Huff v. Commissioner of Internal Revenue
| Decision Date | 11 March 1932 |
| Docket Number | No. 6213.,6213. |
| Citation | 56 F.2d 788 |
| Parties | HUFF et al. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Harry C. Weeks, of Wichita Falls, Tex., for petitioners.
G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and J. P. Jackson, Sp. Assts. to the Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and R. N. McMillan, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.
Before BRYAN, FOSTER, and WALKER, Circuit Judges.
The record in this case presents the question whether R. E. Huff and his wife, E. B. Huff, residents of Texas, were entitled to deduct from their gross incomes in 1920, part of which was community income, the amount of a loss which was sustained in the manner indicated below. In the year 1918 R. E. Huff, who was a lawyer and banker, and John S. Mabry entered into a partnership for the conduct of a fire insurance business under the name Wichita Great Western Underwriters, the headquarters of the business being at Wichita Falls, Tex. Under the plan adopted, the partners were to be joint managing attorneys, any person wishing to participate in the business might become an underwriter by subscribing for such amount as he might desire to invest, paying one-fourth of such amount in cash. Ten per cent. of the cash payments was allowed to the managing attorneys, the balance of such payments to constitute a reserve or trust fund, which was to remain the property of the subscribers, who became severally but not jointly liable for a specified amount of the liability incurred under policies issued. That fund, and the revenues from the investment thereof, were to be used only in paying fire losses in excess of the amount in the association's reserve fund, into which 75 per cent. of the gross premium income was to go, the other 25 per cent. of such gross premium income to be used for expenses. Huff and Mabry as managing attorneys were authorized "to collect, receive and disburse under the supervision of the advisory board all premiums, moneys and funds at any time owing" to the underwriters and policyholders, and were to exercise a general supervision over the affairs of the enterprise and over the investment of its funds. At the end of each year, the underwriters were to be paid 10 per cent. of the gross premiums collected and on the basis of their subscriptions. The profits of the enterprise were to be equally divided between the two partners.
Neither Huff nor the advisory board took any active part in the conduct of the business until the latter part of the year 1920. Up to that time Mabry was actively in charge of the business. In the fall of 1920 Huff, after becoming apprehensive as to the condition of the association, put his son in the association's office to check up on the management of its affairs. Thereafter, in December, 1920, Huff discovered that Mabry, without being authorized to do so, had abstracted a considerable sum of money from the abovementioned reserve or trust fund, had used $25,000 of that money in paying a debt of the partnership, and that Mabry had been drawing a monthly salary of $1,500, although he was only entitled to draw from $300 to $400 per month. When the unauthorized use of the trust fund was discovered in December, 1920, Mabry was in Missouri. Huff tried to get him back to Wichita Falls, but for a time Mabry would not return. He did come back, however, in January, 1921, and was at once removed as one of the managing attorneys by Huff or at Huff's instigation. The firm of Huff and Mabry then discontinued business. Mabry promised to pay back the money he had taken, but never did so. He owned no property, and a judgment against him would have been worthless. For that reason no action was brought against him to collect the amount. While Huff was trying to determine the exact amount of the defalcation, an inspector from Oregon came into the office to make an examination and report. This greatly interfered with and delayed Huff's examination. The Oregon inspector published a very damaging report in the latter part of December, 1920. As a result of this report, many persons who had given notes for their insurance premiums refused to pay, suits against the association were filed, and it was forced into the hands of a receiver late in February, 1921. Some collections from premiums were made in January and February, 1921. Huff was unable to determine the amount of Huff and Mabry's assets before the close of 1920. On February 16, 1921, the partnership assets amounted to $3,228.65, which Huff then turned over to the association, together with $21,771.35, which he furnished personally. He has never received any reimbursement. R. E. Huff did not keep regular books of account of his affairs, but kept memoranda of his income, losses, interest paid, and like matters. From these he made his income tax returns upon a cash receipts and disbursements basis. Huff and his wife, in making their returns for 1920, each took a deduction on account of the alleged embezzlement by Mabry. The Commissioner of Internal Revenue disallowed those deductions, upon the ground that, as the funds embezzled were not the property of the taxpayers, and as they were not called upon to make good the defalcation until 1921, no loss was sustained by them in 1920. The Board of Tax Appeals reached the same conclusion.
The Revenue Act of 1918 (40 Stat. 1057) contains the following:
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