Goodman v. Commissioner

Charles Goodman et al. 1 v. Commissioner.

Goodman v. Commissioner

Docket Nos. 103137, 104869-104871, 110224-110227, 110246, 1837, 4976, 5294-5296, 5809, 5810, 6002, 6021.

United States Tax Court

1946 Tax Ct. Memo LEXIS 11 ; 5 T.C.M. (CCH) 1126 ; T.C.M. (RIA) 46300 ;

December 18, 1946

L. L. Hamby, Esq., Transportation Bldg., Washington, D.C., for the petitioners. Conway N. Kitchen, Esq., for the respondent. *14

DISNEY

Memorandum Findings of Fact and Opinion

DISNEY , Judge: These proceedings were consolidated for hearing and involve the following deficiencies and penalties, the amounts of the deficiencies being in income taxes unless otherwise indicated: Gradwik, Inc. of Delaware

Year Docket Tax Deficiency 50% penalty 25% penalty

1934 103137 Income tax $2,442.38

1934 103137 Excess profits 263.14

1934 103137 Surtax 749.99 $ 187.50

1935 103137 Income tax 8,204.10 $4,102.05

1935 103137 Excess profits 2,292.91 1,146.46

1935 103137 Surtax 6,824.12 3,412.06 1,706.03

Charles Goodman

1929 104869 $ 25,155.64 $ 12,577.82

1930 104869 8,684.85 4,342.43

1931 104869 11,481.34 6,305.18

1935 104869 28,565.03 14,282.52

1936 104869 28,918.46 14,459.23

1937 104869 8,570.98 4,285.49

1938 6021 16,215.42 8,107.71

1939 1837 89,027.11 44,513.56

1940 4976 4,536.76 2,268.38

1941 6002 8,791.45 4,395.73

$229,947.04 $115,538.05

Mideastern Contracting Corporation

1938 5294 Income tax $ 7,790.98 $ 3,895.49 $ 1,947.75

1938 5294 Excess profits 6,361.03 3,180.52 1,590.26

1939 5294 Income tax 76,956.00 38,478.00 19,239.00

1939 5294 Declared value excess profits

tax 63,600.00 31,800.00 15,900.00

*15 James E. Gibbons

Year Docket Deficiency 60% penalty

1938 5295 $ 1,637.59 $ 818.80

1939 5809 77,941.25 41,133.29

$79,578.84 $41,952.09

William Heyman and Lydia Vogel Heyman

Year Docket Deficiency 50% penalty

1938 5296 $ 48.00 $ 24.00

Lydia Vogel Heyman

1939 5810 $68,255.47 $38,497.44

Year Docket Deficiency 5% penalty

Sylvia Goodman 1938 110224 $ 51.14

Robert and Carolyn Goodman 1938 110225 108.38

William Goodman 1939 110226 99.37

Annette Goodman 1938 110227 99.37

Doris G. Jacoby 1938 110246 99.37

Builo Corporation 1936 104870 672.39 $33.62

Winhill Corporation 1937 104871

Income tax $3,839.15

Excess profits tax 2,141.51

$5,980.66

Many issues were raised by the petitions, some of which were conceded or abandoned at the hearing. The questions so disposed of at the hearing, as well as admissions of the parties upon brief, will be reflected in the recomputations to be filed under Rule 50.

The questions still at issue will be indicated in the captions for findings of fact or in the opinions. There are some common issues *16 in the proceedings and part of the evidence relates to more than one petitioner. With the exception of the case of the Mideastern Contracting Corporation, findings of fact will be made for each year, followed by opinions on the issues raised for that year. In some instances the facts so found will be applicable to, or include facts for other years. All of the facts, notwithstanding the segregation made for convenience in disposing of the proceedings, constitute findings of fact on all issues involved herein to the extent material. Because of the large number of cases, years and issues involved, for the sake of clarity certain general findings of fact are made, having to do with the parties and corporations involved and their general relation to each other. More detailed findings are set forth in connection with the opinion on each year, party, or issue, as the case may be.

General Findings of Fact

1. These cases involve, in general, three families, together with corporations with which the families, or some of them, or some members of them, were connected, as follows:

2. The members of the three families involved are:

Goodman:

Charles (hereinafter sometimes referred to as *17 Goodman)

Rose, his wife (died May 1934)

Sylvia, second wife (married November 1934)

Sons: Robert, born August 1914; William, born December 1926

Daughters: Annette, born January 1924; Doris, born October 1919

Heyman:

William

Lydia Vogel, his wife

Son: Samuel, born March 1, 1928

Gibbons:

James E. (hereinafter sometimes called Gibbons)

Catherine, his wife

Sons: James E., III, Eugene, Raymond, all of age in July 1939

3. The corporations involved, and their general relation to various members of the above families, are:

Heyman & Goodman Co. of New Jersey. The stock of the corporation was owned equally by Charles Goodman and William Heyman, business associates from 1916 until about 1940.

Winhill Corporation. One-half of the corporation's stock was owned by Goodman and members of his family.

Builo Corporation. The stock was owned by Goodman family, Goodman one-sixth, and was not in the family account.

Mideastern Contracting Corporation. The stock was owned by Goodman, Gibbons and Lydia V. Heyman, each one-third. William Heyman was never a stockholder of the corporation. Goodman's shares were in the family account.

Gradwik, Inc. of Delaware, a personal holding *18 corporation. Goodman owned five-sixths of its stock and his second wife, Sylvia, one-sixth. It was organized in 1933 and dissolved December 1936.

Goldberger-Raabin Co., Inc. Goodman owned 500 shares of the corporation's stock, and included them in the family account.

Hart & Early Co., Inc. Goodman owned 530 shares of the corporation's stock. The stock was carried in the family account.

Airhill Corporation. The corporation's stock was owned by the Goodman family in and after 1940. Goodman made loans to it out of family account.

Gradwik, Inc. of New York. The corporation held title to the summer home of the Goodman family on Tupper Lake, New York. The capital stock of the corporation was in the family account on September 30, 1939, when the corporation was dissolved.

Docket No. 104869 - Charles Goodman - Year 1929

Findings of Fact

Issue A. - Loss of $15,000 on sale of stock of Bankers Securities Corporation

4. Charles Goodman, the petitioner, is an individual residing at 300 Central Park West, New York, New York. His income tax returns for the years 1929, 1930, 1931, 1935, 1936, and 1937, were filed with the collector for the third district of New York, and for 1938, *19 1939, 1940, and 1941, with the collector for the second district of New York. Joint returns of husband and wife were filed by petitioner and his wife Rose for 1929 and 1931, and individual returns by the petitioner for the other years.

5. On April 26, 1928, the Bankers Securities Corporation, Philadelphia, Pennsylvania, issued to petitioner a preferred stock allotment warrant for 1,000 shares at the price of $60 a share, payable in four equal installments. The petitioner paid the purchase price and on September 25, 1928, was issued stock certificate No. P-693 for 1,000 shares of the stock. The certificate was surrendered on October 21, 1930, for transfer. The stock certificate contains one assignment dated November 15, 1930, and to the Heyman & Goodman Co. of New Jersey, a corporation whose outstanding stock was owned in equal amounts by petitioner and William Heyman, one of the petitioners in these proceedings, and a business associate of petitioner from 1916 until between 1938 and 1940. The certificate bears a cancellation date of November 22, 1930.

6. On December 3, 1928, the Bankers Securities Corporation issued a preferred stock allotment warrant to petitioner for the purchase *20 of 1,000 shares of stock at the price of $60 a share. The petitioner paid the purchase price and on January 21, 1929, stock certificate No. S-2 was issued to him for 1,000 shares of the stock. The certificate was surrendered on October 21, 1930, for transfer. The stock certificate was assigned by petitioner under the date of November 15, 1930, to the Heyman & Goodman Co. of New Jersey. It bears a cancellation date of November 22, 1930.

7. On April 29, 1929, the Bankers Securities Corporation issued to petitioner stock certificates Nos. T-2012, T-2013, T-2014, T-2015, and T-2016, each for 50 shares of its preferred stock. Each of the stock certificates was assigned by petitioner under date of September 30, 1930, to Rose Goodman, his wife, and were surrendered for transfer on that date. They contain no other assignments. On October 15, 1930, the Bankers Securities Corporation paid a dividend of $187.50 to Rose Goodman as the registered owner of 250 shares of its stock on September 30, 1930.

8. At some undisclosed time prior to January 15, 1929, petitioner transferred stock certificate No. P-693 for 1,000 shares to Heyman & Goodman Co. of New Jersey by voucher transfer certificate *21 for $60 a share. A like transfer for the same price was made of certificate No. S-2 for 1,000 shares at some undisclosed time prior to April 15, 1929. In October 1929, petitioner reacquired 1,500 shares of the stock from Heyman & Goodman Co. of New Jersey for $60 a share.

9. On September 26, 1928, and January 21, 1929, William Heyman acquired 2,000 shares of preferred stock of the Bankers Securities Corporation represented by certificates Nos. P-817 and S-1, each for 1,000 shares. Certificate No. P-817 contains an assignment under date of November 15, 1930, transferring 500 shares to the Heyman & Goodman Co. of New Jersey, and a like number to the Goldberger-Raabin Co., Inc. Certificate No. S-1 contains an assignment under the same date transferring the shares to the Goldberger-Raabin Co., Inc.

10. The Mideastern Contracting Corporation, the petitioner in docket No. 5294, was organized in 1927 by petitioner, William Heyman, and James E. Gibbons, the petitioner in docket No. 5809, to engage in the contracting business.

11. In 1929 petitioner and William Heyman desired to borrow $150,000 from the Mideastern Contracting Corporation to finance the construction of an apartment by *22 the Eldorado Towers Corporation, a subsidiary of Heyman & Goodman Co. of New Jersey, and offered to deposit stock of the Bankers Securities Corporation as collateral. James E. Gibbons insisted that it would be necessary for the Mideastern Contracting Corporation to purchase the stock so that it could sell the securities in the event it needed the money. On October 28, 1929, and November 4, 1929, the Mideastern Contracting Corporation issued its checks in favor of William Heyman for $70,000 and $80,000, respectively, in payment of 3,000 shares of preferred stock of the Bankers Securities Corporation owned by Charles Goodman and William Heyman, and purchased by Mideastern. The check for $80,000 was signed by James E. Gibbons as "President-V. Pres." and by William Heyman as "Secty-Treas." The checks were deposited in a bank to the credit of the Eldorado Towers Corporation. Petitioner was given credit for one-half of the check for $70,000 in a notation on the stub of the check books of the Eldorado Towers Corporation. The stock was transferred by a voucher transfer certificate, a form of transfer frequently used when the purchaser does not intend to hold the securities for a great length *23 of time. The stock was used on about February 20, 1930, by the Mideastern Contracting Corp. to pay for stock of Goldberger-Raabin Co. At the same time Goldberger-Raabin acquired 1,000 shares of the stock from Heyman & Goodman Co. of New Jersey.

12. The Bankers Securities Corporation acted as its own transfer agent. Its stockholders' ledger indicates that Charles Goodman was the owner of stock certificates Nos. T-2012 to T-2016, inclusive, and stock certificates Nos. P-693 and S-2, until September 30, 1930, and October 21, 1930, respectively, when the certificates were surrendered.

13. In his return for 1929 the petitioner claimed a loss of $15,000 on the sale of 1,500 shares of stock of the Bankers Securities Corporation on October 15, 1929. In his determination of the deficiency the respondent disallowed the deduction upon the ground that the petitioner had failed to submit evidence that the sale was actually consummated in 1929.

Issue B. - Dividends of $7,250 paid on Bankers Securities Corporation stock

14. During 1929 the Bankers Securities Corporation paid by its checks the following dividends to Charles Goodman on the preferred stock outstanding in his name: January 15 $ 750 1

April 15 2,000 2

July 15 2,250 1

October 15 2,250 3

*24

15. The Heyman & Goodman Co. of New Jersey charged petitioner with the dividends of January 15, and April 15, and the dividends on 2,000 shares of the 2,250 shares on which the dividends of July 15, and October 15, were paid.

16. The dividends referred to in finding No. 14 were not reported in the joint income tax return filed by the petitioner for himself and his wife for 1929. Issue C. - Gain of $43,081 on sale of stock and warrants of Midwest Utilities Corporation

17. On August 14, 1929, the petitioner purchased through Boody, McLellan & Co., stockbrokers, 200 shares of 6 per cent preferred stock of Midwest Utilities Corporation at a cost of $30,050 and on October 15, 1929, received 200 rights on preferred stock and 200 rights on common stock. On October 21, 1929, petitioner sold the 200 rights on common for $10,264, and on November 21, 1929, the *25 200 shares of preferred stock were redeemed for $22,100. On November 14, 1929, the 200 rights on preferred stock were delivered out of the account. On December 10, 1929, the broker received into the account, 100 class A and 100 class B warrants, and 100 shares of preferred stock of the Midwest Utilities Corporation. All of each class of warrants was sold on December 10, 1929, for $393, a total of $786, and all of the preferred stock was sold on December 12, 1929, for $9,931. The gain realized by the petitioner on the sales was $13,031.

18. In his determination of the deficiency the respondent included the selling price of $43,081 of the securities referred to in finding No. 17 in petitioner's income as ordinary gain without any deduction for basis upon the ground that cost had not been shown.

Issue D. - Gain of $16,637.40 on sale of stock of Cities Service Corporation

19. On August 1, 1927, petitioner acquired under his account with Boody, McLellan & Co. 100 shares of stock of the Cities Service Corporation at a cost of $4,552.50. Stock dividends increased the number of shares to 524. On May 6, 1929, Boody, McLellan & Co. sold the stock and 16 additional shares for $16,637.40 *26 and credited the proceeds to the account of Rose Goodman. Thereafter in May 1929 the broker purchased 16 shares of the stock on account of the shortage in the sale and charged the cost of $103.03 to Rose Goodman's account.

20. At times the petitioner's wife held securities in her name. With a few exceptions such securities were held for petitioner as his agent or nominee. Securities outstanding in the name of and owned by Rose Goodman were reported in income tax returns whenever necessary to reflect her income.

21. The petitioner and Rose Goodman were married in 1912. She died on May 1, 1934. In a petition executed on May 23, 1934, applying to the Surrogate's Court of the County of New York for the issuance to him of letters of administration on his wife's estate, the petitioner alleged that the value of the personal property of which Rose Goodman died possessed did not exceed $250. On June 24, 1937, pursuant to a petition filed by petitioner, as administrator, on June 23, 1937, the court amended the record in the proceedings to show that the value of such property at the death of the decedent was $1,250. The administrator never filed an estate tax return for the decedent.

22. *27 The sale of stock related in findings of fact No. 19 was not reported in the joint return filed by petitioner and his wife for 1929. In determining the deficiency the respondent included the entire selling price of $16,637.40 in income as ordinary gain upon the ground that the petitioner had failed to prove the cost of the securities.

Issue E. - Gain of $30,304.28 on sale of bonds of Buenos Aires

23. In February 1927 the petitioner purchased $3,000 of bonds of Buenos Aires for $2,970 and sold them in March 1929 for $3,178.37. During February 1927 he purchased $2,000 of the same bonds for $1,980 and sold them in April 1929 for $2,138.91. In May 1927 petitioner purchased $24,000 of the same bonds for $24,149.88 and sold them in June 1929 for $24,987. The purchases and sales were made through Boody, McLellan & Co. and were entered in the account of petitioner with the broker.

24. The sales of bonds set forth in findings of fact No. 23 were not reported in the joint income tax return filed by petitioner and his wife for 1929. In determining the deficiency the respondent included all of the proceeds of sale, amounting to $30,304.28, in petitioner's income as ordinary gain, upon *28 the ground that the petitioner had not shown the cost of the bonds.

Issue F. - Statute of Limitations and Fraud

25. The joint return of petitioner and his wife for 1929 was filed on March 13, 1930. The notice of deficiency to petitioner for the years 1929, 1930, 1931, 1935, 1936, and 1937, was mailed on June 28, 1940. The joint return for the year 1929 showed income from "Salaries, Wages, Commissions, etc.," of $150,000, and from Rents and Royalties from Domestic Corporations of $2,134, less $32,500 loss on stocks, and less $17,500 "Income from Partnerships" - deducted, though not indicated as loss, making a "Total Income" of $102,134. The $32,500 consists of $15,000 loss on 1,500 shares of Bankers Securities Corporation and $17,500 loss on 500 shares of U.S. Rubber Co. The sale of U.S. Rubber Co. stock is indicated as through Boody, McLellan & Co. No other explanation is contained in the return and the return shows no profits from sale of securities or other transactions in securities.

26. The joint income tax return filed by the petitioner for 1929 was false and fraudulent with intent to evade tax, and a part of the deficiency was due to fraud with intent to evade tax.

