Cass v. Commissioner , 16 B.T.A. 1341 ( 1929 )

ALVIN C. CASS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Cass v. Commissioner

Docket No. 19890.

United States Board of Tax Appeals

16 B.T.A. 1341; 1929 BTA LEXIS 2403;

July 16, 1929, Promulgated

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">*2403 Deduction claimed by petitioner is allowed as a bad debt, or loss.

Max Pearl, C.P.A., for the petitioner.

J. E. Marshall, Esq., for the respondent.

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MORRIS

">*1341 This proceeding is for a redetermination of a deficiency in income tax of $915.66 for the calendar year 1923. The petition alleges error on the part of the respondent in disallowing a deduction of $10,000, representing an amount determined by petitioner to represent the uncollectible portion of a debt due from petitioner's former law partner. In an amended answer the respondent asserted claim to a deficiency of $1,031.75, based upon his increasing the petitioner's distributive share of partnership income from $26,282.39 to $26,604.35, which increase is conceded by the petitioner.

At the hearing petitioner amended his petition by alleging that Charles L. Apfel embezzled the following items of income of the firm of Cass & Apfel during 1923:

(a) $1,400.01 taken by him in excess of his distributive share;

(b) $4,500 taken and used by him in the purchase of real estate bought in the name of E. Bright Wilson for said Wilson and Apfel in fraud of petitioner's right to one-half of">*2404 the benefits of said purchase moneys.

(c) $900 taken by check of Long Beach Automobile & Storage Co., in which petitioner had a one-half interest.

(d) In addition to the amount withdrawn by Charles L. Apfel, of $1,400.01, he withdrew $13,197.12, an amount equal to that withdrawn by the petitioner, whereas said Apfel was on January 1, 1923, indebted to the said firm of Cass & Apfel for excess withdrawals during the previous year in the amount of $39,000, and was therefore not entitled to withdraw any moneys during the year 1923.

FINDINGS OF FACT.

In March, 1909, petitioner and Charles L. Apfel formed a law partnership to do business in the City of New York under the firm name of Cass & Apfel. The income of the partnership was to be divided equally and neither of the partners was to withdraw more than the other.

The firm early adopted the policy of investing a portion of its earnings in real estate, and in the spring of 1920 Apfel approached Cass with the proposition that he, Apfel, be relieved from active ">*1342 legal work and be allowed to devote his entire time to the real estate business of the firm. Cass agreed to this proposition, and thereafter devoted his">*2405 entire time to the firm's law practice. He knew of purchases and sales of real estate made by Apfel, but he was not familiar with nor well informed as to the extent of Apfel's activities.

In the fall of 1918, or shortly thereafter, Apfel began by various means to divert funds of the partnership to himself or his nominees. Some of his transactions were haneled through various dummy corporations, and some by transactions wherein Apfel appeared as a silent partner with others. One of the corporations through which Apfel operated was the Long Beach Automobile & Storage Co., from which corporation he withdrew over $220,000, leaving the corporation without assets. Title to properties acquired by Apfel with partnership funds was taken in the name of the dummy corporations, or in the name of Apfel's wife, or in the name of persons with whom he was trading as a silent partner. The profits made by Apfel on these various transactions were either reinvested or dissipated, as petitioner never received his distributive share thereof.

In 1922 Cass discovered certain transactions which made him suspect that he was being victimized by his partner. He began a systematic search to determine">*2406 the extent of Apfel's operations, but before he could conclude his investigations he had to dissolve the partnership in order to protect clients of the firm. This dissolution was effected on or about July 13, 1923.

At December 31, 1922, Apfel's drawing account exceeded the petitioner's by more than $39,000. On July 31, 1923, petitioner's drawing account for the seven months of the year totaled $13,197.12, while Apfel's totaled $14,597.13.

Upon dissolution petitioner made unsuccessful demands on Apfel for his portion of the partnership's earnings that had been invested in real estate. In August, 1923, petitioner filed suit against Apfel. In October, 1923, upon petitioner's application, a receiver was appointed to acquire the assets of the former partnership of Cass & Apfel. At the time of the dissolution Apfel had no property in his own name that could be reached on execution, except a half interest in his residence at Long Beach, and on the day that petitioner filed suit against him, Apfel conveyed this interest.

The records of the Supreme Court of New York in the suit between petitioner and Apfel show that the latter applied for permission from the court to pledge properties">*2407 that he or his wife owned or had an interest in, in lieu of the bond demanded by the court, because the various bonding companies had refused to bond Apfel. Attached to the application were two schedules purporting to show the value of properties owned, or equities in properties belonging to ">*1343 Apfel and his wife. The schedule covering properties and equities owned by Sadie Apfel shows a total value of $121,400. The schedule listing properties and assets of Apfel shows a total value of $104,950, but all of the assets therein listed had been seized by the receiver or turned over to the Chamberlain of the City of New York.

On January 16, 1928, the Supreme Court of New York entered judgment for petitioner against Apfel, surcharging the latter with several hundred thousands of dollars. Apfel was ordered to account for all his real estate transactions, for all earnings and profits made by him, and for all his withdrawals, and to specifically charge himself with $240,785.15 received from certain corporations through which he dealt. Numerous other items totaling more than $120,000 were specifically set forth in the judgment for which Apfel was ordered to account.

In searching">*2408 out and locating these items and in prosecuting his case to judgment, petitioner expended many thousands of dollars. He has never been able to secure anything on his judgment, which was appealed, or from the receiver. The assets acquired by the receiver have to a considerable extent been exhausted by fees and charges.

During 1923 Apfel completed the dissipation of the Long Beach Automobile & Storage Co. by the withdrawal of $900. In March, 1923, he withdrew $4,500 of the partnership funds to invest in Long Beach property, taking title to the property purchased in the name of E. Bright Wilson, with whom Apfel was doing business as a silent partner.

Petitioner's distributive share of the partnership income for 1923 was $26,604.35, but he actually received only $13,197.12. During 1923 and subsequent thereto petitioner received no distribution of partnership funds except the $13,197.12 aforementioned.

In reporting income for 1923 petitioner determined that he would be unable to collect at least $10,000 of the amount due from Apfel. Accordingly he reduced his distributive share of partnership income, which he had reported as $26,282.39, by that amount. This deduction was">*2409 disallowed by respondent and a deficiency determined, for the redetermination of which petitioner brings this proceeding.

OPINION.

MORRIS: The only question involved in this proceeding relates to the deduction of $10,000 taken by the petitioner in his return as a bad debt. At the hearing the petitioner amended his petition claiming this amount either as a bad debt or loss through embezzlement. The facts show that, while petitioner's distributive share of the partnership ">*1344 income for 1923 was $26,604.35, he actually withdrew only $13,197.12 during that year, and subsequently thereto has received no further distributions. The record further shows that petitioner's partner had for a number of years been diverting partnership funds to his own use, but due to the manner in which the real estate transactions were handled by him, the amounts and dates of the defalcations are almost impossible of ascertainment. We are satisfied, however, from the testimony relating to the partner's financial condition and the amounts taken by him which could be traced to the taxable year, that the petitioner is entitled to the $10,000 deduction.

Judgment will be entered under Rule">*2410 50.