1939 BTA LEXIS 851 | B.T.A. | 1939
Lead Opinion
The respondent has filed two briefs in this proceeding, but in neither brief does he advance any argument in support of his determination that the sales of securities to the petitioner’s wife in 1931 were lacking in bona fides, were ineffective to entitle the petitioner to deductions for losses, or were an indication that a part of the deficiency for 1931 was due to fraud with intent to evade tax. The closest scrutiny fails to reveal any reason why those sales should be regarded as lacking in bona fides, as being ineffective to entitle the petitioner to the deductions which he claimed, or to indicate that any part of the deficiency for 1931 was due to fraud with intent to evade tax. Further discussion of those transactions seems unnecessary.
This leaves for consideration only the transactions between the petitioner and his wholly owned corporation, Innisfail, involving the ownership by Innisfail of Chrysler, Hudson, and Aldebaran stock. Two general issues are involved. The first is whether the transactions were mere shams so that the petitioner’s claims of losses and his failure to report the dividends on the stock show an intent upon his part to defraud the Government of taxes legally due from him. The
The Commissioner filed his original brief on December 19,1936, but made no argument whatsoever in that brief to support his determination that a part of the deficiency for 1931 was due to fraud with intent to evade tax. Fraud for the other years had not been suggested at that time. Thereafter, the fraud issue was raised for the other two years by amended answers at the separate docket numbers for those years.
The fraud issue is whether any part of the deficiency for any of the years 1929, 1930, or 1931 was due to fraud with intent to evade tax. Facts relied upon to support fraud must be alleged as well as proven. The facts alleged by the respondent in these proceedings to support his charges of fraud consist only of the sales to the wife, the sales of Chrysler, Hudson, and Aldebaran stock to Innisfail, and the failure of the petitioner to report the dividends upon the Chrysler and Hudson stock. All of those circumstances have been considered carefully, as well as all other transactions which bear in any way upon them. Obviously, the discussion must be limited to the more significant events — but none has been overlooked. The cases cited by the respondent upon the fraud issue are not in point, some because they involved only attempted reorganizations, others because they show an improper use of control over the corporation. This case involves neither an attempted reorganization nor improper control over Irniisf ail.
The petitioner has testified that he honestly believed that he had a right to make the sales to the corporation and to take the deductions for losses resulting from those sales, and was not required thereafter to report the dividends on the securities sold. There is no evidence in the record which, in our opinion, can be regarded as indicating the contrary. If he did not have this belief and if he did not intend to transfer the securities to Innisfail, it is difficult to understand his actions. Although he was trying to keep down his taxes, all of his acts indicate that he was endeavoring to meet the requirements of the law. He thought his plan was effective and it never occurred to him to go beyond the legal effect of his acts to avoid tax by means of fraud or deception. His view was not unreasonable, and even if it were wrong, his belief in it would exonerate him from any charge of fraud. Rogers Recreation Co. v. Commissioner, 103 Fed. (2d) 780; Peterson & Pegau Baking Co., 2 B. T. A. 637, 640; J. S. McDonnell, 6 B. T. A. 685, 695; George L. Richard, 15 B. T. A. 316, 317; Landers Brothers Co., 17 B. T. A. 1078,1081; James Nicholson, 32 B. T. A. 977, 988, 989. There is no indication that he ever misrepresented any fact, withheld
Since the transactions in question were between the petitioner and his wholly owned corporation, they must be carefully scrutinized for the purpose of determining that the petitioner took no improper advantage of his power over the corporation and that the transactions were what they would seem to be upon a less intensive examination. The transactions have been subjected to careful scrutiny.
The respondent argues that the separateness of Innisfail should be ignored for tax purposes in this proceeding. The facts show that Innis-fail was regularly incorporated and was a separate legal entity from the petitioner. The respondent does not contend otherwise. He merely contends that the separate corporate entity should be disregarded for income tax purposes. Yet he, himself, has not disregarded the separateness of Innisfail for income tax purposes but has treated Innis-fail as a separate taxable entity. The corporation had many admittedly legitimate transactions and may not be disregarded for tax purposes. See Smith v. Higgins, 102 Fed. (2d) 456, which involved Innisfail and the present petitioner.
The Commissioner requested in his final brief a finding that the petitioner “transferred by bill of sale to said corporation [Innisfail] 5,005 shares of Chrysler preferred stock then held by Bassett for 97 shares of Innisfail capital stock, together with the option right granted by the exchange agreement of June 2, 1925.” That finding is a proper one and it shows that Innisfail Avas the owner of the 5,005 preferred shares and of the right under the option. Innisfail then exercised the option and exchanged the 5,005 shares of preferred for 26,477 shares of Chrysler common stock. Thus it became the owner of the 26,477 shares of Chrysler common stock in 1926. The remaining Chrysler shares were purchased by subscription in 1928. Only the Hudson and Aldebaran shares were purchased directly from the petitioner.
