*143 Decision will be entered under Rule 50.
Losses. -- Held, deductions taken for the years 1927, 1928, and 1929 for theft losses were properly taken in those years and petitioner cannot take a deduction in 1958 for the same loss, either as a bad debt or as an embezzlement loss.
*166 Respondent determined deficiencies in the income tax of petitioner as follows:
| Year | Amount |
| 1956 | $ 736.19 |
| 1957 | 404.98 |
| 1958 | 4,043.29 |
| Total | 5,184.46 |
The adjustment and explanation of the adjustment for 1958 are set forth in the notice of deficiency as follows:
| Adjustments to income | |
| Net loss disclosed by return | ($ 125,722.38) |
| Additional income and unallowable deductions: (a) Bad debt | |
| 139,200.00 | |
| Taxable income as adjusted | 13,477.62 |
(a) It is determined that the bad debt deduction of $ 139.200.00 claimed in your income tax return for the taxable year 1958 is not allowable since you have not shown that the debt became worthless in 1958 nor have you established any basis in the debt for which a deduction is allowable.
The years 1956 and 1957 are involved solely because of claimed net operating loss deductions for those years based*145 on a carryback from 1958. Petitioner deducted the amount of $ 139,200 as a bad debt in 1958 and in an amendment to the petition, petitioner increased the claimed deduction to $ 149,600.
The issue presented for our decision is whether petitioner is entitled to a deduction either as an embezzlement loss deduction or as a bad debt deduction for the year 1958 and, if so, the amount.
FINDINGS OF FACT
Most of the facts have been stipulated by the parties and the stipulation, together with exhibits attached thereto, is incorporated herein by this reference. There also was some oral testimony. As to the *167 facts included in the stipulation only those that seem necessary to an understanding of the case will be included here.
Petitioner James Petroleum Corp. is a Delaware corporation incorporated in 1927 with its principal office at Tulsa, Okla. It filed its income tax returns for 1956, 1957, and 1958 with the district director of internal revenue at Oklahoma City, Okla. Petitioner is and has been an accrual basis taxpayer.
Robert Jackson, sometimes hereinafter called Jackson, was the chief organizer of the corporation and he served as its president and treasurer from June 15, 1927, *146 until January 9, 1930. Unknown to the stockholders, Jackson used for his personal benefit the following amounts of the proceeds of a sale of petitioner's stock:
| Year | Amount |
| 1927 | $ 44,291.88 |
| 1928 | 219,751.94 |
| 1929 | 103,265.70 |
| 367,309.52 |
Early in 1930 the stockholders discovered that Jackson had used substantial sums belonging to the corporation for his own benefit. After Jackson's resignation an audit was made which fixed the amounts taken by Jackson. Jackson embezzled the total amount of $ 367,309.52 from the corporation during the period 1927, 1928, and 1929.
Petitioner deducted $ 103,265.70 as an embezzlement loss in its 1929 income tax return which was filed on or about October 4, 1930, which deduction was allowed by the examining revenue agent and by the Commissioner of Internal Revenue. Petitioner also obtained refunds for 1927 and 1928 based on the deduction of $ 44,291.88 and $ 219,751.94, respectively, as embezzlement losses for those years. These deductions were allowed by the examining revenue agent who recommended the refunds which were allowed by the Commissioner.
Jackson was adjudicated a bankrupt on September 8, 1930, on a petition for involuntary *147 bankruptcy. The schedules annexed showed assets of $ 804,703.48 and liabilities of $ 1,238,719.40. Petitioner's claim against Jackson was scheduled in the bankruptcy but its claim was not discharged thereby. In August 1931 the trustee in bankruptcy sued certain transferees to recover paintings which Jackson had preferentially transferred to certain creditors in 1929. The suit was settled for $ 20,000 and in May 1934 petitioner received notice that the gross receipts of the proceeding merely covered fees and expenses leaving nothing for creditors.
During 1930, Jackson delivered properties to petitioner valued at $ 38,763. Petitioner charged off $ 328,546.52 against surplus in 1930 *168 which amount represented $ 367,309.52 minus credit for the $ 38,763 worth of property.
On August 4, 1932, petitioner served Jackson with a summons and complaint in an action for an accounting in the State of New York. An agreement of settlement was executed by the parties on June 19, 1933. By the terms of the agreement Jackson delivered a check to petitioner for $ 15,000 and 13 non-interest-bearing promissory notes with the following due dates and in the following amounts:
Note for $ 5,000*148 due August 15, 1933
Note for 5,000 due September 15, 1933
Note for 5,000 due October 15, 1933
Note for 5,000 due November 15, 1933
Note for 5,000 due December 15, 1933
Note for 5,000 due January 15, 1934
Note for 5,000 due February 15, 1934
Note for 10,000 due April 30, 1934
Note for 10,000 due July 31, 1934
Note for 10,000 due October 15, 1934
Note for 10,000 due January 10, 1935
Note for 10,000 due April 15, 1935
Note for 100,000 due April 15, 1936
Petitioner did not report any income in the year 1933 upon the execution of the settlement agreement nor did it report income upon the receipt of the notes executed by Jackson. Petitioner did not include the notes in its assets but its balance sheet for 1933 did contain the following footnote:
| The Corporation holds notes from Robert Jackson in the amount of | $ 170,000 |
| Less: Contingent collection fees | 34,000 |
| Net proceeds, if collected | 136,000 |
Jackson defaulted on April 18, 1934, when he failed to pay the $ 5,000 note due February 15, 1934, and his default continued thereafter.
