Croker v. Commissioner

BULA E. CROKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Croker v. Commissioner Docket No. 41121. United States Board of Tax Appeals 27 B.T.A. 588; 1933 BTA LEXIS 1330; January 31, 1933, Promulgated *1330 1. The petitioner authorized an individual to act as her agent for the sale of real estate in Florida. Not being able to obtain an accounting from him, she employed attorneys to institute suit against him and paid them in 1923 fees in connection with such employment. Held, the amounts paid are a legal deduction from gross income. 2. In 1923, the agent received certain moneys which belonged to the petitioner. He failed to pay these amounts to her in 1923 and petitioner claims that they are a legal deduction from the gross income either as a debt ascertained to be worthless and charged off within the year or as a loss from embezzlement. Held, the amounts are not legal deductions from gross income. Richard D. Mackey, Esq., and Francis R. Driscoll, Esq., for the petitioner. O. W. Swecker, Esq., for the respondent. SMITH *588 This is a proceeding for the redetermination of a deficiency in income tax for 1923 of $1,496.68. The allegations of error stated in the petitioner are: *589 (1) The addition of $7,200 to the income reported by the petitioner in her return for the year 1923, said item being interest on a mortgage*1331 note of $120,000 given by Martha Walton. (2) The disallowance as a deduction of the sum of $36,382.12, the amount paid by the petitioner during the taxable year 1923 for legal services and disbursements. (3) The disallowance as a deduction of the sum of $5,000 brokers' commissions on the sale of a mortgage in the sum of $120,000 made by Martha Walton. (4) The disallowance of the sum of $5,000 as a loss sustained by petitioner on the sale of said mortgage of $120,000. (5) The disallowance as a deduction of $24,838.25 as a bad debt, such sum being the balance due to petitioner on the sale price of the said mortgage of $120,000. (6) The disallowance as a deduction of the amount paid in excess of $2,565.58 for taxes paid on property in Florida. The respondent concedes error with respect to allegations of error (3) and (4). FINDINGS OF FACT. The petitioner is the widow of Richard Croker who died April 29, 1922. At that time the petitioner owned individually and jointly with her husband valuable real estate in Florida. In 1920 they went to Ireland to live and appointed J. B. McDonald to act as their agent in Florida. They authorized him to sell about two miles*1332 of Beach front lots at Palm Beach at a price to net them $150 per front foot. Any amount in excess of that price was to be retained by McDonald as his commission. They had implicit confidence in McDonald and turned over to him the deeds to the real estate which they owned. They also left in McDonald's care certain bonds and mortgages upon which he was to collect the interest when it became due. He was also to pay taxes on real estate and make other necessary expenditures. Included in the property turned over to McDonald was a mortgage note of the petitioner in the amount of $120,000. McDonald collected the interest on this note from 1920 to 1923 and in the latter year collected $3,600 representing the semiannual interest paid on the note in April. In the early part of 1923, the petitioner gave McDonald power of attorney to sell the above mentioned mortgage note at a discount of $5,000 and further provided that he was to receive a commission of $5,000 on the sale. On June 19, 1923, McDonald sold the note for $115,000 and after deducting his commission of $5,000 turned over to the petitioner $85,165.75 of the $110,000 net proceeds from the sale. He has never remitted to the*1333 petitioner the interest which he had received in April nor any part of the difference *590 between $85,165.75, the amount remitted, and the net proceeds of $110,000. During 1923 the petitioner paid the following attorneys' fees and expenses: E. J. L'Engle, $2,473.81; Winters and Foskett, $900. She also paid other attorneys' fees in 1923, which are not claimed to be a legal deduction from gross income. The fees paid to E. J. L'Engle were for services rendered the petitioner and for expenses in defense of a suit brought against her by Howard Croker, one of her husband's sons, and also for services connected with the settlement of the estate. The amount paid L'Engle ($2,473.81) also includes certain fees paid by him in connection with the probate of Richard Croker's will. The fees paid to Winters and Foskett were in connection with legal services performed or to be performed by them in connection with obtaining an accounting from the petitioner's agent, McDonald. During 1923 the petitioner's agent paid for her taxes upon real estate belonging to her in Florida amounting to $2,957.22. As her agent he had caused the organization in 1920 of a corporation by the name of*1334 Palm Beach Estates and had transferred to the corporation certain land which he had been authorized to sell for the petitioner and her husband, as above described. In 1923 McDonald paid taxes assessed upon Palm Beach Estates of $3,355.38. In the audit of the petitioner's return, the Commissioner has allowed the deduction for taxes paid in 1923 of only $2,565.58. Petitioner's tax return for 1923 was made on a cash receipts and disbursements basis. OPINION. SMITH: The first question raised by the petitioner is with respect to the addition to gross income of $7,200 claimed to represent interest on a mortgage note owned by the petitioner. At the hearing of this case the respondent admitted that only $3,600 should have been added to the gross income reported by the petitioner. The petitioner contends, on the other hand, that no part of such amount constituted taxable income to her because not received by her within the year. Petitioner further contends that if the amount of $3,600 is included in gross income it should be allowed as a deduction from gross income, upon the ground that it was embezzled by her agent in 1923. *1335 It is a well established principle of law that receipt by an agent constitutes receipt by the principal. ; ; . With respect to the claim that the amount is deductible from gross income as a loss sustained through embezzlement in 1923, the record shows no proof of embezzlement. *591 The petitioner brought suit against McDonald late in 1923, or in the early part of 1924, for the recovery of the amount, together with other moneys claimed to belong to her, but it appeared that the agent had a valid claim for offsets to the amounts claimed to be due. Intent is an essential element of the crime of embezzlement, and the cases hold that the crime is not committed where the agent retains money without concealment and under a claim of right, and that it is immaterial whether or not the claim was well founded. See ; ; *1336 . In any event, there is no proof of an embezzlement of the money by McDonald. Furthermore, there is no proof that the amount was a debt ascertained to be worthless and charged off in 1923, for the reason that, in so far as the petitioner knew in 1923, McDonald was financially responsible. The second allegation of error is that the respondent has erroneously disallowed the deduction from gross income of $36,282.12 representing attorneys' fees and disbursements of 1923. On brief the petitioner waives the right to deduct any amount except the fees for services paid to E. J. L'Engle and to Winters and Foskett. The fees paid to L'Engle were in connection with litigation brought by the petitioner's stepson against her for the rescission of certain transfers of property made by Richard Croker to the petitioner prior to 1920. We held in , affd., , that the attoneys' fees paid in connection with this suit in 1922 were not legal deductions from the petitioner's gross income of that year. In accordance with that decision, it is held that the amounts paid in 1923 are*1337 not legal deductions from the gross income of 1923. The petitioner contends that a part of the fees paid to E. J. L'Engle in 1923 were in connection with legal proceedings taken on her behalf against her agent, McDonald. An examination of "Exhibit 6" shows, however, that $1,371.20 of the amount in question was paid by the petitioner on May 19, 1923, and was in connection with the case of Croker v. Croker, in the Supreme Court of Florida. The balance of the amount, namely, $1,102.61, is made up of numerous expense items beginning June 3, 1922, and ending August 12, 1923. Some of these items clearly have reference to the ancillary probate of the will of Richard Croker in Florida. Upon the evidence of record, the action of the respondent in disallowing the deduction of the entire amount ($2,473.81) paid to L'Engle is sustained. The petitioner also, in 1923, paid to Winters and Foskett $900. This was for fees paid to this firm of attorneys for advice and for the purpose of employing them to prosecute legal proceedings against *592 J. B. McDonald, the petitioner's agent in Florida. The petitioner had, together with her husband, appointed McDonald to act as her agent*1338 in the sale of valuable real estate in Florida and for the purpose of collecting interest upon bonds and notes. The sale and care of this property and of her investments in Florida constituted her business. The fact that she employed an agent to act for her in these matters does not change the statute of her business. The taxing statute permits as individual to deduct from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 214(a)(1), Revenue Act of 1921. Looking after her business interests required the time and attention of the petitioner in 1923. In , it was held that where a suit or action against a taxpayer is directly connected with, or "proximately resulted from, his business, the expense incurred is a business expense within the meaning of section 214(a), subd. 1, of the act." It is held that the petitioner is entitled to deduct from gross income the attorneys' fee of $900 paid Winters and Foskett. Cf. *1339 . The claim of the petitioner for the deduction of $24,838.25 representing the difference between the net proceeds of a mortgage sold and the amount remitted to her by her agent is claimed as a deduction from gross income as a bad debt or as a loss sustained through embezzlement. This claim stands upon the same plane as the claim with respect to the interest upon the mortgage, and for reasons above stated it is not sustained. Petitioner, through her agent, paid in 1923 $2,957.22 real estate taxes assessed upon her property in Florida. The Commissioner has allowed the deduction of only $2,565.58 of this amount. The petitioner is entitled to the deduction of $2,957.22 for taxes paid. The petitioner further claims the right to deduct from gross income $3,355.38 paid by her agent, McDonald, in connection with real estate assessed to Palm Beach Estates, a corporation. The evidence indicates that these lands belonged to Palm Beach Estates and not to the petitioner. The taxes assessed upon those lands are taxes of the corporation and not of the petitioner. The disallowance by the respondent of the deduction for such taxes is sustained. *1340 Judgment will be entered under Rule 50.