*29 Opinion

Statute of Limitations and Fraud

The petitioner alleges that assessment and collection of the deficiency determined against him for 1929 are barred by the statute of limitations. The joint return of petitioner and his wife for 1929 was filed on March 13, 1930, and as the notice of deficiency was not mailed until June 28, 1940, a date after the expiration of the period of two years allowed by section 275(a) of the Revenue Act of 1928 for assessment and collection, the notice of deficiency was not timely unless one of the exceptions in section 276 applies. The respondent asserted a fraud penalty and alleged in his answer and amendment thereto that the petitioner filed a fraudulent return with intent to evade tax. If such a fraudulent return was filed, assessment may be made at any time. Section 276(a), Revenue Act of 1928. Under the circumstances the fraud question will therefore be considered first.

The contentions of respondent, upon brief, are, in general, that petitioner sustained no loss upon a scale of stock of the Bankers Securities Corporation, as claimed in his return, and that he failed to report dividends of $7,250 on such stock, and gain on the sale of stock *30 of the Cities Service Corporation, and bonds of Buenos Aires. He has abandoned his claim of fraud in connection with omission in the return of gain on the sale of stock and warrants of the Midwest Utilities Corporation.

The statute places upon the respondent the burden of proving fraud. Section 601, Revenue Act of 1928. His proof must be by clear and convincing evidence, a mere preponderance not being sufficient. George L. Rickard, 15 B.T.A. 316 ; M. Rea Gano, 19 B.T.A. 518 (533); The National City Bank of New York, Executor, 35 B.T.A. 975 (988); affd., 98 Fed. (2d) 93 .

Falsity or fraud, with intent to evade tax, need not be proven as to the entire return, and if part thereof is found false or fraudulent, with intent to evade tax, the statute of limitations will not apply. Lorraine Corporation, 33 B.T.A. 1158 .

After detailed examination of the petitioner's return, and the facts above set forth as to 1929 income, we have come to the conclusion that the respondent has shown clearly and convincingly, though only as to a portion of the matters covered by the return that there was false and fraudulent filing, with intent *31 to evade tax for the year 1929. Petitioner's return is simple. The income consists of $150,000, "Salaries, Wages, Commissions, etc.," from Heyman & Goodman Co., and $2,134 Rents and Royalties from Domestic Corporations, with deduction of $17,500 ("Income from Partnerships" - not indicated as loss, but apparently so considered, since it is deducted) and deduction of $32,500, explained as loss on 1,500 shares of Bankers Securities Corporation and 500 shares of U.S. Rubber Co. This leaves a "Total Income" of $102,134. The only explanation is with reference to the Bankers Securities Corporation and U.S. Rubber Co. stock. It thus appears that the petitioner claims a loss of $32,500 on two transactions in stock. He had, however, as shown by the facts above, eight other stock transactions throughout the year, three with reference to the Buenos Aires stock, one as to Cities Service Corporation, one purchase of Midwest Utilities Corporation, and three sales of Midwest Utilities. As seen above, the respondent does not rely upon the failure to report profits from the Midwest Utilities sales as proof of fraud, and we will not do so. Yet, we can not overlook the fact that, as shown by the petitioner's *32 return, he had very few stock transactions in 1929, and out of ten (if we include those in Midwest Utilities) reported only two, as losses, omitting to report the profits in the others, which amount to $1,204.40 as to the Buenos Aires transactions and $11,981.87 as to the Cities Service stock, a total of $13,186.27. We note that the Cities Service stock, the Buenos Aires bonds and the U.S. Rubber Co. stock were handled through Boody, McLellan & Co., as was the purchase of the Midwest Utilities stock. We note also that the total sales of securities during the year (aside from those of Bankers Securities Corporation and U.S. Rubber Co., totaling $100,000) were $90,022.68. We think it clear that a person does not honestly omit from earnings $13,186.27 and report only his two losses, when he has had at most only ten transactions in securities and four of them have been productive of gain. Mere proof of oversight is, of course, not proof of fraud, but we can not but hold that fraud and intent to evade tax clearly appears where out of not more than ten transactions in stocks only two are reported, showing losses, and four, showing gains of $13,186.27 are omitted. The result would not be *33 different even if the Cities Service stock was not considered.

We therefore find it unnecessary to consider whether there was, as respondent charges, fraud in the sale of the stock of Bankers Securities Corporation. We hold that the statute of limitations has not run as to the year 1929. It follows, from the facts above found, that the petitioner is taxable upon the profit from the sales made, including those of the stock and warrants of Midwest Utilities Corporation.

Issues C, D, and E. - Profits

The parties are in agreement that the profit from sale of Cities Service Corporation stock is $11,981.87 and that the gain on Buenos Aires bonds was $1,204.40. We so hold. In the determination of the deficiency against Charles Goodman, the Commissioner included in his income the gain from sale of the Cities Service stock. The burden is upon the petitioner to show otherwise. The evidence is not sufficient to overcome the presumption. The parties agree that the selling price of the Midwest Utilities Corporation securities was $43,081. The respondent contends that the petitioner has not discharged his burden of proving cost and asks us to sustain his action in including such amount in *34 income as gain. The petitioner contends that he has shown a cost of $30,050, the amount paid on August 14, 1929, for 200 shares of 6 per cent preferred stock, plus $10,000 paid in connection with the acquisition of the warrants, and preferred stock sold on December 12. We have found a cost of $30,050 for the 200 shares of preferred stock acquired through the broker on August 14. There is indication, but no convincing proof, that the rights were acquired in the purchase. The account of petitioner with the broker shows a deposit of $10,000 on November 27, 1929, but there is no proof that the $10,000 as alleged by the petitioner, together with the 200 preferred rights, was used to purchase the warrants and new preferred stock, and so forms a part of the cost basis, as contended by petitioner. Accordingly, there is no proof of cost in excess of $30,050, and we hold that petitioner's gain on the sales was $13,031.

Issues A and B. - Loss on Bankers Securities Corporation Stock and Dividends

Although the respondent strenuously contends to the contrary, we have found that there was a sale of the 1,500 shares of stock of the Bankers Securities Corporation by the petitioner to Mideastern *35 Contracting Corporation for $75,000, or $15,000 less than the petitioner's cost basis, and therefore that there was deductible loss. The evidence from which we made the finding includes testimony of petitioner, William Heyman and James E. Gibbons on the transaction. The respondent requests us to disregard their testimony as "too fantastic for belief."

It was not unbelievable or unreasonable for Gibbons, as an officer of the Mideastern Contracting Corporation, to require the sale of the stock to the corporation, rather than to make the loan desired by petitioner and Heyman with the stock as security. Gibbons was not a stockholder of the Eldorado Towers Corporation and no contention is made that he had no financial interest in Mideastern or that the sales price was below the prevailing market for the stock. It is true that the certificates for the stock were not assigned to Mideastern, but we can not, under the evidence before us, hold that the method used was not sufficient to pass title as between the parties. The purchase price was paid and the money reached the treasury of the Eldorado Towers Corporation, its ultimate destination. The documentary evidence shows that the Eldorado *36 Towers Corporation recognized by a notation on a stub of its check book that $35,000 of the amount came from petitioner. Thus there is some documentary evidence in the record to corroborate the testimony of the three individuals. Proof by petitioner of a sale to Mideastern was sufficient to overcome the showing of respondent that the books of the Bankers Securities Corporation showed petitioner to be the owner of the stock throughout 1929. No evidence controverts the showing of a custom of using voucher certificates as indicia of title. The failure of petitioner to produce books of Mideastern to corroborate the testimony of petitioner, Heyman, and Gibbons, is explained none too well, it is true, by inability to locate them. If its books were secreted or destroyed, it is not shown. A mere showing that the books can not be located is not enough to support a finding that they do not reflect the sale.

The argument of respondent with respect to the dividends paid on the stock of the Bankers Securities Corporation is that petitioner was the owner thereof throughout 1929. The proof is that the stock was owned by the Heyman & Goodman Co. of New Jersey on the dividend payment dates and that *37 the deposit of the checks by petitioner to his or his wife's credit was compensated by a charge to petitioner on the books of the owner, thus leaving petitioner without income to report.

No objection was made by respondent to testimony of petitioner that the dividend payments were charged to him on the books of the Heyman & Goodman Co. of New Jersey.

On all of the evidence, with reference to the Bankers Securities Corporation stock and the dividends therefrom, it is our opinion that the petitioner has met his burden of showing that the stock was sold, and that the dividends therefrom were paid, though indirectly, to the vendee.

Docket No. 104869 - Charles Goodman - Year 1930

Findings of Fact

Issue A. - Loss of $15,400 on Sale of 700 Shares of Stock of Commonwealth Casualty Co.

27. On July 27, 1929, petitioner purchased from Hart & Early Co., Inc., at a cost of $18,900, 700 shares of stock of Commonwealth Casualty Co. On July 30, 1929, the shares were received on the account of petitioner with Boody, McLellan & Co. The account was long, i.e., the stock was being carried in the account for petitioner, with respect to the same stock, until December 5, 1931. On December 27, 1930, petitioner *38 sold the stock to William Goldsmith for $3,500, the purchaser making payment by a note for $11,500, which amount included the selling price of $8,000 for 500 shares of stock of B. F. Goodrich Rubber Co. The note was paid on April 3, 1931.

28. In his individual income tax return filed for 1930 on June 15, 1931, the petitioner claimed a loss deduction of $15,400 on account of the sale. In his determination of the deficiency the respondent disallowed the deduction upon the ground that the sale was not bona fide.

Issue B. - Loss of $14,437.50 on Sale of 500 Shares of Stock of B. F. Goodrich Rubber Co.

29. On December 4, 1929, the petitioner purchased 500 shares of stock of B. F. Goodrich Rubber Co. through Boody, McLellan & Co. for $22,512.50. The stock was long in the account of petitioner with the broker throughout 1930. On February 5, 1931, the shares were delivered out of the broker's account and new certificates were issued in the name of petitioner. The new certificates were received by the broker and delivered to petitioner on February 6, 1931. The petitioner sold the stock on December 27, 1930, to William Goldsmith for $8,000. The note for $11,500 received in payment for *39 the stock and 700 shares of stock of Commonwealth Casualty Co. was paid on April 3, 1931.

30. In his individual income tax return for 1930, the petitioner claimed a loss of $14,437.50 on account of the sale of 500 shares of stock of B. F. Goodrich Rubber Co., based upon cost of $22,437.50 and a selling price of $8,000. In his determination of the deficiency, the respondent disallowed the deduction upon the ground that the sale was not bona fide.

Issue C. - Income of Rose Goodman - $8,108.64

31. The separate income tax return filed by Rose Goodman for 1930 reported net income of $6,858.64. The gross income of $9,128.44 reported in the return consisted of interest on bank deposits and bonds in the amount of $2,082.50, dividends totaling $1,375 and $5,670.94 from a building and loan association. The respondent disallowed a deduction of $1,250 and included the corrected net income of $8,108.64 in the income of petitioner upon the ground that the income represented his property.

Issue D. - Dividends of $7,125 on Stock of Bankers Securities Corp.

32. During 1930 the Bankers Securities Corporation paid the following dividends, totaling $7,125, to petitioner on stock outstanding *40 in his name on its books:

1. January 15, 1930, $2,250, at the rate of $1 a share to stockholders of record on December 30, 1929. The check was endorsed by petitioner for credit to his bank account. Of the dividend paid $1,500 was paid to the Mideastern Contracting Corporation by a charge on its books to petitioner.

2. April 15, 1930, $1,687.50, at the rate of 75 cents a share on 2,250 shares, to stockholders of record March 31, 1930. The check was endorsed by petitioner for deposit with Boody, McLellan & Co. Of the amount of the dividend, the net amount of $1,500 was paid to Goldberger-Raabin Co. by a charge on its books to petitioner.

3. July 15, 1930, $1,687.50, at the rate of 75 cents a share on 2,250 shares, to stockholders of record June 30, 1930. The check was endorsed as follows:

Charles Goodman, by W. H. William Heyman Goldberger-Raabin Co. Inc.

At that time petitioner was in Europe and William Heyman had a power of attorney from petitioner to endorse the check. Of the amount of the dividend, the net amount of $1,500 was paid to Goldberger-Raabin Co. by a charge on its books to petitioner.

4. October 15, 1930, $1,500, at the rate of 75 cents a share on 2,000 shares, *41 to stockholders of record September 30, 1930. The check was endorsed by petitioner to Goldberger-Raabin Co.

33. In his return for 1930 the petitioner reported dividends of $17,246.63 on stock of domestic corporations. The amount did not include the dividends of $7,125 referred to in finding No. 32.

Issue E. - Loss of $20,000 on Sale of 2,000 Shares of Stock of Union Building Co.

34. On November 12, 1928, petitioner acquired 2,000 shares of stock of the Union Building Co. at a cost of $30,000. The petitioner sold the stock on October 1, 1930, to his wife for $10,000, such amount being the market price for the stock on that date.

35. In his return for 1930, the petitioner claimed a loss of $20,000 sustained on the sale described in finding No. 34. In his determination of the deficiency the respondent disallowed the loss upon the ground that it was not incurred in a bona fide sale.

Statute of Limitations

Opinion

For the year 1930, as for 1929, the respondent asserted a fraud penalty and depends upon sustaining his burden of proof in that regard to support the timeliness of his notice of deficiency. He contends that petitioner fraudulently claimed losses in the stock sales *42 involved in issues A and B, and omitted from his return the income involved in issues C and D, in each case with intent to evade tax. He makes no contention, upon brief, that there was fraud in connection with the loss of $20,000 alleged to have been sustained in the sale of stock of the Union Building Co.

The sales of stock of Commonwealth Casualty Co. and B. F. Goodrich Rubber Co., involved in issues A and B, were made in one transaction and will be considered together. The respondent contends that the stock was not sold in 1930 and that the absence of sales to support the claims made by petitioner in his return for losses in conclusively established by the proof he made from the books of Boody, McLellan & Co. that the stock was long in the brokerage account of petitioner with the broker throughout 1930 and was not delivered out of the account for transfer until 1931. We have from testimony of petitioner that he sold the stock to William Goldsmith on December 27, 1930, for $11,500, and that in payment, he received the purchaser's note, which was paid in full on April 3, 1931. The petitioner supported his testimony by introducing a bank statement showing a deposit entry on April 3, 1931, in *43 his account of the amount of $11,500 paid by the maker of the note. The respondent asks us to disregard petitioner's testimony for lack of corroboration.

It does not appear unusual for stock not to be delivered at the time of its sale, especially in transactions in which a note is given for the purchase price, and the mere fact that stock is long in a brokerage account does not prove that the stock was not sold prior to its delivery out of the account for transfer. The petitioner's testimony is supported by the bank statement and his investment book, kept by his bookkeeper. The respondent says that petitioner's failure to produce William Goldsmith as a witness leads to the conclusion that the buyer would not have corroborated petitioner's testimony respecting the sales. The assertion is based upon the theory that Goldsmith was available as a witness. The record does not show that William Goldsmith could have been produced by petitioner as a witness and respondent does not directly allege that he was available. The inference we are asked to make without a foundation is no substitute for the proof required of respondent under the circumstances. The petitioner furnished some corroborative *44 evidence for his testimony and it was the duty of respondent, not the petitioner's, to overcome it. It is true that, with reference to Gradwik's income for 1935, below considered, we hold as fraudulent a purported sale to William Goldsmith, though holding otherwise here as to a sale to him. But, though matters in other years may be corroborative of fraud, each year should be considered separately, and proof of fraud for one year will not sustain the respondent's burden of proving fraud in another Charles J. Delone, 34 B.T.A. 1139 ; reversed on other grounds, 100 Fed. (2d) 507 ; Thomas J. McLaughlin, 29 B.T.A. 247 , 249 . We think such burden was not met, as to 1930, and as to this issue.

Next, respondent contends that petitioner's failure to include in his return the net income of $6,858.64 (increased to $8,108.64 in determining the deficiency involved herein) reported by his wife, was fraudulent with intent to evade tax. He relies chiefly upon testimony of petitioner before the Special Intelligence Unit of the Bureau of Internal Revenue on November 21, and 22, 1939, which testimony he contends establishes that Rose Goodman was at all times the *45 nominee of petitioner. The respondent requested such a finding of fact in connection with this issue, and also as part of our findings of fact in issue D in 1929. In disposing of the issue of fraud in 1929, we did not find it necessary to discuss the matter. The point requires comment here in view of the position taken by the respondent.

The petitioner testified under oath before the Special Intelligence Unit that:

It [Gradwik, Inc., of Delaware, a corporation] bought its securities [at the time of its organization in 1933] from myself, I suppose from Charles Goodman, or from Charles Goodman's agent, Rose Goodman. [Words in brackets supplied.]

In response to the next question as to whom he meant by "Rose Goodman, your agent," petitioner testified that:

Rose Goodman was my wife and I used her in many transactions, to hold securities in her name, and with few exceptions, most of them were, of course, my securities. * * * I used her to put my securities in her name at times.

