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Code Sec(s): |
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Court Name: |
U.S.
Court of Appeals, Tenth Circuit. |
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Docket No.: |
No.
1241. |
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Date Decided: |
01/18/1936
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Disposition: |
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Cites: |
17
AFTR 369, 81 F2d 457, 36-1 USTC P 9085. |
1. Taxpayer who, while motoring at night to
procure workman to repair building, collided with automobile, which collision resulted
in litigation and loss to taxpayer not covered by insurance held
entitled to deduction of such loss under finding of Board of Tax Appeals that
damages resulted from taxpayer's "negligent" driving of his
automobile
Reference(s):
(Revenue Act 1928, § 23 (e) (1).
A.
E. Pearson, of Oklahoma City, Okl. (Walter G. Moyle, of Washington, D. C., on
the brief), for petitioner.
Arnold
Raum, Sp. Asst. to Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and Sewall
Key and Warren F. Wattles, Sp. Assts. to Atty. Gen., on the brief), for
respondent.
Petition by Forest Anderson to review an order of the Board
of Tax Appeals redetermining a deficiency in the tax imposed by the
Commissioner of Internal Revenue.
Order reversed.
Before
LEWIS, PHILLIPS, and McDERMOTT, Circuit Judges.
Judge: McDERMOTT, Circuit
Judge.
Two
items in Anderson's income tax return for 1929 have been before the Board of
Tax Appeals and are here on a petition to review. One concerns an item of
$142,000 received by the taxpayer from the sale of certain mineral interests
which he had owned for more than two years, and which he returned for taxation
as capital gain. The Board held, four members dissenting, that the gain was
taxable as ordinary income. After the decisions of Burnet v. Harmel, 287 U.S.
103, 53 S.Ct. 74, 77 L.Ed. 199, and Alexander v. King (C.C.A.10) 46 F.(2d) 235,
74 A.L.R. 174, the Commissioner ruled that an outright sale of mineral
interests, as contradistinguished from a lease with royalties reserved, should
be treated as a sale of a capital asset. G.C.M. 12118, XII-2 C.B. 119.
Respondent therefore now confesses error in the ruling on this item and
consents to a revision of the tax liability accordingly. In this position we
concur, for the conveyances are deeds and not leases.
The
item remaining in dispute is a deduction of $19,112 (reduced by concession to
$14,000), which the taxpayer asserts represents a loss incurred in his
business, not compensated by insurance. Revenue Act 1928, § 23 (e) (1), 45
Stat. 799.
Anderson
is a farmer who also owned and managed some buildings in Earlsboro which he
rented, and from which rentals he returned $5,194.40 as income during the year
in question. In order to rent a building for a grocery store, he wanted to put
in a cement floor. He was driving from his home to Ardmore 110 miles away to
hire a man to do the work when his car collided with another, a man was killed
and his car damaged. Anderson was sued in the state court, a judgment
recovered, compromised later for $19,000 and paid during the taxable year. He
also paid $4,112 for court costs, witnesses' fees, and other expense. Of this
$23,112 paid out, he was reimbursed $5,000 from his insurance, leaving an
out-of-pocket loss of $18,112. The Board made no special findings, as it is no
longer required to do; but in its opinion shortly disposed of the controversy
as follows:
"The
amount claimed represents the uninsured part of his liability for damage for
death resulting from his negligent driving of his own automobile. If allowable
at all, such a loss must be the proximate result of the business (cf.
Kornhauser v. United States, 276 U.S. 145, 48 S.Ct. 219, 72 L.Ed. 505); and
such a finding of fact is not justified by the evidence. The petitioner, the
sole witness, testified that in order to procure the prompt services of a
laborer to do some cement work in the floor
of a building of which he was the owner and lessor, he was driving his own
Cadillac car a distance of 220 miles in the nighttime with a friend when the
collision occurred for which he was liable. We think the payment of the
judgment is too remote to be characterized as a loss incurred in
business."
