APPEAL from a judgment of the Superior Court of the County of Yavapai. Richard Lamson, Judge. Judgment reversed and cause remanded with directions.
Mr. Joe Conway, Attorney General, and Mr. Edward P. Cline, Assistant Attorney General, for Appellant.
Messrs. Byrne & McDaniel and Mr. Palmer C. Byrne, for Appellee.
[59 Ariz. 30] ROSS, J.
The taxpayer, Dixon Fagerberg, and the State Tax Commission could not agree as to whether certain expenditures of the taxpayer were deductible as loss for the years 1937 and 1938 from the taxpayer's income under The Income Tax Act of 1933 and amendments thereto. Chap. 8, First Special Session 1933; §§ 73-1501 to 73-1551, Ariz Code 1939.
In 1932 the taxpayer, who was a member of the board of directors of the Phoenix Flour Mills Company, a corporation, together with another director thereof, used the funds of the corporation, without its consent, to speculate in wheat and as a result on June 1, 1932, the corporation had sustained a loss of $110,180.57. Thereafter the corporation sued the taxpayer in the Superior Court of Yavapai County for conversion and in September, 1937, recovered judgment against him for the sum of $55,090.28, interest and costs (Fagerberg v. Phoenix Flour Mills Company, 50 Ariz. 227, 71 P.2d 1022), totaling $62,078.96, which he paid during 1937. In his income tax returns for 1937 he deducted a part of this sum from his income, and likewise in 1938, and the question is his right to do so. [59 Ariz. 31]
Subsequent to the filing of the returns the tax commission disallowed such deductions and levied additional assessments for the years 1937 and 1938 in the amounts of $1,087.73 and $509.63, respectively, plus interest. After a hearing the additional assessments were affirmed.
Thereupon the taxpayer appealed to the Superior Court of Yavapai County. That court found the additional assessments to be illegal and directed the tax commission to cancel such assessments and to make no claim for income for 1937 and 1938, although the taxpayer's income for such years was, respectively, $29,004.58 and $16,158.49.
The tax commission has appealed and questions the correctness of the judgment. There is no dispute as to the facts; the question is purely one of law.
It was contended by the tax commission at the hearing before it that the loss the corporation sustained occurred in 1932, before we had an income tax law, and that therefore under no conditions could it be claimed as deductible. In this contention
the tax commission was in error. The loss, under the decisions, is regarded as having occurred at the time the corporation obtained a final judgment against the taxpayer. Lucas v. American Code Co., 280 U.S. 445, 50 S.Ct. 202, 74 L.Ed. 538, 67 A.L.R. 1010; Brown v. Helvering, 291 U.S. 193, 54 S.Ct. 356, 78 L.Ed. 725.
However, at the hearing in the superior court and on this appeal the attorney general relies ...