SPARKS, Circuit Judge.
This petition to review a decision of the Board of Tax Appeals presents the very troublesome question as to the year in which the taxpayer should be allowed to take a deduction for loss by fire under the statute which provides that deductions shall be allowed for losses sustained during the taxable year and not compensated for by insurance or otherwise. 26 USCA § 986 (a) (4).
Respondent, a Wisconsin corporation engaged in the manufacture of trailer and steel dump bodies, suffered a fire in 1921 which destroyed property to the value of $165,739 not covered by insurance. It claimed that the greater part of the loss resulted from the negligence of the Janesville Electric Company, which was under contract to supply the power needed to operate the water pumps, in cutting off the power just as the fire department was getting the fire under control. In 1921 respondent brought suit against the electric company for the entire amount of the loss not covered by insurance. In the trial court a demurrer to the complaint was sustained, which ruling was, however, reversed by the Wisconsin Supreme Court in 1922. Highway Trailer Co. v. Janesville Electric Co., 178 Wis. 340, 190 N. W. 110, 27 A. L. R. 1268. In the hearing which followed, respondent obtained a judgment for $47,703 damages in 1924. It thereupon wrote off its books the difference between the total uninsured loss and the amount of damages allowed by the court, and claimed the deduction for the difference, $118,036, in its return for the year 1924. The company, however, appealed from the judgment, and in 1925 it was reversed by the Supreme Court of Wisconsin, and the action dismissed. Highway Trailer Co. v. Janesville Electric Co., 187 Wis. 161, 204 N. W. 773. Respondent thereupon claimed a deduction of the $47,703 for the year 1925. The Commissioner disallowed both these deductions, holding that the entire deduction should have been claimed for the year 1921 when the fire occurred. On appeal to the
There have been many cases before the courts involving this question, and it must be admitted that the decisions do not appear always to be consistent.
It seems to us that none of the above cases is as nearly in point as another Supreme Court case which was not considered by the Board, and which we think controls the decision in this case. We refer to the case of United States v. S. S. White Dental Manufacturing Co., 274 U.S. 398, 47 S.Ct. 598, 600, 71 L. Ed. 1120. There the taxpayer sued to recover for overpayment of a tax for the year 1918 claiming a deduction in the amount of its investment in a subsidiary German corporation the entire property of which, valued at $130,000, was seized by the German government in that year as enemy property. The property was returned in 1920, and sold in 1922 for $6,000, which amount was returned as income by the taxpayer in that year. Subsequently a claim for $70,000 was allowed by the Mixed Claims Commission, no part of which had been paid. The taxpayer had charged off its entire investment in 1918 and claimed its deduction for that year, paying its tax under protest when the Commissioner disallowed the deduction. The Court held that the loss was so evidenced by a closed transaction as to authorize its deduction from gross income for the year in which it occurred, saying,
"* * * The statute obviously does not contemplate * * * the deduction of losses resulting from the mere fluctuation in value of property owned by the taxpayer. * * * But with equal certainty they do contemplate the deduction from gross income of
"We need not attempt to say what constitutes a closed transaction evidencing loss in other situations. It is enough to justify the deduction here that the transaction causing the loss was completed when the seizure was made. It was none the less a deductible loss then, although later the German government bound itself to repay and an award was made by the Mixed Claims Commission which may result in a recovery."
It seems to us that the three cases relied upon by the Board, all of which were decided after the White Dental Case, do not overrule it, but merely represent quite different states of fact. Where, as in the case at bar, an actual physical loss occurs, resulting in a certain definite, fixed amount of damage, it seems better practice to allow the deduction for that entire amount of damage (not covered by insurance) in the year in which the loss actually occurs, according to the rule in the White Dental Case, rather than to defer it until subsequent events indicate whether or not a recovery is to be had from other parties for a part of the loss. We think that this does not conflict with the rule of the Huff Case, supra, that "the loss `must be actual and present,'" because the loss is actual and present as soon as the physical damage occurs, as distinct from the situation where the loss claimed arises from a liability which may or may not ever materialize.
The decision is reversed, and the cause remanded to the Board of Tax Appeals for further proceedings in harmony with this opinion.
EVANS, Circuit Judge (dissenting).
A loss "which is not compensated for by insurance or otherwise" (section 234 (a) (4), Revenue Act 1921, 42 Stat. 255) is ordinarily not allowed until its realization. In Lucas v. American Code Co., 280 U.S. 445, 50 S.Ct. 202, 203, 74 L. Ed. 538, 67 A. L. R. 1010, the court said: "Generally speaking, the income tax law is concerned only with realized losses, as with realized gains." Realization is usually evidenced by closed or completed transactions. United States v. S. S. White Dental Manufacturing Co., 274 U.S. 398, 47 S.Ct. 598, 71 L. Ed. 1120. Article 141, Treasury Regulations 62, dealing with losses says: "They (losses) must usually be evidenced by closed and completed transactions."
Applying these rules to the facts of this case, it seems to the writer that part of the loss occurred in the year in which the Wisconsin trial court awarded judgment in taxpayer's favor for damages for only a part of what it claimed. The balance occurred the next year when the Wisconsin court reversed this judgment. It was in these years that the losses were realized. Then, and not until then, were they "evidenced by closed and completed transactions." It seems to me the Board of Tax Appeals correctly held that the losses occurred, not when the fire took place, but when the jury's verdict and the Supreme Court's decision closed the issues of amount and liability.