Gilt Edge Textile Corp. v. Commissioner

9 T.C. 543, 1947 U.S. Tax Ct. LEXIS 86

• Court: United States Tax Court
• Decided: September 30, 1947
• Docket: Docket No. 10447
• Status: Published

Opinions

OPINION.

Arundell, Judge:

Eespondent disallowed the claimed deduction of $30,000 on the ground that it was a payment made to satisfy a personal liability of Philip Dimond. It appears from the evidence before us, however, that the item in question originated as an interest-bearing loan from petitioner to the estate of Louis Spitz in 1929. Philip Dimond, petitioner’s president, was also a coexecutor of the estate. In 1931, when it appeared that the estate was having financial difficulties, Dimond, acting in petitioner’s behalf, sought to obtain repayment of the loan from the estate to petitioner by arranging for the petitioner to purchase from the estate certain shares of stock in Quebest Investing Co. Although separate checks were exchanged, the net effect of the transaction was that petitioner took credit upon the purchase price of the stock for the debt owing to it from the estate and paid the estate the cash difference. Later, in the suit brought against Dimond by the heirs and legatees of Louis Spitz and the other executors of the Spitz estate, it was alleged that the $30,000 payment constituted a preference. The final decree of the chancery court entered pursuant to a stipulation of the parties in settlement of the suit ordered Dimond, among other things, to repay or cause to be paid in cash the $30,000 by way of return to the estate of Louis Spitz. Petitioner thereupon issued its check to Dimond in that amount and he in turn endorsed it to the estate. Dimond paid, the remaining $70,000 called for by the décree in connection with the second, third, and fourth causes of action.

In view of these circumstances, we think respondent’s disallowance of the deduction of $30,000 claimed by petitioner was improper. Two of the complainants in the suit were contending that they were preferred creditors of the estate. If all the facts alleged in the complaint could be proved, it may well be that petitioner, as the recipient of a preferential payment, could have been legally compelled to make direct restitution to the estate. It may also be that other liabilities could have been asserted directly against the petitioner, based on its transactions with the estate. Apparently, petitioner considered that its risks of incurring losses were substantial, because it retained separate counsel and paid him a $5,000 fee to represent its interests in the outcome of the litigation.

But whether petitioner could have been proceeded against directly and compelled to return the money to the estate is not, we think, controlling of the right to the deduction. Petitioner contends that it was legally obligated to reimburse Dimond for his loss when it later developed that he was answerable to the estate for the money he had collected for petitioner’s benefit. There appears to be considerable merit in the contention, for, under the general principles of the law of agency, an agent is entitled to reimbursement from his principal for expenses and losses incurred in the course of the principal’s business and to indemnity from liability to third parties arising from the agent’s acts where the principal has received the benefit of such acts. See Bibb v. Allen, 149 U. S. 481, 498; Admiral Oriental Line v. United States, 86 Fed. (2d) 201, 202; Irving Trust Co. v. Townsend, 1 Fed. Supp. 837; Restatement Agency, § 439; C. J. S., Agency, §§ 196, 197. Dimond was no less petitioner’s agent-in arranging for the collection of petitioner’s debt merely because the same act, in his other capacity as executor, formed the basis of one of the liabilities asserted against him in the suit. And petitioner received the benefit of that act.

Nevertheless, we need not rest our decision on a holding that petitioner, as principal, was legally liable to indemnify Dimond, as its agent. We have said before that even a moral obligation arising out of a business transaction will suffice to support a loss deduction. Herschel V. Jones, 1 B. T. A. 1226; Abraham Greenspon, 8 T. C. 431. The petitioner here was no mere volunteer. In equity and good conscience it was obliged to satisfy that part of the decree against Dimond calling for the repayment of the $30,000 to the estate. After making the payment, there was no possibility for petitioner to recover any part of it from the estate or the heirs, because, in exchange for releases from all the complainants, petitioner executed cross releases to them.

The payment in the taxable year marked the ultimate conclusion of the transaction entered into in 1929 and fixed the petitioner’s loss. We think it fully qualifies for deduction as a loss under section 23 (f) of the code, and we so hold.

Reviewed by the Court.

Decision will be entered for the petitioner.