[396]*396OPINION.
Murdock :
The respondent has filed two briefs in this proceeding, but in neither brief does he advance any argument in support of his determination that the sales of securities to the petitioner’s wife in 1931 were lacking in bona fides, were ineffective to entitle the petitioner to deductions for losses, or were an indication that a part of the deficiency for 1931 was due to fraud with intent to evade tax. The closest scrutiny fails to reveal any reason why those sales should be regarded as lacking in bona fides, as being ineffective to entitle the petitioner to the deductions which he claimed, or to indicate that any part of the deficiency for 1931 was due to fraud with intent to evade tax. Further discussion of those transactions seems unnecessary.
This leaves for consideration only the transactions between the petitioner and his wholly owned corporation, Innisfail, involving the ownership by Innisfail of Chrysler, Hudson, and Aldebaran stock. Two general issues are involved. The first is whether the transactions were mere shams so that the petitioner’s claims of losses and his failure to report the dividends on the stock show an intent upon his part to defraud the Government of taxes legally due from him. The [397]*397respondent has the burden of proof on that issue. The second is whether the petitioner correctly returned his income. The petitioner has the burden of proof on that issue.
The Commissioner filed his original brief on December 19,1936, but made no argument whatsoever in that brief to support his determination that a part of the deficiency for 1931 was due to fraud with intent to evade tax. Fraud for the other years had not been suggested at that time. Thereafter, the fraud issue was raised for the other two years by amended answers at the separate docket numbers for those years.
The fraud issue is whether any part of the deficiency for any of the years 1929, 1930, or 1931 was due to fraud with intent to evade tax. Facts relied upon to support fraud must be alleged as well as proven. The facts alleged by the respondent in these proceedings to support his charges of fraud consist only of the sales to the wife, the sales of Chrysler, Hudson, and Aldebaran stock to Innisfail, and the failure of the petitioner to report the dividends upon the Chrysler and Hudson stock. All of those circumstances have been considered carefully, as well as all other transactions which bear in any way upon them. Obviously, the discussion must be limited to the more significant events — but none has been overlooked. The cases cited by the respondent upon the fraud issue are not in point, some because they involved only attempted reorganizations, others because they show an improper use of control over the corporation. This case involves neither an attempted reorganization nor improper control over Irniisf ail.
The petitioner has testified that he honestly believed that he had a right to make the sales to the corporation and to take the deductions for losses resulting from those sales, and was not required thereafter to report the dividends on the securities sold. There is no evidence in the record which, in our opinion, can be regarded as indicating the contrary. If he did not have this belief and if he did not intend to transfer the securities to Innisfail, it is difficult to understand his actions. Although he was trying to keep down his taxes, all of his acts indicate that he was endeavoring to meet the requirements of the law. He thought his plan was effective and it never occurred to him to go beyond the legal effect of his acts to avoid tax by means of fraud or deception. His view was not unreasonable, and even if it were wrong, his belief in it would exonerate him from any charge of fraud. Rogers Recreation Co. v. Commissioner, 103 Fed. (2d) 780; Peterson & Pegau Baking Co., 2 B. T. A. 637, 640; J. S. McDonnell, 6 B. T. A. 685, 695; George L. Richard, 15 B. T. A. 316, 317; Landers Brothers Co., 17 B. T. A. 1078,1081; James Nicholson, 32 B. T. A. 977, 988, 989. There is no indication that he ever misrepresented any fact, withheld [398]*398any information, or resisted or prevented the discovery by the Commissioner of any pertinent fact. The Commissioner does not claim that he has been misled.
Since the transactions in question were between the petitioner and his wholly owned corporation, they must be carefully scrutinized for the purpose of determining that the petitioner took no improper advantage of his power over the corporation and that the transactions were what they would seem to be upon a less intensive examination. The transactions have been subjected to careful scrutiny.
