Pasternak v. United States

MaddeN, Judge, delivered the opinion of the court: Tbe plaintiff sues for a refund of income tax paid by him for tbe year 1941. He claims that he should have been allowed a war loss deduction for that year, which deduction, if it had been allowed, would have greatly reduced his taxable income, and his tax. He was, in fact, allowed a war loss deduction but it was allocated to the year 1942, and therefore, because of the Current Tax Payment Act of 1943, 57 Stat. 126, and also apparently because his income for 1942 was smaller, his tax saving was nowhere near so large as it would have been if the deduction had been allowed for the year 1941. The plaintiff in December 1941 and for some years prior thereto owned real estate and personal property located in — 308 — Rumania, and personal property located in Hungary. In December, 1941 Rumania and Hungary were under the control of Germany, their governments being puppet governments imposed upon those countries by Germany. The Internal Revenue Code of 1939 was amended by the Internal Revenue Act of 1942, 56 Stat. 798, by the insertion of section 127 entitled “War Losses.” In order to avoid the difficulties which a taxpayer would have in proving the fact and the date of his loss of his property in territory which was in the hands of enemy countries, section 127, 26 U.S.C. (1952 ed.) § 127, laid down certain arbitrary rules as to the tax consequences of certain events. Section 127(a) (2) provided: Property within any country at war with the United States, or within an area under the control of any such country on the date war with such country was declared by the United States, shall be deemed to have been destroyed or seized on the date war with such country was declared by the United States. The United States declared war on Germany on December 11,1941. As we have seen, Rumania and Hungary were then under the control of Germany. It would seem to follow that the plaintiff suffered his war loss hi 1941, and is entitled to a judgment. The Government urges several reasons why he should not recover. It says that a taxpayer in order to qualify for a war loss deduction, must prove not only that he owned the property in question, but that he had effective ownership and control of the property on the presumptive date of its loss. The owner of property is presumed to possess the legal attributes of ownership. There is no evidence that the plaintiff did not possess those attributes. The owner of property in any country which is governed by a dictatorship is subject to the whims of the dictator. If the power of the dictator to confiscate property at will prevented the plaintiff from having such ownership as would qualify him for a war loss, it did the same for every owner of property in Germany and in all the countries under German control. Section 127 could not have been meant to be so interpreted. The Government suggests that because the plaintiff was a Jew, his property might have been taken from him before — 309 — December 11,1941, and, therefore, he may have had nothing to lose. We have held that when the evidence showed that the taxpayer’s property had been earlier confiscated by a German decree aimed at the property of Jews, the taxpayer was not the owner when the United States declared war on Germany. Mayer v. United States, 126 C. Cls. 1. In the instant case there is no evidence of any such decree applicable to the plaintiff’s property. The Government says that the plaintiff has not proved the value of the property for which he claims a war loss. When the plaintiff filed his claims for refund his situation was studied by an examining officer of the Internal Eevenue Service. That officer reported that the plaintiff’s property in Rumania had cost the plaintiff $19,100, and the property in Hungary $12,100. The report recommended that losses in the above amounts should be recognized, though the plaintiff had not provided “proof of the cost.” We suppose that this statement meant that documentary proof had not been presented. Evidence of some kind, oral or circumstantial, must have been presented or the examining officer would not have recommended the allowance, and his superiors would not have acted, as we shall see that they did act, upon his recommendation. We discuss this point further hereinafter. The examining officer recommended that the plaintiff’s war losses be allocated to the year 1942 because the United States declared war on Hungary and Rumania on June 5, 1942. The Internal Revenue agent in charge wrote the plaintiff that his claim for refund of 1941 tax was rejected, and that his claim for refund of 1943 tax was allowed, in the amount of $3,384.71. The 1942 war loss affected the 1943 tax because of the Current Tax Payment Act of 1943, sufra. The letter enclosed a copy of the examining officer’s report, which gave the reasons for the action taken. The amount of the plaintiff’s losses, determined by the examining officer, and upon which the proposed refund of 1943 taxes was based, was adopted. The plaintiff was advised that he could either accept the findings or reject them and file a protest. The plaintiff filed a formal protest and request for reconsideration, claiming that his war losses should have been at — 310 — tributed to 1941. Tbe request was denied, and tbe Commissioner of Internal Revenue issued a rejection of tbe plaintiff’s claim for refund for 1941. Tbe refund for 1943 in the amount of $3,884.14 was made to tbe plaintiff, on the basis of tbe amounts of losses determined by the examining officer. The Government says that tbe plaintiff’s war losses were 1942 losses, for income deduction purposes, because section 29.127(a)-3 of Treasury Regulations 111 provides: * * * Areas under tbe control of the governments of Hungary, Rumania, and Bulgaria will not be considered under enemy control prior to tbe date the United States declared that a state of war existed with such governments. As we have