Cahn v. Commissioner of Internal Revenue, 8380.

• Decision Date: 03 November 1937
• Docket Number: No. 8380.,8380.
• Citation: 92 F.2d 674
• Parties: CAHN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

92 F.2d 674 (1937)

CAHN v. COMMISSIONER OF INTERNAL REVENUE.

No. 8380.

Circuit Court of Appeals, Ninth Circuit.

November 3, 1937.

David Schwartz, of Los Angeles, Cal., for petitioner.

James W. Morris, Asst. U. S. Atty. Gen., and Sewall Key and Joseph M. Jones, Sp. Asst. to Atty. Gen., for respondent.

Before DENMAN, STEPHENS, and HEALY, Circuit Judges.

DENMAN, Circuit Judge.

This is a petition to review an order of the Board of Tax Appeals, which sustained the Commissioner's assessment of an income tax deficiency against the petitioner for the year 1924.

The case was heard before the Board and before this court on an agreed statement of facts. The statement shows that taxpayer was a member of a Los Angeles jewelry partnership which, during the year 1924, sustained a loss from burglary in a sum in excess of $34,000. The firm carried burglary insurance with Lloyds of London, the policies having been issued by London brokers. Claim for loss was made against the insurers, but throughout the year 1924 and a part of 1925 the insurers denied liability on the grounds that the taxpayer's firm had violated the insurance contract. The position of the insurer is stated in the agreed statement of fact as: "7. Negotiations were conducted between the insurance companies and members of the partnership and their attorneys from the date of the theft until December 31st, 1924, at which time no settlement of the claim had been made. During all of the period of said negotiations the insurance companies denied any and all liability on the grounds that the theft if any, was from the inside; that the amount of loss sustained, if any, was not of the amount and value as claimed in the proof of loss filed; that on account of a breach in the contracts of insurance by the partnership, Robbins'; in not keeping a watchman on duty there was no liability on the part of said Lloyds of London; that at no time from the date of the theft on March 24th, 1924, and until July 20th, 1925, did said insurance company admit or concede that it was liable for the loss claimed by the partnership; that at no time prior to December 31st, 1924, or until July 20th, 1925, did said Lloyds of London or any of its agents pay or offer to pay any part of said loss; that the local insurance agents who solicited the insurance stated to the members of the partnership and their attorney that said Lloyds Insurance Company had no legally authorized agent within the State of California upon whom legal service of a complaint in a suit at law might be served, and the partners ascertained this to be a fact; that said local agents of said Lloyds of London, advised the taxpayer and his attorney that suit on the claim would have to be prosecuted in England, the home office of the insurance company; that a judgment obtained against said insurance company in California would be unenforceable because said company had no funds or other property within the State which might be levied upon or attached to satisfy the judgment." (Italics supplied.)

In this situation, the partnership, which kept its books on an accrual basis, deducted the amount of the jewelry loss on its income tax return for 1924, under section 214(a) (5), chapter 234, Revenue Act of 1924, 43 Stat. 253, 269, 270, which provides:

"In computing net income there shall be allowed as deductions: * * *

"(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business."

In February, 1925, the taxpayer's firm commenced an action in the California superior court against Lloyds upon the insurance policies. Lloyds did not appear and submit to jurisdiction until April 6, 1925, when it contested the claim. Thus the appearance and contest of the claim came even after the taxpayer's return was made. In July, 1925, the suit was compromised and the insurers paid the firm $27,500 in full settlement. This amount less attorney's fees was included in gross income in the partnership return for 1925.

The Commissioner claims that so much of the burglary loss of 1924 as was recovered by the compromise and settlement with the insurers in 1925 could not properly be deducted as a loss under section 214 (a) (5) of the Revenue Act, supra, because it was a loss "compensated for by insurance." He does not assert that a compensation in 1925 would preclude a deduction of a loss in 1924; his position is that the loss was "compensated for" in 1924 by reason of the existence during that year of the claim against the insurance company.

We do not agree with the Commissioner and with the...