As to whether the securities purchased by Gradwik, Inc., of Delaware, at the time of its organization "were in reality your own property," petitioner testified:

They were. There may be one or two *46 exceptions that would show on her income tax. For income tax purposes, very often she was the owner of certain things, and where she is stated she was the owner, she really was. When she reported it on her income tax, she was the absolute owner there. There is no doubt about that because I wouldn't let her be in any dubious position.

Concerning the value of securities owned by Rose Goodman "at any certain time," petitioner testified:

No I have no idea. It is I owned it except when she reported in her income tax.

Other pertinent questions and answers during the interview were:

Q. Well then if the record in this book shows that the securities were Rose Goodman's securities, that would be correct then?

A. Well, I testified to you that the securities in Rose Goodman's name was in her name as my agent and they belonged to me. I can't change that, Mr. Nelson; that is correct.

* * *

Q. Had you ever told him [Kilburn Arnold, who did some bookkeeping for petitioner, including the making of entries in a security record or ledger] that she was your nominee?

A. That Rose Goodman -. I wouldn't say we never discussed that particular, but he should have known. I customarily paid *47 for securities and put them in my wife's name. [Words in brackets supplied.]

* * *

Q. In regard to these transactions that he entered in the books as being Rose Goodman's, did you tell him those were Rose Goodman's transactions?

A. Well, he would have to enter them in Rose Goodman's account if I wanted her account kept as my agent that way.

Q. Well, the entries in the records indicate that the securities belonged to Rose Goodman.

A. Not when it is my wife, as I explained to you; my wife, and we were very close, and I used her as nominee in a great many things and it was utterly safe for me to do so.

* * *

Q. Well, Mr. Goodman, you want us to believe that all these transactions reported as Rose Goodman's income on her income tax return were transactions that she owned outright?

A. That's right. Q. And all other transactions were transactions that she consummated as your agent?

A. I don't want you to understand it that way at all. In all transactions she was my agent except for the few where she became the absolute owner as reported on the income tax return. I wanted to be very sure that my wife, Rose Goodman, was never involved in anything dubious.

At the *48 hearing before this Court the petitioner was interrogated with respect to this testimony and his replies were generally that he had no recollection of the questions and answers and, in effect, that Rose Goodman was the owner of the securities concerning which she reported income.

The petitioner argues that we should disregard his testimony before the Special Intelligence Unit upon the ground that it is incomplete.

Counsel appeared for petitioner at the time of his examination by agents of the Special Intelligence Unit. He testified before us that the stenographer present did not take down or transcribe all of petitioner's testimony, or all of his objections and remarks on behalf of petitioner, including a request that the stenographer should take down all statements of petitioner. Petitioner's counsel also was present at interviews on dates later than November 21 and 22, 1939, but he could not recall whether he interposed objections on such dates, his best recollection being that he made objections "during the entire series of examinations." There were some proceedings off of the record. We are not aware of the nature of all of the alleged objections or satisfied from the testimony *49 that the objections, if made, were intended to be part of the record of the proceedings. The stenographer at the interview testified that she took notes of all of petitioner's testimony; that if any objections were made by his counsel, they would appear in her notes and that the transcripts she subsequently made represent accurate transcriptions of her notes. The testimony of petitioner's counsel at the interview fails to establish that his alleged objections had any reference to the point involved here or that they were made during the interviews on November 21 and 22. We think the transcripts, introduced into the record as respondent's Exhibits W-9 and X-9, represent accurate statements of the proceedings had on such dates.

Some of the testimony of petitioner before the Special Intelligence Unit indicates that he at all times used his wife as a nominee or agent. Some of it relates to the situation prevailing in 1933. Consideration of all of the testimony establishes that there were exceptions and that the exceptions are shown by her income tax returns.

Respondent introduced into the record a computation made from available records, particularly the books of Gradwik, Inc., of *50 Delaware, to show that Rose Goodman had a net worth of about $184,000 at the time of her death on May 1, 1934. From this showing, he says that Rose Goodman would have had an estate of such value if she had not been the nominee of petitioner. To support his view he points to the petition filed by petitioner in the Surrogate's Court of New York County for letters of administration on the estate of his wife, asserting a value of only $250 for her estate, and an amendment thereto, increasing the value to $1,250. The point raised may be disposed of without extensive discussion. The date of valuation is more than three years after the taxable year involved herein and during such period many things could have occurred to alter the ownership of property outstanding in her name in 1930. No claim is made that the specific property outstanding in her name at the time of her death was held by her as a nominee of petitioner in 1930. The computation shows that it was not. The most it proves is that on May 1, 1934, Gradwik, Inc., of Delaware, was indebted to Rose Goodman in the amount of about $184,000. This is far from proof that property was held in 1930 as a nominee of petitioner.

The final *51 contention of respondent is that fraud is shown by petitioner's failure to report dividends of $7,125, received on stock of the Bankers Securities Corporation. A similar point was raised with respect to dividends on the same stock in 1929. The facts are similar and we see no reason to reach a different conclusion.

Petitioner acquired 1,000 shares of the stock in 1928 and 1,500 additional shares in blocks of 1,000 and 250, in 1929. He transferred 2,000 shares to Heyman & Goodman Co., of New Jersey, prior to April 15, 1929, and subsequently acquired 1,500 shares from it for transfer to Mideastern in October or November 1929. In February 1930, the Goldberger-Raabin Co. acquired the 1,500 shares of stock held by Mideastern and the 500 shares held by Heyman & Goodman Co. of New Jersey. The 250 shares remaining in petitioner's hands were surrendered for transfer on September 30, 1930, but he continued to be the record owner of 2,000 shares on the books of the Bankers Securities Corporation.

The testimony shows that proper charges were made against petitioner on the books of the owners of the stock for the dividends received by him, except $500 of the dividend check of January 15, 1930, as *52 to which there is no evidence. The mere failure to account for this small amount is not of itself enough to establish fraud. It is obvious that the amount should have been paid to Heyman & Goodman Co. of New Jersey, the owner of 500 shares at that time. Nothing of record shows that it was not so paid by a charge against petitioner on its books or otherwise, or shows, with the necessary cogency, that it was omitted from the income tax report falsely or fraudulently with intent to evade tax.

From all the evidence we conclude that respondent has failed to sustain his burden of proof of fraud in 1930. Accordingly, assessment of the deficiency is barred by the statute of limitations and it is unnecessary to consider the issues raised by the petitioner.

Docket No. 104869 - Charles Goodman - Year 1931

Issue A. - Increase of Interest Income by $3,243.16

Findings of Fact

36. In the joint return of petitioner and his wife for 1931, filed on June 15, 1932, and amended return, filed on March 4, 1933, the petitioner reported income of $14,921.10 from interest. In his determination of the deficiency for 1931, respondent increased the amount of interest reported in the return to $18,164.26.

*53 Opinion

The petitioner admitted at the hearing that some interest collections were overlooked when preparing his return and that the correct amount is $18,164.26, as determined by the respondent. Accordingly, the respondent is sustained on this issue.

Issue B. - Loss of $28,524 Sustained on Sale of 2,050 Shares of Stock of United American Utilities, Inc.

Findings of Fact

37. On September 27, 1929, the petitioner purchased from E. A. Fitkin & Co., stock brokers, 2,000 shares of common stock of United American Utilities, Inc., at a cost of $30,000. A stock dividend of 50 shares was paid on the stock in 1930. On November 5, 1931, petitioner sold the stock to E. A. Fitkin & Co. for $1,455.50. The petitioner repurchased the stock from E. A. Fitkin & Co. on December 4, 1931.

38. On December 15, 1931, B. H. Brunner & Co., a corporation engaged in the over-the-counter security business, purchased from petitioner for its trading account, an account used by the broker for buying and selling securities the same day, 2,050 shares of stock of the United American Utilities, Inc., for $1,640, less $82 stamp tax, or for the net amount of $1,558. Stock certificates Nos. CC-782 to CC-801, *54 inclusive, and CC-0965, for the securities sold, were delivered to the purchaser on December 16, 1931, on which date it sold the stock to James F. Murphy, 1860 Broadway, New York City, for $1,768.13, which amount included a selling commission of $128.13.

39. B. H. Brunner & Co. had never purchased any other shares of stock of the United American Utilities, Inc., and would not have purchased the 2,050 shares from petitioner, if it had not had a buyer to purchase the stock from it. At times the seller of stock to B. H. Brunner & Co. furnished a buyer to purchase the stock from it.

40. James F. Murphy was a contractor. His checking account in the National City Bank of New York shows a deposit of $1,800 on December 15, 1931, a charge of $1,768.13 on December 18, 1931, for a certified check and a charge of $31.87 on December 22, 1931.

41. The checking account of the petitioner with the Chase National Bank of New York shows a charge of $1,800 on December 16, 1931, for a check issued in favor of James F. Murphy, and a deposit on December 21, 1931, of $31.87. The check for $1,800 was issued in favor of J. F. Murphy for the purpose of making the purchase of stock from B. H. Brunner & *55 Co., referred to in finding No. 38, with the understanding that any excess amount would be refunded to petitioner. James F. Murphy made a deposit of $2,500 in his checking account on November 21, 1931, to increase the balance in the account to $2,536.38. The balance in the account from the close of November 28, 1931, to December 3, 1931, was $260.73. From December 1, 1931, until the deposit of the check for $1,800 on December 5, 1931, the balance in the checking account of James F. Murphy was never in excess of $237.90.

42. On March 19, 1934, petitioner was the stockholder of record of 2,050 shares of common stock of United American Utilities, Inc. On March 21, 1934, the petitioner, giving his address as 1860 Broadway, New York City, deposited with the Delaware Trust Company in connection with a plan of reorganization of the United American Utilities, Inc., certificates Nos. CC-782 to CC-801, inclusive, and CC-0965, for a total of 2,050 shares of the latter's common stock, and on April 2, 1934, received in exchange therefor common stock of the Community Gas & Power Co. The certificates of stock of the United American Utilities, Inc., which were surrendered in the plan of reorganization, *56 were destroyed in 1937, pursuant to a court order.

Issue C. - Loss of $7,000 on the Sale of 2,000 Shares of Stock of the Union Building Company

Issue D. - Loss of $2,150 on the Sale of 100 Shares of Preferred Stock of the Mitten Bank Securities Corporation

Issue E. - Loss of $13,250 on the Sale of 250 Shares of Preferred Stock of the Bankers Securities Corporation

Findings of Fact

43. On October 1, 1930, Rose Goodman purchased from her husband 2,000 shares of stock of the Union Building Co. for $10,000. At some undisclosed time she purchased 100 shares of preferred stock of the Mitten Bank Securities Corporation for $2,500. On September 25, 1930, Rose Goodman purchased 250 shares of preferred stock of the Bankers Securities Corporation for $15,000.

44. The books of L. L. Friedman & Co., a stockbroker with offices in Newark, New Jersey, disclose that on November 24, 1931, it purchased these securities from Rose Goodman and sold them to Harry Cooper, 1 Exchange Place, Jersey City, New Jersey, as follows: Prices

Stock Purchase Sale

Union Building Co. $3,000 $3,000

Mitten Bank Securities Corp. 350 350

Bankers Securities Corp. 1,750 1,750

*57 The broker paid Rose Goodman $3,350 for the United Building Co. and Mitten Bank Securities Corporation stock, and received payment for the sales made to Harry Cooper. The broker charged a commission of $70 for the sale of the Union Building Co. stock to Cooper and a commission of $21.88 for the other stocks.

45. The books of L. L. Friedman & Co. disclose that on January 4, 1932, it purchased the stocks from Harry Cooper and sold them to Rose Goodman for the same prices and charged the same commissions. The broker was paid $3,000, plus a commission of $70 by Rose Goodman for the Union Building Co. stock sold to her.

46. L. L. Friedman & Co. merely acted as broker in the transactions. The broker was furnished a buyer for the securities when it purchased them from Rose Goodman and Cooper, as set forth in findings Nos. 44 and 45.

47. Stock certificate No. C-1182, issued on October 1, 1930, to Rose Goodman for 100 shares of stock of the Union Building Co., bears an assignment of November 27, 1931, to the name of Harry Cooper. Stock certificate No. C-1271, issued on December 2, 1931, in the name of Harry Cooper for a like number of shares of the same stock, bears an undated assignment *58 under the signature of Harry Cooper to the name of Rose Goodman.

48. Stock certificate No. P-1428, issued on October 14, 1930, to Rose Goodman for 100 shares of preferred stock of the Mitten Bank Securities Corporation, bears an assignment of November 27, 1931, to the name of Harry Cooper. Stock certificate No. P-1798, issued on December 2, 1931, in the name of Harry Cooper for a like number of shares of the same stock bears an assignment of January 4, 1932, to the name of Rose Goodman.

49. Stock certificates Nos. R-3799, R-3800, and T-3384, issued on September 30, 1930, in the name of Rose Goodman for a total of 250 shares of preferred stock of the Bankers Securities Corporation, bear assignments of November 27, 1931, to Harry Cooper. Stock certificates Nos. R-4213, R-4214, and T-3652, issued on December 3, 1931, in the name of Harry Cooper for a like number of shares of the same stock, bear assignments of January 4, 1932, to the name of Rose Goodman.

50. Harry Cooper has been practicing law in the State of New Jersey as an attorney for about 29 years. In 1931 and 1932 he was engaged in private practice and had his office with Heyman & Heyman, brothers of William Heyman, one *59 of the petitioners in these proceedings, in Jersey City, New Jersey.

51. Harry Cooper never met or saw Rose Goodman. He did not purchase from or sell to L. L. Friedman & Co. any of the stocks referred to in findings Nos. 44 and 45, and has never had a beneficial interest in any stock of such corporations. He has never had any business dealings with L. L. Friedman & Co. and has never purchased any stock of those corporations. Harry Cooper never received any money from or paid any money to L. L. Friedman & Co. or Rose Goodman for the stocks in question.

52. The joint return for 1931 of the petitioner and his wife claimed deductions of $28,524, $7,000, $2,150, and $13,250 for losses sustained on the sale of the securities involved in issues B, C, D, and E, respectively. The respondent disallowed the deductions upon the ground that the sales were not bona fide.

53. The sales of stock as set forth in findings Nos. 38 and 44 were not bona fide.

54. The joint return filed by petitioner and his wife for 1931 was false and fraudulent with intent to evade tax, and part of the deficiency was due to fraud with intent to evade tax.

Opinion

The petitioner alleges that assessment and *60 collection of the deficiency for 1931 are barred by the statute of limitations. As was the case in 1929 and 1930, the notice of deficiency was mailed after the expiration of the statutory period for assessment and collection of the proposed deficiency, and unless, affirmatively pleaded by respondent, the return was false or fraudulent, with intent to evade tax, assessment is barred by the statute of limitations.

The respondent contends upon brief that he has sustained his burden of proving fraud with respect to the stock losses claimed by petitioner in issues B, C, D, and E.

The fraudulent character of the alleged sale involving stock of United American Utilities, Inc., is clearly shown by the evidence. Petitioner concedes upon answering brief that the first transaction conducted through E. A. Fitkin & Co. was a wash sale and did not result in a deductible loss under the provisions of section 118 of the Revenue Act of 1928. That petitioner realized soon after his repurchase of the stock that any loss deduction he might claim under the transaction would be disallowed, is apparent from the steps he took promptly thereafter to sell the same stock in a transaction that would give color *61 to a deductible loss.

The evidence on the alleged sale through B. H. Brunner & Co. establishes that petitioner furnished the buyer and the money with which to make the purchase. The force of the evidence is not weakened by a failure of respondent to show that the stock broker knew that Murphy would be the buyer. Petitioner knew the approximate amount for which the stock could be purchased from B. H. Brunner & Co., including its commission for making the sale, for he gave Murphy a check for $1,800 to make the purchase and the small excess of $31.87 of the amount of the check over the purchase price and commission was promptly refunded to petitioner. Thus petitioner knew that Murphy would be the buyer.

Neither is it in any wise weakened by a failure to show that petitioner did not repurchase the stock from Murphy. The proof is that the certificates deposited with B. H. Brunner & Co. and later on the same day allegedly sold to Murphy, were surrendered by petitioner in 1934 in connection with a reorganization of the United American Utilities, Inc. If such a repurchase was made, it was the burden of petitioner to show it to overcome the inference of the evidence that delivery of the *62 certificates by Murphy to petitioner without consideration was a part of the scheme to obtain a loss without a bona fide sale. Under the circumstances here, we can not presume a repurchase. Transactions of this sort do not occur without a prearranged plan. The object of the plan devised and carried through by petitioner with the assistance of Murphy was to obtain a fictitious loss for income tax deduction purposes. It was deliberately entered into and discloses a purpose of petitioner to evade his just burden of taxation by fraudulent means.

Little discussion is required to show the fraudulent nature of the other transactions relied upon by the respondent to support his assertion of the fraud penalty. The facts disclose a carefully prepared plan to pass the stocks through the office of a broker without a real buyer and with the hope and expectation that the substance of the transactions would be hidden by their outside form. The broker was supplied a buyer at the prices it paid, and was sure of a commission for the part it played, without assuming any risk of loss. The payment it made for the securities was immediately offset by a receipt of the same amount, plus a fee, in the deal *63 put through in the name of Harry Cooper, if, in fact, the payment to it was not made concurrently with its payment to Rose Goodman, the purported seller.

