2 F. Supp. 960 | W.D. Pa. | 1932
The Commissioner of Internal Revenue assessed against the plaintiff an additional tax of $2,760 upon examination of the latter’s return of its income for the year 1928. This amount was paid under protest by plaintiff, which, by the instant suit, seeks to recover it. The defendant has filed a statutory demurrer to plaintiff’s claim.
The facts set forth in the statement of claim are substantially as follows: During the years 1922 to 1928, inclusive, an employee of the plaintiff bank embezzled $95>,-360 of the funds of the bank. On September 15, 1928, of this amount $42,650 was embezzled, and of this last amount $41,810 was recovered by the bank, leaving the total amount embezzled without direct recovery, $53,540. Of this amount the bank recovered $33,540 from a surety company
The statutory provisions relative to the inquiry are as follows:
The Revenue Act of 1928, § 23 (26 US CA § 2023) reads in part as follows:
“In computing net income there shall he allowed as deductions:
“ * * * (f) Losses by Corporations. In the ease of a corporation, losses sustained during the taxable year and not compensated for hv insurance or otherwise. * * * “(j) Bad Debts. Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.”
It is evident from the foregoing provisions of the Revenue Act of 1928 that Congress intended to differentiate between losses and bad debts, although failing to lay down any definite line of demarcation between the two. Almost without exception the courts have held that tho word “debts” as referred to in paragraph (j) of section 23 of the Revenue Act of 1928, and in like language in prior statutes, applies only to debts within the ordinary and general meaning of the word, that is, obligations voluntarily created between debtor and creditor; and that the word “losses” was intended to cover sums lost by theft, conflagration, or the like. Assuming tho intent of Congress to differentiate between the two terms and applying the foi’egoing definitions, it is plain that tho deduction which plaintiff claims from its 1928 income was a loss and not a bad debt. This conclusion being reached, our decision follows almost automatically. Losses are sustained within the meaning of the taxing act when tho events definitely occur which give riso thereto. Lewellyn, Collector, v. Electric Reduction Co., 275 U. S. 243, 48 S. Ct. 63, 72 L. Ed. 262; Lucas, Commissioner, v. American Code Co., 280 U. S. 445, 50 S. Ct. 202, 74 L. Ed. 538; Huff v. Commissioner of Internal Revenue (C. C. A.) 56 F.(2d) 788.
Counsel for the plaintiff have called our attention to several cases which, it is claimed, hold that an embezzlement may be deducted as a bad debt in a year subsequent to the dato of the original conversion. Chief of these eases is Farish & Co. v. Commissioner (C. C. A.) 31 F.(2d) 79. In that case an employee of the taxpayer had embezzled certain securities which were in the custody of the taxpayer, but which belonged to other persons. The embezzlement having been discovered in a subsequent year, the taxpayer borrowed money and replaced the stolen securities. Subsequent to the discovery of the theft, the employee agreed to reimburse the taxpayer from property which he expected to receive. Thereupon the amount of tho embezzlement was charged against the employee. Upon its being determined later that nothing could be recovered, the amount was charged off as a had debt. In the opinion in this case tho court upheld the deduction because it hold it to bo a debt which had arisen by reason of the agreement between the employee and the taxpayer. It is admitted in the opinion that, had there been no such agreement, and had tho securities embezzled been the property of the taxpayer, the shortage would have been a loss under the statute, and as such deductible only in the return for the year of tho embezzlement.
Douglas County Light & Water Co. v. Commissioner (C. C. A.) 43 F.(2d) 904, and Ledger Co. v. United States (Ct. Cl.) 37 F.
In the instant case no such agreement with the defaulter was made by the taxpayer. Its money was definitely lost by it upon the date of the embezzlement. This being so, we are regretfully compelled to order that judgment be entered in favor of the defendant.