Comm'r of Internal Revenue

Tax Court of the United States.Apr 14, 1960
34 T.C. 59 (U.S.T.C. 1960)

Docket No. 76846.



Grover Cunningham, Jr., Esq., for the petitioners. Harold L. Cook, Esq., and Allen T. Akin, Esq., for the respondent.

Grover Cunningham, Jr., Esq., for the petitioners. Harold L. Cook, Esq., and Allen T. Akin, Esq., for the respondent.

Petitioner J. H. McKinley had a theft loss of $12,500 in 1955. He did not discover such loss in 1955 but discovered it in 1956. Held, petitioners are not entitled to a deduction in 1955 for such theft loss under section 165(a) and (e), I.R.C. 1954.

The Commissioner has determined a deficiency in petitioner's income tax for the year 1955 of $4,790.44. The deficiency is due to several adjustments made by the Commissioner to the adjusted gross income (loss) shown on petitioners' return. Only one of these adjustments in now in controversy. That adjustment is: ‘(d) Short-term capital loss.$662.50.’

The petitioners assign error as to the foregoing adjustment as follows:

(a) In the taxable year involved the Commissioner has disallowed a $12,500.00 theft loss, and has treated such loss as a non-business bad debt. The Commissioner has a deduction of.$662.50 in lieu of such $12,500.00 deduction as a theft loss.


Most of the facts were stipulated and the facts so stipulated are incorporated herein by this reference.

The petitioners are husband and wife and reside at Big Spring, Howard County, Texas. They filed a joint Federal income tax return for the taxable year 1955 with the district director of internal revenue, Dallas, Texas. Petitioner J. H. McKinley will sometimes hereafter be referred to as petitioner.

Petitioner has been in the ranching, grain elevator, and other businesses over a period of years.

On or about October 31, 1955, W. D. Robbins, sometimes hereafter referred to as Robbins, attempted to sell 30,000 shares of Texas Empire Minerals, Inc., stock to petitioner. Petitioner refused to purchase the stock but did agree to lend Robbins $12,500, with the stock certificate to be put up as collateral security. On or about October 31, 1955, petitioner gave his personal check for $12,500 to Robbins and recorded it on his books and records as a loan. At the same time that petitioner gave Robbins the check for $12,500, Robbins delivered his check for $15,000, dated February 1, 1956, to petitioner. This check for $15,000 was in lieu of a note and bore the explanation ‘Security on Stock Loan— for 30,000 Shares of Texas Empire Minerals from Ed Gray.’ On or about the time that Robbins issued his check for $15,000 to petitioner, he delivered the stock certificate for 30,000 shares in Texas Empire Minerals, Inc., to W. D. Miller to hold as collateral.

The petitioners did not claim any deduction with regard to the $12,500 transaction with Robbins in their 1955 joint return. No mention of this transaction with Robbins was made in the return.

Upon audit of the 1955 return filed by petitioners, the Commissioner, in the deficiency notice, allowed a short-term capital loss of.$662.50 with the following explanation:

(d) It is determined that the $12,500.00 payment which you made one W. D. Robbins on October 31, 1955 does not constitute either an allowable theft loss or business bad debt under the internal revenue laws but does constitute a non-business bad debt deductible as a short-term capital loss in 1955 computed as follows:

+--------------------------------------------+ ¦Item ¦Amount ¦ +----------------------------------+---------¦ ¦Maximum capital loss allowable ¦$1,000.00¦ +----------------------------------+---------¦ ¦Amount deducted on the 1955 return¦337.50 ¦ +----------------------------------+---------¦ ¦Additional amount allowable ¦$662.50 ¦ +--------------------------------------------+

On August 26, 1958, the grand jury of Howard County, Texas, returned an indictment against Robbins charging him with theft and passing forged instruments. This indictment, among other things, states:

That W.D. Robbins on or about the 1st day of November, 1955, and anterior to the presentment of this Indictment, in the County of Howard and State of Texas, did then and there unlawfully, willingly, knowingly and fraudulently (sic) pass as true to Homer McKinley, a certain stock certificate in writing, bearing the false and forged endorsement had theretofore been made with out lawful authority and with intent to injure and defraud, which said stock certificate and forged endorsement was then and there of the tenor as follows, to-wit: (Here follows copy of the stock certificate together with the endorsement thereon.)

On February 27, 1959, Robbins entered a plea of guilty to the offense ‘Theft by False Pretext’ and his sentence was 3 years' confinement in the penitentiary of the State of Texas.

Petitioner did not discover that Robbins, who had given him a check for $15,000 dated February 1, 1956, on the First National Bank of Aspermont, Texas, did not have any funds in said bank until sometime in 1956. He did not discover that the stock certificate for 30,000 shares of common stock in Texas Empire Minerals, Inc., which had been placed with him as collateral security for the loan of $12,500, was a forgery until sometime in 1956.

Petitioner did not discover his theft loss of $12,500 in 1955; petitioner discovered his theft loss in 1956.


BLACK, Judge:

Petitioners state their contentions in their brief as follows:

No. 1. Since W. D. Robbins has pled (sic) guilty to theft by false pretext by virtue of the subject transaction with the petitioner, there is nothing further for this court to decide, since the issue of theft is governed by State law, and such matter has already been determined by the State courts.