Harry Cooper was selected to lend his name to give the transaction some color of substance for income tax deduction purposes. We need not know with whom he made the arrangement or why he was willing to become a party to the fictitious sales. His character of nothing more than a mere dummy in the transaction is shown beyond question by his testimony, among other things, that he never paid out or received any money in the deals, never owned or had any beneficial interest in stocks of the issuing corporations, never had any business dealings with the broker, and had never seen or met Rose Goodman.

We do not know who paid the broker, but he was paid, and the payer was not Harry Cooper.

The 1931 transactions were only part of the plan. In 1932 the transactions were reversed at the same prices and with no more reality than the 1931 deals. Upon completion, Rose Goodman had the same number of shares of stock and was not out of pocket anything more than the commissions charged by the broker to pass the unreal sales through its books. *64 She had some evidence of a right to deduct an amount for losses sustained in the 1931 transaction to counterbalance the commissions paid to the broker. The evidence proved to be unavailing before the Commissioner and has no greater weight here. The facts before us establish fraudulent sales of the stocks in question with intent to evade taxes, with the result that a part of the deficiency was due to fraud with intent to evade tax.

The petitioner having deducted amounts in the return as losses sustained in the fraudulent sales, the return was false or fraudulent with intent to evade tax, and it follows not only that assessment and collection of the deficiency for 1931 are not barred by the statute of limitations, but that the sales were not bona fide, and respondent did not err in disallowing the loss deductions and imposing the fraud penalty.

Issue F. - Increase of Loss on the Sale of 500 Shares of Stock of B. F. Goodrich Rubber Co. from $4,557.50 to $19,070

55. In their joint return for 1931, petitioner and his wife claimed a loss of $4,557.50 on the sale of 500 shares of common stock of the B. F. Goodrich Rubber Co. for $3,442.50. In his determination of the deficiency, respondent *65 increased the loss to $19,070 by allowing a cost basis of $22,512.50, instead of the basis of $8,000 claimed by petitioner.

Opinion

In his determination of the deficiency against petitioner for 1930 the respondent disallowed a loss deduction of $14,437.50, alleged to have been sustained on the sale of 500 shares of stock of B. F. Goodrich Rubber Co., his ground for his action being that the sale was not bona fide. Our conclusion that assessment and collection of the deficiency for 1930 was barred by the statute of limitations because of the failure of respondent to sustain his burden of proof on the fraud issue, rendered it unnecessary for us to pass upon the loss question for that year. The parties are in agreement that the 500 shares of Goodrich stock are the same as those involved in the alleged sale in 1930 to Goldsmith, paid for by the note paid on April 3, 1931, and that they were reacquired for $8,000 and resold in 1931.

The petitioner contended that the sale in 1930 was bona fide and resulted in a loss of $14,512.50. Consistent with such a position, he alleged as error in 1931 the respondent's action in increasing the loss from $4,557.50 to $19,070 by ignoring the sale *66 in 1930 and using the original cost of $22,512.50 as a basis. In his answer, respondent admitted that if the bona fides of the 1930 sale were shown, then he erred in increasing the loss. Upon brief petitioner admits that the allowance of a loss deduction for $19,070 would not be in accordance with the evidence. Under the circumstances, a loss of $4,557.50 will be allowed in the recomputation to be made under Rule 50.

Issues G and H. - Losses of $5,116.61 and $4,980 on Sales of 505 Units of Stock of the Plaza Investing Corporation and 50 Units of Media Drug Company

Findings of Fact

56. On December 30, 1930, Rose Goodman purchased through B. H. Brunner & Co., at a cost of $6,123.13, 505 units of stock of the Plaza Investing Corporation. The same broker signed a statement bearing the date of November 25, 1931, and addressed to Rose Goodman in which it purported to confirm the purchase from her on that date of 505 units of the stock for $1,010, or $2 per unit, less $3,48 for transfer stamps. On the same day it signed a statement addressed to Kilburn S. Arnold, confirming the sale to him on that date of 1,010 units of the stock at $2-1/8 per unit, or for $2,146.25.

57. On September 26, 1930, Rose *67 Goodman acquired, at a cost of $5,050, 50 units of stock of the Media Drug Co. Adrian H. Muller & Son, security auctioneers (with an office at 81 William Street, New York City) issued a bill bearing the date of December 2, 1931, and containing a statement that it had on that date sold at auction to Kilburn S. Arnold for the amount and risk of Rose Goodman 50 units of stock of the Media Drug Co. for $70.

58. Kilburn S. Arnold was a bookkeeper for Heyman & Goodman Co. of New Jersey, commencing in 1925. From 1928 or 1929 until about 1935, he kept the personal books of petitioner. His net worth in 1931 was $6,000 or $7,000.

59. In the joint return filed by petitioner and his wife for 1931 deductions of $5,116.61 and $4,980 were claimed for losses sustained in sales of the stock involved in these issues. The respondent disallowed the deductions upon the ground that the sales were not bona fide.

60. The sales were not bona fide.

Opinion

The point on which the issues turn is whether the alleged losses were sustained in bona fide sales.

The effect of the contention made by the petitioner in his opening brief is that the disposition of units of Plaza Investing Corporation involved *68 only a sale to the broker at $2 per unit. On the date of the alleged sale, the broker issued a statement purporting to confirm a sale of 1,010 units of the security to Kilburn S. Arnold at $2-1/8 per unit. The argument of petitioner in his reply brief is that the purchaser of the 505 units was Arnold. Aside from the indirect admission of petitioner, the inference from the facts is that the 505 units in question are involved in the alleged sale of 1,010 units by the broker to Arnold. The Media Drug Co. stock involves only one alleged sale and that was to Kilburn S. Arnold through a firm of auctioneers.

The alleged buyer, Kilburn S. Arnold, was called as a witness on behalf of the petitioner and on direct examination was interrogated only concerning transactions with Gradwik, Inc., of Delaware. Upon cross-examination he testified that he had no recollection of using his own funds to buy stocks of the corporations or ever owning any of such stocks. When shown sales memoranda of the broker and the auctioneer for the transactions disclosing him to be the purchaser of the stocks, the witness testified on redirect examination that he recalled purchasing the stocks and that if he purchased *69 them, he used his own funds. Upon recross-examination he testified that his net worth in 1931 was not more than $7,000, which amount he accumulated out of his salary as a bookeeper, bonuses paid to him, Christmas presents and a little outside work, and that he had no recollection of using one-third of his net worth in 1931 to purchase the Plaza Investing Corporation stock.

It is evident that the record does not disclose all of the facts concerning the transactions and no useful purpose would be served by speculating on evidence not furnished us. The equivocal testimony of Kilburn S. Arnold, and categorical testimony of petitioner while consulting the alleged sales slips and an income report prepared by his bookkeeper, the alleged buyer, are not enough to overcome the presumption in favor of the correctness of the respondent's determination that the sales were not bona fide. Accordingly, the issues are decided in favor of the respondent.

Docket No. 103137 - Gradwik, Inc. of Delaware - Year 1934

Issue A. - Fraud and statute of limitations

Issue B. - Deductibility of $3,000 and $2,000 paid to Robert Goodman and Charles Goodman as salary

Findings of Fact

61. Gradwik, Inc. *70 of Delaware, the petitioner, was organized on April 10, 1933, under the laws of Delaware. Its original and amended income and excess profits tax returns for 1934 were filed with the collector for the third district of New York on March 11, 1935, and April 10, 1935, respectively.

62. The petitioner was a personal holding corporation having its principal place of business at 1860 Broadway, New York City.

63. On June 1, 1933, the petitioner issued certificate No. 1 to Charles Goodman for one share of its common stock, and certificates Nos. 2 to 6, inclusive, to Rose Goodman for one share each. The certificates were signed by Rose Goodman as president and Charles Goodman as secretary-treasurer. On the same day Rose Goodman executed an instrument assigning certificates Nos. 2, 3, 4, and 5, to herself, in trust, for the purpose of collecting the income on the stock and accumulating it during the minority of her children, Robert, Annette, Doris and William, for their equal benefit. The instrument further provided for payment of the income and accumulations in equal amounts to the children during the lifetime of her husband and herself for their support, maintenance and education, and *71 that upon the death of herself and her husband the stock should be distributed equally among the children of their survivors and the issue or spouse, if any, of any deceased child. Also that "upon my death I empower my husband Charles to designate a new trustee hereunder, including himself." On January 8, 1934, certificates Nos. 2, 3, 4, 5 and 6, were assigned by Rose Goodman in her individual capacity to Charles Goodman. Certificate No. 11 for one share was issued to Charles Goodman on January 8, 1934, in exchange for certificate No. 6. On November 23, 1934, certificate No. 11 was assigned to Sylvia Goodman, the second wife of Charles Goodman, and on the same date, certificate No. 12 was issued in her favor upon the surrender of certificate No. 11. Certificate No. 12 was signed by Sylvia Goodman as president and Charles Goodman as secretary-treasurer.

64. On May 1, 1934, the date of death of Rose Goodman, Charles Goodman executed an instrument reciting that he was the owner of stock certificates Nos. 2, 3, 4 and 5; that he assigned the certificates to himself, in trust, to collect, accumulate and distribute the income during his lifetime, the same as was provided for in the instrument *72 executed by his wife on June 1, 1933. It provided also for a like distribution of corpus upon his death, when his son could designate a new trustee, including himself. The income tax return filed by petitioner for 1934 lists Charles Goodman, who signed the document as secretary, as the owner of five shares of the corporation's stock.

65. Robert Goodman, son of Charles Goodman, was born August 5, 1914. He was in residence at Cornell University from September 1931 to June 1936 and for the first terms of the 1936-1937 and 1938-1939 sessions. He was on leave of absence from January 4, 1937, to June 1937. On November 23, 1934, the petitioner issued a check in favor of Robert Goodman, for $3,000 in payment of salary for the year ending December 31, 1934. The check was endorsed by Charles Goodman for deposit to the credit of Robert Goodman in the Public National Bank and Trust Co.

66. Robert Goodman performed no services for petitioner during 1934 and 1935.

67. On November 23, 1934, Charles Goodman took out four life insurance policies with the Prudential Insurance Co. of America on his own life for $25,000 each, on which the total premium was $5,393.50.

68. On November 17, 1934, Robert *73 Goodman drew a check on his account with the Pacific National Bank and Trust Co. in favor of himself for $3,050. Thereafter, Robert Goodman endorsed the check and delivered it to Charles Goodman, who endorsed it to the Prudential Insurance Co. of America. On November 24, 1934, Charles Goodman drew checks on his bank account in favor of the Prudential Insurance Co. for $5,218.48 and $2,343.50. The three checks, aggregating $10,611.98, were deposited by the Prudential Insurance Co. of November 24, 1934, and were in payment of two annual premiums on the policies of Charles Goodman, one of which was a prepayment at a discount of $175.02.

69. The checking account of Robert Goodman in the Public National Bank and Trust Co. shows a credit balance of $1,005.13 on November 20, 1934, a deposit of $3,000 on November 23, 1934, of the check of Gradwik, Inc. of Delaware for that amount, withdrawals totaling $114.63 on November 23 and 24, and a withdrawal of $3,050 on November 26.

70. The balance sheets of petitioner in its income tax return for 1934 list assets of about $300,000 at the beginning of the year and $186,000 at the close of the year, consisting principally of stocks and bonds.

*74 71. During 1934, 1935 and 1936, Charles Goodman, as secretary and treasurer of petitioner, devoted about one-half of his time to the affairs of petitioner. Most of that time during those years was spent investigating the value of securities of utility companies throughout the United States, with the view of making purchases or sales of such securities.

72. Robert Goodman and Charles Goodman reported in their income tax returns for 1934 the receipt of $3,000 and $2,000, respectively, as salary from Gradwik, Inc. of Delaware. The check for $3,050 received by Charles Goodman from Robert Goodman on or about November 17, 1934, was not reported in the return filed by the former for 1934.

73. The income tax return filed by petitioner for 1934 reported gross income of $15,854.78 and claimed deductions of $3,000 and $2,000 as officers' salaries paid to Robert Goodman, vice president and to Charles Goodman, secretary-treasurer, respectively. The word "necessary" was inserted in schedule C of the return in response to a question as to the time the alleged officers devoted to the business. In his determination of the deficiency the respondent disallowed $1,500 of the amount paid to Charles *75 Goodman, upon the ground that the amount represented excessive compensation, and all of the amount paid to Robert Goodman, upon the ground that the petitioner had failed to establish the reasonableness of the compensation or that he had performed service for the corporation.

74. The notice of deficiency was mailed to the petitioner on March 14, 1940.

75. The income tax return filed by petitioner for 1934 was false and fraudulent with intent to evade tax, and a part of the deficiency was due to fraud with intent to evade tax.

Opinion

Issue A. - Fraud and statute of limitations

The petitioner alleged that assessment of the deficiencies is barred by the statute of limitations because of the respondent's failure to mail the notice within the three year period allowed by the statute. In his answer to the amended petition, respondent alleged that as petitioner omitted in excess of 25 per centum of the amount of its gross income in its income and excess profits tax return, and failed to file a personal holding company return, the notice was timely. At the hearing respondent moved and was given permission to amend to conform to proof to assert fraud penalties in respect to all of *76 the deficiencies and thereafter filed an amendment to his answer to raise the issue. Upon brief the respondent relies upon the presence of fraud to support the timeliness of the notice of deficiency. He argues that he proved fraud by evidence of the payment of a salary to Robert Goodman without rendering any service to the corporation.

Throughout 1934 the stock of petitioner, a personal holding company, was owned by Charles Goodman, Rose Goodman, who died on May 1, 1934, Sylvia Goodman, Charles Goodman's second wife, and Rose Goodman and Charles Goodman as trustees in the instruments executed on June 1, 1933, and May 1, 1934, respectively. We need not decide whether the instruments created valid trusts, for in any event the corporation's stock was owned and controlled during the taxable year by Charles Goodman and his respective wives, either in their individual capacity or as such and as trustees, and, accordingly, were in a position to administer the affairs of the corporation in any manner they saw fit.

The evidence showed that during 1934 Robert Goodman was a minor, having been born August 5, 1914, and was a student at Cornell University. Thus, he was not available to perform *77 the customary duties of a corporate officer or to devote "necessary" time to the affairs of the business, assuming that he was qualified to serve in the capacity of an officer of the corporation. Notwithstanding the absence of Robert Goodman in school during the period for which he was paid a salary, he was paid as compensation for services rendered, 50 per cent more than his father who was the directing head of the corporation.

Upon brief petitioner, while alleging that there is no evidence to support a proposed finding of respondent that Robert Goodman performed no services for the corporation, points to no evidence to establish that services were performed, in spite of the absence of Robert in school. The effect of the testimony of Charles Goodman on direct examination, which constitutes the sole evidence on the point is that during 1934 he discussed security investment matters with his son to educate him for future services with his various enterprises, including Gradwik, Inc. of Delaware.

Charles Goodman testified that "He [Robert Goodman] had responsibility of an officer but he is really the son of a father and my idea was to build him up and have him have experience in *78 my various enterprises and one of them was Gradwik of Delaware." The testimony infers that the salary would not have been paid if the receipient had not been the son of Charles Goodman. It is not proof of rendition of service to petitioner; rather the testimony is no more than an effort to furnish a plausible basis for the deduction.

Charles Goodman, the officer of petitioner who signed the check for the salary in question and the return in which the amount was claimed as a deduction, is an educated man of many years of business experience and must be charged with knowledge that corporations engaged in business for profit do not pay, and have no statutory right to deduct for tax purposes, salaries except for services actually rendered.

No explanation was offered by petitioner for the payment of the salary in a lump sum, partially in advance, rather than in monthly or other regular installments as is customarily done. It is obvious that it was paid on November 23, 1934, to provide Charles Goodman with funds to pay premiums the next day on insurance policies taken out on his own life. Neither was any attempt made by petitioner to show the circumstances of the transaction between *79 Robert Goodman and his father for such use of the money. The effect of it, without any explanation, was the receipt by Charles Goodman of taxfree money to meet a personal obligation.

The decisive facts are that the petitioner paid the salary and claimed the deduction with knowledge that Robert Goodman was not expected to and did not perform any services for it. The representations made under the circumstances disclose a fraudulent intent. J. L. Norie, 3 T.C. 676 , affirmed 149 Fed. (2d) 739 . It follows that assessment and collection of the deficiencies are not barred by the statute of limitations, that the deficiencies are due in part to fraud with intent to evade tax and that it was proper for the respondent to impose the fraud penalties. This conclusion will require us to dispose of other issues raised by the petitioner.

Issue B. - Salary deductions

Petitioner argues that as the salary paid to Robert Goodman "may seem somewhat excessive" and that the salary paid to Charles Goodman "seems grossly inadequate," under the circumstances, we should resolve the question upon the basis of whether the combined salaries are reasonable for the services of both *80 individuals.