seen, tbe United States declared war on Rumania and Hungary on June 5,1942. The Treasury Regulation quoted above is contradictory of section 127 (a) (2) of tbe war loss statute, and tbe statute, not the regulation, must prevail. We return to tbe question whether the plaintiff has proved the amount of bis losses. We have shown above that the examining officer studied the plaintiff’s situation and determined, upon evidence which must have been satisfactory to him, the amount of the losses. The examining officer’s determination was adopted by his superiors, and a refund was made to the plaintiff based upon those amounts. The refund was, as we have seen, computed on the plaintiff’s 1943 taxes. In the instant suit the plaintiff adopts the loss figures used by the Government in computing the refund given him. We think the plaintiff was not required to produce, in the trial of the instant case, other evidence of the amount of his losses. Their amounts had been determined by the Government, which had acted upon that determination to the extent of refunding $3,384.71 to the plaintiff. We think that determination, and the action upon it, is evidence, and we accept it as such since there is nothing in the record which contradicts it. The plaintiff is entitled to recover and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38(c). It is so ordered. — 311 — LaeamoRE, Judge, Whitaker, Judge, and Johes, Chief Judge, concur. FINDINGS OE FACT The court, having considered the evidence, the report of trial commissioner W. Ney Evans, and the briefs and argument of counsel, makes findings of fact as follows: 1. Plaintiff is a naturalized citizen of the United States currently residing in California. He was born of Jewish parents in Scilagy Somlyo, Rumania, in 1901, came to the United States in 1921, was naturalized in 1927, resided in Europe from 1928 to 1936, and returned to the United States during the year last mentioned. 2. (a) During his residence in Europe plaintiff acquired certain improved real estate and personal property located at Scilagy Somlyo, Rumania, and certain personal property located in Budapest, Hungary. Plaintiff was the owner of all such property when he left Europe in 1936. The property was likewise so owned,1 and so located in December 1941, when Rumania and Hungary declared war on the United States. (b) The United States declared war on Germany on December 11,1941. Rumania declared war on the United States on December 12,1941. Hungary declared war on the United States on December 13, 1941. The United States declared war on Rumania and on Hungary on June 5,1942. (c) Rumania (including Scilagy Somlyo) and Hungary (including Budapest) were under the control of Germany on (and for some time before) December 11, 1941.2 3. (a) Plaintiff filed his Federal income tax return for the calendar year 19413 with the Collector of Internal Revenue for the Sixth California District (hereinafter referred to as the Collector) on February 24,1942, showing a tax liability of $35,651.15. On the same day the sum of $32,083.60 was paid thereon, and on October 20, 1942, the further sum of $3,567.55 (representing the balance) was paid thereon. Subsequently, on September 9, 1943, an asserted deficiency in — 312 — the amount of $4,110.49 was paid, making the total Federal income tax paid by plaintiff for the calendar year 1941 the sum of $39,761.64. In addition thereto, on September 9,1943, plaintiff paid interest in the amount of $347.76. (b)No loss with respect to the properties mentioned in frndiug 2(a) was claimed by plaintiff in his 1941 income tax return, under section 127 or any other section of the Internal Revenue Code of 1939, and no such deduction for that year has been allowed to plaintiff by the Commissioner of Internal Revenue. 4. (a) Plaintiff and his wife4 filed separate individual Federal income and victory tax returns for the calendar year 1942 and for the calendar year 1943. (b) Plaintiff’s net income, as shown by the foregoing returns, was (1) for the calendar year 1942, $35,539.23, and (2) for the calendar year 1943, $40,736.52.5 5. (a) On October 23, 1950, plaintiff filed with the Collector a claim for refund of his 1941 tax in the amount of $25,973.08. (b) On November 27, 1950, plaintiff filed with the Collector a claim for refund of his 1942 tax in the amount of $16,122.28. (c) On November 28, 1950, plaintiff filed with the Collector a claim for refund of his 1943 tax in the amount of $4,030.57. (d) Each of the foregoing claims for refund was predicated on the allowability, as a war loss deduction under section 127 of the Internal Revenue Code of 1939, of the cost of the properties mentioned in finding 2(a). 6. (a) The Rumanian properties were described by plaintiff in an exhibit attached to his claim, wherein the cost of such properties was listed as $19,600. (b) The Hungarian properties were likewise described by plaintiff in an exhibit attached to his claim, wherein the cost of such properties was listed as $24,200. (c) Affidavits attached to the claim attested to the existence and ownership of the properties and of the confiscation — 313 — thereof by the Bussian Government. No substantiation of the cost of the items was furnished.6 7. (a) On July 1, 1952, the Internal Bevenue Agent in Charge forwarded to plaintiff a copy of the report of the Examining Officer. The letter of transmittal advised plaintiff (1) that his claim for refund of 1941 tax was rejected, (2) that his claim for refund of 1943 tax was allowed in the amount of $3,884.71, and (3) that plaintiff could either accept the findings set forth or reject them and file a protest. (b) The report described in the preceding paragraph contained the following: The overassessment recommended in this report results solely from taxpayer’s claim for refund for 1943 which is herein allowed in part. To the extent not allowed it is hereby denied as are taxpayer’s claims for 1941 and 1942. As indicated in the claims