The respondent argues that the separateness of Innisfail should be ignored for tax purposes in this proceeding. The facts show that Innis-fail was regularly incorporated and was a separate legal entity from the petitioner. The respondent does not contend otherwise. He merely contends that the separate corporate entity should be disregarded for income tax purposes. Yet he, himself, has not disregarded the separateness of Innisfail for income tax purposes but has treated Innis-fail as a separate taxable entity. The corporation had many admittedly legitimate transactions and may not be disregarded for tax purposes. See Smith v. Higgins, 102 Fed. (2d) 456, which involved Innisfail and the present petitioner.
The Commissioner requested in his final brief a finding that the petitioner “transferred by bill of sale to said corporation [Innisfail] 5,005 shares of Chrysler preferred stock then held by Bassett for 97 shares of Innisfail capital stock, together with the option right granted by the exchange agreement of June 2, 1925.” That finding is a proper one and it shows that Innisfail Avas the owner of the 5,005 preferred shares and of the right under the option. Innisfail then exercised the option and exchanged the 5,005 shares of preferred for 26,477 shares of Chrysler common stock. Thus it became the owner of the 26,477 shares of Chrysler common stock in 1926. The remaining Chrysler shares were purchased by subscription in 1928. Only the Hudson and Aldebaran shares were purchased directly from the petitioner.
The respondent argues that Innisfail paid no consideration to the petitioner for any of the shares. Innisfail issued its own stock in exchange for the Chrysler preferred and the option right, and it can not be forcefully argued that there was any lack of consideration for that transfer. The Chrysler common was not acquired from the petitioner but was acquired by exercising the option and exchanging the preferred for the common. Clearly Innisfail became the owner of those common shares and there is no basis for any argument that it failed to pay proper consideration for them. The petitioner advanced the subscription price for the 4,412 Chrysler common shares acquired in 1928 and charged Innisfail with the amount of that [399]*399advance on his books. A corresponding entry was made upon the books of Innisfail to show that it owed the amount to the petitioner. Innisfail purchased the Hudson stock and the Aldebaran stock directly from the petitioner and entries were made upon its books and upon the books of the petitioner to show that it owed the petitioner the purchase price of those shares. Consideration can move from a purchaser to a seller by means of debits and credits upon the books of the two parties without the actual transfer of any funds.
Free access — add to your briefcase to read the full text and ask questions with AI
[396]*396OPINION.
Murdock :
The respondent has filed two briefs in this proceeding, but in neither brief does he advance any argument in support of his determination that the sales of securities to the petitioner’s wife in 1931 were lacking in bona fides, were ineffective to entitle the petitioner to deductions for losses, or were an indication that a part of the deficiency for 1931 was due to fraud with intent to evade tax. The closest scrutiny fails to reveal any reason why those sales should be regarded as lacking in bona fides, as being ineffective to entitle the petitioner to the deductions which he claimed, or to indicate that any part of the deficiency for 1931 was due to fraud with intent to evade tax. Further discussion of those transactions seems unnecessary.
This leaves for consideration only the transactions between the petitioner and his wholly owned corporation, Innisfail, involving the ownership by Innisfail of Chrysler, Hudson, and Aldebaran stock. Two general issues are involved. The first is whether the transactions were mere shams so that the petitioner’s claims of losses and his failure to report the dividends on the stock show an intent upon his part to defraud the Government of taxes legally due from him. The [397]*397respondent has the burden of proof on that issue. The second is whether the petitioner correctly returned his income. The petitioner has the burden of proof on that issue.
The Commissioner filed his original brief on December 19,1936, but made no argument whatsoever in that brief to support his determination that a part of the deficiency for 1931 was due to fraud with intent to evade tax. Fraud for the other years had not been suggested at that time. Thereafter, the fraud issue was raised for the other two years by amended answers at the separate docket numbers for those years.
