1927 BTA LEXIS 2492">*2492 Commissioner's disallowance of a loss deduction approved.
9 B.T.A. 900">*900 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1920. The total amount of the deficiency determined by the Commissioner for the above year was $1,940.33, and the petitioner does not allege that the whole of this amount is incorrect. He seeks relief from the action of the Commissioner in disallowing as a deduction an item of $13,566.58, alleged to have been a loss sustained during the year.
FINDINGS OF FACT.
The petitioner, Israel T. Deyo, is a resident of the City of Binghamton, N.Y., and is by profession an attorney-at-law, having practiced in the City of Binghamton from 1883 to the date of the hearing of this case. From 1883 to 1908, he was associated as a partner with David H. Carver who died in July of the latter year. Shortly after Carver's death, his son, W. B. Carver, was admitted into the partnership which then consisted of the petitioner and Charles H. Hitchcock. During the year 1910, the senior partners learned that Carver had been1927 BTA LEXIS 2492">*2493 buying and selling stocks on margin through C. I. Hudson & Co. of New York City, which firm had a branch office located in Binghamton, under the management of one Mitchell. Carver had lost in these transactions all of his own money and some belonging to his wife. Upon discovering this, Deyo and Hitchcock made him sever his connection as a partner of the firm.
For some years it had been the practice of the firm to invest money belonging to certain of its clients and to keep the securities purchased for them. Upon the discovery of Carver's transactions with the brokerage office, the petitioner advised Mitchell that Carver had lost in these transactions whatever money he possessed and that, as the petitioner's firm was entrusted with large amounts in securities and money for investment by its clients, it could not afford to keep in its employ, in any capacity whatsoever, any person who made a habit of gambling upon the stock market. Mitchell assured the petitioner that it was not their practice to handle the accounts of anyone occupying a trust position and that C. I. Hudson & Co. would no 9 B.T.A. 900">*901 longer deal with Carver in any marginal transactions. At the very time this1927 BTA LEXIS 2492">*2494 conversation was held, Carver had again opened up his account with C. I. Hudson & Co. and this fact was known to Mitchell. The two senior partners of the petitioner's firm, believing that Carver had discontinued trading upon margins, later in the year 1910, again took Carver into the firm as a partner. From that time until the fall of 1912, Carver continued to trade with C. I. Hudson & Co. on margins and during the summer of 1912, when questioned by the petitioner, denied that he had any connection with C. I. Hudson & Co.
On the night of November 27, 1912, Carver absconded and a hasty examination of the firm's affairs disclosed the fact that he had stolen about $50,000 worth of securities and money belonging to the firm's clients but in the possession of the firm. Since the discovery in 1910 of Carver's marginal transactions, the securities of the firm's clients had been kept in a vault of the Security Mutual Life Insurance Co., Binghamton, and it was discovered that Carver had been admitted into the vault for the purpose of clipping coupons and then had taken the bonds and other securities and had used the proceeds to meet his losses on his transactions with C. I. Hudson & Co. 1927 BTA LEXIS 2492">*2495 After Carver had absconded a detailed check was made of the amount which he had stolen and it was discovered that of the clients' funds, or securities, deposited for safe-keeping with the petitioner's firm, $34,055.79 had been converted into cash, and that bonds belonging to the Estate of Charles C. Jackson to the total amount of $14,742.40, were missing and presumably had been taken by Carver.