The respondent argues that Innisfail paid no consideration to the petitioner for any of the shares. Innisfail issued its own stock in exchange for the Chrysler preferred and the option right, and it can not be forcefully argued that there was any lack of consideration for that transfer. The Chrysler common was not acquired from the petitioner but was acquired by exercising the option and exchanging the preferred for the common. Clearly Innisfail became the owner of those common shares and there is no basis for any argument that it failed to pay proper consideration for them. The petitioner advanced the subscription price for the 4,412 Chrysler common shares acquired in 1928 and charged Innisfail with the amount of that
The respondent also argues that the sales of Chrysler and Hudson stock were incomplete because the petitioner retained the certificates in his own name and never made any delivery to Innisfail. This argument is not made in the case of the Aldebaran stock because the certificates for that stock were transferred to the name of Innisfail. The petitioner admits that the certificates for the Chrysler and Hudson stock were at all times material hereto in his name and that certificates were never issued in the name of Innisfail. He explained why he kept those particular certificates in his own name. He was the only person active in the affairs of Innisfail. He testified that corporations generally hold listed securities not in the name of the corporation, but in the name of an individual, in order to avoid the incon
The intention of the parties is more important than delivery. Dee Furey Mott, supra; Hoffman v. Commissioner, 71 Fed. (2d) 929; Walter F. Henningsen, 30 B. T. A. 301. The intent of the petitioner to have Innisfail acquire complete legal title to and ownership of the shares appears in a number of ways. The petitioner has testified that such was his intention. He wanted Innisfail to have the original preferred shares so that it could realize the profit from the exchange and so that he would not realize that profit. He also wanted Innisfail to acquire title to the Hudson and Aldebaran shares so that he would be entitled to take a deduction for loss on those aliares. He was an intelligent man, an experienced lawyer, and a person familiar with the tax laws. He knew that the results which he desired could not be obtained unless Innisfail acquired title and ownership. Commissioner v. Ferree, 84 Fed. (2d) 124, affirming 32 B. T. A. 725. He never thereafter claimed any ownership in the shares or acted in any way inconsistent with Innisfail’s ownership. He segregated the shares and marked them as belonging to Innisfail. He had records made on his own books and upon the books of Innisfail which showed clearly that
The respondent argues that the petitioner completely dominated Innisfail and for that reason the latter is to be disregarded for tax purposes. The petitioner concedes that he dominated Innisfail, but the evidence shows that he never took any improper advantage of bis power in any of the transactions involved in this proceeding. No argument is made that any of the transactions of sale between the petitioner and Innisfail were made at prices other than the fair market price of the securities at the time of the sale. The evidence shows that the prices in every instance were fair and proper. No contention is made and there is no evidence that either the petitioner or Innisfail ever used an incorrect basis for gain or loss or an incorrect figure to represent the amount realized from any of the transactions. Innisfail received the full financial benefits and suffered the consequences of ownership of the Chrysler, Hudson, and Aldebaran shares. Although the petitioner freely transferred funds back and forth as was convenient, still there is no indication in the record that he ever used his power to control the corporation in any improper way to his own advantage, to the injury of the corporation, or to the injury of the Government. He admits that one of his purposes in organizing Innisfail was to reduce taxes. Neither the power to control nor the purpose of organization requires that the separateness of an individual and his corporation be disregarded for tax purposes where the corporation is not used improperly. Gregory v. Helvering, 293 U. S. 465; Jones v. Helvering, 71 Fed. (2d) 214; cer-tiorari denied, 293 U. S. 583; Commissioner v. Eldridge, 19 Fed. (2d) 629; James Lee Johnson, 37 B. T. A. 155 and cases there cited; affd., 104 Fed. (2d) 140.
The respondent charges at one place in his brief that the directors of Innisfail were dummies, while at another place he charges that those same directors did not authorize the acts of the petitioner on behalf of Innisfail. This inconsistency weakens both arguments, but, what is more important, the facts show that all of the acts of the petitioner on behalf of Innisfail were either authorized beforehand or were ratified afterwards by the directors of the corporation.
The record as a whole does not present clear and convincing evidence of fraud. Drawoh, Inc., 28 B. T. A. 666; George L. Richard, 15 B. T. A. 316; Harry Feldman, 34 B. T. A. 517. We hold that the Commissioner erred in determining that a fraud penalty was due under section 293 (b) for 1931, and his later contention of fraud for 1929 and 1930 also fails for lack of proof.
