McIlhenny v. Commissioner of Internal Revenue, 4077.

• Decision Date: 04 March 1930
• Docket Number: No. 4077.,4077.
• Citation: 39 F.2d 356
• Parties: McILHENNY et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

39 F.2d 356 (1930)

McILHENNY et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 4077.

Circuit Court of Appeals, Third Circuit.

March 4, 1930.

Robert E. Lamberton, of Philadelphia, Pa., for petitioners.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, and Morton K. Rothschild, Sp. Asst. Attys. Gen. (C. M. Charest, Gen. Counsel, and Stanley Suydam, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before WOOLLEY and DAVIS, Circuit Judges, and MORRIS, District Judge.

MORRIS, District Judge.

John D. McIlhenny filed an income tax return for the year 1920, in which he claimed a deduction for loss of $4,749.42. Early in 1923, a revenue agent examined his return and disallowed the deduction. McIlhenny filed a protest. In February of 1924 the Commissioner of Internal Revenue, after giving consideration to the report of the revenue agent and the taxpayer's protest, expressly allowed the deduction in full. Other adjustments in the return, however, resulted in a determination of a deficiency and an assessment of an additional tax which McIlhenny duly paid in full. On November 18, 1925, the same Commissioner, without having before him any evidence of fraud, malfeasance, misrepresentation of fact, or new evidence of any character, reopened the case, disallowed the deduction and, on January 8, 1926, notwithstanding the protest of the executors of McIlhenny, who had died on November 23, 1925, determined, solely because of such disallowance, a deficiency in his income tax for 1920 in the sum of $2,043.82. The executors appealed from the redetermination of the Commissioner to the United States Board of Tax Appeals. The Board sustained the Commissioner.

The case is now here upon a petition for review of the Board's decision. The facts upon which the Commissioner first allowed and later disallowed the claimed deduction are that in 1916 John McIlhenny, father of John D. McIlhenny, the taxpayer, died testate leaving his residuary estate in equal shares to his five children. In the year 1920, John McIlhenny's executors sold certain securities at a net loss of $23,747.10 and distributed the proceeds among his five residuary legatees. The one-fifth part of this loss, or $4,749.42 constituted the sum claimed as a deduction by John D. McIlhenny in his individual return for that year. The ground upon which such sum was claimed as a deduction by the taxpayer and at first allowed by the Commissioner as a personal loss was that in 1920 the estate of John McIlhenny was not in process of administration, and that the securities then held by the executors were held by them not as executors but as agents of the legatees. In his subsequent deficiency letter disallowing the deduction, the Commissioner stated: "No evidence is of record in this office that such executors ever made a final settlement of the estate or were legally discharged. It is, therefore, conclusive that the assets of the estate were exclusively in charge of such executors, as executors of the estate and not as agents of the beneficiaries, and therefore, losses on the sale of such assets of the estate may not be proportionately deducted by the beneficiaries on their individual returns."

But the sole question presented by the record before us is not whether the first action of the Commissioner in allowing the deduction was right or wrong, but whether having once determined the matter, and the tax computed upon such determination having been paid, the Commissioner had power or authority, in the absence of fraud or other new evidence, to reopen the case, disallow the deduction theretofore allowed by him, and make a redetermination of the tax. In support of their contention that the Commissioner was without power to reopen the case and make a redetermination, the petitioners, the taxpayer's executors, rely upon Woodworth v. Kales, 26 F.(2d) 178 (C. C. A. 6), and the Commissioner's order of January 20, 1923, while the Commissioner finds support for...