JAMES PETROLEUM CORPORATION v. CIR

• Decision Date: 06 May 1964
• Docket Number: No. 7469.,7469.
• Citation: 331 F.2d 344
• Parties: JAMES PETROLEUM CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Tenth Circuit

331 F.2d 344 (1964)

JAMES PETROLEUM CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 7469.

United States Court of Appeals Tenth Circuit.

May 6, 1964.

Watson Washburn, New York City, for petitioner.

Harry Marselli, Atty., Dept. of Justice (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Melva M. Graney, and Alan D. Pekelner, Attys., Dept. of Justice, on the brief), for respondent.

Before BREITENSTEIN, HILL and SETH, Circuit Judges.

SETH, Circuit Judge.

Income tax deficiencies were assessed against petitioner by reason of a deduction taken in 1958 in the amount of $139,200.00 for uncollectible notes held by the petitioner. The notes were given to the corporation in 1933 by a former officer who, in 1927, 1928, and 1929, had embezzled approximately $367,309.52 from the taxpayer-corporation. The taxpayer had previously taken deductions for the total amount of the embezzlement in the three years when the embezzlements took place. Each deduction was in the amount embezzled in each year, 1927, $44,291.88; 1928, $219,751.94; and 1929, $103,265.70. The deductions were too large for petitioner to receive full tax benefit therefrom. The notes were intended to represent the agreed balance to be paid by the former officer as reimbursement. The petitioner did not report these notes as income in 1933, but the notes were referred to in the corporation's balance sheet. Through the years 1933-1957, the taxpayer collected $89,668.44 from the embezzler; of this, $63,000.00 was of the principal due. These collections were reported as part of taxpayer's gross income. Petitioner's attorneys continued to attempt to collect additional amounts. In 1958 the taxpayer held $140,000.00 of the embezzler's unpaid notes.

The taxpayer in its petition asserts that the deducted loss occurred in 1958 because until that time payments had been received, but in 1958 the embezzler could not pay the relatively small amount to settle the claim on the notes. Further he was of such age that his future earning capacity was small. The petitioner further states in its petition that to the extent it did not realize tax benefits for "the loss," it was entitled to claim the remainder of such loss in the "year of final determination," and hence claimed the $139,200.00 loss for 1958. The Tax Court was thus asked to determine that there were no deficiencies resulting from this deduction in 1958.

The Tax Court denied the taxpayer-petitioner relief, and this petition for review was taken. Int.Rev.Code of 1954, §§ 7482 and 7483.

The Tax Court in its opinion (40 T.C. 166) stated: "The question presented here, therefore, requires us to determine whether or not petitioner properly took the deductions in 1927, 1928 and 1929. If the deductions were properly taken in those years petitioner, it seems to us, would not be entitled to the same deduction again in 1958; we know of no law that would permit it." The Tax Court concluded that the deductions in 1927, 1928, and 1929 were proper; however, we are unable to determine from its findings and opinion the basis for this conclusion. There is only the finding of the ultimate fact or conclusion with no other findings to show how such conclusion was reached. There is no statement, and no supporting finding, to show that there was no reasonable prospect of recovery in 1927, 1928, and 1929, the years chosen by the Tax Court, and why this was so. The reasonable prospect of recovery is an ultimate fact to be determined. Whether and when an embezzlement loss occurs is a practical fact to be decided from surrounding circumstances. Alison v. United States, 344 U.S. 167, 73 S.Ct. 191, 97 L.Ed. 186. There being no supporting findings, we are unable to determine the basis for the decision as we cannot make nor assume findings. Bowyer v. Commissioner, 287 F.2d 787 (10th Cir.).

The Tax Court did not need to determine the particular year to be used if petitioner failed in his burden to prove the year claimed in the petition. This court, in Denver & Rio Grande Western R. R. Co. v. Commissioner, 279 F.2d 368, a bad debt case, considered Section 23 (k) of the 1939 Code, and placed the burden on the taxpayer to prove the year when the debt became worthless. Further this court held that the question is whether in fact the debt became worthless, and not whether the creditor thought it to be worthless. This standard should be applied to this case of embezzlement, and to the bad debt aspect of the case.

If it can be assumed from the result that the Tax Court found there was no reasonable prospect of recovery in 1927, 1928, and 1929, the question would be whether there is substantial...