*928 1. A taxpayer who asserts that he is not taxable on the profit which he received from the sale of stock, on the theory that he held the stock under a constructive trust, must prove the existence of such a trust.
2. The fact that the taxpayer made a payment in settlement of suits by representatives of the person from whom he purchased the stock to recover the proceeds and for an accounting, and that he had close business and social relations with the vendor and members of his family, is insufficient to establish the existence of a constructive trust, where the evidence discloses that, in the suits, the taxpayer asserted his ownership of the stock and denied that his purchase was improper, the suits were settled on advice of counsel before trial, the settlement embraced matters other than those involved in the suits, and the vendor of the stock fixed the selling price, and there is no proof that such price was not a fair one.
3. The difference between the cost of the stock and the proceeds of the sale is income of the taxpayer in the year of the sale, and, as he received the proceeds under claim and color of title and without restriction and there was no evidence at the time*929 that anyone was disposed to question his title, his income for that year is not affected by the amount paid in a later year in settlement of the suits against him.
*581 The Commissioner determined a deficiency of $922.88 in the petitioner's income tax for the year 1926. An error was assigned relating to the disallowance of a deduction amounting to $7,250.66, representing premiums paid on life insurance covering the life of Harry S. Talmadge. Counsel for the petitioner agreed with the Member at *582 the close of the hearing that the petitioner was not entitled to that deduction and has not briefed or argued that issue. The only other error assigned was assigned in the following language:
In determining the tax payable by these petitioners, the return filed by petitioners for the calendar year 1926 contained the following item:
| Schedule D (in part) | ||||
| Kind of property | Date acquired | Date sold | Amt. received | Cost |
| Stock, Star Eagle | ||||
| Publishing Co. | 5-8-24 | 5-17-26 | $314,502.00 | $59,866.66 |
*930 Net gain or loss: $254,635.39
This is incorrect in that the amount received should have been set out as $189,502.05 and the amount under "net gain" should have been $129,635.39, and the respondent erred in that the net income in the notice of deficiency should have been reduced by this amount.
FINDINGS OF FACT.
The petitioner is an individual. He has been connected with the newspaper publishing business at all times material hereto.
Harry Talmadge, Clarence Vernam, Paul Block, and Nathaniel C. Wright purchased the stock of the Newark Star Publishing Co. for about $235,000 at a receiver's sale in 1915. There were 3,000 shares of stock and each man purchased one fourth of it. The company published a newspaper known as the Newark Star Eagle. The petitioner was circulation manager for the company and resided in Newark from 1916 until the early part of 1918. Early in 1918 he left Newark and thereafter was more or less connected with the company in an advisory capacity. The four individuals, above named, and the petitioner, or some of them, were associated in the publication of newspapers in Toledo and Detroit.
The petitioner had known Wright for about twenty years*931 prior to the death of the latter and had been associated with him in business for about eighteen years. Their personal and business relationship was very close. The petitioner had known Wright's sister, Etha Wright, for a great many years. He was a frequent visitor at her home. The relations between the petitioner and Etha Wright in 1923 were very close. In the latter part of 1922 Wright was in poor health. He felt that his condition of health was rather serious. He did not want his heirs to own common stock in a newspaper. He desired that the petitioner should acquire his stock in the Newark Star Publishing Co. He owned at that time 750 shares of this stock, of which 50 shares were represented by a certificate in his own name, 350 shares were represented by a certificate in the name of his wife, and 350 shares were represented by a certificate in the name of Etha Wright, his sister. He sold 350 shares of this stock to the petitioner in October 1922 for $133.33 per share and he sold 50 additional shares *583 to the petitioner in April 1923 for $133.33 per share. Certificates for these 400 shares were delivered to the petitioner at or shortly after the dates mentioned. *932 The petitioner gave his notes to Wright in payment for the stock and subsequently paid the notes.
