Friedman v. Delaney

Attorney Lee Friedman (plaintiff) filed a bankruptcy petition for a trusted client, Louis Wax, whose proposed composition required depositing $7,000 with the court to discharge his debts to creditors. Friedman urged attorneys for the creditors to accept the proposed composition and personally assured them Wax had the $7,000 because he could borrow $5,000 against his life insurance policy. Apparently, Friedman made those assurances without first discussing them with Wax. Wax and his wife, who was the beneficiary under the policy, refused to pledge the policy. Friedman supplied about $5,000 of his own funds and deposited the $7,000 with the court. Eighteen months later, Friedman petitioned to recover the deposit, explaining that the proposed composition had been abandoned and the money belonged to Friedman. The court denied the petition, and Friedman agreed not to oppose transferring the money to the bankruptcy trustee, even though about $5,000 was Friedman’s own money. Friedman claimed a $5,000 loss connected with Wax’s bankruptcy proceedings as a deduction from income on his federal tax return. Tax commissioner Delaney (defendant) disallowed the deduction and assessed a deficiency. Friedman filed suit challenging the deficiency, claiming the commissioner should have allowed the deduction either as an ordinary and necessary business expense or as a business loss because the ethics of the legal profession required Friedman to keep his word.