The statute confines deductions for salaries to reasonable amounts of personal services actually rendered. (Section 23(a) Revenue Act of 1934). No provision is made for lumping salaries for deduction purposes. L. Schepp Co. 25 B.T.A. 419 . Robert Goodman performed no personal services for petitioner and no part of the amount paid to him is deductible. No proof was offered to show that petitioner ever authorized a salary to Charles Goodman in excess of $2,000 and the issue, as framed by the pleadings, limits the amount of the deduction to $2,000. Personal services were actually performed by Charles Goodman and enough has been shown to establish the reasonableness of the compensation paid to him. Accordingly, respondent erred in disallowing $1,500 of the $2,000 claimed as a deduction for salary paid to Charles Goodman.

Issue C. - Capital gain of $5,069.18 on sale of securities

Findings of Fact

76. In 1934 the petitioner sold to Charles Goodman various securities, including $104,500 face amount of bonds of United Public Utilities Co., which bonds had a cost basis to petitioner of $27,981.53 and a fair market value of $27,170 at the time of the sale.

*81 Included among the other securities sold were the following bonds: Date sold Security Cost

February 28 $ 10,000 Community Power & Light Co. $ 3,925.00

January 3 5,000 General Water Works & Electric Corp. 2,012.50

January 3 1,000 Tobacco Products 865.50

January 3 50,000 New England Gas & Electric Co. 19,480.00

September 24 120,000 Federal Public Service 32,067.50

September 24 34,000 Central Western Public Service 7,480.00

The petitioner used the costs shown above as the selling price when recording the sales of the listed bonds in its books.

77. In his determination of the deficiency the respondent held that the petitioner realized gain of $4,002.22 on the sale of $104,500 face amount of bonds of the United Public Utilities Co., based upon a fair market value of $31,983.75 for the bonds at the time of the transfer, and gain or loss, or no gain or loss on the sale of 15 other securities in 1934. The total amount of gain determined was $5,069.18. The petitioner sustained a loss of $811.53 on the sale of the United Public Utilities Co. bonds.

Opinion

The petitioner alleged error respecting gain or loss on 13 of the 16 blocks of *82 securities involved in the transfers. At the hearing its counsel announced that he had abandoned the issues except those relating to bonds of the United Public Utilities Co., $120,000 face amount of bonds of the Federal Public Service, $34,000 face amount of bonds of the Central Western Public Service and $50,000 face amount of bonds of the New England Gas & Electric Co. Upon brief petitioner abandoned the issue respecting bonds of the New England Gas & Electric Co.

The respondent contends that the petitioner abandoned all of the issues. At the hearing, counsel for the petitioner, in connection with tax liability of Charles Goodman for 1935, offered testimony respecting the fair market value of bonds of the four corporations referred to in the preceding paragraph and subsequently the same day, when taking up the proceeding involving petitioner, he made the following announcement:

With the exception, Your Honor, of the valuations under the heading of "Fair Market Value" in this notice of deficiency:

Paragraph (A), as to those four securities, we have no contest, as to the cost or the gain or profit, but shall ask that you consider the valuations which the Petitioner has given *83 this morning as for those four items on that date.

A portion of the remarks of counsel for petitioner indicates intention to concede the issues respecting the four blocks of securities but when construed in its entirety, it is evident that the intent was to reserve the right to contest the correctness of the fair market values determined by the respondent. There would have been no point in asking us to consider the testimony previously offered respecting the value of the securities unless petitioner intended to contest the valuations determined by the respondent.

The respondent determined that the fair market value of the bonds of the Federal Public Service Co. and Central Western Public Service Co. at the time of the transfer was the same as cost to petitioner and consequently found that no gain was realized or loss sustained by petitioner with respect to the securities. The sales of these bonds were not included among the 13 blocks of securities as to which errors were alleged by petitioner in its amended petition and no question was raised by the petitioner concerning them in other pleadings or otherwise except upon brief. Accordingly, the only issue before us is the amount *84 of gain realized or loss sustained in connection with the sale of bonds of the United Public Utilities Co.

The parties agree upon the cost of the United Public Utilities bonds. The sale was made in September 1934 but was not entered in the petitioner's books until the close of the year. The respondent held that the transaction constituted a sale of the bonds at their market value at the time of transfer and seems to have concluded that the sale was made on December 31, 1934. The proof here is that the sale was made on about September 24, 1934, and that the fair market value of the bonds on that date was $27,170. It follows that petitioner sustained a loss of $811.53 on the sale instead of realizing gain of $4,002.22, as determined by the respondent.

Issue D. - Interest income in the amount of $718.99

Opinion

In his determination of the deficiency the respondent included the amount of $718.99 in petitioner's income as interest accrued on certain securities. Upon brief the petitioner concedes that the interest was received and is includible in its income.

Issue E. - Whether the amount of $8,416.88 paid to Charles Goodman was interest or a dividend

Findings of Fact

78. *85 On or about November 22, 1934, to provide Charles Goodman with funds needed for a trip to Europe, which trip he made commencing five days later and ending January 3, 1935, petitioner's bookkeeper, K. S. Arnold, computed the amount of $11,416.83 as interest on the loan account of Charles Goodman to the close of the year and issued check No. 196 in favor of Charles Goodman for that amount. He made a notation on the stub of the check that it was "to be adjusted later." Upon his return to the United States, Charles Goodman directed K. S. Arnold "to cancel all the interest that applied on United Public Utilities, Central Trust, and Federal Public Service, and to take enough additional interest on the balance of the securities to bring the total refund up to an even $3,000."

79. The books of petitioner disclose a charge on November 23, 1934, of $8,416.83 to interest and a charge of $3,000 on December 31, 1934, to a loans payable account in the name of Charles Goodman or Rose Goodman or Robert Goodman or the survivors or survivor. Of the amount of $3,000, $2,000 represented payment of the salary of Charles Goodman for 1934.

80. In his return for 1934, Charles Goodman reported interest *86 income of $8,419.15. The petitioner's return for 1934 contained a deduction of $8,419.41 for interest. In his determination of the deficiency the respondant disallowed the deduction upon the ground that $8,416.88 of the amount constituted dividends paid in the guise of interest.

Opinion

The testimony on the issue is confined to mere statements of Charles Goodman on direct examination that he received the amount as interest on loans and that he had no knowledge of receiving dividends "as such" during 1934. Upon brief petitioner complains of the failure of respondent to offer evidence to establish that the amount constituted dividends and not interest. The determination of respondent is prima facie correct and the presumption must stand unless overcome by the petitioner.

The testimony is nothing more than conclusions of the witness and without the surrounding circumstances, has little or no probative value. The assertions are, in effect, no more than appeared in his and petitioner's return, both of which he signed. Statements in returns, testified to be true, do not comprise proof. Louis Halle, 7 T.C. 245 . We lack evidence on whether the loans were to bear interest, *87 and if so, the rate. Such evidence is important here in view of the arbitrary manner in which the net amount paid was ultimately determined. The method employed lacks the usual factors of computing interest on indebtedness.

Our finding No. 63 shows that from January 8, 1934, until at least November 23, 1934, all of the stock of petitioner was outstanding in the name of Charles Goodman and he would be the proper stockholder to receive any dividends paid by the corporation. We think the evidence tends to sustain the respondent's determination. In any event, there is not enough evidence to overcome the presumption in favor of respondent and his disallowance of the deduction will not be disturbed.

Issue F. - Delinquency penalty on surtax

Findings of Fact

81. The petitioner did not file a return for 1934 as a personal holding company. Such a return was filed by the Commissioner of Internal Revenue for the petitioner on or about January 18, 1937, and disclosed adjusted net income of $1,676.15, undistributed net income of $1,340.92, surtax of $402.28, and a delinquency penalty of $100.57 for failure to file a return within the time prescribed by law was added.

Opinion

The petitioner *88 is not contesting the imposition of the delinquency penalty upon any ground other than that assessment of the deficiencies is barred by the statute of limitations. We having concluded that the statute has not run because of fraud, it follows, under the circumstances, that the imposition of the penalty under the provisions of section 351 of the Revenue Act of 1934 was proper.

Docket No. 103137 - Gradwik, Inc. of Delaware - Year 1935

Issue A. - Statute of limitations: Delinquency penalty

Opinion

The petitioner concedes upon brief that assessment and collection of the deficiencies and penalties involved herein are not barred by the statute of limitations and that it was proper for the respondent to impose a delinquency penalty on the correct surtax for its failure to file a personal holding company return for the taxable year. The penalty is therefore approved.

Issue B. - Disallowance of deductions in amount of $3,870.02 and $8,561.69 for salaries and other expenses, and interest, respectively

Opinion

Upon brief the petitioner conceded that respondent did not err in disallowing these deductions. The disallowance is therefore approved.

Issue C. - Capital gain of $61,820.41

*89 Findings of Fact

82. In its income tax return for 1935, which was filed with the collector for the third district of New York, petitioner reported gain on sales of stock as follows: Date

Shares Security Cost of sale Sales Price Gain

75 N. Y. Water Service $ 1,500 4-24-35 $ 4,530.75 $ 3,030.75

500 Goldberger-Raabin Co. 50,000 1-15-35 50,000.00

1000 Mideastern Contracting Corp. 10,000 1-15-35 10,000.00

530 Hart & Early Co. 1-15-35 20,000.00 20,000.00

The sales of the last three stocks were made to Charles Goodman and were placed in the family account, infra. With the exception of stocks of N. Y. Water Service and Hart & Early Co., cost was used as the selling price. In his determination of the deficiency, respondent determined total gains of $61,820.41 by using the same cost basis and a total fair market value of $123,320.41, as follows, for the securities at the time of their sale: Number Fair Market

of Shares Security Date of Sale Value

75 N. Y. Water Service 3-24-35 $ 4,200.00

500 Goldberger-Raabin Co. 1-31-35 62,032.46

1000 Mideastern Contracting Corp. 1- 1-35 22,090.86

530 Hart & Early Co. 1- 1-35 34,997.09

*90 Opinion

The parties never disagreed on the cost of these securities. Petitioner now admits on brief that the fair market values determined by the respondent are correct. Accordingly, the adjustments made by the respondent will not be disturbed.

Issue D. - Salaries of $3,000 and $2,000 paid to Robert Goodman and Charles Goodman, respectively

Opinion

83. We adopt as our findings of fact under this issue, findings of fact hereinbefore made with respect to a like issue involved in the tax liability of petitioner for 1934, under findings of fact Nos. 63 to 71, inclusive.

The facts respecting this issue not differing from the facts under a like question in 1934, our conclusions must be the same, and, therefore, sustain respondent in disallowing the deduction of $3,000 claimed for salary paid to Robert Goodman and reverse his action in disallowing $1,500 of the salary of $2,000 paid to Charles Goodman.

Issue E. - Loss of $51,755 on sale of stock of building and loan associations

Fraud Penalty

Findings of Fact

84. In 1932 or prior thereto Charles Goodman invested the following amounts in shares of building and loan associations doing business in Philadelphia, Pennsylvania: *91 Merrimac $ 4,404.00

Lester M. Bloch 1,699.80

Nixon-Nerdlinger 7,324.00

C.B.C. 3,105.37

Baron Hirsch 6,747.20

Jewish Congress 566.40

Uniform 1,620.45

Combined 3,558.80

Gordon 2,162.60

Randall 744.15

Lillian 706.80

Morris Haber 12,609.00

Bank 9,743.64

$54,992.21

85. The pass books for the shares were issued to Charles Goodman and/or Rose Goodman, or vice versa, with the exception of the pass book for 200 shares of the Morris Haber Building & Loan Association, which was issued to Charles Goodman. The records of the building and loan associations indicate the individuals, to whom the shares were issued, as the owners of the pass books during the following periods:

Merrimac - Oct. 2, 1936, to present time.

Lester M. Bloch - Feb. 13, 1934, to Oct. 15, 1938.

Nixon-Nirdlinger - Jan. 1, 1935, to Dec. 31, 1939.

C.B.C. - Oct. 1932 to Sept. 1, 1938.

Baron Hirsch - March 11, 1935, to present time.

Jewish Congress - Aug. 22, 1935, to Nov. 30, 1942.

Uniform - Oct. 1, 1933, to liquidation in about 1938.

Combined - Dec. 14, 1933, to present time.

Gordon - Feb. 1931 to present time.

Randall - July 15, 1935, to May 15, 1944.

Lillian *92 - Oct. 22, 1934, to Sept. 27, 1943.

Morris Haber - Prior to 1935 to Dec. 1939.

86. The building and loan association paid the following dividends on the shares: Lester M. Bloch Building & Loan Association

Jan. 13, 1934 $ 72.00

Nov. 6, 1935 $ 43.20

June 12, 1934 72.00

June 10, 1936 28.80

Dec. 21, 1934 72.00

Jan. 10, 1938 57.60

Aug. 10, 1935 432.00

Oct. 15, 1938 57.60

Nixon-Nirdlinger Building & Loan Association

$493.60 on August 14, 1935, February 1, 1936, November 5, 1936, November 12, 1937, and June 15, 1938. Uniform Building & Loan Association

Nov. 21, 1933 $550.78 Mar. 1, 1934 $137.69

Sept. 9, 1934 68.84 May 15, 1935 68.84

July 18, 1935 68.84 Sept. 16, 1935 68.84

Sept. 5, 1936 206.52 Nov. 25, 1936 68.84

June 20, 1938 27.54

All of the distributions were liquidating dividends. Combined Building & Loan Association

June 10, 1935 $157.25 Sept. 12, 1935 $251.60

All of the distributions were liquidating dividends. Gordon Building & Loan Association

Mar. 4, 1937 $196.50 Oct. 6, 1938 $ 98.25

Feb. 5, 1942 98.25 June 3, 1943 78.60

All of the distributions *93 were liquidating dividends. Randall Building & Loan Association

July 8, 1935 $ 41.93 Jan. 20, 1937 $ 41.93

Oct. 1, 1937 41.92 Dec. 20, 1937 41.92

Dec. 30, 1938 20.96 July 25, 1939 18.87

Lillian Building & Loan Association

Oct. 6, 1938 $30.75

Morris Haber Building & Loan Association

Oct 4, 1937 $3,062.50 Oct. 27, 1938 $1,837.50

87. The Department of Banking of the State of Pennsylvania took possession of the affairs of the following building and loan associations on the dates shown:

Baron Hirsch - January 16, 1936

C.B.C. - January 21, 1937

Combined - December 19, 1935

Jewish Congress - August 22, 1935

Merrimac - October 2, 1936

The building and loan associations were insolvent when the Department of Banking took charge of their affairs, and had no assets to pay shareholders. Shareholders of the associations were notified of the amount outstanding to their credit on the books of the associations at the time of taking possession.

88. All of the checks issued by the building and loan associations for the dividends referred to in findings of fact No. 86 were payable to Rose Goodman and/or Charles Goodman, or vice versa, *94 or Charles Goodman as the owners or owner of the shares at the times the distributions were made. All of the checks were endorsed by Charles Goodman, and with the exception of two checks endorsed to an insurance company, substantially all of them were deposited in a bank to his or Robert Goodman's credit and the remaining checks were deposited in a bank to the credit of Doris Goodman, Rose Goodman or Sylvia Goodman.

89. On December 18, 1935, Adrian H. Muller & Son, 40 Wall Street, New York City, rendered a statement for a sale at auction on that date for the account of Charles Goodman for $105, of all the shares of the building and loan associations referred to in findings of fact No. 84. A charge of $121 was made by the auctioneer in connection with the alleged sale. The check for $105 which was issued by the auctioneer on December 18, 1935, in favor of Charles Goodman for the proceeds of the alleged sale, was endorsed by Charles Goodman for deposit in his bank account.

90. The joint income tax return of Charles Goodman and his wife for 1932 contained the following deductions for partial worthlessness of the following building and loan shares: Per cent

Combined 50 $ 1,779.40

Bank 75 7,307.73

Merrimac 90 3,963.60

Uniform 50 810.22

C.B.C. 75 2,329.03

Baron Hirsch 90 6,072.48

Randall 50 372.07

Morris Haber 90 11,348.10

Lillian 70 494.76

Gordon 50 1,081.30

Nixon-Nirdlinger 50 3,662.00

*95 No deductions were claimed in the returns for 1933 and 1934 for losses on the shares.

91. In his income tax return for 1937, Charles Goodman claimed deductions of $6,747.20 and $3,105.37 for shares of the Hirsch and C.B.C. Building & Loan Associations, respectively, the amounts being his original cost basis, with the explanation that they "were part of Building loans by stipulation and agreement to stipulate in which losses were not allowed in 1932." The respondent disallowed the deductions because of failure of proof that the shares became worthless in 1937.

