------+----------------¦
¦Less recovery ¦254,595.98 ¦
+-----------------+----------------¦
¦Loss claimed ¦605,116.52 ¦
+----------------------------------+
The amount of loss so claimed corresponds with the amount of the checks except for the taxable year ended September 30, 1958. For that year the checks totaled $49,750 rather than the amount of $37,250, as set out on the petitioner's return filed for its taxable year ended September 30, 1965. This is a difference of $12,500 and is represented by check number 1515 in that amount issued on March 3, 1958, to ‘J. C. Jackson.’
The return filed by the petitioner for its taxable year ended September 30, 1965, reflected a net operating loss in the amount of $383,923.65. Of this amount, $17,567 was deducted as a net operating loss carryback in the petitioner's taxable year ended September 30, 1962; $118,490 was deducted as a net operating loss carryback in the petitioner's taxable year ended September 30, 1963; and $247,867 was deducted as a net operating loss carryback in the petitioner's taxable year ended September 30, 1964.
In his statutory notice of deficiency respondent determined that the deduction of $605,116.52 claimed as an embezzlement loss on the petitioner's return filed for its taxable year ended September 30, 1965, was not allowable to the extent of $388,900. The amount disallowed by respondent was attributable to embezzlement in the following taxable years2 and in the following amounts:
Petitioner contends that it should be allowed to deduct the full amount ($605,116.52) of the unrecovered embezzled funds. Since the embezzlement was discovered during the taxable year ended September 30, 1965, petitioner argues that it properly claimed a deduction under section 165(a) and (e)3 of the Code for that taxable year. Section 1.165-8(d), Income Tax Regs., provides that the term ‘theft) includes embezzlement. In other words, the petitioner simply says that its claimed embezzlement loss deduction falls squarely within the plain language of the statute.
The only position taken by the respondent is this: The law prohibits a taxpayer from taking more than a single deduction for the same item; and where, as here, a taxpayer has previously derived a tax benefit or advantage through an erroneous deduction or otherwise, he may not deduct the same amount in a subsequent year after the Commissioner is barred by the statute of limitations from adjusting the tax for the prior year. Respondent relies heavily on Charles Ilfeld Co. v. Hernandez, 292 U.S. 62, 68 (1934); United States v. Skelly Oil Co., 394 U.S. 678, 685 (1969); and R. G. Robinson, 12 T.C. 246 (1949), affd. 181 F.2d 17, 18-19 (C.A. 5, 1950).
For the first time in its reply brief the petitioner asserted that the ‘proper procedure to be followed, if respondent believes that petitioner has received a double benefit, is set forth in sections 1311-1315 of the Internal Revenue Code of 1954.’ Petitioner then points out the prerequisites to effectuate the mitigation-of-limitations provisions of sections 1311-1315 as to otherwise closed years, i.e., that there...
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