The fraud issue is whether any part of the deficiency for any of the years 1929, 1930, or 1931 was due to fraud with intent to evade tax. Facts relied upon to support fraud must be alleged as well as proven. The facts alleged by the respondent in these proceedings to support his charges of fraud consist only of the sales to the wife, the sales of Chrysler, Hudson, and Aldebaran stock to Innisfail, and the failure of the petitioner to report the dividends upon the Chrysler and Hudson stock. All of those circumstances have been considered carefully, as well as all other transactions which bear in any way upon them. Obviously, the discussion must be limited to the more significant events — but none has been overlooked. The cases cited by the respondent upon the fraud issue are not in point, some because they involved only attempted reorganizations, others because they show an improper use of control over the corporation. This case involves neither an attempted reorganization nor improper control over Irniisf ail.
The petitioner has testified that he honestly believed that he had a right to make the sales to the corporation and to take the deductions for losses resulting from those sales, and was not required thereafter to report the dividends on the securities sold. There is no evidence in the record which, in our opinion, can be regarded as indicating the contrary. If he did not have this belief and if he did not intend to transfer the securities to Innisfail, it is difficult to understand his actions. Although he was trying to keep down his taxes, all of his acts indicate that he was endeavoring to meet the requirements of the law. He thought his plan was effective and it never occurred to him to go beyond the legal effect of his acts to avoid tax by means of fraud or deception. His view was not unreasonable, and even if it were wrong, his belief in it would exonerate him from any charge of fraud. Rogers Recreation Co. v. Commissioner, 103 Fed. (2d) 780; Peterson & Pegau Baking Co., 2 B. T. A. 637, 640; J. S. McDonnell, 6 B. T. A. 685, 695; George L. Richard, 15 B. T. A. 316, 317; Landers Brothers Co., 17 B. T. A. 1078,1081; James Nicholson, 32 B. T. A. 977, 988, 989. There is no indication that he ever misrepresented any fact, withheld [398]*398any information, or resisted or prevented the discovery by the Commissioner of any pertinent fact. The Commissioner does not claim that he has been misled.
Since the transactions in question were between the petitioner and his wholly owned corporation, they must be carefully scrutinized for the purpose of determining that the petitioner took no improper advantage of his power over the corporation and that the transactions were what they would seem to be upon a less intensive examination. The transactions have been subjected to careful scrutiny.
The respondent argues that the separateness of Innisfail should be ignored for tax purposes in this proceeding. The facts show that Innis-fail was regularly incorporated and was a separate legal entity from the petitioner. The respondent does not contend otherwise. He merely contends that the separate corporate entity should be disregarded for income tax purposes. Yet he, himself, has not disregarded the separateness of Innisfail for income tax purposes but has treated Innis-fail as a separate taxable entity. The corporation had many admittedly legitimate transactions and may not be disregarded for tax purposes. See Smith v. Higgins, 102 Fed. (2d) 456, which involved Innisfail and the present petitioner.
The Commissioner requested in his final brief a finding that the petitioner “transferred by bill of sale to said corporation [Innisfail] 5,005 shares of Chrysler preferred stock then held by Bassett for 97 shares of Innisfail capital stock, together with the option right granted by the exchange agreement of June 2, 1925.” That finding is a proper one and it shows that Innisfail Avas the owner of the 5,005 preferred shares and of the right under the option. Innisfail then exercised the option and exchanged the 5,005 shares of preferred for 26,477 shares of Chrysler common stock. Thus it became the owner of the 26,477 shares of Chrysler common stock in 1926. The remaining Chrysler shares were purchased by subscription in 1928. Only the Hudson and Aldebaran shares were purchased directly from the petitioner.
