*226 Decision will be entered under Rule 50.
Income -- Deduction -- Loss -- Theft -- Section 23 (e) (3). -- Amount of loss determined and allowed under section 23 (e) (3) where owners paid a contractor and he feloniously absconded with the money after doing only a small part of the work of constructing their residence.
*1046 The Commissioner determined a deficiency of $ 602.14 in income tax for 1948 against the petitioners. The only issue for decision is whether the petitioners are entitled to a deduction of $ 3,627.36 under section 23 (e) (3) resulting from the failure of a contractor to complete the construction of a house.
FINDINGS OF FACT.
The petitioners, husband and wife, filed a joint return for 1948 with the collector of internal revenue for the twenty-third district of Pennsylvania.
The petitioners entered into a contract dated December 22, 1947, with Emanuel Landstrom, a general contractor, for the construction of a dwelling on property of the petitioners in Pittsburgh, Pennsylvania. Landstrom agreed to provide all labor and materials for*227 the residence and to construct it in accordance with plans and specifications furnished by the petitioners and made a part of the agreement. The work was to be completed within approximately 90 days after construction began. $ 11,340 was to be paid to Landstrom for the work, payable $ 3,500 upon the signing of the contract, and $ 4,000 "When second floor joists are in place & sub-floor is on." The contract did not state when the balance was to be paid. The parties entered into another contract, before work was started, to complete the second floor of the dwelling to include a kitchen, dining room, bedroom, living room, and bath, for the additional amount of $ 3,384.
The petitioners paid Landstrom $ 3,500 on December 22, 1947, and $ 4,000 on February 11, 1948.
Landstrom started work on the dwelling on February 18, 1948, and proceeded in a normal way to construct the building until he abandoned the job and disappeared on or about April 26, 1948. The petitioners have been unable to locate him despite reasonable efforts on their part. They filed a criminal complaint against him and he was indicted by the Grand Jury of Allegheny County, Pennsylvania, at *1047 No. 91 April Sessions*228 1950 for fraudulent conversion, a felony, but the county officers, aided by the petitioner, have not been able to find him and he has not been tried.
The petitioners, on their return for 1948, claimed a deduction of $ 3,627.36 as a "Net loss when contractor abandoned job and stopped work on or about April 26, 1948." The alleged loss was not covered by any bond or insurance and the petitioners in their search for Landstrom never found any assets or property belonging to him.
The Commissioner, in determining the deficiency, disallowed the $ 3,627.36 and explained: "Loss on construction of home must be substantiated. Pending further substantiation same is disallowed."
The following amounts for material and labor had been paid by Landstrom up to the time he abandoned the work and disappeared:
| Glassport Lumber Company, for material | $ 2,569.64 |
| Labor for installation of concrete blocks | 200.00 |
| Carpenter labor, 3 men for 3 weeks | 798.00 |
| Laborer, 3 weeks | 180.00 |
| Excavation | 125.00 |
| Total | $ 3,872.64 |
The contract required Landstrom to obtain at his own expense the necessary building permit or permits, to obtain the amounts of workmen's compensation and liability insurance required*229 by law, and to obtain fire insurance sufficient to protect both himself and the owner during the course of construction of the building. The record does not show how much, if anything, the contractor spent prior to abandonment to carry out those provisions of the contract.
The record does not show the value of the services of Landstrom represented in the construction which was accomplished up to the time he left or the value of the construction at that time.
The petitioner sustained a loss of $ 2,500 in 1948 as a result of Landstrom's felonious acts in that year, which loss was not compensated for by insurance or otherwise.
All facts stipulated by the parties are incorporated herein by this reference.
OPINION.
The evidence shows that the petitioners paid Landstrom $ 7,500 as a part payment on a dwelling which he was to construct for them; he absconded with some of their money after erecting on the premises an incomplete structure which was not worth anything like $ 7,500; his act was a felonious one under the laws of Pennsylvania; and the petitioners thereby sustained a loss. The Commissioner contends that the petitioners sustained no loss, but his reasons *1048 therefor are*230 not persuasive. Cf. . He also contends that the petitioners have failed to show the amount of the loss.
The evidence is not clear as to the exact amount of the loss. The petitioner testified to the amounts of money which he knew had been spent by the contractor on the job, but it is not clear that the contractor might not have spent other amounts not known to the petitioner. If the contractor had spent the entire $ 7,500 on the dwelling, there could be no loss deductible under section 23 (e) (3) because in that case there would be no theft, or anything resembling theft, of any of the money paid by the petitioners to Landstrom. Likewise, if Landstrom, without spending all of the money paid to him, had placed a structure on the premises having a value equal to or in excess of $ 7,500, it would be difficult to see wherein there would be any theft, or anything resembling a theft, which would be deductible under section 23 (e) (3). However, it is reasonably clear that the structure on the premises at the time Landstrom absconded was worth considerably less than $ 7,500, and less than $ 7,500 had been expended on it. *231 The Court, following the principle of , has determined the amount of loss at $ 2,500.
The respondent contends further that even though the amount of the alleged loss is established, it is nevertheless not deductible because it was neither a theft nor an embezzlement. The determination of the Commissioner was merely that the alleged loss had not been substantiated and was disallowed "Pending further substantiation." The record supplies further substantiation to the extent of $ 2,500 at least and that overcomes the determination of the Commissioner. Furthermore, the deduction is not limited to theft since embezzlement has frequently been held sufficiently like theft to give rise to a deduction under section 23 (e) (3) as the Commissioner admits. Cf. , appeal dismissed , holding that a sale of forged mortgages was a "theft." He advances no persuasive argument that loss from felonious acts such as Landstrom was guilty of should not be regarded as deductible under section 23 (e) (3). Landstrom*232 received the $ 7,500 as his own and agreed to build the building. Had he wanted to terminate the agreement, honesty would have required him to have a settlement with the petitioners and pay back to them at least some portion of the $ 7,500 to which they then had a right. But instead of doing that, he feloniously absconded with the remaining portion of the $ 7,500. It would take nice reasoning to distinguish this from theft or embezzlement and the Court is not prepared to say that this portion of the Commissioner's argument has any merit.
Decision will be entered under Rule 50.