embezzled from her the sum of $ 30,155.37. Certain sums were recovered by the plaintiff which left the net loss to her in the amount of $ 21,804,90, which she claimed as the deduction from her gross income as set forth in paragraph 3 above.
7. The net loss was established on November 18, 1942.
8. 'The Net Amount Embezzled' for each year from 1931 to 1940, both inclusive, was determined from Cree's books.
9. No money was taken by Cree during the year 1941.
10. Plaintiff had no reason to suspect that any of her funds were being embezzled by Cree and had no knowledge of such embezzlement until after his death on November 24, 1941.
11. Throughout the period above mentioned, Cree was a director in several banks and prominent in real estate and business circles in the City of Pittsburgh. He enjoyed substantial credit and had a reputation of meeting all his obligations as they accrued.
From the foregoing Findings of Fact the court arrives at the following
Conclusions of Law.
1. The plaintiff is not entitled to a deduction of any part of the loss of $ 21,804.90 in the taxable year 1941.
2. The defendant is entitled to judgment.
The applicable provision of the Internal Revenue Code is Section 23(e), 26 U.S c.a.,
which provides: 'In computing net income there shall be allowed as deductions:
'(e) Losses by individuals. In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise-
'(1) if incurred in trade or business; or
'(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or
'(3) of property not connected with the trade or business if the loss arises from fires, storms, shipwreck, or other casualty, or from theft.'
In Boston Consol. Gas Co. v. Commissioner of Internal Revenue, 1, Cir., 1942, 128 F.2d 473 it was held that a loss sustained by the taxpayer through embezzlements in years prior to 1935 but not discovered until that year could be deducted as a 1935 loss. The court gave considerable weight to the oppressive and unjust results to the taxpayer who was unable to establish the specific amounts embezzled in any particular year prior to the taxable year. In First Nat. Bank of Sharon, Pa. v. Heiner, 3 Cir., 1933, 66 F.2d 925, the Court of Appeals for the Third Circuit held that a loss sustained by the taxpayer through embezzlement prior to 1928 but not discovered until that year could not be deducted as a 1928 loss. The court refused to permit the taxpayer to convert a series of embezzlements in prior years into a bad debt, deductible in the taxable year. Factually these cases resemble the instant case except that here the embezzler was a trustee instead of an employee and the net amount embezzled in each year prior to 1941 was determined from the embezzler's books after his death.
If this were a case of first impression in this Circuit I would follow the conclusion reached in the Boston Consol. Gas Co. case, particularly for the reasons stated in Judge Magruder's concurring opinion.
Also, because I perceive a connotation in the use of the word 'sustained' in Section 23(e) that losses by embezzlement are suffered during the year of bona fide discovery although the property was covertly taken during previous years. It could then be concluded that Mrs. Alison did not sustain a loss until such time as she attempted, without success, to secure a return of her property.
However, since I cannot detect any fundamental distinction between the instant case and the Sharon case I am bound by the legal principles therein expressed. Judgment will be entered for defendant.