92. In an amended income tax return dated February 3, 1942, for 1938, Charles Goodman claimed losses aggregating $19,963.82, this being his original cost basis, less liquidating dividends of $1,166.10, on the shares of Merrimac, C.B.C., Baron Hirsch, Combined, Uniform, and Jewish Congress Building and Loan Associations. The computation of the losses attached to the return contains an assertion that the Commissioner disallowed deductions for losses on the shares in 1935 and that liquidation dividends of $408.85 and $206.52 were received on the shares of the Combined and Uniform Building and Loan Associations, respectively, *96 in 1935.

93. The individual income tax return of Charles Goodman for 1935 did not report the sale of any shares of building and loan associations to petitioner or claim as a deduction, losses on such shares.

94. In its income tax return for 1935 the petitioner reported a capital loss of $51,775 on sales of the shares involved herein, based upon a total cost of $53,514, and credits of $1,634 for recoveries of bases and $105 received at a sale. Capital gains of $23,030.75 were reported, and as a result, only $2,000 was claimed as a capital loss. In his determination of the deficiency the respondent disallowed the loss of $51,775 upon the ground that it was not bona fide.

95. A part of the deficiency for 1935 was due to fraud with intent to evade tax.

Opinion

The petitioner is asking us to allow this deduction upon the basis of an acquisition of the shares from Charles Goodman in January 1935 "at a net cost of $51,755 at the time it sold those shares," and a sale at auction on December 18, 1935, for $105. The respondent contends that petitioner never owned the shares and therefore could not, and did not, sell the shares in 1935.

The petitioner does not deny that the records *97 of the various building and loan associations show Charles Goodman and him and/or Rose Goodman to have been the owners of the shares at all times and that all distributions of dividends on the shares, including payments made in 1935, some of which were liquidating dividends, were made to the record owners, which never included petitioner. All of the checks issued for the dividends were endorsed by Charles Goodman, and with a few exceptions all of them were deposited in bank accounts in his or Robert Goodman's name.

Charles Goodman, the administrative officer of petitioner, believed as early as 1932 that many of the shares had decreased in value. This is shown by the claim he made in his return for that year for deductions of from 50 per cent to 90 per cent of his investuent on account of partial worthlessness of the shares of 11 of the 13 associations. Notwithstanding such action and the receipt by him in 1933 and 1934 of liquidating dividends from at least one of the associations, Charles Goodman caused petitioner to report the alleged sale at his original cost basis, less $1,634 for recoveries of capital. This indicates no arm's length sale to petitioner; rather an attempt on his *98 part to place the petitioner in a position to recover in a subsequent transaction an investment of his that in his opinion had greatly depreciated in value.

Upon direct examination Charles Goodman testified that he sold the shares to petitioner in January 1935, having previously "overlooked" them. Later, with the 1935 return of petitioner before him for reference purposes, he testified that the date of sale was January 2, 1935. Upon reflection he concluded that the return was incorrect, as he did not return to the United States until January 3, 1935.

No attempt was made by petitioner to justify the alleged sale to it at exactly the seller's cost or to explain its failure to have the record ownership of the shares transferred. The alleged auction sale was transacted in the name of Charles Goodman and he, not petitioner, received a check for the proceeds. In response to questioning upon direct examination concerning the payment of the distributions to him in 1935 instead of to petitioner, Charles Goodman testified that "Those amounts were credited to Gradwik of Delaware. I do not remember the bookkeeping," and that "they went to Gradwik of Delaware." No other effort was made to show *99 that petitioner received the dividend payments. No evidence was offered to establish that petitioner received, by credit or otherwise, the proceeds of the alleged auction sale of the shares. Neither did petitioner attempt to prove that it paid Charles Goodman for the shares or entered them on its books. Aside from the returns of petitioner claiming the losses in question, and unsupported testimony of Charles Goodman, there is no evidence showing ownership of the shares in petitioner. Other evidence shows that Charles Goodman and him and/or Rose Goodman were the record owners of the shares throughout 1935.

Was any part of the deficiency due to fraud with intent to evade tax? We have found that petitioner never owned the building and loan shares. Accordingly, it could not sell them or rightfully claim a loss deduction arising from a sale made by the real owner. To claim a loss deduction on the sale of assets never sold or owned discloses a fraudulent purpose.

Upon brief, however, petitioner argues that its tax would not have been more than $528.53 without the deduction for the losses in question, and if the shares were sold for the account of Charles Goodman, as the respondent contends, *100 and he had taken the deduction, he would not have had any tax liability for 1935, instead of $575.76, the amount paid by him. This argument is intended to show that the amount of tax involved would not justify the commission of a fraudulent act. The argument overlooks decreased deductions and greater capital gains by virtue of admissions made by petitioner at the hearing and upon brief.

The facts found indicate that Charles Goodman was concerned about the year in which the Commissioner would allow deductions for losses on shares of the various building and loan associations. We know the effort he made in his 1932 return to take loss deductions on the shares. Nothing was claimed in his returns for 1933 and 1934. The question of when losses should be claimed was discussed by Charles Goodman with agents of the Bureau of Internal Revenue, but it does not appear that any of the discussion occurred prior to 1935. There is some indication that the subject was discussed in 1936 or 1937. In any event, inability to determine the year in which to claim a loss does not condone the action of Charles Goodman here in causing petitioner to make the claim without ever having acquired the shares.

*101 The evidence points to the use by Charles Goodman of petitioner, a corporation whose stock was outstanding in the name of Charles Goodman and his wife, to take a loss on the shares. The distinction between the corporation and the individual, as taxpayers, was disregarded for the express purpose of obtaining relief from income taxes. This is shown, among other things, by the use by petitioner of Charles Goodman's cost basis, notwithstanding a belief that the value of most of the shares was considerably less than the cost to Charles Goodman; the failure to have ownership of the shares transferred to it on the books of the building and loan associations; the assertion of ownership of the shares by Charles Goodman by accepting dividends when the securities were allegedly owned by petitioner; the acceptance by Charles Goodman of the proceeds of the alleged sale of the shares at auction, and the use by Charles Goodman in his 1937 return and amended return for 1938 of his original cost basis in making claims for losses on some of the shares, which action completely ignores ownership by petitioner, and a sale by it, and is opposed to the idea, advanced by the petitioner, that the shares *102 were acquired by Charles Goodman from William Goldsmith, the alleged purchaser at the auction sale, in February 1936, as a gift. Charles Goodman testified that he claimed his original cost basis in the shares of the Baron Hirsch and C.B.C. Building and Loan Associations "Because the Internal Revenue Department would not allow me that in 1935, which is the right year for the loss * * *." Upon being asked why he claimed a loss in 1935, if petitioner owned the shares in that year, Charles Goodman testified:

I state that Gradwik of Delaware had the loss in 1935. I did not take any loss in 1935, although apparently I should have, but I did not because I thought that the property which was Charles and/or Rose [Goodman's], should be sold, should go into Gradwik of Delaware as a matter of right the way I think, but I did not take much of a loss in Gradwik of Delaware in 1935, I simply gave the Government a present of a large amount of money.

Counsel for petitioner then informed the witness that the notice of deficiency did not assert that he had taken a loss deduction in 1935. The testimony illustrates Charles Goodman's disregard of himself and petitioner as separate and distinct taxpayers.

*103 We conclude from all of the evidence that petitioner made no sale of the shares in question, and, accordingly, sustained no loss to deduct from gross income. Not only did no sale by petitioner occur, but the evidence establishes that the deduction was taken upon the basis of a sale never made, and that a part of the deficiency was due to fraud with intent to evade tax. It follows that respondent did not err in disallowing the deduction or imposing the fraud penalty.

The conclusion reached by us on the issue of fraud renders it unnecessary to consider whether fraud also was shown because of the deduction of salary paid to Robert Goodman without rendition of services for the compensation. The point was, in any event, not raised by respondent except upon brief.

Docket No. 104869 - Charles Goodman - Year 1935

Issue A. - Increasing interest income from $1,476 to $10,928.81

Issue B. - Capital gains $67,663.71

Findings of Fact

96. During 1935 petitioner sold through his account with Boody, McLellan & Co., coupon bonds as follows: Date sold Security Cost

April 8 $9,000 Community Power & Light Co. $5,150.04

April 9 $1,000 Community Power & Light Co. 572.36

April 5 $2,000 General Water Works and Elec. Corp. 1,328.61

April 23 $3,000 General Water Works and Elec. Corp. 2,090.42

March 13 $1,000 Ohio Water Service Co. 752.93

March 28 $5,000 Ohio Water Service Co. 3,750.08

April 1 $6,000 Ohio Water Service Co. 4,547.60

*104 97. The Community Power & Light Co. and General Water Works and Elec. Corp. bonds were acquired by petitioner from Gradwik, Inc. of Delaware as set forth in findings of fact No. 76. The bonds of the Ohio Water Service Co. were purchased by petitioner through brokers on November 22, 1932, at a cost of $6,070. During 1935 the petitioner received a total of $10,928.81 in interest on these bonds and other bonds as follows: Security Cost

Community Power & Light Co. $ 302.78

General Water Works & Electric Corporation 90.28

Ohio Water Service Co. 391.67

Tobacco Products (coupon bonds) 16.25 $ 800.98

American Utilities Service Corp. $3,900.00

New England Gas & Electric Co. 3,192.00

United Public Utilities Corp. 3,035.83 $10,127.83

Total $10,928.81

98. Of the interest received by petitioner, the following amounts were collected by the Chase National Bank and credited by it to petitioner's checking account on the dates shown: May 1, 1935 Ohio Water Service Co. $ 300.00

May 1, 1935 American Utilities Serv-

ice Corp. 1,800.00

July 1, 1935 United Public Utilities

Co. 1,530.00

Dec. 31, 1935 United Public Utilities

Co. 1,222.50

Total $4,852.50

*105 99. The return of Robert Goodman for 1934 reported interest income of $2,478.75, which amount included interest of $625 on $50,000 of bonds of the New England Gas & Electric Co. The investment ledger of petitioner for 1934 credited to his children interest of $2,500 received on the bonds.

100. On about September 24, 1934, the petitioner acquired bonds from Gradwik, Inc. of Delaware as follows: Security Cost

$104,500 United Public Utilities Co. $27,170

$120,000 Federal Public Service 30,600

$ 34,000 Central West Public Service 4,845

101. On February 14, 1935, the $104,500 of bonds of the United Public Utilities Co. were exchanged for the following bonds, stock and scrip of the United Public Utilities Corp. and having a total value of $41,292.33 at the time of the exchange. $37,250 bonds - 6/60

$15,000 bonds - 5 1/2/60

745 shares preferred stock - $3.00

300 shares preferred stock - 2.75

1,045 shares common stock

$ 7,650 ten year scrip

102. On February 15, 1935, the $120,000 face amount of bonds of the Federal Public Service were exchanged for $60,000 face amount of bonds; 1,200 shares of preferred stock, and 5,040 shares of common *106 stock of the American Utilities Service Corp. having a fair market value of $39,270 at the time of the exchange.

103. The $34,000 face amount of bonds of the Central West Public Service were sold by petitioner in 1935 through his account with Boody, McLellan & Co. for $12,188.90, as follows: April 1 $ 4,000 $1,038.40

May 24 5,000 1,498.00

July 8 15,000 5,444.00

Sept. 11 5,000 2,098.00

Oct. 14 5,000 2,110.50

104. On January 3, 1934, petitioner acquired $50,000 face amount of bonds of the New England Gas & Electric Co.from Gradwik, Inc. of Delaware for $19,312.50, this amount being the fair market value of the bonds on the date of sale, and sold them on December 31, 1935, to the Builo Corporation for $36,000.

105. On November 22, 1934, the petitioner executed an instrument reading as follows:

Gifts made by Charles Goodman November 22, 1934, - $5,000 to my wife, Sylvia Goodman

5,000 to my son, Robert Goodman

5,000 to my daughter, Doris Goodman

5,000 to my daughter, Annette Goodman

5,000 to my son, William Goodman

I have purchased for $5,000 for the account and risk of each person above, one-sixth interest in the following *107 securities. I now have these securities in my possession. 120 Federal Public Service bonds

which cost $32,067.00

104 1/2 United Public Utilities bonds

which cost 27,981.00

50 New England Gas & Elec.

bonds which cost 19,500.00

34 Central West bonds which cost 7,480.00

$87,028.00

The balance of present value of one-sixth share over $5,000 is to be a loan. I will act as trustee and will account for same from time to time as in my judgment seems best.

This memo. is signed by me to make a record of an absolute gift clear of obligations to any persons or so far as I know, clear of tax to our Government.

[Signed] Charles Goodman

Witness Rose Spinrad

The dates of birth of petitioner's four children were as follows: Robert - August 5, 1914

Doris - October 21, 1919

Annette - January 5, 1924

William - December 6, 1926

106. On January 15, 1935, the Mideastern Contracting Corporation issued stock certificate No. C-32 to Charles Goodman as trustee for his wife and four children, and himself individually, each one-sixth, for 1,000 shares of its common stock. Petitioner has held the certificate since it was issued.

*108 107. On October 2, 1935, the Goldberger-Raabin Co., Inc. issued stock certificate No. 32 to Charles Goodman as trustee for his wife and four children and himself individually for 500 shares of its common stock.

108. On or about June 15, 1935, Hart and Early Co., Inc., issued stock certificate No. 64 to Charles Goodman as trustee for his wife and four children and himself individually, each one-sixth, for 530 shares of its common stock. The certificate was issued in exchange for certificate No. 63, which was transferred by Gradwik, Inc. of Delaware by an endorsement bearing the date of June 15, 1935, to Charles Goodman as trustee for his wife and four children and himself individually, each one-sixth.

109. In 1935, $5,000 of the $37,250 of bonds of the United Public Utilities Co. were sold for $4,079.25 and the remainder of the bonds for $27,412. The $50,000 of bonds of the New England Gas & Electric, the $60,000 of bonds of the American Utilities Service and the $15,000 of 5 1/2 per cent bonds of the United Public Utilities, were also sold in 1935.

110. On November 23, 1935, petitioner signed a memorandum reading as follows:

November 23, 1935

November 23, 1935 - Gifts made *109 by Charles Goodman, - $5,000.00 to my wife, Sylvia Goodman

5,000.00 to my son, Robert Goodman

5,000.00 to my daughter, Doris Goodman

5,000.00 to my daughter, Annette Goodman

5,000.00 to my son, William Goodman

[Signed] Charles Goodman

Witness Rose Spinrad

111. The proceeds of sales made by petitioner in 1935 of securities in the alleged trust of November 22, 1934, hereafter referred to for convenience as the family account, and the interest and dividends received on the securities, were deposited in his personal bank account and used by petitioner to purchase other securities for the family account.

112. In 1936, 1937, 1938, 1939 and 1940, the income received by petitioner from dividends and interest on, and the proceeds of sale of securities in the family account were invested by petitioner in other securities for the family account. In 1939 a loan of $52,590.33 was made to the Airhill Corp. out of the family account. The shares of stock of the Mideastern Contracting Corporation, Goldberger-Raabin Co., Inc., and Hart & Early Co., Inc., referred to in findings of fact Nos. 106, 107 and 108, respectively, were acquired by petitioner for, and were *110 placed in the family account. There were no purchases in the family account in 1941. The proceeds of sales made in 1941 and interest and dividends, received by petitioner in that year on loans and securities, was about $28,500. In that year another loan of $4,409.67 was made to the Airhill Corporation and $350 was repaid.

113. The account of petitioner with Boody, McLellan & Co. shows the following securities in the account on October 29, 1941, and delivery of the securities out of the account on the dates specified: Security Delivery Date

$17,000 Laclede Gas June 26, 1941

29,000 Laclede Gas Nov. 15, 1941

32,000 Jacksonville Gas Nov. 15, 1941

120 shares preferred stock of

Bankers Securities Corp. Nov. 26, 1941

The delivery of the Bankers Securities Corp. stock closed the account.

On November 13, 1941, the family account was closed. Securities in the family account on that date included the following: $ 4,600 Laclede Gas bonds

$29,000 Jacksonville Gas bonds

120 shares preferred stock of Bankers

Securities Corp.

530 shares, Hart and Early Co. Inc.

1,000 shares, Mideastern Contracting Corp.

114. The petitioner prepared *111 the income tax returns for his wife and four children after November 22, 1934, except that Robert Goodman prepared his own return after reaching the age of 21.

115. The family account was not mentioned by petitioner in his income tax returns for 1934 and 1935. It is referred to directly or indirectly in his returns for 1936, 1937, 1938, 1939 and 1940.

116. On January 11, 1939, the petitioner executed a waiver consenting to assessment of income taxes due under his return for 1935 at any time on or before June 30, 1940.

117. In his return for 1935 petitioner reported interest income of $1,476. In his determination of the deficiency the respondent increased the amount reported by $9,452.81, or to $10,928.81, in connection with which adjustment he held that of the total interest, $1,551 was erroneously included in the return of each of petitioner's four children, $1,476 in the return of petitioner's wife, and that $1,772.81 was not reported. The petitioner did not report in his return for 1935, the sale of bonds of the Community Power & Light Co., General Water Works and Electric Corp., and Ohio Water Service Co. He reported the sale of bonds of the American Utilities Service Co. *112 , United Public Utilities Corp., New England Gas & Electric Co., and Central West Public Service, and included in his income, one-sixth of the gain as computed by him. In his determination of the deficiency the respondent taxed all of the gain to petitioner.