In 1934 petitioner commenced an action against the First National Bank of Concord, N.H., in the State of New Hampshire. Petitioner claimed*149 that the bank had transferred petitioner's funds for Jackson's benefit. Petitioner was willing to settle the claim for $ 5,000 to $ 10,000. The court had denied petitioner's motion to amend the complaint. The suit against the bank was finally terminated in 1941 when the statute of limitations ran on petitioner's claim.
On July 18, 1935, an interlocutory judgment was entered requiring Jackson to account because he was in default. On November 2, 1941, he was found in contempt for failing to account but he was never punished for contempt.
Petitioner collected the following amounts from Jackson pursuant to the agreement: *169
| Year | Gross collection | Expense | Net collection |
| 1933 | $ 30,150.00 | $ 8,030.00 | $ 22,120.00 |
| 1934 | 26,450.00 | 5,209.00 | 21,160.00 |
| 1935 | 6,178.44 | 1,235.60 | 4,942.84 |
| 1936 | 3,900.00 | 780.00 | 3,120.00 |
| 1937 | 4,800.00 | 960.00 | 3,840.00 |
| 1938 | 2,730.00 | 546.00 | 2,184.00 |
| 1939 | 4,700.00 | 940.00 | 3,760.00 |
| 1940 | 1,000.00 | 200.00 | 800.00 |
| 1941 | 265.00 | 53.00 | 212.00 |
| 1942 | 435.00 | 87.00 | 348.00 |
| 1943 | 2,630.00 | 526.00 | 2,104.00 |
| 1944 | 2,100.00 | 420.00 | 1,680.00 |
| 1945 | 100.00 | 20.00 | 80.00 |
| 1946 | 500.00 | 100.00 | 400.00 |
| 1947-48 | 0 | 0 | 0 |
| 1949 | 630.00 | 126.00 | 504.00 |
| 1950 | 100.00 | 20.00 | 80.00 |
| 1951-55 | 0 | 0 | 0 |
| 1956 | 2,000.00 | 400.00 | 1,600.00 |
| 1957 | 1,000.00 | 200.00 | 800.00 |
| Total | 89,668.44 | 19,933.60 | 69,734.84 |
*150 In 1958 petitioner still held notes against Jackson aggregating $ 140,000.
During the period 1933 to 1956, petitioner reported net collections from the payments made by Jackson in its gross income. In the statutory notice of deficiency respondent determined that net collections for 1956 be eliminated from gross income as a nontaxable recovery.
Petitioner's attorneys continued to make many attempts to collect from Jackson during the period 1946-57. In 1940 petitioner attempted to settle the claim for $ 15,000 but Jackson could not raise that amount. In 1942 petitioner tried to settle for $ 10,000 and for $ 7,500 in 1950 but Jackson could not raise the money. In 1956 and 1957 petitioner tried to settle the claim for $ 5,000 and Jackson agreed to a settlement for that amount and borrowed $ 3,000 which he paid to petitioner pursuant to this settlement attempt but the remainder was never paid.
OPINION
Petitioner contends that it suffered a loss of $ 149,600 in 1958, notwithstanding prior deductions for the losses in 1927, 1928, and 1929 due to the worthlessness of its claims against Jackson. Petitioner contends that it is immaterial whether the loss was an embezzlement loss deduction*151 or a bad debt deduction on the notes Jackson gave to petitioner in 1933. Petitioner claims that 1958 is the proper year for the deduction because it was the first year since 1933 in which there were neither any payments received nor any negotiations regarding future payments. Furthermore, petitioner claims that Jackson's advanced age in 1958 made it unlikely that he would raise any additional funds. Therefore, contends petitioner, it was in 1958 that its claim against Jackson became completely worthless.
*170 Respondent contends that petitioner is not entitled to a deduction in 1958 either as a bad debt or as an embezzlement loss. Respondent argues that if the deduction is classified as an embezzlement loss it was worthless in 1930 or at least prior to 1958. As to the notes received in 1933, respondent argues that no independent deduction could be taken for the notes because they were merely in recognition for the underlying embezzlement claims which had already been taken as losses. Alternatively, respondent contends that since the notes were never included in income petitioner is prevented from claiming a loss on these notes as a matter of law.
