Opinion
No. 88.
January 2, 1946. Writ of Certiorari Denied May 13, 1946. See 66 S.Ct. 1022.
Appeal from the United States District Court for the Northern District of New York.
Suit by I. Hasbrouck Chahoon against Harry M. Hickey, Collector of United States Internal Revenue for the Fourteenth District of New York, for refund of income taxes paid. From a judgment for the plaintiff, 60 F. Supp. 409, the defendant appeals.
Reversed.
This is a suit by taxpayer to recover moneys alleged to have been wrongfully collected as income tax for the year 1936. The pertinent portions of the 1936 Revenue Act are as follows:
"Sec. 23. Deductions from Gross Income. In computing net income there shall be allowed as deductions:
"(a) Expenses. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. * * *
"(e) Losses by Individuals. In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise —
"(1) if incurred in trade or business; or
"(2) if incurred in any transaction entered into for profit, though not connected with the trade or business * * *." 26 U.S.C.A. Int.Rev.Acts, page 827.
The facts presented to this court consist solely of the trial judge's "findings of fact" reported in D.C., 60 F. Supp. 409.
Samuel O. Clark, Jr. of Washington, D.C. (Sewall Key, A.F. Prescott, and Frederic G. Rita, all of Washington, D.C., and Irving J. Higbee, of Syracuse, N.Y., of counsel), for appellant.
Laurence Graves and Edward G. Griffin, both of New York City, for appellee.
Before SWAN, CHASE and FRANK, Circuit Judges.
We assume, merely arguendo, the strongest case for taxpayer, i.e., that the judgment below would have been correct had the taxpayer's participation in the indemnity agreements been necessary, or even seemingly necessary, to prevent substantial losses to the corporations other than the bank in which "he and his family were vitally interested and from which he was receiving substantial salaries." But the only possible source of such loss disclosed in the facts as found by the trial judge consisted of the loss of the deposits in the bank of those corporations; and from the facts as stated in Finding 7, the bank, although its capital was impaired, had sufficient assets to pay its depositors in full.
Taxpayer owned 148 shares of stock of the bank out of a total of 5,000 outstanding. His salary as the bank's president was $10,000 on September 28, 1931, when he signed the indemnity agreements, and was reduced to $5,500 about 2¼ years later, on January 1, 1934. The potential liability of $100,000 which taxpayer contracted under those agreements had no reasonable business relation to the loss he would have suffered had the bank been closed. The trial judge found that the agreements provided that "if the sale of bonds resulted in a profit, the profit was the bank's and not the subscribers'" among whom was the taxpayer. We think that the trial judge made an unjustifiable inference when he said that taxpayer's participation in the agreements "was a normal business transaction made to protect his extensive interests and substantial salaries in the various corporations, particularly" the bank. Accordingly, the transaction did not come within either (a) or (e) of Section 23. See Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212; Burnet v. Clark, 287 U.S. 410, 53 S.Ct. 207, 77 L.Ed. 397; In re Park's Estate, 2 Cir., 58 F.2d 965. On the facts here, Dunn McCarthy v. Commissioner, 2 Cir., 139 F.2d 242, is inapposite.
Reversed.