Peterson Linotyping Co. v. Commissioner

PETERSON LINOTYPING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Peterson Linotyping Co. v. Commissioner Docket No. 11867. United States Board of Tax Appeals 10 B.T.A. 542; 1928 BTA LEXIS 4086; February 6, 1928, Promulgated *4086 The petitioner's treasurer embezzled its funds in the year 1914. The petitioner discovered the embezzlement in 1916, and brought suit to recover the amount embezzled. In 1921 the embezzler went into bankruptcy wholly insolvent and the petitioner did not receive anything on its claim. Held, that the amount of the embezzlement constituted a loss in 1914, and that it is not deductible as a bad debt in the year 1921. I. N. Nelson, Esq., for the petitioner. James A. O'Callaghan, Esq., for the respondent. MARQUETTE *542 This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1921 in the amount of $1,224.79. The deficiency letter also determined an overassessment for the year 1920 and the petition alleges that an appeal is also taken as to that year, but at the hearing all assignments of error were abandoned by the petitioner except that the respondent erred in disallowing the deduction taken by the petitioner in its return for 1921 on account of an alleged worthless debt. *543 The petitioner is an Illinois corporation with its principal office and place of business*4087 at Chicago, Ill. During the year 1921 it was affiliated with its subsidiary, the Regan Publishing House, Inc. In the year 1914 the Regan Printing House, Inc., one of a group of three affiliated companies, to wit, G. D. Steere Co., Peterson Linotyping Co., and Regan Printing House, Inc., discovered that its treasurer, John G. Budde, had embezzled $41,023.79 of its money. In 1916 the Regan Printing House, Inc., brought suit in the Circuit Court for Cook County, Illinois, against Budde for the recovery of the money he had embezzled. The suit was still pending and undisposed of on February 9, 1921, on which date Budde filed a petition in bankruptcy in the District Court of the United States for the Northern District of Illinois. Budde was wholly insolvent and no dividends were paid out of the bankruptcy proceeding to the general creditors of Budde and the Regan Printing House, Inc., never received anything on the amount due it from Budde. The amount embezzled by Budde has not been claimed by any of the affiliated companies above mentioned as a deduction from gross income in any of their tax returns filed up to the present time. The claim of the Regan Printing House, Inc., against*4088 John G. Budde on account of the amount embezzled by him was in the year 1914 charged on the books of the Regan Printing House, Inc., to a suspense account. Prior to December 31, 1916, a reserve for bad debts in the sum $41,603.39, which included the claim of $41,023.79 against Budde, was set up on the books of the Regan Printing House, Inc. The Regan Printing House, Inc., carried on its books in its reserve for bad debts the said amount of $41,023.79 due it from Budde until 1924, when the reserve was credited against the suspense account where the Budde shortage was carried, and in that year the claim against Budde was written off on the books of the Regan Printing House, Inc., as a bad debt. OPINION. MARQUETTE: The petitioner contends that the amount of $41,023.79 embezzled by Budde in the year 1914 constituted a debt which became worthless in 1921 when Budde went into bankruptcy wholly insolvent, and that it is properly deductible from gross income for the year 1921 as a debt ascertained to be worthless and charged off within that year. We are, however, unable to agree with the petitioner's contention. The issue here presented has been decided by this Board in several cases*4089 adversely to the contention that the petitioner herein makes. In , the facts of which are very similar to those of the instant proceeding, we held that a fraudulent appropriation of petitioner's goods constituted *544 "losses sustained," rather than "debts ascertained to be worthless." We think that the conclusion reached in that case is sound and applicable here and that the embezzlement by Budde from the Regan Printing House, Inc., constituted a loss to the company but did not create the relation of debtor and creditor. No doubt the company had a cause of action against Budde to recover the money he had embezzled, but the right to recover did not rest upon either an express or an implied contract. A loss can only be deducted from income for the year when it was sustained. In , it was held that the petitioner's loss by embezzlement, as here, occurred when the money was taken although petitioner did not know of the embezzlement until a later year. The same holding was announced by United States District Court for the Southern District*4090 of Ohio in the case of United Statesv. Cleveland, Cincinnati, Chicago & St. Louis Ry. Co., February 23, 1916, unreported. In that case the court said: The time of the discovery of the loss bears no relation to the date the loss was sustained. The loss was sustained when the theft occurred, although the defendant did not know at the time of the depletion of depletion of its assets. See also Appeals of J. A. Bentley and . The record herein establishes clearly that the embezzlement by Budde took place in the year 1914. The resulting loss to the Regan Printing House, Inc., was therefore sustained in that year and it may not be deducted in computing net income for a later year. Reviewed by the Board. Judgment will be entered for the respondent.