taxpayer suffered a loss of real and personal property in Hungary and Bomania [sic] sometime in 1944 or 1945 as result of the seizure or destruction of such property by soldiers or agents of a foreign government. * * * $ $ * * * The findings in this report were discussed with the taxpayer who declined to execute an agreement for the reason that he believes the loss should be allowed in * * * 1941. It is the taxpayer’s contention that the loss is allowable under the provisions of section 127(a) (1) of the Code which covers losses of Property Not in Enemy Countries under the theory that both Hungary and Bomania [sic] were under the control of Germany and therefore the loss would be allowable as of December 12th and 13th (1941), being the dates those countries declared war against the United States. A formal protest will be filed by the taxpayer. (c) Further excerpts from the report follow: The loss as claimed for the year 1941 is hereby denied in full for the reasons indicated below: The Internal Bevenue Code provides as follows in Section 127(a)(2) PkopeRty IN Enemy Countries. — Property within any country at war with the United States, or within an — 314 — area under the control of any such country on the date war with such country was declared by the United States, shall be deemed to have been destroyed or seized on the date war with such country was declared by the United States. Section 29.127(a)-3 of Eegulations 111 provides: * * * Areas under the control of the governments of Hungary, Bumania, and Bulgaria will not be considered under enemy control prior to the date the United States declared that a state of war existed with such governments. Since the United States declared war on Hungary and Bumania on June 5, 1942, such date fixes the year in which taxpayer’s loss is allowable.7 (d) The report further noted (1) that “The property in Bomania [sic] is described in detail in Exhibit A of taxpayer’s claim” and (2) that “The property in Budapest, Hungary is described in Exhibit B of taxpayer’s claim.” The report showed that, for the property in Bumania, the taxpayer claimed cost of $19,600 and that the Examining Officer had allowed $19,100, while the taxpayer had listed the cost of the property in Hungary as $24,200, and the Examining Officer had allowed $12,100. (e) Plaintiff has accepted the foregoing allowances, of $19,100 for the property in Bumania and $12,100 for the property in Hungary (total $31,200), as proper cost bases for the purposes of this action. 8. The report described in the preceding finding concluded as follows: * * * .[I]t is recommended that the loss of the items in question be recognized. * * * [I]n the absence of proof of the cost of such items it is recommended that loss be allowed under the Oohan rule8 in respect to the property [in Hungary] * * * and that the loss in respect to the items [in Bumania] * * * be reduced to $19,100 * * *. * * * [T]otal loss as allowed in this report * * * $31,200. — 315 — 9. (a) The Collector’s office received and considered the report described in finding 7(a) as the report of the Internal Revenue Agent in Charge. (b) Plaintiff filed formal protest of the report on July 8, 1952, and, on August 1, 1952, his authorized representative asked the Internal Revenue Agent in Charge for reconsideration. The request for reconsideration was referred to the Pacific District Appellate Staff of the Collector’s office. 10. (a) By letter dated November 17, 1952, the Head, Pacific District Appellate Staff, Collector’s office, rejected plaintiff’s claim for refund of 1941 tax, giving the following reasons: It is held that no part of the deduction claimed for “European War loss” on account of property situated in Hungary and Rumania is allowable in the year 1941 under the provisions of section 127 of the Internal Revenue Code inasmuch as the areas under the control of the governments of said countries cannot be considered under enemy control prior to June 5, 1942, the date on which the United States declared a state of war existed with such governments. (b) On February 10, 1953, the Commissioner of Internal Revenue issued a rejection notice of the refund claim for 1941. 11. (a) On November 5,1953, a refund was made to plaintiff by the Commissioner of Internal Revenue on account of plaintiff’s 1943 tax in the sum of $3,884.74, based on recognition by the Commissioner of the war loss of the properties described in finding 2 (a) in the amount of $31,200. (b) Except for the refund described in the preceding paragraph, plaintiff has not been compensated for the claimed loss by insurance or otherwise. CONCLUSION OF LAW Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38(c). — 316 — In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due thereunder, it was ordered on July 8, 1960, that judgment for the plaintiff be entered for $16,028.34, with interest on $3,884.73 from September 9, 1943, to March 15,1944, and with interest as provided by law on the following amounts from the following dates: September 9, 1943_ $225.75 September 9, 1943_ 347.76 October 20, 1942_ 3,567.55 February 24, 1942_ 11,887.28 Footnotes [1] Insofar as material to this action this was the separate property of the plaintiff until such time as it was destroyed or deemed to have been destroyed. [2] When the united States declared war on Germany, German puppet governments were in control of both Rumania and Hungary. [3] Plaintiff was single during 1941. [4] The Pasternaks were married' In 1942. [5] These figures compare with 1941 net Income, as shown on plaintiff’s return, of $84,438.68. [6] The Internal Revenue Agent In Charge reported to the Collector that “• * * taxpayer Is unable to furnish substantiation of the cost * * *.** [7] Allowance of the claim for 1943 instead of 1942 resulted from the operation of the Current Tax Payment Act of 1943, under which the taxpayer’s liability for 1942 was ultimately determined. [8] Cohan v. Commissioner, 39 F. 2d 540, 543—4.