Merkle v. State Tax Commission

Lyle R. Wolfe, Judge (Pro Tempore). This appeal has come before the court as a result of the commission’s disallowance of losses claimed by the taxpayers on their 1961 joint Oregon income tax return. The losses were claimed in connection with property received from the Estate of Kurt G. Hirsch, deceased, in Grant County, by Mrs. Eunice Merkle, formerly Eunice MacGillivray, as the residuary beneficiary under the will of the decedent. Eunice Merkle, under the will, was entitled to the entire estate, except for minor specific bequests to Walter G. Hirsch, surviving brother of the decedent. The brother contested the will on the grounds of undue influence and lack of testa *284 mentary capacity. The contest in the Grant County Circuit Court, if successful, would have resulted in intestacy. Since Mrs. Merkle was not a relative of the decedent, the decedent’s brother, as heir, would have received the entire estate. Mrs. Merkle individually paid the decedent’s brother the sum of $8,475.00 in settlement, and the contesting brother thereupon relinquished and waived his claim to the estate. She also paid legal expenses of $2,113.60 to her attorneys, Banta, Silven, Horton & Young, out of her own funds for defending her rights in the will contest. Plaintiffs at the time of the hearing abandoned their claim of deductibility of the legal expense. The estate paid the estate inheritance tax upon, and Mrs. Merkle ultimately received, the residuary estate assets, excepting only the specific bequests to the surviving brother, without any deduction for the •sum paid in settlement of the will contest. The only issue is whether the settlement payment is an expenditure deductible as a loss on the 1961 joint income tax return by Mrs. Merlde as beneficiary of the estate. In preparing that return, the payment was pro-rated among the assets received by Mrs. Merkle, which consisted of cash, mortgages, notes, and a limited amount of real property. The item disallowed by the Commission is the loss claimed as attributed to cash, mortgages and notes. The problem is finding the specific income tax provisions defining and authorizing deductible losses, and seeking such case law as may assist the Court in applying these provisions to the facts of this case. The classes of deductible losses are enumerated in OPS 316.320(1) (a), (b) and (c), providing as follows: “In computing net income there shall be allowed as *285 deductions, losses sustained during the tax year and not compensated for by insurance or otherwise: (a) If incurred in trade or business. (b) If incurred in any transaction entered into for profit, though not connected with the trade or business. (c) Of property not connected with 'the trade or business, if arising from fire, storm, shipwreck or other casualty, or from theft. * * # ?? The plaintiffs in their complaint appear to claim a loss under OES 316.320(2). Unfortunately, subsection (2) does not add an additional class of deductible losses, but merely describes the method of computing the basis for determining the amount of deductions for losses, if any, sustained under subsection (1) of OES 316.320. Furthermore, no consideration of OES 316.266(6) and OES 316.270(2) is required, unless it is first determined that there exists a deductible loss within the three general classes described in subsection (1) of OES 316.320. No citation has been suggested that the settlement payment falls within the categories described in subsection (1) of OES 316.320. On the contrary, plaintiffs in their brief stated that “these expenditures are not claimed as a ‘loss deduction’, but as a 'capital expenditure to be added to the basis of the property and recovered on its subsequent liquidation.” It would seem that the settlement payment lies outside the scope of the authorized deductible losses. It is fundamental that losses are deductible for tax purposes only when authorized by statute. Estate of Eleanor D. Erdman, Deceased, et al v. Commissioner, 37 TC 1119 (1962); Estate of Dietz v. Commissioner, 16 TC Memo, 482 (CCH 1957); Brown v. Commissioner, 19 TC 87 (1952); W. Thomas Menefee and *286 Florence E. Menefee v. Commissioner, 8 TC 309 (1947); Clara A. McKee v. Commissioner, 19 BTA 430 (1930). Plaintiffs apparently complain of inconsistency between the inheritance and income tax 'systems. Such inconsistency may exist, but the consequences of the enforcement of the tax statutes in the two fields result from the legislative enactments. The legislature, not the court, is the architect of the statutes, and is solely responsible for the designation and selection of the means and methods of raising revenue and of the persons and subject matter to be affected thereby. Attempting to eliminate possible inconsistencies arising out of the application of the statutes embodied in the two systems is in many cases an irrelevant factor in the judicial consideration of a case and tends merely to obfuscate the judicial task of applying specific provisions of the income tax law. Neither the validity nor the usefulness of such factor in the judicial process has been demonstrated for this case. The cases and authorities of Lyeth v. Hoey, 305 US 188, 59 S Ct. 155, 83 L. Ed. 119, 119 A.L.R. 410 (1938) ; In re Cook (New York), 79 N.E. 991; Hartung v. Unander, 224 Or 165, 169-171, 355 P2d 738 (1960); Opinions of the Attorney General, 1946-48, pp. 182-3, No. 26; 28 Am. Jur. Inheritance, Estate awd Gift Taxes, %% 109 and 110, pp. 87-88; discussed by counsel, seem to touch upon factual situations and statutes not involved in this case, and also indicate the improbability of any successful judicial undertaking to achieve consistency. Statutory differences and separate theories distinguish the systems of inheritance tax and income tax in Oregon. Belton v. Buesing, 240 Or 399, 629, 402 P2d 98 (1965). It is futile often to expect to find *287 referable concepts and consistency in tbe two systems. These taxation systems have different policy thrusts and apply to their respective subject matters in ways peculiar to their own designs, producing sometimes disparate and irreconcilable consequences. The Court concludes there are no circumstances present to justify extending the categories of deductible losses described in subsection (1) of ORS 316.320 to include the settlement payment. The remedy, if any, probably must be sought from the tax law creator, the legislature. The Order of the Commission is affirmed.