DocketNumber: Docket Nos. 112627, 112628.
Citation Numbers: 3 T.C.M. 179, 1944 Tax Ct. Memo LEXIS 348
Filed Date: 2/28/1944
Status: Non-Precedential
Modified Date: 11/20/2020
Memorandum Findings of Fact and Opinion
DISNEY Judge: These proceedings involve the redetermination of deficiencies of $531.95 and $348.13 in income taxes of the respective petitioners for the year 1940. The issue is whether the respondent erred in disallowing a bad debt deduction of $3,783.40 to each petitioner arising from a stock brokerage account. The proceedings were consolidated for hearing and report.
Findings of Fact
The petitioners, husband and wife, are a marital community under the laws of Washington. For convenience the husband will sometimes be referred to herein as the petitioner. The returns of the petitioners for 1940 were filed with the collector at Tacoma, Washington.
For four or five years prior to January, 1939, petitioner had a stock brokerage account with a stockbroker with an office at Wenatchee, Washington. The purchases of stock made by petitioner under his account were generally on a marginal basis, in connection with which petitioner supplied the broker with additional margin, when requested. He made outright purchases of stocks not listed on the New York Stock Exchange. *349 The broker, upon request, made payments to petitioner from the account. Petitioner did not know whether the money he paid to the broker for the purchase of stock was actually used by the broker for that purpose.
On about January 10, 1939, as the result of an examination made by a representative of the Security Exchange Commission of the affairs of the broker, the broker's office was closed and he was arrested and placed in jail. Petitioner learned of the arrest, and the reason therefor, a few days after it occurred. On the complaint of two witnesses, not including petitioner or his wife, or involving his account, the broker was indicted, tried and convicted of embezzlement. The affairs of the broker were placed under the jurisdiction of a state insolvency court in 1939 and later in the same year were transferred to a bankruptcy court. Claims aggregating approximately $185,000 were filed in the proceedings of which about $106,000 were allowed. Petitioner filed a claim with the bankruptcy court in 1939, based upon the market value on the date the broker filed his petition in bankruptcy of stock shown to the credit of petitioner on the books of the broker. About 14.09 per cent of petitioner's*350 claim was allowed. Two dividends were received by petitioner, the first in August, 1940, and the second in September, 1940. Petitioner received no stock after the Security Exchange Commission commenced its investigation of the affairs of the broker.
The returns filed by petitioners for 1939 showed no tax liability and contained no deductions on account of the payments made to the broker for stock. The returns filed by the petitioners for 1940 contained a community deduction of $7,566.80 for bad debts. In his determination of the deficiency the respondent disallowed the deduction with the following explanation for his action:
"You claimed as a bad debt. the amount of loss you sustained as the result of embezzlement of N. J. Larimer, an individual who formerly operated a stock brokerage business at Wenatchee. The loss was sustained prior to January 1, 1940 and is therefore not an allowable deduction from 1940 income."
The evidence does not establish that the amount in question was a loss sustained or a bad debt which became worthless, within the taxable year.
Opinion
The petitioner claimed the result of his dealings with the broker as a bad debt deduction. The respondent concluded*351 that the loss resulted from embezzlements of the stockbroker and that the deduction was controlled by the loss provision of the statute. Upon brief petitioners contend that a debt was created within the meaning of
It is well settled that the bad debt and loss provisions of revenue acts are mutually exclusive.
Deductions from gross income are a matter of legislative grace and may not be taken unless clearly authorized.
The petitioner does not concede upon brief that his funds or property were embezzled, but his discussion of the applicable statute is based upon the theory that there was a wrongful taking of his property. The evidence does not establish what happened to the property of petitioner in the hands of the broker, and none of it is opposed to the conclusion reached by respondent in his determination*353 of the deficiencies that the deductions claimed by the petitioners resulted from embezzlements of the broker. Thus petitioner has failed to show that his property was not embezzled and the presumption in favor of respondent's finding must stand. The affairs of the broker and petitioner's property, if any, was under the jurisdiction of a bankruptcy court during most of 1939 and in 1940. Obviously none of petitioner's property was embezzled in 1940, and there is no factual basis for a loss deduction for embezzlement in that year.
Our decision need not rest on a failure of proof on the question of whether embezzlement gave rise to the loss.
The amendment to
The respondent committed no error in denying the deductions in the taxable year. Accordingly