The deficiencies depend upon the same evidence and much of the discussion applies with almost equal force to the general issue of the
Reviewed by the Board.
Decision will be entered under Buie 50.
Dissenting Opinion
dissenting: I dissent from,the conclusions that petitioner is not taxable upon the dividends in question; that bona fide sales of stock were made to the Innisfail Corporation resulting in deductible losses; that none of the deficiency is due to fraud with intent to evade tax. Having heard this case, I am convinced that the evidence supports findings of fact other than many that are made and supports conclusions opposite to those reached. Further, I believe that neither conclusions reached nor dicta of the court expressed in the case of Smith v. Higgins, 102 Fed. (2d) 456 (C. C. A., 2d Cir.), are controlling here or authority for reaching any particular conclusion in this case. The Circuit Court of Appeals for the Second Circuit reviewed, in the Smith v. Higgins case, a record appealed from a jury trial involving transactions between the petitioner here and the Innisfail Corporation in a later year, 1932. Each case must stand on its own record. Considerations of this Board in this case must be restricted to the record which has been presented in this case.
Petitioner’s claim that he is tax-exempt upon certain dividends in the taxable years is premised directly upon his contention that in 1929 and 1930 his wholly owned corporation, Innisfail, was indebted to him so that in those years the dividends were received in payment on account of the debt; that in 1931 he received the dividends as loans. In that year he claims to have been indebteded to the corporation. Whether or not Innisfail owed amounts to petitioner and loaned amounts to petitioner is the immediate question. There is also the question whether bona fide sales were made in 1929 of the Hudson and Aldebaran stock. The foundation of petitioner’s theory, of course, is that Innisfail was a separate entity and that it owned certain stocks, particularly Chrysler and Hudson stocks, and that it is taxable upon dividends, being a separate entity and being able to be both a debtor and a creditor of petitioner. The bona fides is questioned throughout by respondent. It is pleaded by respondent that the petitioner filed false and fraudulent returns in each taxable year
It is the purpose of this dissent to show that the Innisfail Corporation was not created for any business or corporate purpose and that it has been used solely for purposes of circumventing the plain intent of the pertinent revenue acts; that it was so completely dominated by petitioner in the transactions involved in the taxable years .and in the transactions in earlier years which are said to have created a debt of the corporation to petitioner that the transactions were not with a separate entity under the revenue acts; that, even apart from all considerations of the reality of the transactions under the revenue acts, petitioner had no intent to and did not alloAV the corporation, claimed to have been a separate entity, to acquire good title to various stocks. I maintain, taking an extremely hypothetical case,
The fallacy of the view of the majority is that it says, in effect, that, since Innisfail was wholly owned and dominated by Smith, he did not need to carry on his transactions with it as he would have
Petitioner organized Innisfail to effect one of those “anticipatory arrangements” whereby the anticipated gain to be realized from the exchange of Chrysler preferred for common stock in 1926 was to be shifted to a corporation formed for tax purposes. Innisfail was organized four days prior to the date the exchange was made. Thereafter Innisfail was a dummy in tax transactions. All transactions attributed to it, with a few minor exceptions, were tax transactions. for the purpose of avoiding tax. The use of Innisfail for such transactions continued until 1932. It is hardly reasonable to believe that it was a mere coincidence that this use was ended in 1932 coincidentally with investigation by revenue agents of petitioner’s receipt of dividends reported in the Innisfail return. It is interesting to note that in 1936 Congress ended the immunity of corporations from tax on dividends and in 1936 petitioner disposed of his interests in Innisfail.
Innisfail was the alter ego of petitioner. — Petitioner completely dominated Innisfail Corporation, being the sole stockholder, and the only person to “deal” with it, provide it with cash, and withdraw cash. The other directors and officers of Innisfail were mere dummies. They were associates of petitioner, employed by the General Motors Co. Innisfail had no office, no furniture or fixtures, no letterheads, no safe deposit box, no employees. It was organized without any cash. It had a bank account upon which only petitioner made withdrawals. Books were kept for Innisfail by petitioner’s own secretary and accountant, who was also an employee of the General Motors Corporation. The balance sheet of Innisfail as of December 31, 1931, lists securities as assets of a total value of $845,228. Out of this total amount the only stocks in the name of Innisfail and purchased out of funds in the Innisfail bank account were a small number of shares of mining stock and some Ecuadorian stock purchased for $8,418. These stocks were issued in the name of the Innisfail Corporation. All other stocks that are listed in the books of Innis-fail over the period from 1926 to the end of 1931 were stocks which either originally belonged to petitioner or were purchased by petitioner with his own funds. Petitioner received all dividends, including dividends on stocks allegedly sold to Innisfail from time to time.
