232 F. 2d 107 - Edwards v. C Bromberg B C

The suit, based on timely filed claims for refund, was brought to recover income taxes overpaid for the years 1948 and 1949, in the respective amounts of $14,293.62 and $775.72.

The claim was that the taxpayer had suffered losses from theft deductible under Sec. 23(e) (3)¹ in excess of $62,500 in 1948 and of $1550 in 1949, at the hands of one Goldberg who, having received money from him under the fraudulent pretense that it would be bet on a horse race or races, had embezzled the money and converted it to his own use.

The collector's representative, contenting himself with putting plaintiff on his proofs, made no special defense.

On the issues thus joined, the cause was tried to the court without a jury on the record made up of the lengthy testimony of plaintiff, the brief testimony of plaintiff's lawyer, a certified public accountant, and a stipulation2 as to plaintiff's net income for the years 1948 and 1949, and as to the judgment to be entered in named contingencies.

The district judge, finding and concluding³ that plaintiff was entitled to recover, entered judgment accordingly, and the collector's administrator has appealed.

Here, urging upon us that the district judge erred, in holding that the taxpayer is entitled to deductions for theft losses under the invoked section with respect to sums which he turned over to Goldberg, in 1948 and 1949, and in entering judgment accordingly, appellant insists that the judgment must be reversed and here rendered for him.

As developed in his argument, this contention takes three forms. One is that the evidence of plaintiff does not make out a case of losses by theft but only one of losses from swindling and that the invoked section contains no provision for deducting these. Another is that in the act of parting with his money, plaintiff Bromberg was himself a party to, and engaged in, a swindling scheme, and that recovery is forbidden by considerations of public policy, as well as the consideration that a suit for moneys wrongfully had and received through a wrongful tax exaction is based upon equitable principles and equity will not aid a swindler. A third point not made below is that the taxpayer had the burden and made no attempt to discharge it, of showing that he had tried to and could not recover his losses.

The taxpayer meets each of these grounds head on with the insistence that none of them is well taken. In addition he asserts of the third that, not made below, it may not be made here.

For the reasons hereafter stated, we agree with taxpayer throughout. We reject appellant's first claim that the loss was not within the theft deduction provided by Sec. 23(e) on reason and on authority. We reject it on reason because the word "theft" is not like "larceny", a technical word of art with a narrowly defined meaning but is, on the contrary, a word of general and broad connotation, intended to cover and covering any criminal appropriation of another's property to the use of the taker, particularly including theft by swindling, false pretenses, and any other form of guile.4 We reject the contention on the authority of Alison v. United States, 344 U.S. 167, 73 S.Ct. 191, 97 L. Ed. 186, holding that theft includes embezzlement, and of Morris Plan Co. v. Commissioner, 42 B.T.A. 1190; Muncie v. Commissioner, 18 T.C. 849; Miller v. Commissioner, 19 T.C. 1046; Earle v. Commissioner, 2 Cir., 72 F.2d 366; and Borden v. Commissioner, 2 Cir., 101 F. 2d 44. In fact there are no decisions to the contrary. Under this line of decisions it has been long and well established that whether a loss from theft occurs within the purview of Section 23(e) (3) of the Internal Revenue Code of 1939 and the corresponding provisions of prior acts, depends upon the law of the jurisdiction where it was sustained and that the exact nature of the crime, whether larceny or embezzlement, of obtaining money under false pretenses, swindling or other wrongful deprivations of the property of another, is of little importance so long as it amounts to theft.

His second point is, we think, equally without merit for the reason given by the district judge, that there was in reality no scheme to defraud others to which taxpayer was a party. There was only the fraudulent pretense of Goldberg, the thief, that there was and the use of that fraudulent pretense to obtain custody and control of taxpayer's money ostensibly as agent or joint adventurer with him but really with the purpose, which was later given effect, of depriving the taxpayer of it by felonious appropriation to his own use. In Akers v. Scofield, 5 Cir., 167 F.2d 718, we held that a swindler could not claim that the title to money he obtained by theft and false pretenses had not passed to him so as to make the money taxable to him as income, just as it was held as to Goldberg that he was liable for income taxes on the money he obtained from the taxpayer in this case. That case does not at all support, it does not even deal with appellant's contention here, that because of taxpayer's acceptance of and willingness to go along with Goldberg's proposition, the taxpayer is deprived of the deduction which without qualification the statute affords him. The argument advanced by the collector, based upon the claim that public policy defeats the deductions, we think is Pecksniffian. The United States, recognizing the transaction as resulting in income to the thief prosecuted him criminally for failing to report the money obtained thereby. It would, we think, be illogical in the extreme to deny the taxpayer the right to claim a deduction with respect to the money which the government taxed to Goldberg as his income and for the nonpayment of income taxes on which it prosecuted him.

Finally, we are in no doubt that taxpayer is right with respect to the third point, that in order for a taxpayer to claim a deduction for a loss from theft, he must show that he has made an effort to and cannot obtain restitution. The statute makes no such requirement, and when the nature of the matter dealt with, thieving and thievery, is considered, it seems clear, we think, that only if there were a specific provision imposing this requirement, would a court be authorized to hold that it exists. Cf. Earle v. Commissioner, 2 Cir., 72 F.2d 366.

The judgment was right. It is affirmed.

RIVES, Circuit Judge (dissenting).

In permitting the deduction of losses from "theft", I.R.C.1939, Sec. 23(e) (3), I.R.C.1954, Sec. 165(c) (3) and (e), I do not think that Congress intended to make the inquiry so broad as to include all forms of dishonesty, cheating, and swindling. See 41 Words and Phrases, Theft, p. 480 et seq.

The taxpayer turned over the money to Goldberg for the purpose and with the intent that it should be used to defraud other persons who might bet their money upon horses in ignorance of the fact that the races had been fixed. Now when he finds that, instead of defrauding others, he himself is the party defrauded, he is in no position to call on the Government to bear a part of his loss. Stone v. White, 301 U.S. 532, 534, 57 S.Ct. 851, 81 L.Ed. 1265; Commissioner v. Heininger, 320 U.S. 467, 474, 64 S.Ct. 249, 88 L.Ed. 171.

Finally and certainly, under the statute, to authorize deduction, the taxpayer must establish not only the theft but the loss therefrom. Alison v. United States, 344 U.S. 167, 170, 73 S.Ct. 191, 97 L.Ed. 186.

I, therefore, respectfully dissent.