The respondent argues that Innisfail paid no consideration to the petitioner for any of the shares. Innisfail issued its own stock in exchange for the Chrysler preferred and the option right, and it can not be forcefully argued that there was any lack of consideration for that transfer. The Chrysler common was not acquired from the petitioner but was acquired by exercising the option and exchanging the preferred for the common. Clearly Innisfail became the owner of those common shares and there is no basis for any argument that it failed to pay proper consideration for them. The petitioner advanced the subscription price for the 4,412 Chrysler common shares acquired in 1928 and charged Innisfail with the amount of that [399]*399advance on his books. A corresponding entry was made upon the books of Innisfail to show that it owed the amount to the petitioner. Innisfail purchased the Hudson stock and the Aldebaran stock directly from the petitioner and entries were made upon its books and upon the books of the petitioner to show that it owed the petitioner the purchase price of those shares. Consideration can move from a purchaser to a seller by means of debits and credits upon the books of the two parties without the actual transfer of any funds. Although mere bookkeeping entries are not controlling, nevertheless, where they are in accordance with the facts and show correctly a course of dealing between two parties, and where the parties fully discharged their obligations as shown on the accounts, there would seem to be no reason for failing to give full recognition to the effect of the accounting entries. The books of the petitioner and of Innis-fail were accurately kept, were accorded complete respect by both parties, and were just as effective for all practical purposes as any accounts between separate entities doing business with each other would be. The debit balance in those accounts was sometimes in favor of one of the parties and was sometimes in favor of the other. No interest was charged upon the debit balances, but this point is not pressed and is not of sufficient importance to materially weaken the evidentiary value of the accounts. The accounts reflected the actual financial situation existing between the parties. The entries showing that Innisfail owed the petitioner the purchase price of the stocks above mentioned were in due course completely offset by other entries showing that the petitioner owed money to Innisfail. Thus it can not be argued successfully that there was any lack of consideration for the transfers of the Chrysler, Hudson, and Aldebaran stocks. The discussion above in regard to the accounting for the purchase price of securities which the petitioner sold to Innisfail applies with equal force to the method of crediting to Innisfail the dividends on the Chrysler and Hudson stock.
The respondent also argues that the sales of Chrysler and Hudson stock were incomplete because the petitioner retained the certificates in his own name and never made any delivery to Innisfail. This argument is not made in the case of the Aldebaran stock because the certificates for that stock were transferred to the name of Innisfail. The petitioner admits that the certificates for the Chrysler and Hudson stock were at all times material hereto in his name and that certificates were never issued in the name of Innisfail. He explained why he kept those particular certificates in his own name. He was the only person active in the affairs of Innisfail. He testified that corporations generally hold listed securities not in the name of the corporation, but in the name of an individual, in order to avoid the incon[400]*400venience of making documentary proof of ownership and authority to transfer which is required when a corporation attempts to sell a listed security standing in its own name, and he had the same purpose in regard to the listed securities of Innisfail. The Board is not unfamiliar with this practice. Rands, Inc., 34 B. T. A. 1094, 1106. The petitioner further explained that the Aldebaran stock was not listed, there was no reason for not having the certificates in the name of the true owner, and, therefore, certificates for that stock were issued in the name of Innisfail. Delivery is not always necessary in the case of sales of shares of stock, and the state law in regard to delivery is not necessarily controlling for income tax purposes. Dee Furey Mott, 35 B. T. A. 195; affd., 103 Fed. (2d) 1009; C. R. Dashiell, 36 B. T. A. 313; affd., 100 Fed. (2d) 625; Ruml v. Commissioner, 83 Fed. (2d) 257. However, the petitioner made such delivery as was reasonable under the circumstances, tie segregated and marked the securities belonging to Innisfail to indicate ownership by Innisfail. The respondent does not deny this. The petitioner thereafter held those certificates for Innisfail and never did anything inconsistent with or in, violation of Innisfail’s ownership of the shares. He executed bills of sale transferring the Chrysler preferred and the Hudson stock to Innisfail. Cf. Estate of James F. Foster, 13 B. T. A. 496. If there had been some other person active in the affairs of Innisfail, he might have placed the Chrysler and Hudson stock in the name of that person as a nominee. The circumstance that the listed securities belonging to Innisfail were represented by certificates in the name of the petitioner seems relatively unimportant in the light of all of the facts.