The petitioner's firm immediately filed a petition in bankruptcy against Carver and he was adjudicated a bankrupt in December, 1912. Before February of 1913, a fund of $18,000 was raised by the petitioner and his partner in the following manner: The petitioner and Hitchcock each advanced the sum of $4,000 and the petitioner's two brothers provided the sum of $10,000, partly in cash and partly by their notes which were held by the First National Bank of Binghamton. The petitioner turned over to his brothers practically all of his own property, including some real estate and stocks, and his interest in a partnership with them. This whole fund was deposited to the credit of the petitioner's two brothers, and all the claims of the petitioner's clients against Carver were assigned to the brothers. 1927 BTA LEXIS 2492">*2496 Payments to the clients were made before March of 1913, in the following amounts, representing in practically every case the payment of 50 per cent of the losses sustained by them:
| Amount of claim | Amount paid | |
| Alma L. B. Allen | $2,528.00 | $1,264.00 |
| Mary Dodge Day | 59.00 | 29.50 |
| Ada M. Ensign | 700.00 | 350.00 |
| Lois A. Glasson | 98.20 | 49.10 |
| Sara L. Hoag | 333.35 | 166.68 |
| Lucina G. Howard | 500.00 | 250.00 |
| Carrie S. Jackson (personal) | 1,301.77 | 650.89 |
| Carrie S. Jackson (trustee) | 7,701.55 | 3,850.78 |
| Lestershire Heights Realty Co | 150.00 | 150.00 |
| John Leverett | 2,301.25 | 1,150.63 |
| W. J. Leverett | 82.82 | 41.41 |
| Theo. L. Leverett | 913.53 | 456.77 |
| Ethel Hyde Moore | 2,410.85 | 1,205.43 |
| Mary N. Marvin | 6,062.00 | 3,031.00 |
| Hannah E. Stone | 2,450.00 | 1,225.00 |
| Evalina Stone | 1,283.00 | 641.50 |
| Ellen F. Stone | 1,200.00 | 600.00 |
| Charlotte V. Snitchler, administratrix | 415.97 | 415.97 |
| Annice Warren | 1,200.00 | 600.00 |
| Leona E. Wheaton | 1,000.00 | 500.00 |
| Malvina Willson | 64.50 | 32.25 |
| Abbie J. Barker | 1,300.00 | 650.00 |
| Total | 34,055.79 | 17,310.91 |
9 B.T.A. 900">*902 The amounts as set forth above represent the claims of all of the clients with the exception of the Estate of Charles1927 BTA LEXIS 2492">*2497 C. Jackson.
Deyo and Hitchcock brought an action against C. I. Hudson & Co. for the total amount of their clients' losses, and in the trial court recovered a verdict against the defendant in the sum of $50,000. This verdict was set aside by the trial judge. An appeal was taken to the Appellate Division of the Supreme Court of New York, and the decision of the trial judge was set aside in December of 1916. Upon appeal, the Court of Appeals on February 25, 1919, in a decision reported in 225 N.Y. 602">225 N.Y. 602, reversed the judgment of the Appellate Division. Upon reargument of the case, the Court of Appeals sustained its judgment, the case being reported in 226 N.Y. 685">226 N.Y. 685. The court held that the plaintiffs had taken the wrong remedy and that instead of bringing an action for fraud and deceit against C. I. Hudson & Co. the action should have been brought against the same defendant to recover stolen monies and securities. Deyo and Hitchcock then brought a new action against C. I. Hudson & Co. for receiving stolen goods with knowledge that they had been stolen and the action was settled on the pleadings by payment by the defendants to the plaintiff's of the sum of1927 BTA LEXIS 2492">*2498 $25,000, this payment being made in December of 1920. About the same time the first and final dividend of the bankrupt estate of W. B. Carver was paid to Deyo and Hitchcock, to whom all their clients' claims had been assigned. Payments so made amounted to $4,737, and Deyo and Hitchcock also received the sum of $101.71 from Carver's wife and his sister. The total amount so received in 1920 was $29,838.71, the whole of which was paid and deposited to the credit of Deyo and Hitchcock, the remaining partners. On December 29, 1920, the following payments were made by the joint checks of Deyo and Hitchcock from the above sum:
| Alma L. B. Allen | $1,264.00 |
| Abbie J. Barker | 650.00 |
| Ada M. Ensign | 350.00 |
| Carrie S. Jackson, executrix | 3,850.77 |