About the first of May 1923, while Wright was in Arizona, the petitioner entered into negotiations with Etha Wright in the presence of Frank S. Lewis, Wright's attorney. The parties knew at that time that Wright was about to die and that Wright's will directed that his property be distributed equally between Etha Wright, his sister, and Howard Wright, his nephew. The petitioner told Etha Wright that he had purchased 400 shares of stock of the Newark Star Publishing Co. from her brother at $133.33 a share, her brother desired the petitioner to acquire his remaining shares at the same price, and the petitioner would pay $133.33 a share for the remaining 350 shares of stock owned by Wright. Etha Wright agreed that the petitioner should have the stock at the price mentioned. The petitioner gave in payment for the stock his note payable to Etha Wright and Howard Wright. This note was subsequently paid. Etha Wright did not have possession of the certificate for the 350 shares of stock at that time. The certificate for the stock was received by the petitioner from Wright's clerk, who*933 had access to his safe-deposit box. This certificate was endorsed by Etha Wright.
Wright died on May 13, 1923.
The petitioner was elected a director and secretary of the Newark Star Publishing Co. in April 1923, to fill the vacancy caused by Wright's resignation. At or about this time the petitioner began to receive a salary from the Newark Star Publishing Co. The circulation of the paper had been gradually increasing and continued to increase, with a corresponding increase in receipts from advertising. The relations between the petitioner and Block became unfriendly and late in 1925 Vernam, Talmadge, and the petitioner purchased Block's interest in the corporation. Early in 1926 Block purchased all of the stock of the corporation. The petitioner in 1926 received in cash from Block $700 per share for the 750 shares of stock which had formerly belonged to Wright and the additional shares which the petitioner had acquired from Block in the latter part of 1925.
A joint return for the petitioner and his wife was filed in the tenth district of Ohio. This return was sworn to by the petitioner's wife, Mary M. Buggie, on April 13, 1927. It was made on the basis of cash receipts*934 and disbursements. Items as follows, relating to stock of the Newark Star Publishing Co., appear on that return:
| Schedule C - Profit from sale of * * * stocks * * * | ||||
| Kind of Property | Date Acquired | Amount | Cost | Net profit |
| received | ||||
| Stock-Star Eagle | Jan. 6, 1926 | $35,022.50 | $30,000.00 | $5,022.50 |
*584
| Schedule D - Capital net gain or loss from sale of | |||||
| assets held more than two years | |||||
| Kind of Property | Date | Date | Amt. rec'd. | Cost | Net gain |
| acquired | sold | or loss | |||
| Stock-Star Eagle Pubg. Co | 10/4/22 | 5/17/26 | $700.45 | $130.84 | $569.61 |
| Stock-Star Eagle Pubg. Co | 5/8/24 | 5/17/26 | 314,502.05 | 59,866.66 | 254,635.39 |
There are no other items on the return relating to stock of Newark Star Publishing Co. The respondent made no change in these items in determining the deficiency.
The petitioner and Talmadge were executors of Wright's estate. They resigned as executors at some time in 1924 in order to enter into a contract with a newspaper company in Toledo which involved a settlement of some kind with the Wright estate.
Etha Wright brought suit against Frederick S. Buggie and Mary M. Buggie, *935 his wife, in 1927 for the proceeds of the sale of the 350 shares of stock of the Newark Star Publishing Co. to Block in 1926. She alleged that she had acquired these shares from her father in 1921; she had appointed Buggie her agent and attorney in fact in respect of these shares of stock; Buggie, on or about May 7, 1923, without her authority and without her knowledge, had had these shares transferred to his own name; he had received dividends of about $25,000; he had sold the shares to Block for $700 a share, or $245,000; and she had received from Buggie a promissory note for $46,665.50 payable to her and her nephew, Howard Wright, in the belief that it was due her from her brother's estate. She further alleged as a second cause of action that, if the court should find that she made a valid sale of the stock to Buggie, then because of Buggie's superior knowledge of the condition and prospects of the newspaper which he failed to disclose to her, he became a trustee for her with respect to the 350 shares of stock and was liable to her for the proceeds of the sale and for dividends in excess of the amount of the note which she received. Buggie denied all of the allegations of Etha*936 Wright's petition wherein it was alleged that the stock did not belong to him and that he had acted improperly, and alleged that the transfer of the 350 shares of stock to him from Etha Wright was a valid sale.