The following description of the major transactions will serve to illustrate how petitioner attributed his own transactions to the corporation :
(a) The first transaction relating to the exchange of Chrysler stock in 1926 needs some further amplification. Prior to June 14, 1926, there were issued to petitioner in his name certificates for 40,314 shares of Chrysler common stock, including the 26,477 shares which Innisfail is said to have acquired. After June 14 and after the option agreement with Bassett ended, petitioner made no delivery of the 26,477 shares of common stock to Innisfail; the Chrysler corporation was not notified of any change of ownership; the stock certificates were not endorsed in blank or endorsed to Innisfail. The certificates were not in any manner appropriated to any bill of sale to. Innisfail. The certificates at all times remained in Smith’s safe deposit box
(b) In December 1927 petitioner deposited in Innisfail’s bank account $15,000; the next day a check on the account was drawn for $12,375 payable to the Mardon Corporation in a purchase of menthol crystals. J. C. Kennedy of the Mardon Corporation was a friend of Smith. In 1928 petitioner received from the Mardon Corporation $14,916, which he deposited in his own account. In this transaction, Innisfail was used by petitioner in a transaction clearly his own. No corporate authorization appears. The transaction was reported on Innisfail’s income tax return.
(c) In 1927 Smith deposited $5,000 in Innisfail’s bank account. Shortly after a check was drawn on the account for $5,000 to A. H. Carlisle, a friend of petitioner. This was a loan to Carlisle, which he did not repay to Innisfail. In 1928 Carlisle gave Smith 500 shares of Bondshares Fiscal Corporation stock, the certificates being in Smith’s name. In the “running account” with Innisfail, it was charged with the $5,000 put in its bank account. When Smith received dividends on the Bondshares stock he credited the amounts on books to Innisfail.
(d) In 1927 Innisfail had no cash to pay Federal income tax reported by it for 1926 in the amount of $69,679.17 on the gain from the exchange of Chrysler stock. Petitioner before the due dates for quarterly income tax payments deposited cash in the Innisfail bank account, on which checks were drawn to pay Federal taxes. On the books, Innisfail was charged for the amounts advanced.
(e) In 1927 petitioner executed two memoranda of sale stating that he sold to Innisfail 500 shares of Gillette Safety Bazor stock for $49,750 and 1,700 shares of Gimbel Bros, stock for $68,000. The certificates remained in Smith’s name and possession and he continued to receive the dividends. He charged Innisfail on the books for the alleged purchase price and credited Innisfail for dividends received thereafter. Petitioner took deductions in his returns for the “sales” of these stocks. Subsequently these stocks were sold to outsiders. The proceeds of the sales were temporarily deposited in the Innisfail bank account and brought the amount of cash in the account up to around $100,000. In 1928, $100,000 was put out on call loans and interest thereon was deposited in the Innisfail bank account, and $3,903 remained in the Innisfail bank at the end of 1928. On December 26, 1928, a cash dividend was “declared” on Innisfail stock, which amounted to $70,000. Innisfail had no cash with which to pay the dividend. Instead there was a charge on the books against Innisfail for $70,000 creating a “debt.” Petitioner filed his income tax returns on a cash basis and reported this dividend in his own re
(f) In July 1928 Smith purchased with his own funds new Chrysler common stock, 4,412 shares, for $253,690. The certificates were issued in his own name and he received the dividends. There was no corporate authorization for such purchase for or by Innisfail, but on the books Smith charged Innisfail for the purchase price, creating a “debt” to him. This debit in 1928 on the books accounts chiefly for the so-called debt of Innisfail to petitioner at the beginning of 1929. In reality it was no more than a book item. In December 1929 Smith sold the stock for $145,596 and deposited the proceeds in his own bank account and credited Innisfail on the books. Prior to the sale by Smith, a memo of sale was written stating that Innisfail sold to Smith 4,412 shares of Chrysler common stock for $145,596. The memo of sale should be recognized as merely a device in an entire plan. The transaction was clearly a Smith transaction and not one of a separate corporate entity. The income tax return filed for Innisfail in 1929 reported the loss on the sale of the stock.
(g) In December 1929 E. G. Tracy was elected a vice president of Innisfail. He was a retired physician and a friend of Smith, and was very sick and in need of financial aid. Out of the Innisfail bank account Tracy was paid $2,200 in 1929 and $3,600 in 1930 and 1931, as “salary.” These payments were nothing other than gifts to Tracy from Smith, paid out of the Innisfail bank account. In the income tax returns of Innisfail for these years deductions were taken for “salaries” in the above amounts.
