Norton v. Comm'r of Internal Revenue
| Decision Date | 07 June 1963 |
| Docket Number | Docket No. 94946. |
| Citation | 40 T.C. 500 |
| Parties | EVELYN NELL NORTON, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
James C. Soper, for the petitioner.
Richard E. Lobedan, for the respondent.
Petitioner entered into an agreement with a licensed California contractor for the construction of a swimming pool on her property, payment to be made as the work progressed. After petitioner had paid approximately 85 percent of the agreed price to the contractor upon his representations that the work was being done in accordance with the contract and that subcontractors and materialmen were being paid, the contractor left the work incomplete, and 4 days thereafter was adjudicated a bankrupt. The work was not, in fact, done in accordance with the specifications in the contract and some of the subcontractors and materialmen had not been paid. The poor quality of the work made the pool unsafe. Petitioner put in a steel pool at a cost greater than would have been necessary had the other pool not been on the land. Held, petitioner has not shown that the untrue statements as to the quality of the work done by the contractor were knowingly and designedly false and, therefore, has not shown that the amounts expended by her because of these untrue statements represented a theft loss, but has shown that the contractor's representations as to the subcontractors and material men being paid were knowingly and designedly false and that to the extent she made payments on the basis of these false representations she sustained a deductible theft loss.
Respondent determined a deficiency in petitioner's income tax for the calendar year 1959 in the amount of $10,595.53. The issue for decision is whether the amount of $13,631.05 which was the total cost to petitioner of the failure of a contractor to properly complete a swimming pool on petitioner's property or any portion of this amount is deductible by petitioner as a theft loss.
All of the facts have been stipulated and are found accordingly.
Petitioner, an individual residing in Piedmont, Calif., filed her Federal income tax return for the calendar year 1959 with the district director of internal revenue at San Francisco, Calif.
On or about May 8, 1958, petitioner entered into a contract with Donald G. Webb, doing business as Paddock Pools of East Bay, for the construction of a swimming pool. At the time this contract was entered into, Webb was a duly licensed contractor pursuant to the Business and Professions Code of the State of California and petitioner was so informed.
The contract set forth the specifications of the pool that was to be constructed and contained a warranty by the contractor that all construction material shall be of good quality and that construction work shall be done in a workmanlike manner. The total contract price was $9,446.42, and the contract provided that petitioner should pay the contractor 10 percent as a deposit, 60 percent on guniting, 25 percent on placing of cast stone coping, and balance on completion.
Webb commenced construction of the swimming pool and during the course of construction petitioner paid installments aggregating $8,112 upon Webb's representation that the work was being performed as per contract and that the subcontractors and materialmen were being paid. On or about December 18, 1958, Webb ceased work upon the pool construction. At that time the pool was not completed as per contract in that certain pool accessories had not been installed, the fence and gate around the pool area were not complete, the heating and filter systems were not complete, and the electrical work was not complete.
The pool as constructed by Webb was defective in the following respects: (1) The plastic lining and concrete exterior of the pool were cracked and defective; (2) the foundation of the pool was not constructed in accordance with the plans and specifications in that the fill upon which the pool and the adjacent deck area were placed was not sufficiently compacted, the foundation of the pool contained one less concrete pier than was called for in the specifications, and the pool did not rest upon one of the concrete piers actually installed; and (3) the pool did not contain adequate steel reinforcing rods as per contract.
Webb failed to pay certain of his subcontractors, who then filed mechanics' liens against petitioner's property in the aggregate sum of $4,160.94.
Petitioner engaged a civil engineer to inspect the pool after Webb ceased work thereon and was advised that in its then condition it constituted a hazard to the persons and property of petitioner and her neighbors. The most economical method of rectifying the then existing hazard consistent with petitioner's desire to install a swimming pool was to construct a steel pool on the existing pool site.
Petitioner lodged a complaint with the Contractors' State License Board of the State of California and was advised that because of pending disciplinary proceedings against Webb the prosecution of her complaint would be of no avail.
On or about December 22, 1958, Webb was adjudicated a bankrupt in the District Court of the United States in and for the Northern District of California, Northern Division.