| Dr. John Leverett | 1,150.62 |
| Rev. T. L. Leverett | 456.76 |
| Ethel Hyde Moore | 205.42 |
| Ada M. Ensign, executrix | 3,031.00 |
| Evalina Stone | 641.50 |
| Evalina Stone, administratrix | 1,225.00 |
| Carrie S. Jackson, executrix | 600.00 |
| Annice Warren | 600.00 |
| Leona Wheaton Gray | 500.00 |
| First National Bank | 9,744.00 |
| Carrie S. Jackson, executrix | 54.90 |
| Hinman, Howard & Kattell | 5,264.74 |
| Jenkins, Deyo & Hitchcock | 200.00 |
| Lucina G. Howard | 50.00 |
| Total | 29,838.71 |
1927 BTA LEXIS 2492">*2499 9 B.T.A. 900">*903 The above sums represented the unpaid 50 per cent of the clients' claims with the exception of the following: The payment of $9,744 to the First National Bank represented the amount unpaid upon a note given by Deyo to the bank for the purchase of certain securities to replace those stolen from the estate of Charles C. Jackson. The sum of $5,264.74 represented the unpaid balance due to Hinman, Howard & Kattell for attorney's fees and expenses incident to the actions brought by Deyo and Hitchcock against C. I. Hudson & Co. Part of these fees had been paid in previous years. The payment of the sum of $200 to Jenkins, Deyo & Hitchcock, represented the unpaid balance of losses of one of the firm's clients, Lucina G. Howard, which was turned over to the petitioner's new firm in payment of certain professional services rendered to this client.
About June 7, 1919, the petitioner personally purchased certain bonds at a cost of $12,326.22, which he held for the estate of Charles C. Jackson to reimburse the estate for its losses. The petitioner received $1,200 as a contribution in part payment of these bonds and the remainder of the purchase price was paid by giving the sum1927 BTA LEXIS 2492">*2500 of $1,200 in cash and his note for $9,926.22 to the First National Bank of Binghamton, which note he paid on December 29, 1920, as indicated above. The bonds so purchased were given over to Carrie S. Jackson, the executrix of the estate, in December, 1920.
The petitioner has always kept his books and made his returns upon the cash receipts and disbursements basis.
OPINION.
MURDOCK: It is difficult to understand from the pleadings, testimony and argument of the petitioner just what the real situation is. 9 B.T.A. 900">*904 We hesitate to discuss one of the arguments advanced by the petitioner to the exclusion of the others lest it appear that we have based our decision upon the failure of the one line of reasoning, and yet to discuss all of the petitioner's arguments would lead us fruitlessly into abstract theorization. The decision of the case is not difficult, and does not justify an extensive discussion. The petitioner has not advanced and we can not think of any sound argument, supported by sufficient facts in evidence, which would justify a change in the Commissioner's determination.
Bearing in mind the facts in this case which show that the securities which were taken1927 BTA LEXIS 2492">*2501 belonged not to the petitioner, but to his clients, and that the petitioner's loss was not sustained at the time of the wrongdoing, but only at the time when he was required to pay out money, and that he reported his income on the cash receipts and disbursements basis, we see no reason to disturb the Commissioner's determination inasmuch as it appears that any money which the petitioner paid out in the year 1920 as the result of his partner's peculations would not exceed the amount of money which he received in 1920 from the settlement of his claims against others, arising from his partner's wrongdoing. The money which he received from the settlement of these claims does not seem to have been included in his income for the year. We are led to this conclusion after consideration of the petitioner's testimony and the Commissioner's deficiency notice. Therefore, if we were to allow any loss deduction, it would be necessary to add at least a like amount to income and the deficiency would not be reduced.
Reviewed by the Board.
Judgment will be entered for the respondent.
MARQUETTE, STERNHAGEN, TRUSSELL, GREEN, PHILLIPS, VAN FOSSAN, and MILLIKEN dissent.