Schmidlapp v. Commissioner of Internal Revenue

• Decision Date: 02 May 1938
• Docket Number: No. 213.,213.
• Citation: 96 F.2d 680
• Parties: SCHMIDLAPP v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

96 F.2d 680 (1938)

SCHMIDLAPP v.COMMISSIONER OF INTERNAL REVENUE.

No. 213.

Circuit Court of Appeals, Second Circuit.

May 2, 1938.

Perkins, Malone & Washburn, of New York City(Frank B. Washburn and Watson Washburn, both of New York City, of counsel), for petitioner.

James W. Morris, Asst. Atty. Gen., and J. Louis Monarch and Joseph M. Jones, Sp. Assts. to Atty. Gen., for respondent.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

L.HAND, Circuit Judge.

This appeal is from an order of the Board of Tax Appeals, assessing added income taxes against the taxpayer for the years 1931 and 1932.The issues relate to deductions of which four are in dispute, and all of which the Board disallowed; to identify them we shall call them, (1) entertainment expenses; (2) apartment rent; (3) loss on Winchester-Simmons shares; (4) loss on Chase Bank shares.As they are quite separate and involve different considerations, we may take them up seriatim.

(1) Entertainment Expenses.

The taxpayer was a vice-president of the Chase National Bank of New York, which expected that as part of his duties he would entertain at his own expense visitors whose favor the bank desired; just as some manufacturers entertain the buyers of mercantile houses to induce their patronage.The taxpayer lived lavishly, and swore that a substantial part of his expenses were incurred to discharge this implied duty; he estimated that his outlay upon such guests amounted to $3,000 in each year.The case comes up only upon the Board's finding and its meaning is equivocal; it was as follows."The record of such expenditures is very unsatisfactory.With the exception of the item of `Recess Club Charges' no expenditures were specifically attributable to entertaining bank customers, and none was adequately proved."We cannot tell why the proof was inadequate, and possibly should not have agreed that it was, but as the record stands we must take it that only the "Recess Club Charges" were sufficiently proved — $590.75 in 1932.If proved, these outlays were, however, deductible.In Cohan v. Commissioner, 2 Cir., 39 F.2d 540, we held that the expenses of an impresario in entertaining the actors and chorus during the period of rehearsals, was one of the "ordinary and necessary expenses * * * in carrying on" his business; and we cannot see anything to distinguish the expenses at bar, so far as they really were to drum up business for the bank, though it was proper to be extremely suspicious as to how far that was their purpose.It is no answer to say that they were for the bank's benefit; so were all the taxpayer's services; if it did in fact give him to understand that he was to extend a factitious hospitality in its interest, the cost of it was a necessary expense of his office.The Commissioner does not ask us not to recognize such an arrangement as lawful, and indeed any compunctions as to its propriety lie rather in the field of dignity and good taste, than of morals.To the extent of $590.75 in the year 1932, the deduction should have been allowed.

(2) Apartment Rent.

The taxpayer had leased and occupied an apartment in New York; he abandoned it and moved to another in the spring of 1931.He still had the old lease on his hands, and retained a broker as early as November, 1930, to dispose of it.He was unsuccessful, and deducted the rent reserved for 1931 and 1932, as a loss "incurred in any transaction entered into for profit."Section 23(e)(2), Revenue Acts of 1928 and 1932, 26 U.S.C.A. § 23(e)(2) and note.In Heiner v. Tindle, 276 U.S. 582, 48 S.Ct. 326, 72 L.Ed. 714, the taxpayer, being obliged to move from his home, let it to others; when he sold it, he was allowed to deduct as a loss the difference between its value when lease began and the eventual sales price.As a new matter something may no doubt be said against distinguishing between a house actually let, and one unsuccessfully put upon the market; putting the property in the hands of a broker might perhaps be regarded as itself the inception of a "transaction entered into for profit."But Morgan v. Commissioner, 5 Cir., 76 F. 2d 390, andRumsey v. Commissioner, 2 Cir., 82 F.2d 158, are the other way; they hold in effect that only an actual letting creates a "transaction", and it is true that only then does it become impossible for the owner to resume his original occupation.DeFord v. Commissioner, 1 Cir., 29 F.2d 532 is not in point on the facts.These deductions were properly denied.

(3) The Loss on the Winchester-Simmons Shares.

The taxpayer had bought some shares in the Winchester-Simmons Company, a holding company whose only assets were 90% of the common shares of the Winchester Repeating Arms Company, and 90% of those of the Associated Simmons Hardware Company.The Winchester-Simmons Co. had itself borrowed $1,000,000 before 1930, and the Winchester Repeating Arms Co. went bankrupt early in 1931, its common shares being entirely worthless thereafter.The Simmons Company went into the hands of receivers in January of 1932, and the taxpayer in December, 1932, sold his Winchester-Simmons shares for one dollar.The question is whether he suffered a "capital loss" in 1932 — as he originally asserted, and as it was allowed — or an "ordinary loss", as he now claims.It is true that the Simmons shares are not found to have had no value at all in 1932, but both sides assume that they were not worth $1,000,000.The Winchester-Simmons shares were therefore worthless."`Capital' loss means deductible loss resulting from the sale or exchange of capital assets."Section 101(c)(2) of the Revenue Act of 1932,26 U.S.C.A. § 101 note.As long as assets have any value whatever, a gain or loss "results" from their sale, their "unrealized" depreciation not being "recognized" until then.Theoretically, that conception might have been extended to property whose value had altogether disappeared, but theory has not been pushed so far.A taxpayer suffers a "recognized" loss, if the property becomes altogether worthless as much as though it were physically destroyed.United States v. S. S. White Dental Mfg. Co., 274 U.S. 298, 47 S.Ct. 598, 71 L.Ed. 1120.Moreover, such a loss may not be reserved and taken in a later year through the device of a sale.De Loss v. Commissioner, 2 Cir., 28 F.2d 803;...