(h) In September 1930 a memo of sale was executed, stating that Innisfail sold to Smith 10,000 shares of Chrysler common stock for $195,000. The certificates referred to in the memo were already in Smith’s name and possession and were part of the original 26,477 shares. There was no corporate authorization for the “sale.” On the books Smith credited Innisfail with $195,000. After the memo was executed Smith reported in his own income tax returns dividends on the 10,000 shares of Chrysler common. This transaction was another step in the manipulation of the “running account” on the books between Smith and Innisfail.
With the exception of several deposits of cash by Smith in the Innisfail bank account to enable the payment of taxes reported due from Innisfail and a few minor purchases of mining and Ecuadorian stocks with funds from the Innisfail bank account, the trans
The Hudson and Aldebaran stocks transactions in 19&9. — -To supplement facts set forth in the findings of fact, the record shows the following. In December 1929 petitioner owned 2,000 shares of Hudson Motors stocks represented by certificates in his own name. The memo of sale which petitioner executed in 1929, purporting to effect a sale of 1,900 shares of Hudson stock, did not identify any certificates and petitioner did not appropriate any to the memo of sale by attaching to it any certificates or by endorsing any of the certificates he held. . No notice of any change of ownership of any of the Hudson stock was given to the Hudson Motors Co. and no order was issued to pay dividends to Innisfail or to its account. The minutes of the Innisfail Corporation are silent on the transaction and do not contain any authorization to purchase Hudson stock. Petitioner retained the same full custody of, control over, and benefits from the stock after executing the memo of sale as before. The certificates
The bona -fides of the transactions. — The issues do not involve questions of the right of petitioner to make sales of stocks to his wholly owned corporation, or to borrow from or loan to a wholly owned corporation. The question is, in the main, whether petitioner has properly manifested an intention to make real sales of stock at various times, to make real transfers of title at various times to his corporation, to establish a real debtor and creditor relationship. Starting with the taxable year 1929, the instance of a purported sale of Hudson stock to Innisfail by means of a memo of sale only, without delivery or transfer of the stock, without any order to pay thereafter dividends to Innisfail, but with continuous receipt and retention of dividends after the writing of the memo of sale, we find in that transaction, giving rise to a direct issue before us, a repetition of a procedure followed by petitioner in several instances beginning in 1926 with the organization of Innisfail. Petitioner’s reliance upon a book balance at the beginning of 1929 as representing
Petitioner has testified that “stocks pass by delivery and endorsement.” That is a correct statement of local law. See sec. 162, Personal Property Law of New York; Wills v. Investors Bankstocks Corporation, 257 N. Y. 451; 178 N. E. 755; Agar v. Orda, 258 N. Y. S. 274; affd., 264 N. Y. S. 939; affd., 190 N. E. 479; Coyne v. Chatham Phenix National Bank & Trust Co., 281 N. Y. S. 271. Petitioner is a lawyer and is presumed to know legal requirements and the way of carrying out ordinary business transactions. In every instance from 1926 through 1931 where petitioner claims to have conveyed title to Innisfail to dividend paying stocks, petitioner never endorsed and delivered the stocks to Innisfail, viz., transactions in Chrysler common stocks, Gillette, Ginibel Bros., Bondshares, and Hudson Motors stocks. In no instance where dividend paying stocks were involved was there any appropriation of the certificates of stock to separate memos of sale. At no time, until investigations by the Government brought it
Because this situation of the real ownership of the stoch was of no particular importance as far as I was concerned, and wlien we got into these tax situations with the Government, the question of the receipt of the stock or the dividends or the question of whose name something stood in at the time, appeared to have importance that it did not have in my mind as a lawyer. [Emphasis supplied.]
At another point petitioner, in answer to a question relating to what assets Innisfail had, which petitioner could not answer without referring to the “running account” record, testified that “It is all bookkeeping transactions.” Elsewhere petitioner admits that he was conscious of tax consequences in every transaction and that Innisfail was formed to effect a reduction in taxes which petitioner would otherwise be liable to pay. So it is inconsistent for petitioner to claim in one breath that he had a bona fide intent to convey title to stocks to Innisfail and, in another, to say that real ownership of the stocks had no importance in his mind as a lawyer; to contend that effective transfers of title were completely made, under the facts and circumstances surrounding his continued retention of stocks and of the incidents and benefits of ownership, and still to recognize that stocks pass by endorsement and delivery.