No. 2. In the alternative Petitioner contends that the preponderance of the evidence before this court is to the effect that the transaction between W. D.Robbins and the Petitioner properly is characterized as a theft.

In support of their contention that they are entitled to take a theft loss of $12,500 in the taxable year 1955 instead of the non-business bad debt deduction which the Commissioner has determined in his deficiency notice, petitioners rely upon Morris Plan Co. of St.Joseph, 42 B.T.A. 1190. That case held that under the circumstances present in that case the vendor obtained petitioner's money by deceit and artifice which amounted, under the Missouri law, to theft and the taxpayer's loss was sustained in 1936 when it parted with the money. In the Morris Plan Co. case, in deciding the issue for the taxpayer, we said:

For the purpose of the present report, exactness in determining the nature of the crime, i.e., whether it be larceny, embezzlement, obtaining money under false pretenses or otherwise, or in naming the guilty party or parties, is of less importance than the character of the deduction. The controlling fact is that petitioner sustained its loss as a result of transactions in 1936 which amounted to theft under the laws of Missouri.

We think that case does sustain petitioner's contention that local law determines whether a theft has occurred. Also, we think that inasmuch as Robbins was indicted in 1958 by the grand jury of Howard County, Texas, for theft and that he was subsequently found guilty and sentenced to the Texas penitentiary for a term of 3 years, petitioner has established that Robbins obtained the $12,500 from petitioner in 1955 by theft through false pretense.

The United States Court of Appeals for the Fifth Circuit, in Edwards v. Bromberg, 232 F.2d 107, has held that the word ‘theft’ is not, like ‘larceny,’ a technical word of art with narrowly defined meaning, but a word of general and broad connotation, covering any criminal appropriation of another's property to taker's use, particularly including theft by swindling, false pretenses, embezzlement, or any other form of guile.

Therefore, in view of the above-cited authorities, we think petitioner has clearly established that he did sustain a theft loss in 1955 of $12,500 through his transactions with Robbins and doubtless he would be entitled to take that loss as a deduction in 1955 under our decision in Morris Plan Co. of St. Joseph, supra, except for one fact. That fact is, the law governing such a loss incurred in 1955 is not the same as it was in the Morris Plan Co. case. The law governing the instant case, section 165(a) and (e), I.R.C. 1954, is as follows:


(a) GENERAL RULE.— There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

(e) THEFT LOSSES.— For purposes of subsection (a), any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss.

Regulations section 1.165-8 (T.D. 6445 filed January 15, 1960) reads:

(a) Allowance of deduction. * * *

(2) A loss arising from theft shall be treated under section 165(a) as sustained during the taxable year in which the taxpayer discovers the loss. See Section 165(e). Thus, a theft loss is not deductible under section 165(a) for the taxable year in which the theft actually occurs unless that is also the year in which the taxpayer discovers the loss. * * *

As we have already stated, we think petitioner had a theft loss of $12,500 in 1955 when he loaned Robbins $12,500 secured by a check for $15,000 payable February 1, 1956, with a certificate of stock for 30,000 shares in Texas Empire Minerals, Inc., as collateral security, which certificate proved to be a forgery and from which transaction Robbins was subsequently indicted and convicted. But under the applicable statute and regulation quoted above, in order to get the deduction in 1955, it is not sufficient alone that petitioner prove that he had a theft loss in 1955, he must also prove that he discovered such loss in 1955.

Petitioner testified at some length as to the time when he discovered his theft loss. The upshot of his testimony was that sometime after he had made the loan of $12,500 to Robbins, he became suspicious that the $15,000 postdated check which Robbins had given him, secured by the certificate of 30,000 shares of Texas Empire Minerals, Inc., common stock, was worthless. He went to the bank on which the check was drawn and learned that Robbins had no funds in the bank, that the check was worthless, and later learned that the certificate of stock was a forgery. He testified he thought this was prior to Christman 1955 but could not be sure.

We have examined petitioner's testimony carefully and it is too uncertain as to when he discovered that Robbins had victimized him with false pretenses for us to make a finding that his discovery of the theft was in 1955. Another fact in the record which convinces us that petitioner did not discover it in 1955 is that the joint income tax return of petitioners which is in evidence was signed by petitioners February 24, 1956, and it makes no claim for any deduction of a theft loss. On page 2 of the return are blank lines for the listing of: ‘Losses from fire, storm or other casualty, or theft.’ None are listed on the lines which are provided in the return for such purpose. We have carefully examined petitioners' return and nowhere do we find any mention made of petitioner's transaction with Robbins. Of course, it is true that the mere fact that petitioners made no claim in their return for the deduction of a theft loss in 1955 from this transaction with Robbins would not prelude their making such a claim in this proceeding. But we do think that where there is so much uncertainty from petitioner's testimony as to just when he discovered his theft loss, the fact that he claimed no such theft loss on his return is a circumstance to be considered in concluding that petitioner did not discover such loss in 1955.

After careful consideration of petitioner's testimony and the whole record, we have found that petitioner did not discover his theft loss in 1955. In view of this finding, petitioners are not entitled to a theft loss deduction of $12,500 in 1955.

Decision will be entered for the respondent.