118. A part of the deficiency for 1935 was due to fraud with intent to evade tax.

Opinion

The parties are now in agreement upon the amount of interest received under the issue.

The difference between the parties is whether the interest is taxable in its entirety to petitioner, as contended by respondent, or whether the interest of $800.98 on the bonds of Community Power, General Water Works, Ohio Water Service and Tobacco Products is taxable in equal amounts to petitioner's four children, and the remaining interest, to them, and petitioner and his wife, one-sixth to each, as owners of the family account, a contended by petitioner. In each instance the question turns upon whether gifts were made of the securities from which the income was derived.

Was there a gift to the children of the bonds on which the interest of $800.98 was paid? Upon brief, petitioner asserts that there was an intention to make a gift but "there was *113 no actual delivery to them at the time of payment of the interest * * * which would be required, at least among strangers, in the absence of a written declaration of trust which is lacking here. In that respect the transaction is lacking in the formality of a delivery or final execution of the gift, and we must recognize that the evidence falls short of establishing the complete execution of the intended gift unless, because of the relationship among the parties, the failure of strict formality may be considered excusable. That is for this Court to determine." No cases are cited by petitioner to support his suggestion of a rule making the elements of a gift by parents to their children less onerous than one between other individuals. Though in some states it has been held that rules as to delivery are not so strict between members of a family living in the same home, 38 C.J.S. 803, no cases from New York are cited as authority, or suggested by the petitioner, so we conclude there is no such rule in that state. Moreover even cases so holding require showing of passage of dominion and control, and completion of the gift. Mere intent was not sufficient, even though the proposed grantee *114 was a nephew, in Viggiani v. Favata, 13 N. Y. S. (2d) 353 .

As evidence bearing on the question of a gift, petitioner points to his testimony and entries made in his investment books, which he alleges show that the bonds and interest received were the property of the children. Petitioner's testimony is merely a conclusion that the bonds were owned by his four children, that "They got them from myself or my wife, Mrs. Rose Goodman" in 1932 and 1934, when the securities were acquired by him or his wife; that he "set them aside in a separate place as belonging to the four children" and that thereafter he maintained a record in his books of what belonged to them for income tax purposes.

The investment ledger of petitioner, the only book relied upon, contains no entries in 1932 for income of the children. The ledger for 1934 contains entries under the heading "children" for interest on the bonds; also one on September 1 for interest on bonds of the New England Gas & Electric Co. The ledger sheet for 1935 contains an entry under the date of April 4 for interest of $529.17 without clearly identifying the bonds on which it was paid. The books containing entries, if any, after *115 May 3, 1935, are not in the record.

In Adolph Weil, 31 B.T.A. 399 , affirmed 82 Fed. (2d) 561 , the Board said:

From an examination of the authorities we find the essential elements of a bona fide gift inter vivos to be (1) a donor competent to make the gift; (2) a donee capable of taking the gift; (3) a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift, in praesenti; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control over it; (5) a delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it; (6) acceptance of the gift by the donee; * * *

"The 'delivery' must be as perfect as the nature of the property and the circumstances and surroundings of the parties will reasonably permit." Lunsford Richardson, 39 B.T.A. 927 . Weil v. Commissioner, supra ; Coffey v. Commissioner, 141 Fed. (2d) 204 , affirming 1 T.C. 579 . *116

In R. C. Coffey, supra , the taxpayer, in 1922, 1924, and 1925, endorsed the certificates of stock for transfer to his minor children and informed the witness to his signature that he was making a gift of the shares to the children to whom the certificates were endorsed. The taxpayer retained the certificates in his possession until 1938, when he presented them to the issuing corporations for transfer to the children on the corporations' book. In the meantime he received the dividends paid on the shares and appropriated them to his own use without making an accounting to his children until 1938. Under the circumstances we held that there were no completed gifts of the shares prior to the close of 1938.

The fact that petitioner indicated in his investment ledger that the interest was income of his children and caused returns to be made for the children for interest on the bonds, coupled with his testimony here, is not sufficient proof of intent to make gifts of the bonds. No contention is made by petitioner that he ever took steps to deliver the securities by transferring title to them on the books of the issuing corporations, or otherwise. Neither does petitioner advance *117 the theory that he was holding the bonds as a trustee or guardian for his children. See Weil v. Commissioner, supra , in which, as in the Coffey case, the alleged donees were minor children.

Under the circumstances, no completed gifts were made of the bonds of Community Power & Light Co., General Water Works and Electric Corporation, Ohio Water Service Co., or Tobacco Products, and it was not error for respondent to tax petitioner on $800.98, the amount of interest he received on those bonds in 1935.

The respondent determined capital gain and loss on sales of the same bonds, the only question herein concerning his action being whether the entire amounts should be reflected in the return of petitioner as determined by the respondent or taxed to his four children, as contended by petitioner. The petitioner concedes that our decision on the interest question will dispose of this issue. Accordingly, the adjustments made by the respondent as to the capital gain will not be disturbed.

Was there a gift of the other bonds (i.e., of American Utilities Service Corporation, New England Gas & Electric Co., and United Public Utilities Corp.) on which the remaining interest of $10,127.83 was *118 paid? The petitioner contends that by the memorandum executed by him on November 22, 1934, he made an absolute gift to his wife and four children of five-sixths, one-sixth to each, of his interest in the bonds and constituted himself trustee of the securities. While the document on its face lists gifts purportedly made by petitioner, the subject and extent thereof is not shown.

The first paragraph of the memorandum, without more, indicates an intention to make a cash gift of $5,000 to each child and the wife. In the next paragraph petitioner asserted that he had used the $25,000 to purchase for each a one-sixth interest in specified bonds which had cost him $87,028. Together there is indication of some intent to make a gift to each of a one-sixth interest in the bonds. The provisions of the next paragraph, instead of clarifying the ambiguity, confuses the question, for its provides that "The balance of present value of one-sixth share over $5,000 is to be a loan." If there was a gift of only $5,000 to each, the loan would be from petitioner to them of the difference between $25,000 and the then value of the bonds, less the one-sixth retained by petitioner. Petitioner contends that *119 there were such loans. There is no evidence of record, however, and petitioner does not contend, that the alleged donees agreed to borrow any amounts from petitioner under the transaction, assuming that the "present value" was in excess of $30,000, the then value not being shown. If there was a gift of five-sixths of the value of the bonds, with a loan to petitioner of the value in excess of $25,000 the debt would be owing by petitioner, instead of the alleged donees.

The memorandum of November 23, 1935, purports to list further gifts of $5,000 to each child and the wife. Petitioner testified that the alleged gift represented "* * * a cash credit against money they owed me.""For buying securities for them." Concerning whether a book record before him, which was not placed in evidence, contained any credit for the alleged gifts, petitioner testified as follows:

It does, in this way, that I added $5,000 for my one-sixth, and I credit $30,000 or a total of $60,000 for two years' gifts, this paper and the other paper.

Consideration of the memoranda in the light of petitioner's testimony indicates intent to make a record showing cash gifts, totaling $50,000 in connection with the *120 bonds specified in the November 22, 1934, memorandum, and securities purchased in 1935. If it was intended to cover subsequent purchases made by petitioner in 1935 for their account, there is no explanation of the status of any excess of value over $30,000. If the additional amounts are regarded as credits on "loans" made in the November 22, 1934, memorandum, it would seem that the alleged donees were regarded as the borrowers in that year. If such were the case, the alleged donees would be indebted to the petitioner for the difference, if any, between $60,000 and the fair market value of the bonds on November 22, 1934.

There was no arms' length purchases by the petitioner of the bonds listed in his memorandum of November 22, 1934, as they were required by him from Gradwik, Inc. of Delaware at cost to it, and such cost figures, with some immaterial differences, were used as the cost to him. Findings 76 and 105. We have determined the sales price to Gradwik, Inc. of Delaware and cost to petitioner to be the fair market value of the bonds at the time of the transfer. Findings 100 and 104. Thus, the figures used by petitioner did not reflect the actual cost to him or represent the value *121 of the bonds on November 22, 1934, the date of his alleged gift.

In 1935 the petitioner acquired shares of stock of Goldberger-Raabin Co., Mideastern Contracting Corporation and Hart & Early Co., and placed them in the family account. The sales price of these securities were returned by Gradwik, Inc. of Delaware at cost to it, but upon brief it is conceded that fair market value at the time of sale is the sales price to Gradwik and cost to petitioner. These securities, having a fair market value of about $120,000 at the time of their acquisition by petitioner from Gradwik, Inc. of Delaware, were placed in the family account, but no contention is made by petitioner upon brief that funds of the family account were used to purchase the securities. The memorandum of November 22, 1934, does not include these securities and there is no evidence in the record on petitioner's intent to make them the subject of a gift. The contention of petitioner upon brief is that the alleged 1935 gifts of $5,000 each to petitioner's wife and children were applied as credits against the purchase of the bonds listed in the memorandum of November 22, 1934. Such a view leaves us with no evidence on gifts *122 of these shares of stock. If the gifts alleged to have been made in 1935 were intended to apply on purchases made after November 22, 1934, there would be considerable indebtedness owing by petitioner or the alleged donees for excess value of the stocks. In any event, petitioner was, on the face of the memorandum made by him, either intended to be indebted to his alleged donees, or vice versa. Notwithstanding this condition of the record, aside from the gifts alleged to have been made on November 23, 1935, there is no evidence of repayment or charge-off of the loans. We do know that they were not taken into account by petitioner in the distribution he alleges was made of the securities when the family account was terminated in 1941.

The investment ledger of petitioner for 1934 credits petitioner's four children with interest of $2,500 received on the $50,000 face amount of bonds of the New England Gas & Electric Co., one payment of which interest having been made on November 1, 1934. Robert Goodman reported one-fourth of such interest in his return for 1934. The record does not show the manner in which the petitioner acquired the bonds from his children, if, as he alleged, they owned *123 the securities as late as November 1, 1934.

It is evident that petitioner did not intend to make outright gifts in 1934 of the bonds.

The petitioner also asserts that the writing of November 22, 1934, constituted a declaration of trust with himself as trustee, as to the securities described therein. Though he does not discuss the point, the importance of the question justifies further examination of the record. The respondent contends that the document and the one executed in 1935 are nothing more than self-serving declarations and have no probative value.

In Greenspun v. Commissioner, 156 Fed. (2d) 917 , the court, referring to certain questions, involving family nature of trusts, dominance by a father-husband-grantor, also a question as to whether payments were deductions or dividends, said:

* * * Coming up on a record which tells a tale of family trusts and family corporations, and of Greenspun as the genius evoking and dominating them all, their proper answer requires not only a recognition of these facts but a thorough understanding and correct appraisal of the weight they should be given in the scales of decision.

The record is of much the same general nature *124 here, and we must weigh the facts in the light of the whole situation.

There is little to indicate that petitioner ever regarded the writing of November 22, 1934, as creating a trust. There was no transfer of the bonds to petitioner, as trustee; the interest and dividends on the securities were paid to petitioner and deposited by him in his personal bank account; there was no segregation of the property and income therefrom in a special account, or otherwise; petitioner did not endeavor to prove and does not contend, that he ever filed a fiduciary return for the alleged trust; the 1934 return of petitioner contains nothing on the transfer of the bonds to a trust and while his 1935 return reported gains on sales on the basis of a one-sixth ownership, no reference was made to the "trust" as grounds for using one-sixth of the basis and selling price of securities in computing gain or loss; the 1936 return of petitioner reported total dividends and interest received and gain derived, and showed one-sixth thereof as being petitioner's income with a reference that his wife and four children each had a "one-sixth in the" accounts and other than the preparation of income tax returns for *125 the minor children, no accounting of any nature was ever made for the "trust". Thus, petitioner did not perform any of the ordinary duties of a trustee or divulge that he was acting as such, and his declaration that he would account for his acts as trustee from time to time "as in my [his] judgment seems best" was never put into effect. Neither did petitioner provide in his declaration for making distributions of income; for re-investing principal, investing earnings or otherwise increasing corpus, for a date of termination or for any restrictions upon his powers as a trustee. His failure in any manner to limit his powers as a trustee indicates that he never intended to assume any of the legal obligations of a trustee; rather that he intended to retain the right to deal with the property at all times in his individual capacity. The trust alleged, so obviously would not meet the test of Helvering v. Clifford, 309 U.S. 331 , that we consider further discussion in that regard superfluous. We, however, note Harry F. Canelo, 41 B.T.A. 713 , where the taxpayer contended that he created a trust orally to engage in stock transactions for the benefit of a member of *126 his family and close relatives. The brokerage accounts were kept in his name, but he informed floor men who handled the accounts that other members of his family had a financial interest in the brokerage accounts. He filed fiduciary returns each year for the alleged trust and caused individual returns to be prepared and executed for the individuals listed in the fiduciary returns as beneficiaries and later paid the tax shown to be due in the individual returns. Withdrawals of cash were made from the brokerage accounts by the taxpayer, some of which were used by him for the benefit of the alleged beneficiaries. From these and other facts we held that there was no trust.

There was never a delivery of the securities to the alleged donees here, unless, as contended by petitioner, it occurred upon the closing of the family account in 1941. At that time petitioner prepared a statement of the securities on hand and showed a division of them approximately equally among his four children and his wife and himself. He testified that the securities were distributed in accordance with his tabulation. We are asked to accept this testimony of an interested witness as proof of distribution, without *127 being supported or corroborated by any other evidence. Uncontradicted evidence, particularly of a single witness, is not necessarily binding on the Court, especially where the witness is a party and so interested. Easton v. Brant, 19 Fed. (2d) 857 ; Ramsay v. Lebow, 220 Mass. 227 ; 107 N.E. 926 ; MacReynolds v. Coney Island & B.R. Co., 155 N. Y. S. 655 . The evidence is to be considered as a whole and in the setting in which given. Dimond v. Terminal R.R. Ass'n of St. Louis, 141 S.W. (2d) 789 . Its persuasiveness may be destroyed by analysis, though uncontroverted. Goodyear Tire & Rubber Co. v. Federal Trade Commission, 101 Fed. (2d) 620 . There are many exceptions to the rule as to following uncontradicted testimony. Quock Ting v. United States, 140 U.S. 417 . See also Platter v. Minneapolis & St. L.R. Co., 143 N.W. 992 . Considering the nature of the issue and the interest of the witness, more should have been offered to prove actual distributions. Under the circumstances present here, we should not accept the petitioner's testimony alone as sufficient proof of actual distribution *128 of the securities to the designated parties.

We therefore, on all of the evidence, find that no completed gifts were made; that no trust was created, and that all of the interest of $10,127.83 in question is taxable to petitioner.

The petitioner concedes upon brief that our conclusion with respect to Issue A, will dispose of not only petitioner's taxable interest in gain or loss on the securities in 1935, but his interest in income from, and gain and loss from, the sale of the securities in the family account in all subsequent years. The petitioner is not contesting the respondent's determination respecting the date of acquisition, cost, sales price or fair market value of the securities in 1935, except the date of acquisition and cost of bonds of the Federal Public Service, United Public Utilities Co., and Central West Public Service. Such bonds were acquired about September 24, 1934, at a cost of $30,600, $27,170, and $4,845, respectively. Adjustments will be made under Rule 50 in accordance therewith.

Issue C. - Salary, $1,500

Findings of Fact

119. In 1935 petitioner received salary of $2,000 from Gradwik, Inc. of Delaware for his services as secretary and treasurer of *129 the corporation. In his determination of the deficiency the respondent held that $500 of the amount constituted salary and that the remainder of $1,500 was taxable to petitioner as a dividend.

Opinion

We have held that the entire amount of $2,000 was deductible by Gradwik, Inc. of Delaware in 1935, as reasonable compensation for personal services actually rendered. The conclusion requires us to hold here that the amount in question constituted salary as an officer of the corporation, and not a dividend from the corporation. On this issue we hold for the petitioner.

Issue D. - Dividend of $18,684.29

Findings of Fact

120. On October 9, 1935, Gradwik, Inc. of Delaware, issued a check to Robert Goodman in the amount of $3,000 for salary. The check was signed by petitioner as president-treasurer and was endorsed by petitioner for deposit in the payee's account in the Public National Bank & Trust Co.

121. On October 8, 1935, Robert Goodman issued a check to petitioner for $3,100, who deposited the check in his account with the Chase National Bank. The credit balance in the bank account of Robert Goodman was $2,018.36 at the time he issued the check. The amount of the check *130 was not included in petitioner's income tax return for 1935.

122. The petitioner reported no amount in his 1935 income tax return as income from dividends. In his determination of the deficiency the respondent included in petitioner's gross income the amount of $18,684.29 as dividends received from Gradwik, Inc. of Delaware.