The only explanation petitioner gives now for his retention of certificates of stock after executing memos of sale relied upon as effecting complete transfers of title, is that it would be more difficult to transfer stocks out of the name of a corporation than it is to transfer stocks out of the name of an individual, the implication being that retention of certificates in his own name was merely a convenience; and yet petitioner knew that there would be no active trading in the stocks involved and that there were few blocks of
Neither can I conclude that petitioner under his theory ever repaid any amounts of dividends, alleged to have been borrowed, by transferring to Innisfail title to other property, such as title to other stocks. Up to the beginning of 1929 such transactions as are recorded in the running account as “debits” to Innisfail to offset “credits” made for cash dividends received by Smith or to be made for dividends to be received by Smith, relate only to debits for the purported sales of 500 shares of Gillette stock and 1,700 shares of Gimbel Bros. stocks and petitioner’s own subscription for 4,412 new shares of Chrysler common stock. But, as for ‘the first two stocks, Innisfail obtained no rights of ownership such as acquisition of title in an arm’s length transaction would yield, because petitioner retained the stocks, received dividends at all times, and eventually received into his own bank account proceeds of later sales to outside parties. As for the new Chrysler stock, the same facts are present. In that transaction there was no corporate authorization for purchase of 4,412 shares of new Chrysler stock. Innisfail never agreed or bound itself to purchase this new stock from anyone and certainly in 1928 when the transaction was imputed to Innisfail it was in no position to buy new stock for $253,690. Cf. Stiver v. Commissioner, 90 Fed. (2d) 505, 508. The transaction was another link in the scheme of petitioner to cover up his continued receipt of dividends as payment of “debts” of Innisfail to him. There is no evidence except book entries and
Returning to the original 1926 transaction — and that is the keystone in the arch of the “running account” on the books and the whole series of manipulations — I am wholly unable to conclude, as does the majority, that in 1926 “The Chrysler common stock was not acquired from petitioner but was acquired by exercising the option and exchanging the preferred for the common”; or to conclude that “Innisfail then exercised the option and exchanged the 5,005 shares of preferred for 26,477 shares of Chrysler common stock.” Space does not permit setting forth the steps that were taken in the Bassett-Smith option agreement and the Maxwell Motors reorganization (the findings of fact made fail to give all the steps, but they are revealed in the record). However, it is a fact that the 5,005 shares of Chrysler preferred stock had already been exchanged for the 26,477 shares of common stock prior to June 14, 1926; Smith had the certificates for the common stock and all that remained to be done was to give Bassett formal notice that he could retain the preferred stock and for him to formally release the common stock. The letter dated June 14, 1926, from Innisfail to Bassett, who incidentally was not in any respect connected with the Chrysler Corporation, was a matter of form and part of petitioner’s “anticipatory arrangement” to escape tax upon gain from the exchange. In substance, Innisfail was merely Smith’s agent in giving that notice to Bassett. Further, Smith was the only person from whom Innisfail could acquire the certificates for the 26,477 shares of Chrysler common stock and Smith did not deliver or transfer the stock to Innisfail at any time. Smith’s offer to transfer Chrysler stock to Innisfail dated June 14, 1926, was not completed by performance at any time from that date through 1931 and stood only as an agreement to make a conveyance which remained in an executory state for the entire period under consideration. Under such facts it is not material that 97 shares of Innisfail stock were issued in 1926 to petitioner “in exchange” for the Chrysler stock in this proceeding. There is sufficient evidence to provide a presumption that there was no consideration for their issuance.
The bookkeeping entries making up the “running account” with Innisfail are not the entire bookkeeping record of Innisfail. It is correct that books were kept for the corporation and audited periodically. There are a few transactions reflected on the Innisfail books that have no relation to any of the transactions involved here or to any of the transactions making up the “running account”, but such transactions are minor and few and do not enter into our con
The term “running account” is apt. It had a mobile character. It was clearly petitioner’s intent that all credits and credit balances in Innisfail’s favor would be offset by “debits” to bring about a balance. But that was the mechanism of the plan devised to carry out petitioner’s express desire that Innisfail should not outwardly pay him any money. Stripped to the essence, petitioner, having created for tax purposes in 1926, a corporation, to report a gain of a half million dollars on an exchange of stock, thereafter devised his “running account” device to circumvent, to the highest degree commensurate with any appearance of reality, the collection of revenues to become due because of the existence of the corporation. The device had several blades and it can be better understood by keeping in mind the provisions of the revenue act applicable to such corporations (see sec. 220 (a), Act of 1926; sec. 104, Act of 1928) and the sections defining dividends (see sec. 201 (a), Act of 1926, and sec.