By decision dated April 30, 1959, before the Registrar of Contractors, Contractors' State License Board, State of California, it was ordered that the license of Webb doing business as Paddock Pools of East Bay be revoked. This decision was the adoption of a proposed decision of a hearing officer for the Contractors' State License Board. The hearing was on an accusation of an investigator for the Contractors' State License Board in his official capacity based on his investigation of eight contracts between Webb and certain owners whereby Webb was to construct swimming pools for these owners, but petitioner was not one of the eight owners involved. One of the findings in the decision was that Webb had diverted funds received for the prosecution of each of the eight construction projects and applied such funds to other construction projects, operations, obligations, or purposes, but that the evidence was not sufficiently comprehensive or specific to support a finding of an exact amount of such diversion. However, it was found that the amount of funds diverted from each of the construction projects was substantial.
On July 14, 1959, petitioner filed a proof of claim in Webb's bankruptcy proceeding in the District Court of the United States in and for the Northern District of California, Northern Division, in which she alleged that Webb was at and before the filing of his petition for adjudication of bankruptcy, and still was, liable to her in the sum of $18,366.98. The proof of claim alleged that Webb's liability to petitioner was founded upon the breach of a contractual obligation by Webb to perform services for petitioner in the construction of the swimming pool. Petitioner alleged that Webb had failed in the performance of the contract without cause in failing and refusing to pay subcontractors and materialmen who furnished labor and material in connection with the construction of the pool, and had, in an improper and unworkmanlike manner not in conformance with the plans and specifications, done the work to partially complete the pool. The petitioner also alleged that there was no setoff or counterclaim and that petitioner held no security covering this liability. This proof of claim is still pending in the bankruptcy proceeding.
Because of Webb's failure to properly complete his contract, petitioner expended the following sums:
+-----------------------------------------------------------------------------+
¦Satisfaction of mechanics' liens ¦$3,178.05¦
+-------------------------------------------------------------------+---------¦
¦Engineering fees ¦341.00 ¦
+-------------------------------------------------------------------+---------¦
¦Difference between contract payments to Webb ($8,112) and fair ¦7,112.00 ¦
¦market value of resultant product ($1,000) ¦ ¦
+-------------------------------------------------------------------+---------¦
¦Increased cost of construction of steel pool occasioned by ¦ ¦
¦obstruction of concrete pool, which cost was not more than would ¦3,000.00 ¦
¦have been the expense of removing the concrete pool ¦ ¦
+-------------------------------------------------------------------+---------¦
¦...To continue reading
Request your trial
-
Thompson v. Commissioner
...whereby Hotel fraudulently appropriated the property of petitioner. We cannot assume this crucial fact without proof. Evelyn Nell Norton Dec. 26,165, 40 T. C. 500 (1963). The mere violation of a trust does not constitute the fraudulent appropriation which is necessary to constitute embezzle......
-
West v. Comm'r of Internal Revenue
...is of little importance provided it constitutes a theft. Edwards v. Bromberg, 232 F.2d 107, 111 (5th Cir. 1956); Norton v. Commissioner, 40 T.C. 500, 506 (1963), affd. 333 F.2d 1005 (9th Cir. 1964). Utah Code Ann. sec. 76-6-404 (1978), defines ‘theft‘ as follows: THEFT—ELEMENTS.—A person co......
-
Huey v. COMMISSIONER OF INTERNAL REVENUE
...76-2 USTC ¶ 9592 540 F. D. 448 (9th Cir. 1976); Nichols v. Commissioner Dec. 27,293, 43 T. C. 842, 884 (1965); Norton v. Commissioner Dec. 26,165, 40 T. C. 500, 504-505 (1963), affd. 64-2 USTC ¶ 9569 333 F. 2d 1005 (9th Cir. 1964). Unfortunately, for petitioner, however, we have only the co......
-
Skolnik v. Comm'r of Internal Revenue
...be convicted or even prosecuted, as long as a ‘theft’ in fact occurred under the law of the State wherein it was sustained. Evelyn Nell Norton, 40 T.C. 500 (1963); Paul C. F. Vietzke, supra; Michele Monteleone, 34 T.C. 688 (1960); and Curtis H. Muncie, 18 T.C. 849 (1952). An essential eleme......