Howard Wright, as administrator d. b. n. c. t. a. of the estate of Nathaniel C. Wright, brought a suit against Frederick S. Buggie, Frank S. Lewis, Mary M. Buggie, Mariet Margaret Buggie, and Mary M. Buggie, trustee, in 1927. He alleged that Nathaniel C. Wright had been the owner of 400 shares of the stock of the Newark Star Publishing Co.; 350 of these shares were transferred to Buggie without the knowledge and consent of Nathaniel C. Wright, in October 1922, at which time Buggie gave his promissory note for $46,665.50; the 350 shares were worth far more than $46,665.50; on April 25, 1923, the remaining 50 shares were transferred to Buggie *585 under similar circumstances for his note of $6,666.50; Buggie held the shares in trust for Wright; Buggie received large sums as dividends on the stock, amounting to about $26,000, and in January 1926 sold the stock for $700 per share, or $280,000, and Buggie never accounted to the estate for the money which he had thus wrongfully*937 received. Buggie alleged that he made valid purchases of the stock from Wright and denied all allegations inconsistent therewith.
The two suits above mentioned, together with other suits, were settled by an agreement dated May 7, 1929, in which it was agreed, inter alia, that the defendants in the two suits above mentioned should pay to the Ohio Savings Bank & Trust Co., trustee of the last will and testament of Nathaniel C. Wright, Etha A. Wright, and Charles Howard Wright, administrator d. b. n. c. t. a. of the estate of Nathaniel C. Wright, the sum of $125,000. Pursuant to this agreement Buggie delivered checks amounting to $125,000. It was further agreed that Buggie should receive $35,714.29 from the defendant in another suit and should receive $14,000 of the money paid by Block to Talmadge in settlement of some matters between them and two publication companies. Before entering into this agreement Buggie had consulted four different firms of attorneys. One firm advised him to litigate the suits, while the others advised him to settle the suits upon the best terms he could obtain.
OPINION.
MURDOCK: Counsel for the petitioner argue in their brief, first, that the*938 petitioner realized no gain whatsoever from the disposition of the shares because the shares did not belong to him, but were the corpus of a constructive trust; second, the petitioner was guilty of a breach of trust and the realization of income in such case should be deferred until the rights of the various parties were finally determined; and, third, if the gain is to be taxed as income of 1926, it should be computed by deducting $125,000, the additional cost of the property paid in 1929. The Commissioner contends, with respect to the first two arguments, that the existence of a constructive trust and the fact that the shares did not belong absolutely to the petitioner, have not been pleaded. However, decision of the case need not turn upon the question of pleadings, since the evidence does not show that the petitioner ever occupied any position of trust which would affect his purchase of the stock.
Throughout this proceeding the petitioner's counsel have said repeatedly that the petitioner was at fault in his dealings with the Wrights, while the petitioner has consistently maintained that he was not at fault in the slightest. The petitioner was the only witness in the case. *939 He testified that all of his transactions with Nathaniel *586 C. Wright and with Etha Wright were open and honorable, he took no advantage of either of them in these transactions, and the 750 shares, as well as the cash which he received from the sale of the shares, were his property absolutely. Not only does his testimony fail to indicate that his conduct was in any way reprehensible, but, on the contrary, it tends to prove that he took no advantage whatsoever of the Wrights, he held no position of trust which would affect his purchase of the stock, and his purchases were fair, valid, and not subject to question.