This
leaves us in doubt as to the reason for disallowing the deduction. Respondent
suggests two theories upon which the Board may have acted. If the order is
right on any theory, it should be affirmed.
(1.) It is argued that the Board did not believe the accident
occurred while on a business trip, and it is said that it is incredible that
one would drive so far at night to procure a workman. A hundred and ten miles
is not a long drive as distances are measured out here,—two hours, or a little
more, in the Cadillac he was driving. Nor is night driving unusual,
particularly for a farmer who manages many farms; on the contrary, it is the
time when farm work cannot be done. Why drive so far to procure the services of
a cement worker? Anderson had two, and perhaps three, good reasons for wanting
this particular man. First, Anderson knew he was a good workman; second, he
owed Anderson money which he could thus collect; and, possibly, a colored man
cannot always employ a white mechanic in eastern Oklahoma. There is nothing
inherently incredible about Anderson's story. Alleged discrepancies in his
testimony are pointed out, chief among which is the statement that he paid out
something like $19,000, while his counsel only claim a deduction of $14,000.
But Anderson was nearer right than his counsel, for his counsel overlooked the
item of $4,112 in court costs and expenses. His uncompensated loss was $18,112
as we read the record. Anderson did speak of 1927 instead of 1928 at one time;
but such a slip after a lapse of five years happens with all of us and does not
brand him as a perjurer. Furthermore, respondent was advised of this claim on
April 15, 1930. The trial was on November 9, 1933. The judgment and the
supporting proof were matters of public record. The respondent, with a corps of
trained inspectors at his command, had three and a half years to ascertain the
facts. If Anderson's story was not true, undoubtedly respondent would have
adduced the facts before the Board. Since no syllable of proof was offered to
contradict Anderson, there is no reason to disregard his evidence. Nor is there
anything in the record even to suggest that the Board disregarded the only
evidence before it.
(2.) It is argued that the Board may have intended to find that
the accident resulted from Anderson's willful or anti-social conduct, such for
example as driving while drunk; such conduct is likened to the deliberate
shooting of another.
Deductions
are allowable for losses arising from ordinary mishaps on the highway even
though caused, as they generally are, by negligence of the driver. The
Commissioner has ruled that damages to a pleasure car may be deducted if caused
by negligence of the taxpayer, but not if caused by his willful act. Art. 171,
Regs. 74. Cf. Shearer v. Anderson (C.C.A.2) 16 F.(2d) 995, 51 A.L.R. 534. A
merchant may deduct losses from litigation for personal injuries to others
arising from operating his delivery trucks. C.B.V.-1, p. 226, overruling
C.B.IV-1, p. 140. 1
The Supreme Court has approved; in Kornhauser v. United States, 276 U.S. 145,
153, 48 S.Ct. 219, 220, 72 L.Ed. 505, the subject of deducting losses ensuing
upon litigation was explored and the following rules laid down:
"The
Solicitor of Internal Revenue in a recent opinion has held that legal expenses
incurred by a doctor of medicine in defending a suit for malpractice were
business expenses within the meaning of the statute. In the course of the
opinion it was said that such expenditures were as much ordinary and necessary
business expenses as they would be if made by a merchant in defending an action
for personal injuries caused by one of his delivery automobiles, and that in
the latter case the deduction would be allowed without question. C.B.V.-1, p.
226. ***
"The
basis of these holdings seems to be that
where a suit or action against a taxpayer is directly connected with, or, as
otherwise stated (Appeal of Backer, 1 B.T.A. 214, 216), proximately resulted
from, his business, the expense incurred is a business expense within the
meaning of section 214 (a), subd. (1), of the act. These rulings seem to us to
be sound and the principle upon which they rest covers the present case."
