Callan v. Westover

Decision Date30 October 1953
Docket NumberCiv. No. 13357.
Citation116 F. Supp. 191
CourtU.S. District Court — Southern District of California


Herbert S. Miller, Beverly Hills, Cal., for plaintiff.

Walter S. Binns, Edward R. McHale, Asst. U. S. Atty., E. H. Mitchell, Asst. U. S. Atty., Eugene Harpole, Frank W. Mahoney, Sp. Attys., Bureau of Internal Revenue, Los Angeles, Cal., for defendant.

MATHES, District Judge.

Plaintiff brought this action to recover income taxes claimed to have been erroneously paid to defendant as Collector of Internal Revenue for the calendar year 1946. Jurisdiction of this court is invoked under 28 U.S.C. § 1340. See: Lowe Bros. Co. v. United States, 1938, 304 U.S. 302, 305, 58 S.Ct. 896, 82 L.Ed. 1362; Sage v. United States, 1919, 250 U.S. 33, 37, 39 S.Ct. 415, 63 L.Ed. 828; 28 U.S.C. § 2006 and Reviser's note following § 1346, 28 U.S.C.A.

The original complaint was dismissed upon motion for failure to state a claim or cause of action for which relief could be granted, Fed.Rules Civ.Proc. Rules 8(a), 12(b) (6), 54(c), 28 U.S.C.A. and defendant now moves upon the same grounds to dismiss the amended complaint.

The material facts alleged in the amended complaint are briefly these. Prior to and on and after March 2, 1938 plaintiff was the owner of certain real property improved with two dwelling houses and other fixtures and furnished and equipped with various items of personalty. The total cost to plaintiff of the entire property so improved and equipped was $166,535, after deducting depreciation allowed and allowable. See Int.Rev.Code §§ 23(i), 113(b), 26 U.S.C. §§ 23(i), 113(b); U.S.Treas.Reg. 111, § 29.23(i)-1, 26 CFR § 29.23(i)-1.

It is next alleged that since prior to 1938 "plaintiff has been engaged in the business of constructing, furnishing, owning, operating and renting residential real estate"; and that at the time of the calamity later described one of the two dwelling houses in question was occupied by a paying tenant and the other by plaintiff in keeping with plaintiff's "business practice * * * to occupy residences in order to more advantageously display such residences to prospective tenants or purchasers. * * *"

Then follow allegations that on or about March 2, 1938, "the Los Angeles River overflowed its banks * * * suddenly, and caused a flood which inundated plaintiff's said real estate * * * and entirely washed away and destroyed all * * * improvements * * * and all * * * personal property * * * and so damaged plaintiff's land * * * that the aggregate value * * * after said flood was only Four Thousand Dollars * * *." There is no mention of any insurance.

Plaintiff further alleges: that following the flood he "strongly believed and was advised by his attorneys that he could obtain reimbursement for the damages to his property by legal action against the Los Angeles County Flood Control District and in fact had a reasonable chance at the end of the year 1938 to obtain said reimbursement and possibly a profit"; that accordingly he filed a claim for $220,740 against the Flood Control District, which claim was denied; that he thereupon filed suit against the Flood Control District in the California Superior Court "and continuously and diligently prosecuted the case thereafter"; that the case went to trial by jury in 1946, and a verdict for $80,000 was returned in favor of plaintiff; that he "made no motion for a new trial, nor * * * attempt to secure any remedy other than judgment for the amount of said verdict"; that he "thereupon and at that time in the year 1946 abandoned all efforts to secure any recovery or reimbursement in excess of * * * $80,000 represented by the verdict"; that the Superior Court, upon motion of the Flood Control District, set aside the verdict and ordered a new trial; that plaintiff appealed from the order granting a new trial, but the District Court of Appeal affirmed, Stone v. Los Angeles County Flood Control District, 1942, 81 Cal.App.2d 902, 185 P.2d 396, the California Supreme Court refused plaintiff's petition for a hearing, Id., 81 Cal.App.2d at page 912, 185 P.2d at page 396, and the case was thereupon remanded for a new trial; that "in the year 1948, plaintiff executed an agreement of settlement * * * with the * * * Flood Control District," and his "net recovery in said settlement after attorneys' fees and court costs was * * * $8,403.05."

Plaintiff also alleges that he regularly filed his return and paid defendant the $13,400.67 income tax shown thereon for the calendar year 1946, without deducting any amount as a loss sustained during the taxable year 1946 by reason of the 1938 flood; that "his true income tax liability for the year 1946 was zero"; that the computations shown on his 1946 return were erroneous and the tax was erroneously collected by defendant because "abandonment by plaintiff in the year 1946 of his claim for reimbursement and/or the rendition of the jury verdict and Superior Court judgment for only $80,000 represented the sustaining of a loss by plaintiff in that year * * * of at least $82,585 not reimbursed by insurance or otherwise * * *." See Int. Rev.Code § 23(e), 26 U.S.C. § 23(e).

