O'Meara v. Commissioner

Hell, J., dissenting: I disagree with the majority on the third issue only.

The record establishes the following essential facts pertaining to this issue:

1. Petitioner received the royalties in question in 1937 under a claim of right.

2. He properly reported the royalties as income in his tax return for that year because he claimed ownership thereof and the right to receive them.

3. Petitioner neither incurred any tax burden nor paid any tax by virtue of so reporting the royalties as income.

4. Petitioner did not own the royalties and had no rightful claim thereto.

5. The royalties cost petitioner nothing either in money, property, or services and they were not the increment of property owned by petitioner.

6. Petitioner paid the royalties over to their rightful owners in 1941 under judicial compulsion.

7. Petitioner claimed a deduction in his income tax return for 1941 and the respondent denied the deduction.

From the above recited facts it follows that petitioner lost no property or property right by paying the royalties over to their owners, for the reason that he neither owned the royalties nor had an investment therein. One can not sustain a loss in respect of property to which he had neither title nor in which he had no investment. Loss does not spring from a zero base. One must first have something before he can lose it. There are ways of acquiring ownership of property even without giving something in exchange, but merely taking or receiving property under a claim of right and reporting it as income in a tax return is not one of such ways. In the instant case, even if by the return of the royalties as income petitioner had sustained a tax burden, he would not thereby have acquired ownership of the royalties. It is true that under such circumstances petitioner would be entitled to a deduction in the year of their refundment in the amount of the royalties taxed to him, but not for the reason he had sustained a prop-crty loss represented by the royalties (which he never owned and in which he had no investment). The deduction would be allowable merely as a compensatory factor to offset the tax burden incurred by returning the royalties as income in a prior year. But where, as in the instant case, no tax burden or other economic burden was imposed upon petitioner by his receipt of the royalties and their return as income, there is totally absent any basis in law or upon equitable considerations for allowance of the deduction here claimed. It is inconceivable to me that Congress contemplated or intended that a deduction for property loss should be allowed when there has been no property loss, or that a deduction should be allowed as a compensatory’ matter when there is nothing for which compensation can be made. It is, therefore, my view that the deduction here allowed by the majority is an unwarranted gratuity.

The majority holds that:

Under these circumstances, for every tax purpose, the 1937 income from these royalties was the property of the petitioner. His inclusion of them in his gross income gave him a basis for gain or loss. He has now suffered that loss and, because he must be granted the opportunity to recover the basis so established, the deduction should have been allowed.

I think the foregoing statement fails to take into account every salient fact other than that petitioner received the royalties under a claim of right and reported them as income. It is clear that petitioner, himself, created the concept, for tax purposes, that the royalties were his property by receiving them under the claim of ownership and an unrestricted right to receive them. It thereby became his duty to report them as income. But there are other subsequently developed facts in the case which prevent that concept from carrying through and being made the premise of the above indicated syllogistic conclusion of the majority that petitioner sustained a loss of property and is therefore entitled to the deduction claimed. It seems to me that such conclusion can only be reached by continuing the fictional concept of ownership and ignoring facts which not only completely refute petitioner’s claim of ownership and the right to receive the royalties, but affirmatively establish that he neither sustained loss of property by refundment of the royalties to their rightful owners nor economic burden by receiving and reporting them as income. It appears to me to go beyond the horizon of realism and to substitute fiction for fact to hold that “for every tax purpose, the 1937 income from these royalties was the property of the petitioner.” (Italics supplied.)

I can not agree, therefore, wTith the holding that “for every tax purpose” the royalties were petitioner’s property. Notwithstanding the adroit language employed in the above quoted statement of the majority, the solid fact remains that petitioner sustained no loss and incurred no economic burden in respect of the royalties in question. The established doctrine that realities are the guides to the determination of tax liability should obtain here.

A number of authorities are cited as supporting the miajority opinion. In none of those authorities does it appear that the fact situation presented the question presented by the fact situation here, namely, whether the refundment to the owner of income which the taxpayer had erroneously received under a claim of right and reported as income without any tax consequence entitles the taxpayer to a deduction therefor.

A statement in a case to the effect that income received under a claim of right and reported as income entitles a taxpayer to a deduction therefor if in a subsequent year the income is properly paid over to some one else as rightful owner, is dictum respecting the question we have here unless it appears in the facts of such case that there was no tax consequence to the taxpayer.

TurneR, Arnold, and Harlan,//., agree with this dissent.