As for the weight to be given the evidence that Innisfail income tax returns reported the dividends in question, it is of course elementary that the reporting of income by one taxpayer upon its returns is not proof that it, rather than another taxpayer, is taxable on the income reported. Burnet v. Leininger, 285 U. S. 136; Lucas v. Earl, 281 U. S. 111. Nor is there any estoppel against the Government’s taxing petitioner upon income reported in Innisfail returns because it has accepted the Innisfail returns. A similar argument was made by the taxpayer in Guaranty Trust Co. v. Commissioner, supra. There the court stated: “There could be no estoppel * * * even if one were possible against the Government because it had accepted payment of taxes that were theoretically inconsistent with a liability for others.” Here there is no reason for assuming that Government officials knew the circumstances of the alleged sales of stocks to Innisfail.
There were no transfers of 26$77 shares and shares of Chrysler stock or of 1,900 shares of Hudson stock adequate to relieve petitioner from taxation upon the dividends paid to him on the stocks. — Respondent has included in petitioner’s taxable income in the taxable years income on all Chrysler stocks and on Hudson stocks. Petitioner received the income under circumstances which show that it was subject to his unfettered command and freedom of enjoyment. The evidence shows that all transactions relied upon by petitioner as evidenced by his written memos of sales and entries in his “running account” were devices and anticipatory arrangements to divert taxation from himself upon substantial income re-
While we are not bound by local law in applying the revenue acts, I can see no reason for a holding that in applying the revenue acts there need be less done than local law requires. Thus, while the majority opinion broadly states that “Delivery is not always necessary in the case of sales of stock”, I am of the opinion that this is true only where the evidence shows agreement to make delivery or such clear intent to make delivery that title may pass prior to
Transfer of goods by delivery of a document is another matter. * * * it might he argued that the delivery of any document of title is a symbolical delivery of the goods; but it is obvious that unless the document in fact controls the possession of the goods, one person may be the actual possessor of the goods, while an adverse claimant holds the symbol. This possibility should not be tolerated. [1 Williston on Sales, 2d Ed., par. 274, note 14.]
The situations presented in this case illustrate well the type of situation which I believe should not be tolerated in transactions relied upon to provide a means to escape taxation. I do not believe that section 162 of the New York Personal Property Law allows such situations. Petitioner was the possessor of the stocks, and the memos of sale, mere symbols, gave Innisfail no substantial rights whatever. See Wills v. Investors Bankstocks Corporation, supra. It has been said that the kind of transfer of title contemplated by section 162 of the New York Personal Property Law is a transfer involving some physical act, something more than a theoretical change of title or a vesting of title merely by the election of the vendor to consider title as in the vendee. Phelps-Stokes Estate v. Nixon, 118 N. E. 241, 243. Certainly the facts show that, in the instances of the Chrysler, Hudson, and other stocks, petitioner’s method of allegedly transferring title to those stocks was to make a mere election on his part, supplemented by his running account bookkeeping entries, to consider title in Innisfail in a theoretical way while he continued to enjoy all benefits of ownership, most particularly, the receipt of
Losses claimed on alleged sales of Hudson and Aldebaran stocks.— In the instance of the Aldebaran stock, there was no consideration given by Innisfail. Petitioner claims that in 1929 a sale was made for consideration to be paid in a subsequent year. Under the circumstances payment could be made by Innisfail either by way of the dividends petitioner was receiving on various stocks or by a transfer of stock from Innisfail to petitioner. Believing that no such consideration ever passed, Innisfail not owning any dividends or the 10,000 shares of Chrysler stock alleged to have been “sold” by Innis-fail to petitioner in 1930, the only conclusion which I believe proper is that the transfer of the Aldebaran stock to Innisfail in 1929 was a gift and not a sale. The “debits” and “credits” relied upon by petitioner as proof that consideration moved from Innisfail to him in this transaction by means of debits and credits upon the books have been discussed above and it is my opinion that they are of no substance and do not provide a basis for petitioner’s claim that he sold the Aldebaran stock to Innisfail. Upon a holding that there was a gift, it would follow that petitioner is not entitled to a deduction for a loss under section 23 (e) of the Revenue Act of 1928.
In the instance of the Hudson stock, no loss was sustained by petitioner.
*421 The place of a sale in claiming a deduction is as evidence that a loss has been realized. If the sale is real and is in an isolated transaction, it is conclusive proof. If it is only part of an entire plan, then the entire plan is examined to ascertain whether its effect is to produce a loss or a realized loss. It is immaterial that the motive prompting the sale or the plan of which the sale was a part was to secure a deduction. The matter of interest is whether an actual loss has been realized. Tax laws deal with realities, [eases cited] and look at the entire transaction [cases cited]. (Shoenberg v. Commissioner, supra.)