In conclusion it is alleged that in 1948 plaintiff filed an amended return for 1946 "setting forth the correct tax liability as zero," along with a claim against defendant for a refund of the entire $13,400.67 tax theretofore paid defendant as plaintiff's 1946 tax; and that on or about March 13, 1950 the Commissioner of Internal Revenue rejected the claim in full. This action followed.

Section 23 of the Internal Revenue Code provides in part that:

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

"(e) In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise — (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or (3) of property not connected with the trade or business, if the loss arises from fires, storms, * * * or other casualty, or from theft." 26 U.S.C. § 23(e).

The precise question presented by the motion to dismiss at bar is whether, on the facts alleged in the amended complaint, the court could properly hold as a matter of law that any part of the loss suffered by plaintiff as a proximate consequence of the 1938 flood was "sustained during the taxable year" of 1946, 26 U.S.C. §§ 41, 48, "and not compensated for by insurance or otherwise", within the meaning of the quoted provisions of § 23(e). Cf. Commissioner of Internal Rev. v. Highway Trailer Co., 7 Cir., 1934, 72 F.2d 913, 915 (dissenting opinion), certiorari denied, 1935, 293 U.S. 626, 55 S.Ct. 346, 79 L.Ed. 713.

The applicable regulations of the Commissioner, 26 U.S.C. §§ 62, 3791, provide that: "In general losses for which an amount may be deducted from gross income must be evidenced by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed. Substance and not mere form will govern in determining deductible losses." U.S.Treas.Reg. 111, § 29.23 (e)-1(b), 26 CFR § 23(e)-1(b).

These regulations, as the Court observed in Boehm v. Commissioner, 1945, 326 U.S. 287, 291-292, 66 S.Ct. 120, 123, 90 L.Ed. 78, have been "long continued without substantial change * * * and have the effect of law." See e. g.: United States v. S. S. White Dental Mfg. Co., 1927, 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120; First Nat. Corp. v. Commissioner, 9 Cir., 1945, 147 F.2d 462; Commissioner v. Peterman, 9 Cir., 1941, 118 F.2d 973; Cahn v. Commissioner, 9 Cir., 1937, 92 F.2d 674.

Defendant contends in support of the motion that destruction of plaintiff's property by flood was the "identifiable event" which fixed the time of plaintiff's loss, that the loss was admittedly not "compensated for by insurance or otherwise," and hence must be deemed "evidenced by a closed and complete transaction" within the meaning of the quoted regulations, since the alternative phrase "or otherwise" denotes, says defendant, nothing more or less than a consensual undertaking comparable to a contract of insurance, such as the unequivocal contractual obligation of some third person to reimburse the taxpayer in whole or in part.

In other words, the argument goes, the law intends that both the taxpayer and the Government should know with certainty when a loss is deductible; that the purpose of the statute, 26 U.S.C. § 23(e), is to establish a predictable rule which both permits and requires the taxpayer in a case like that at bar to make the deduction for the year in which the "physical damage" occurs, see Commissioner of Internal Revenue v. Highway Trailer Co., supra, 72 F.2d at page 915, unless "compensated for" by insurance or other contract such as will permit of a deduction later for loss from "bad debts" within § 23(k) of the Internal Revenue Code, 26 U.S.C. § 23(k), in the event the insurer or other obligor should default and the taxpayer thus fail in his efforts at recoupment. Cf. John H. Farish & Co. v. Commissioner, 8 Cir., 1929, 31 F.2d 79, 81; Farmers Elevator & Exchange v. Commissioner, 10 B.T.A. 379, 381 (1928).

Upon granting defendant's motion to dismiss the original complaint I was persuaded that this narrow construction of § 23(e) urged by defendant was sound both in reason and in policy, that the rule urged by defendant made for certainty and predictability for both the taxpayer and the Government and was, moreover, permissible under precedents which by stare decisis bind this court.

That holding was made "in the light of the now familiar rule that an income tax deduction is a matter of legislative grace * * * that the burden of clearly showing the right to the claimed deduction is on the taxpayer." Interstate Transit Lines v. Commissioner, 1943, 319 U.S. 590, 593, 63 S.Ct. 1279, 1281, 87 L.Ed....

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    • April 3, 1959 was unreasonable for the successor-trustee not to have claimed the loss before the litigation was concluded. Callan v. Westover, D.C.S.D. Cal.1953, 116 F.Supp. 191, affirmed sub nom. Riddell v. Callan, 9 Cir., 1956, 235 F.2d 190; cf.: Brown v. Commissioner, 6 Cir., 1938, 94 F.2d 101, 103......
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