Neither
the Commissioner in his Regulations, the Solicitor in his opinion, nor the
Supreme Court in its decision, limits the applicable rule to judgments
recovered on the doctrine of respondeat superior. The cited Regulation allows
the deduction where the loss results "from the faulty driving of the
taxpayer"; the Supreme Court and the Solicitor do not specifically refer
to the personal negligence of the taxpayer, but both use broad language not
limited to accidents occurring when a servant is driving. That deductions
bottomed on negligence are allowed at all negatives the idea that a negligent
act can never be directly connected with trade or business. It is true that a
chauffeur is not employed to commit a negligent act; nor is careless driving
technically a part of any business. But automobiles are used in the conduct of
many businesses, and careless and momentary lapses by drivers seem to be
inseparable incidents to driving cars, both by employees and owners. In
allowing deductions for losses so occasioned, the law but recognizes realities,
and keeps in step with the doctrine that taxation is a practical matter. The
test laid down by the Supreme Court is whether the litigation is directly
connected with or proximately resulted from the business. All the evidence in
this record discloses that the accident was so connected.
If
the Board had found the accident resulted from the willful act or anti-social
conduct of the taxpayer, we would be impressed with the argument that, by
analogy, the same distinction should prevail in case of damage to others as is
applied to damages to the taxpayer's own car by the cited Regulation. But there
is no such finding. On the contrary, in its summary disposition of this claim,
the Board found that the damages resulted from his "negligent"
driving of the car.
This
court cannot make a contrary finding. Our task is ended when we ascertain
whether a finding is supported by substantial evidence, and whether the law is
rightly applied to the facts found. Helvering v. Rankin, 295 U.S. 123, 55 S.Ct.
732, 79 L.Ed. 1343; Helvering v. Taylor, 293 U.S. 507, 511, 55 S.Ct. 287, 79
L.Ed. 623; Williams v. Commissioner (C.C.A.3) 79 F.(2d) 518; Doernbecher Mfg.
Co. v. Commissioner (C.C.A.9) 80 F.(2d) 573; G. & K. Mfg. Co. Helvering, 56
S.Ct. 276, 80 L.Ed. __. This finding of negligence negatives the contention
that the damage was occasioned by the willful or intentional act of Anderson.
Negligence and willfulness are mutually exclusive terms. "Negligence is
negative in its nature, implying the omission of duty, and excludes the idea of
willfulness." Cleveland, C., C. & St. L. R. Co. v. Tartt (C.C.A.7) 64
F. 823, 826. "Negligence involves the absence of willful injury, and is an
unintended breach of duty, resulting in injury to the property or person of
another." The Strathdon (D.C.N.Y.) 89 F. 374, 378. "Negligence and
willfulness are the opposites of each other. They indicate radically different
mental states." Standard Marine Ins. Co. v. Nome Beach L. & T. Co.
(C.C.A.9) 133 F. 636, 647, 1 L.R.A. (N.S.) 1095. "It therefore excludes
conduct which creates liability because of the actor's intention to invade a
legally protected interest of the person injured or of a third person."
Restatement, Torts, § 282 (c). 2 Neither side has
directly attacked this finding, although respondent in his brief inferentially
suggests that we substitute therefor a finding of willfulness. In the absence
of a proper challenge to the finding, we do not reach the question whether it
finds support in the record brought to this court. While the burden before the
Board was upon Anderson to overcome the commissioner's ruling, the Board, by
finding the damage resulted from negligence, has found that the burden was
carried.
The
order is reversed.
1 Paul and
Mertens, in their recent comprehensive text on Income Taxes, Vol. 3, p. 49, summarize
the rule as worked out by the Commissioner, the Board, and the courts, as
follows:
"Thus, it may be said
that the cost of defending or prosecuting damage suits caused by acts done in
the ordinary course of business is deductible; the same is true of the expense
of negotiating a settlement."
2 In Words and
Phrases, First, Second, Third, and Fourth Series, under the heading Negligence,
and the subheading Willfulness Distinguished, are gathered cases from thirteen
states holding that "negligence and willfulness are incompatible,"
and "negligence and willfulness are opposite terms." No cases to the
contrary are cited. To the same effect, see Shearman & Redfield on
Negligence (5th Ed.) § 5.