The facts show that petitioner retained the same benefits of ownership and the same control oyer the Hudson stock after the execution of the memo of sale written to accomplish the alleged sale in 1929. What has been said immediately above regarding passing of consideration from Innisfail to petitioner applies here. Further, it appears that, when the Hudson stock was ultimately sold to outsiders in a later year, petitioner received the proceeds of the sale by a transfer of cash from the Innisfail bank account to his own bank account. Also, what has been said above regarding presumption of continued ownership after an alleged sale where stock certificates are retained and dividends continuously received, applies equally to the Hudson stock transaction. The transaction upon which petitioner relies should be held to be ineffective to produce a deductible loss. Eespondent should be sustained. Shoenberg v. Commissioner, supra; Gregory v. Helvermg, supra; Commissioner v. Griffiths, supra; Nicholson v. Commissioner, supra; Chisholm v. Commissioner, 79 Fed. (2d) 14,16; Albert W. Finlay, 17 B. T. A. 828; M. I. Stewart & Co., 2 B. T. A. 737.
The object of the revenue acts (sec. 22, Act of 1928) is to tax individuals upon gross income from whatever source derived, and the transactions which petitioner claims exempt him from taxation upon income he received in the taxable years upon their face lie outside the plain intent of the statute. Gregory v. Helvering, supra. Likewise, the transactions relied upon for deductions for losses claimed in 1929 lie outside the plain intent of section 23 (e) of the pertinent statute.
The fraud issue. — The additional tax prescribed under section 293 (b) of the 1928 Act, and in other acts, is a tax which Congress has imposed, presumably, under the theory that a taxpayer who, willfully, does not report all his taxable income to the Government must pay a penalty. Eespondent has claimed the fraud penalty for each taxable year because of petitioner’s failure to report in his returns income he received each year from dividends on stocks over which he exercised full control and for taking deductions for losses upon sales that were not bona fide sales. In my opinion respondent has sustained the burden of proof upon him in this issue, having introduced the most revealing evidence, namely, the accounts kept by petitioner on his books pursuant to his tax evasion plan. In my opinion the evidence shows that there
Petitioner is a competent lawyer, who is engaged in a practice which deals with transactions of corporations in the normal conduct of corporate business and fully understands the provisions of the Federal revenue acts. Petitioner, by his own testimony, knew that title to stocks passes by delivery and endorsement of certificates. Petitioner, by his own testimony, created a corporation for tax reduction purposes, and still intended and desired that it should never make any cash distributions to him of large amounts of earnings. Petitioner so arranged matters deliberately to create the appearance of a non-receipt of income which actually he received and intended to receive. It is inconceivable to me that petitioner believed honestly that the Innisfail Corporation was ever the owner of income he received continuously and sought to cover up by a series of sham transactions. Petitioner has not denied that he was responsible for and fully acquainted with all that was represented. As stated in United States v. Murdoch, 290 U. S. 389:
Willfully, when used in a criminal statute, generally means an act done with a bad purpose; without justifiable excuse. The word is also employed to characterize a thing done without ground for believing it is lawful or conduct marked by a careless disregard whether or not one has the right so to act.
While a corporation is a taxable person and while an individual may carry on business transactions with a wholly owned corporation, dealing with it at arm’s length, with the motive of reducing tax lia
The process of weighing evidence is a process of understanding the evidence. If, upon due and careful deliberation, the mind of the trier of the case emerges convinced that there was in the mind of the taxpayer a deceitful and fraudulent intent, then the decision must be against the protestations of innocence from the taxpayer. L. Schepp Co., 25 B. T. A. 419.
Petitioner possessed large assets in cash and securities in 1926 and in subsequent years. He could easily have contributed to his wholly owned corporation working capital; he could easily have permitted Innisfail to own and control its assets, receive income therefrom, and carry on a corporate business in the true sense. He could have done with exactness and fidelity all the things which he now protests he did but, which the facts show, were not done, i. e., convey to Innis-fail title to stocks and lend to and borrow from his corporation. Very easily, he could have done all the above; directed dividends to be paid into the Innisfail bank account; made real transfers of title.
Petitioner’s tax evasion scheme reaches the enormity of his having achieved escape from taxation upon over $405,000 of income derived from dividends on domestic stocks during the period from 1926 through 1931.
The holding should be that the returns filed in the taxable years were false and fraudulent, with intent to evade taxation. Cf. Robert Wilson Carter, 36 B. T. A. 598; M. Rea Gano, 19 B. T. A. 518; Charles E. Mitchell, supra.