The intention of the parties is more important than delivery. Dee Furey Mott, supra; Hoffman v. Commissioner, 71 Fed. (2d) 929; Walter F. Henningsen, 30 B. T. A. 301. The intent of the petitioner to have Innisfail acquire complete legal title to and ownership of the shares appears in a number of ways. The petitioner has testified that such was his intention. He wanted Innisfail to have the original preferred shares so that it could realize the profit from the exchange and so that he would not realize that profit. He also wanted Innisfail to acquire title to the Hudson and Aldebaran shares so that he would be entitled to take a deduction for loss on those aliares. He was an intelligent man, an experienced lawyer, and a person familiar with the tax laws. He knew that the results which he desired could not be obtained unless Innisfail acquired title and ownership. Commissioner v. Ferree, 84 Fed. (2d) 124, affirming 32 B. T. A. 725. He never thereafter claimed any ownership in the shares or acted in any way inconsistent with Innisfail’s ownership. He segregated the shares and marked them as belonging to Innisfail. He had records made on his own books and upon the books of Innisfail which showed clearly that [401]*401Tirnisfa.il was the owner of the shares. Those books were inspected by the Commissioner. It is only reasonable to believe that the petitioner intended that Innisfail should own the shares.
The respondent argues that the petitioner completely dominated Innisfail and for that reason the latter is to be disregarded for tax purposes. The petitioner concedes that he dominated Innisfail, but the evidence shows that he never took any improper advantage of bis power in any of the transactions involved in this proceeding. No argument is made that any of the transactions of sale between the petitioner and Innisfail were made at prices other than the fair market price of the securities at the time of the sale. The evidence shows that the prices in every instance were fair and proper. No contention is made and there is no evidence that either the petitioner or Innisfail ever used an incorrect basis for gain or loss or an incorrect figure to represent the amount realized from any of the transactions. Innisfail received the full financial benefits and suffered the consequences of ownership of the Chrysler, Hudson, and Aldebaran shares. Although the petitioner freely transferred funds back and forth as was convenient, still there is no indication in the record that he ever used his power to control the corporation in any improper way to his own advantage, to the injury of the corporation, or to the injury of the Government. He admits that one of his purposes in organizing Innisfail was to reduce taxes. Neither the power to control nor the purpose of organization requires that the separateness of an individual and his corporation be disregarded for tax purposes where the corporation is not used improperly. Gregory v. Helvering, 293 U. S. 465; Jones v. Helvering, 71 Fed. (2d) 214; cer-tiorari denied, 293 U. S. 583; Commissioner v. Eldridge, 19 Fed. (2d) 629; James Lee Johnson, 37 B. T. A. 155 and cases there cited; affd., 104 Fed. (2d) 140.
The respondent charges at one place in his brief that the directors of Innisfail were dummies, while at another place he charges that those same directors did not authorize the acts of the petitioner on behalf of Innisfail. This inconsistency weakens both arguments, but, what is more important, the facts show that all of the acts of the petitioner on behalf of Innisfail were either authorized beforehand or were ratified afterwards by the directors of the corporation.
The record as a whole does not present clear and convincing evidence of fraud. Drawoh, Inc., 28 B. T. A. 666; George L. Richard, 15 B. T. A. 316; Harry Feldman, 34 B. T. A. 517. We hold that the Commissioner erred in determining that a fraud penalty was due under section 293 (b) for 1931, and his later contention of fraud for 1929 and 1930 also fails for lack of proof.
The deficiencies depend upon the same evidence and much of the discussion applies with almost equal force to the general issue of the [402]*402deficiencies. It shows that the various transactions were not lacking in bona fides, as the Commissioner determined, or in any other essential. It is not our province to judge the actions of the petitioner except as they may bear upon this tax question. Bullen v. Wisconsin, 240 U. S. 625. Specific provisions were inserted in the Revenue Act of 1934 (sec. 24 (a) (6)) to prevent tax avoidance by the use of a family corporation. The sales were effective to entitle the petitioner to the deductions which he claims and to relieve him from tax upon the dividends. Cf. Foster v. Commissioner, 96 Fed. (2d) 130; James Lee Johnson, supra.
Reviewed by the Board.
Decision will be entered under Buie 50.