Opinion

In determining the deficiency herein the respondent explained his inclusion of this amount in petitioner's income by stating that:

Examination of the records of Gradwick, Incorporated, for the year 1935 discloses that you understated the dividends which you received from that corporation by $18,684.29.

The petitioner alleged in his petition that he had "no knowledge of how the amount was computed by respondent nor where it comes from." In his answer to the petition, the respondent admitted a determination by him that petitioner received dividends in the amount of $18,684.29 from Gradwik, Inc. in 1935, and affirmatively alleged that petitioner knowingly, with intent to evade tax, "failed to report the receipt of any taxable dividends during said year." There also was a charge of fraud with respect to understatements by petitioner of interest income *131 and capital gains and the amount in each instance was specifically alleged.

At the hearing petitioner testified that he received no dividends from Gradwik, Inc. of Delaware in 1935 and had no information on how the amount of $18,648.29 was computed except that he had a notion that some part of it might consist of disallowed salaries. Upon brief the respondent asks us to sustain his determination upon the ground that the petitioner has failed to overcome the prima facie correctness of his finding. He contends that a dividend of $3,000, being, he says, part of the $18,648.29, was paid to petitioner under the guise of a salary to Robert Goodman, and argues that petitioner's failure to report the amount was fraudulent with intent to evade tax. No charge of fraud is made upon brief, with respect to the amount of dividends in excess of $3,000.

An examination of books of Gradwik, Inc. of Delaware which were submitted in evidence by respondent fails to disclose the payment of any dividends, as such, to petitioner and our attention has not been called to any other entries that could be construed as payments of dividends. The respondent did not disclose the basis of his determination, except *132 as to the $3,000 salary to Robert. Under the circumstances, we accept the testimony of petitioner that he received no dividends in 1935 from Gradwik, Inc. of Delaware, excepting, however, the payment of $3,000 as salary to Robert Goodman, which we conclude and hold represents a taxable dividend to petitioner.

Issue E. - Interest deduction of $14.68

Issue F. - Contribution of $606 to Walden School

Opinion

The petitioner abandoned the issue raised on the disallowance by respondent of a deduction of $14.68 for interest, and respondent now concedes that petitioner is entitled to a deduction of $606 for a contribution made to the Walden School.

Issue G. - Fraud

Opinion

The respondent alleged that the petitioner filed a false and fraudulent return for 1935 with intent to evade tax because of an understatement of interest income in the amount of $9,452.81; an understatement of capital gains, amounting to $59,475.71, and failure to report the receipt of any taxable dividends; and that petitioner is subject to the 50 per cent penalty under section 293 (b) of the Revenue Act of 1934. The burden is upon the respondent to show such fraud. Upon brief the respondent confines his *133 discussion of the question of fraud to affirmative proof of the receipt by petitioner of $5,112.50 1 of interest income, all of which we have found was collected by the Chase National Bank and credited to petitioner's individual checking account. Of this amount $425 was received on bonds of the General Water Works and Electric Corporation and Ohio Water Service Co., which bonds the petitioner contended, supra, were the subject of gifts made by him or Rose Goodman to their four children, one-fourth to each, in 1934. The remaining $4,687.50 of the interest of $5,112.50, except $135 on bonds of New York City, was collected on bonds which petitioner contended, supra, belonged to the family account. Petitioner admits the receipt of all of the interest.

The contentions of respondent with respect to failure of petitioner to report capital gains, relate to sales of some of the securities, which petitioner contended, supra, were owned by his children and the family account.

*134 We will first consider the interest derived from bonds of the Community Power & Light Co. which petitioner contends were owned by his children. The facts and testimony on the question were discussed by us at considerable length in reaching a conclusion that no completed gifts were made and that the interest income and capital gains were taxable to petitioner. No effort appears to have been made to deliver the bonds to the alleged donees by any form of transfer and as to these particular securities, no contention is being made that they were held by petitioner as a trustee for the children. As the record owner of the bonds, petitioner received the interest paid on them and the proceeds of sale, without, so far as the evidence discloses, making any accounting therefor to his children.

If the petitioner ever made an accounting to his children by segregating the income in separate bank accounts, or otherwise, the evidence to prove it would be in his possession, and he must bear the burden of his failure to produce it after the respondent had made out at least a clear prima facie case of fraud. He caused the children to report the interest, but the record does not disclose whether he *135 included in their returns, the gains realized from the sales.

Fraud may be present even though the income is reported by fictitious owners and the tax thereon paid by the owner of the securities from which the income was derived. Harry F. Canelo, supro. The petitioner here had had numerous dealings in securities and had knowledge of means to employ to transfer title. The fact that he did nothing to make delivery and continued to hold the bonds as his own, while pretending to the Commissioner that they belonged in equal shares to his children, evidences, under the circumstances present here, a fraudulent purpose, with intent to evade tax. Proof by respondent that part of the deficiency was due to fraud, with intent to evade tax, is sufficient to sustain the imposition of a fraud penalty on the entire amount of the deficiency. Because of the importance of the question on like issues in subsequent taxable years involving petitioner, the contentions with respect to fraud in connection with the family account will be here considered and decided.

The effect of the respondent's argument on the question is that the writings of November 22, 1934, and November 23, 1935, are mere self-serving *136 declarations of petitioner, which were used to form the basis for a tax evasion plan.

The facts surrounding the creation and operation of the family account were considered at length in disposing of the issue concerning the taxation of the income of the account to petitioner, and it would serve no useful purpose to repeat them here. We concluded that there was no gift of the securities and that no trust was created.

The petitioner argues that even if no trust existed, there is conclusive evidence contrary to fraud, and points to the income tax returns each filed for one-sixth of the income; that petitioner's returns for 1936 to 1941, inclusive, informed respondent of the existence of the "trust" and that upon the termination of the "trust" in 1941, the corpus thereof, consisting of securities, was distributed equally among the six beneficiaries. These points were considered to the extent necessary in passing upon the issue of whether the income of the account was taxable to petitioner.

We have held that filing fiduciary returns for a trust created for a fraudulent purpose, and paying the tax shown to be on returns the trustor caused the alleged beneficiaries to file, may not *137 be enough to overcome fraud. Harry F. Canelo, supra. Here no claim is made by petitioner that he filed fiduciary returns as trustee, and there was no disclosure of the family account by petitioner to put the respondent on notice until his 1936 return was filed. Thus, the notice by petitioner was not as prompt or as complete when first made, as the notice given in the Canelo case, supra. Notwithstanding proof that petitioner prepared returns for his wife and minor children, and made no distributions of cash to the alleged beneficiaries of the family account, petitioner made no effort to prove the source of the money used to pay the taxes shown to be due on the returns.

Such evidence as was offered on the matter of delivery of corpus of the family account is limited to a tabulation of securities on hand on November 13, 1941, in which an equal distribution among the four children and petitioner and his wife is shown and testimony of petitioner that distributions were made in accordance with the statement prepared by him. For reasons already given, we should not accept the evidence offered as sufficient proof of delivery among the alleged beneficiaries. Proof of delivery *138 of some of the securities out of the account of petitioner with the stock brokerage firm of Boody, McLellan & Co. on November 15, and 26, 1941, does not establish delivery of the securities to the alleged beneficiaries.

No purchases were made in 1941 for the account of the family account but proceeds of sales and loans and interest and dividend payments received, amounted to about $29,000, of which $4,409.67 was loaned to Airhill Corporation. There is no evidence in the record as to the disposition of the balance of about $25,000 received into the account in 1941.

We find nothing in the evidence relied upon by petitioner to overcome the showing of fraud which in our opinion respondent made.

The evidence, in our opinion, establishes that the family account was a fraudulent device of petitioner to divide income among members of the family unit for income tax purposes, while retaining all the resulting benefits for himself; and we so hold. The failure of petitioner to report the interest and income in question from securities in the family account was fraudulent, with intent to evade tax, and a part of the deficiency for 1935 was due to fraud, with intent to evade tax and it was *139 not error for respondent to impose the fraud penalty.

Docket No. 104870 - Builo Corporation - Year 1936

Issue A. - Reducing deduction for salaries from $6,000 to $500

Findings of Fact

123. The petitioner is a New York corporation organized November 27, 1935. Its income tax return for 1936 was filed on March 13, 1937, with the collector for the third district of New York. In March 1937 it filed a return as a personal holding company with the same collector.

124. The return of petitioner for 1936 reported interest income of $1,526.98 on bonds of five corporations; a fee of $2,900 received on a building loan mortgage, and interest of $1,105.11 received on mortgages executed by the Winhill Corporation, a corporation, one-half of whose stock was owned by Charles Goodman and members of his family, in the amount of $58,950 and deductions of $6,124, consisting of $25 for state tax; $99 for capital stock tax, and $6,000 for salaries to Robert Goodman and Charles Goodman, one-half to each.

125. In 1936 Charles Goodman managed the affairs of petitioner, made the loan to the Winhill Corporation for construction of small buildings, and saw to it that the loan was properly expended. *140 When Robert Goodman was home from school in 1936, he received training from his father in the construction of small buildings. Robert Goodman performed no services for petitioner in 1936.

126. All of the outstanding stock of petitioner, consisting of 100 shares of common was owned in 1936 by Charles Goodman and his wife and four children. Charles Goodman owned 16 2/3 shares of the stock.

127. The return of petitioner for 1936 lists Charles Goodman and Robert Goodman as president and vice president, respectively, and each owning 16 2/3 shares of its stock.

128. In his determination of the deficiencies the respondent disallowed the deduction of $3,000 for salary to Robert Goodman upon the ground that no services were performed by him; reduced the deduction of $3,000 for salary to Charles Goodman to $500 upon the ground that the difference of $2,500 represented excessive compensation, and held that the amount of $5,500 disallowed as salary represented a dividend to Charles Goodman. In determining a deficiency in income tax against Charles Goodman for 1936, the amount of $5,500, plus $1,250 of the interest involved in issue B, infra, was included in his taxable income by respondent *141 as dividend payments.

Opinion

The argument of petitioner on this issue is only that the aggregate salaries constitute reasonable compensation for services actually rendered by both of the officers and that the deductibility of the total amount should be tested upon that basis. Such a method is not sanctioned by the statute. L. Schepp Co., supra.

No services were performed by Robert Goodman and no evidence was offered to establish the reasonableness of $3,000 as salary paid to Charles Goodman for the services he performed. The petitioner was a family corporation and its business activities in 1936 were not extensive, being limited to receiving interest on bonds and making a loan to a corporation, one-half of whose stock was owned by petitioner's stockholders. The meager evidence on the issue is insufficient to overcome the prima facie presumption of correctness of the respondent's action, and we will not disturb his adjustments of the salary deductions.

Issue B. - Interest $1,750

Opinion

The petitioner concedes upon brief that it received interest aggregating $1,750 on two classes of bonds of the New England Gas & Electric Co. and bonds of the American Utilities Service, *142 and that the respondent properly included the amount in its income.

Issue C. - Negligence Penalty

Opinion

The respondent asserted a penalty of 5 per cent under the provisions of section 293(a) of the Revenue Act of 1934 because of petitioner's negligence in failing to include the interest of $1,750 in its return.

The only explanation in the record for the omission of the amount in the return is testimony of Charles Goodman that it was overlooked and that he did not know why it was overlooked. Such testimony is not enough to prove lack of negligence in reporting the income. R. V. Board, 14 B.T.A. 374 ; affd., 51 Fed. (2d) 73 ; Oscar G. Joseph, 32 B.T.A. 1192 . The penalty is therefore sustained.

Docket No. 104869 - Charles Goodman - Year 1936

Issue A. - Statute of Limitations

Issue B. - Interest Income, $1,549.17

Findings of Fact

129. During 1936 the petitioner received $1,842.50 interest on $67,000 face amount of bonds of the American States Public Service Co. 5-1/2/48, of which $3,000 were held by him for his sister, Rose Shupan, to whom in 1936 petitioner paid $165 of the interest received. Petitioner purchased the $3,000 of *143 bonds with money supplied him for that purpose by a sister of Rose Shupan.

130. In his income tax return for 1936, filed on March 13, 1937, petitioner reported as interest received on the bonds, $293.33, the amount being one-sixth of the interest of $1,760 received on $64,000 of the bonds. In his determination of the deficiency the respondent taxed petitioner on the entire amount of interest of $1,842.50 received on the bonds, without disclosing his reasons for including the amount paid to Rose Shupan.

Opinion

The petitioner upon brief concedes that assessment of the deficiency is not barred by the statute of limitations and admits the receipt of the interest payments of $1,842.50. The parties differ on whether the interest of $165 paid to Rose Shupan is taxable to petitioner and whether all, or only one-sixth of the remainder of the interest of $1,842.50 is taxable to petitioner.

The testimony of petitioner concerning the purchase of the bonds for and the payment of interest, as received by him, to Rose Shupan is supported by two of his personal checks payable to the order of Rose Shupan for the semi-annual interest payments received by him in 1936. Other testimony by him *144 is that the bonds were exchanged in 1937 for preferred and common stock of the American States Utility Corporation and cash in a reorganization; that he purchased 84 additional shares of preferred with part of the cash, paying the remainder to Rose Shupan, and that in 1940 and 1941 he transferred the preferred and common stock, respectively, to her. We conclude that the $165 interest is not taxable to the petitioner

As pointed out in our discussion of the income tax liability of this petitioner for 1935, supra, the family account was maintained until November 1941, when it was terminated. Each year the petitioner reported one-sixth of the income of the account as taxable to him and the respondent determined that all of the income was taxable to petitioner, and not one-sixth to petitioner, and a like share to his wife and each of the four children. Upon brief he concedes that our decision on the interest of petitioner in the account in 1935 will control the taxability of the income of the account in 1936 and subsequent years. It is also conceded that these bonds were a part of the account. Accordingly, we hold that, except for the interest of $165 on bonds held for the account of *145 Rose Shupan, all of the interest in question is taxable to petitioner.

Issue C. - Dividends of $187.50 from Public National Bank

Opinion

Upon brief the petitioner concedes that he is taxable on $187.50 as dividends received on 500 shares of stock of the Public National Bank.

Issue D. - 1. Dividends of $1,224 on 1,045 Shares of Stock of the United Public Utilities Corp.

2. Dividends of $357 on 1,190 Shares of Stock of the Penn Western Gas & Electric Co.

3. Liquidating Dividend of $10,000 on 500 Shares of Stock of Goldberger-Raabin Co.

4. Capital Gain of $83 on Bonds of Inland Gas Company

Findings of Fact

131. In 1936 the petitioner purchased with funds in the family account 330 and 860 shares of stock of the Penn Western Gas & Electric Co. at a cost of $7,806 and $20,712.50 respectively. The certificate for the block of 330 was issued in the name of Robert Goodman and for the 860 shares, in the name of petitioner. Dividends aggregating $357 were paid on the stock by checks issued on December 23, 1936, payable to the order of the respective stockholders. The checks were deposited to the order of the respective payees, the one in favor of Robert having been endorsed *146 by petitioner.

132. The petitioner also received ordinary dividends of $1,224 on shares of stock of the United Public Utilities Corp., a liquidating dividend of $10,000 on 500 shares of stock of the Goldberger-Raabin Co., and derived capital gain of $83 on the sale of 18 bonds of Inland Gas Company. In his return for 1936 the petitioner reported $1,596.83 of the dividends, and $14 of the gain, as taxable to him. In his determination of the deficiency the respondent included all of the dividends and gain of $83 in the income of the petitioner.

Opinion

These securities were in the family account and the only question still at issue is whether petitioner's interest in the income thereof was 16 2/3 per cent, or 100 per cent. Having concluded that all of the income of the account is taxable to petitioner, we sustain the respondent on this issue.

Issue E. - Dividends of $6,750 from the Builo Corporation

Opinion

The facts with respect to this issue are set forth in the case of the Builo Corporation for 1936, supra.

At the hearing petitioner testified that no dividends were declared by, and that he received no dividends from, the Builo Corporation in 1936. Upon brief he asserts *147 that he is unaware of the basis of the respondent's determination of the receipt by him in 1936 of dividends totaling $6,750 from the corporation.

The statements attached to the deficiency notices mailed to petitioner and the Builo Corporation show that the amount consists of the following items: Salary to Robert Goodman $3,000

Disallowed portion of salary paid to

Charles Goodman by Builo Corporation 2,500

Portion of interest not reported by Builo

Corporation 1,250

Petitioner argues that after "showing" all of the income he received from the Builo Corporation, the burden shifted to respondent to prove that other income constituted the dividends in question, there being no burden upon petitioner to proceed further and prove a negative.

The petitioner was on notice of the manner in which the respondent made his determination and can not escape his burden by a mere categorical denial of the receipt of any dividends. His testimony is nothing more than an unsupported negative answer to the question presented to us for decision.

In Old Mission Portland Cement Co. v. Helvering, 293 U.S. 289 , the Court said that a ruling of the Commissioner on whether *148 a certain donation was made for a prescribed purpose was presumed to rest upon a correct determination of the facts. The effect of the testimony of petitioner here is a conclusion, given without any circumstances to gauge its a

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