As a general rule, a taxpayer*152 may not claim a deduction at will in any year he may select but he must take the deduction in the proper year, and any item incorrectly reported can, subject to the statute of limitations, be corrected by the Commissioner. A deduction incorrectly taken in one year will be corrected by eliminating it for the year in which it was taken and allowing it for the year it should have been taken, (C.A. 6, 1956). Cf. . Petitioner claims that it incorrectly wrote off the embezzlement loss in 1930 1 and incorrectly took deductions for embezzlement loss in 1927, 1928, and 1929, and that the proper year is 1958. Since the prior years of deduction (1927, 1928, and 1929) are now closed by the statute of limitations it would seem that corrections of prior errors, if any, would have to be made through the operation of sections 1311-1315 of the 1954 Code. Both parties agree, however, that the mitigating sections of the 1954 Code, sections 1311-1315, are not applicable here since it is specifically provided in section 1314(d) *153 2 that erroneous deductions in years prior to 1932 cannot be corrected by operation of section 1311. 3
*154 Our Findings of Fact show that, unknown to the stockholders, Jackson used for his personal benefit the following amounts of the stock sales:
| Year | Amount |
| 1927 | $ 44,291.88 |
| 1928 | 219,751.94 |
| 1929 | 103,265.70 |
*171 Furthermore, these Findings of Fact show that petitioner in its income tax return for 1929 claimed an embezzlement loss of $ 103,265.70 for that year and that the Commissioner allowed the loss. The Findings of Fact further show that refund claims were filed for 1927 and 1928 based on the embezzlement losses for those years and that these refund claims were allowed.
The question presented here, therefore, requires us to determine whether or not petitioner properly took the deductions in 1927, 1928, and 1929. If the deductions were properly taken in those years petitioner, it seems to us, would not be entitled to the same deduction again in 1958; we know of no law that would permit it.
Petitioner relies on (C.A. 6, 1959), reversing , for the proposition that an embezzlement loss should not be taken in the year of discovery where*155 a valuable claim for reimbursement against the embezzler exists. Comparing the Scofield case with the instant case, some patent distinctions appear. In the Scofield case the loss had not been deducted once and an attempt made to deduct it again in a later year. The suits had been instituted in the year of discovery of the embezzlement, whereas in the instant case suit was not instituted against Jackson until 1932 or against the Concord bank until 1934. Foresight in 1930 as to chances of recovery and not hindsight is the test by which to view the facts. In Scofield the embezzlers in the year of discovery had a valuable interest in trust property. In contrast, Jackson's financial condition in 1930, the year the embezzlement was discovered, was very poor. On February 14, 1930, Jackson's creditors filed an involuntary petition in bankruptcy. He was adjudicated a bankrupt on September 8, 1930, and obtained a discharge on January 10, 1935. His liabilities were in excess of assets to the extent of more than $ 400,000, which amount was determined without consideration of the amount of petitioner's claim. Other documents submitted to petitioner in 1930 indicated insolvency*156 to the extent of $ 600,000.
This comparison of facts is such that we do not believe the decision in the Scofield case would require us to find that petitioner in the instant case improperly took deductions for the embezzlement losses as described in our Findings of Fact in 1927, 1928, and 1929. At the time the embezzlement was discovered in 1930 it was reasonable for petitioner to assume that its loss would not be recovered and that it could properly write it off. Cf. (C.A. 2, 1934). The fact that petitioner did collect some money from Jackson over a 25-year period does not, we think, make the deductions taken in 1927, 1928, and 1929 improper. Viewing the situation as it existed in 1930 it was reasonable for petitioner to write off the losses as described in our Findings of Fact. Nor do we believe that the receipt of notes from Jackson in 1933 qualifies petitioner to *172 take a bad debt deduction in 1958. These notes were merely evidence of the underlying claim against Jackson for the funds embezzled. Petitioner had only one claim against Jackson and that was for reimbursement for its embezzlement*157 losses. In this case the loss had previously been deducted and petitioner, upon receipt of the embezzler's notes, did not enter them in its books as an asset or report the notes as income in the year received.
We hold that petitioner's claim against Jackson was properly deducted in 1927, 1928, and 1929 as an embezzlement loss and that the loss cannot be deducted again in 1958 as a bad debt or as an embezzlement loss under the facts of this case.
Decision will be entered under Rule 50.
Footnotes
1. In 1930, the year petitioner discovered the embezzlement, it obtained deductions for the years 1927, 1928, and 1929, the years in which the embezzlements actually occurred. This was in accordance with the then existing law.↩
2. SEC. 1314. AMOUNT AND METHOD OF ADJUSTMENT.
(d) Periods for Which Adjustments May Be Made. -- No adjustment shall be made under this part in respect of any taxable year beginning prior to January 1, 1932.↩
3. SEC. 1311. CORRECTION OF ERROR.
(a) General Rule. -- If a determination (as defined in section 1313) is described in one or more of the paragraphs of section 1312 and, on the date of the determination, correction of the effect of the error referred to in the applicable paragraph of section 1312 is prevented by the operation of any law or rule of law, other than this part and other than section 7122 (relating to compromises), then the effect of the error shall be corrected by an adjustment made in the amount and in the manner specified in section 1314.↩