If any constructive trust existed which affected the petitioner's income tax for 1926, its existence should have been proved. Unless his fault is to be inferred from the fact that he settled the suits, there is no evidence to support the constructive trust theory of his counsel. He denied all of the allegations made by the Wrights in the suits against him which cast any reflection upon his prior actions or which were inconsistent with his absolute ownership of the shares of stock at the time he sold them to Block. He has always felt that Block deliberately*940 stirred up this trouble for him and that there was nothing to support the claims of the plaintiffs in those cases. The suits never came to trial and the issues were never judicially determined. The amount he paid in settlement was less than his profit from the sale. The cases were settled by the petitioner upon the advice of a majority of the attorneys whom he had consulted. But a poll of his attorneys in those cases does not constitute evidence establishing a constructive trust for the purpose of this case. Furthermore, other matters were settled at that time and payments were made to the petitioner. Neither fault nor liability on the part of the petitioner need be inferred from the fact that he settled the lawsuits. That settlement is not analagous to a plea of guilty in a criminal proceeding, as his counsel suggests. He mentioned a power of attorney from Wright which enabled him to transact some business on Wright's behalf. But the record does not show the exact nature, purpose, or scope of that power of attorney and does not show that it had any connection whatever with the transactions involved herein. The existence of a constructive trust should not be inferred from*941 the fact that the petitioner had close business and social relations with the Wrights. Wright suggested the sale and fixed the price for the stock. He seems to have been thoroughly familiar with the entire transaction. The evidence does not show that the price fixed was other than a fair one. Etha Wright may have known as much about the business, prospects, and stock of the Newark Star Publishing Co. as the petitioner did, for all this record shows.
The petitioner not only received the proceeds of the sale in cash in 1926 under claim and color of title and without restriction as to the disposition thereof, but at that time and for some time thereafter *587 there was no indication, so far as this record shows, that anyone was disposed or in position to dispute his absolute title to the proceeds of the sale. These proceeds included profits. There was no uncertainty at that time about his right to retain the profits. The Supreme Court said in :
If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to*942 return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent.
Cf. ; affd., ; certiorari denied, ; . The difference between the amount which he paid for the stock and the amount which he received in 1926 in cash was income for 1926. The settlement and the payment which he made in 1929 do not affect his 1926 income, Whatever effect they have upon his income should be reflected in a correct return of his income for 1929. Cf. ;;; .
One further point should not be overlooked, although it does not affect the decision. The evidence clearly establishes that the petitioner acquired 750 shares from the Wrights for a total consideration of about $99,997.50, and it further establishes*943 that all of those shares were sold to Block in 1926 for a total consideration of about $525,000. Thus the amount realized from the disposition of these shares exceeded their cost to the petitioner by about $425,000. Furthermore, it appears that the petitioner joined with two of his associates in purchasing 750 shares from Block in the latter part of 1925 at a cost not shown in the record. The return does not disclose how many shares were involved in the transactions therein reported, but the total profit shown on the return from the disposition of stock of the Newark Star Publishing Co. was only about $260,000. The record contains no satisfactory explanation of why the petitioner did not report a total profit of at least $425,000 from his sale of 750 shares of the stock of the Newark Star Publishing Co. in 1926. Counsel for the petitioner in a reply brief state that in the joint return for 1926 a profit was reported from the disposition of 450 shares and the remaining 300 shares of the original 750 belonged to a trust for the petitioner's daughter. They further concede that only $75,000 of the $125,000 paid in settlement would apply to the 450 shares. The petitioner testified*944 that he gave 449 shares to his wife and 300 shares to his wife in trust for his daughter. However, he further testified that no transfers of these shares were *588 made upon the books of the company, the certificates were endorsed by his wife, and he subsequently reacquired the 449 shares and the 300 shares by simply recalling his gifts. Thus he appears to have been the owner of at least 750 shares at the time of the sale to Block. The Commissioner is making no claim for an increased deficiency and hence the Board has no authority to add anything to the petitioner's income. However, these circumstances certainly indicate that the petitioner's profit from the sale in 1926 was not overstated on his return.
Decision will be entered for the respondent.