Kalodner, Ganey and Seitz, Circuit Judges.
The critical question presented is whether the Tax Court correctly held that theft losses sustained by the petitioner Asphalt Industries, Inc. by reason of diversion of its funds were deductible as a "loss from theft" under Section 165 (a), (e) of the Internal Revenue Code of 1954*fn1 only during the taxable year in which they were discovered.
Section 165 "Losses" provides:
"(a) General rule. -- There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.
"(e) Theft losses. -- For purposes of subsection (a), any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss."
These undisputed facts are relevant to our disposition:
Petitioner is a Pennsylvania corporation. During the taxable year here involved -- the fiscal year ending February 29, 1960 -- petitioner's stock was owned in equal shares by its then president, Conrad V. Anderson, Jr. and its secretary-treasurer, Richard Schwoebel. Petitioner's day-to-day operations were conducted by Anderson and its vice-president and assistant secretary, one Arthur Sanford.
Anderson died on November 12, 1960. Thereafter, in December 1960 or January 1961, Schwoebel, who succeeded Anderson as petitioner's president, discovered that Anderson had cashed for his own use customers' checks made payable to petitioner during the petitioner's 1960 fiscal year and for some five preceding years.
Petitioner promptly notified the Internal Revenue Service of its discovery since its books and income tax returns had not reflected as corporate "income" the diverted and converted funds. The Internal Revenue Service then made deficiency assessments totalling $96,172.84, and imposed fraud penalties aggregating $52,674.18 for the fiscal years ending February 28, 1955 through February 29, 1960. In sustaining the deficiency assessments and fraud penalties the Tax Court ruled that petitioner was not entitled to theft-loss deductions under Section 165 for the years in question, on the ground that they could be claimed only in the year in which they were discovered. 46 T.C. 622 (1966).
This Court, at 384 F.2d 229 (1967), held (p. 235): "* * * the corporation is not chargeable with Anderson's fraud and that the assessments for fraud therefore must be set aside," and ruled that "The decision of the Tax Court will be reversed."
Upon the remand which followed, the Tax Court in a Memorandum Opinion,*fn2 subscribed to the contention of the Internal Revenue Service that we had at 384 F.2d 229 only reversed the fraud assessments for the years 1955-1960, inclusive, and as a necessary concomitant barred the deficiency assessments for the years 1955-1959, and had let stand the "basic deficiency" of $13,819.39 for the fiscal year ending February ...