*815 1. The petitioner, a Canadian corporation, received income from sources within the United Stated during the years 1930 through 1935. No returns having been filed by the petitioner for those years, the respondent in March 1937, on the basis of a statement furnished by the petitioner, prepared returns for the petitioner under section 3176 of the Revised Statutes, as amended, and notified the petitioner of the determination of deficiencies in tax for the respective years. Within the required time the petitioner filed its petition with the Board with respect to such determination. Pursuant to the provisions of section 233 of the applicable acts, in the returns the respondent allowed no amount as a deduction under the provisions of subdivisions (a), (f), and (p)(1) of section 23 of the Revenue Acts of 1928 and 1932 and subdivisions(a), (f) and (p) of section 23 of the Revenue Act of 1934. Held, that the respondent's action in not allowing deductions under said provisions of the respective acts was correct; held, further, that the filing of returns by the petitioner after it filed its petition and before the hearing before the Board was not such a compliance with the requirements*816 of section 233 of the applicable acts as to warrant a reversal of the respondent's action.
2. The respondent's determination of a 25 percent penalty for failure to file retunrs within the time prescribed by law is sustained.
*696 This proceeding involves the respondent's determination of the following deficiencies income tax (including for the years 1930 through *697 1933 the 50 percent addition for accumulation of surplus to evade surtax on stockholders under section 104 of the Revenue Acts of 1928 and 1932), excess profits tax, surtax (for the years 1934 and 1935 on the undistributed adjusted net income as a personal holding company under section 351 of the Revenue Act of 1934), and penalties:
| Year | Income tax | Penalty | Excess profits tax | Penalty | Surtax | Penalty |
| 1930 | $5,229.34 | $1,307.34 | ||||
| 1931 | 2,388.45 | 597.11 | ||||
| 1932 | 1,719.21 | 429.80 | ||||
| 1933 | 5,245.44 | 1,311.36 | $411.41 | $102.85 | ||
| 1934 | 971.49 | 242.87 | 353.27 | 88.32 | $1,695.69 | $423.92 |
| 1935 | 2,713.22 | 678.31 | 986.62 | 246.66 | 4,649.40 | 1,162.35 |
*817 Matters put in controversy by the pleadings are the correctness of the respondent's action (1) in not allowing any amount as a deduction for reasonable and necessary business expenses for any of the years, (2) in not offsetting losses sustained on sales of securities in the United States against gains on similar transactions in determining the amount of petitioner's taxable income from such transactions for all the years, (3) in not allowing as a deduction for the respective taxable years dividends received by the petitioner from corporations organized in the United States, (4) in determining the 25 percent penalty for all years because of failure to file returns, and (5) in determining that the petitioner was subject to excess profits tax for the years 1933 through 1935 and in determining that the petitioner was subject to surtax for 1934 and 1935. In an amended answer the respondent admits error in imposing for 1930 through 1933 the 50 percent addition for accumulation of surplus to evade surtax on stockholders. Certain other admission of error which relate to the determined gains from the sale of stock were made in the amended answer and will be taken up hereinafter at the points*818 where such gains are considered.
FINDINGS OF FACT.
The petitioner is a corporation, organized and existing under the laws of the Province of Quebed, with its principal office at No. 1119 St. Catherine Street, West, Montreal, Canada.
No returns having been filed by the petitioner for the years 1930 through 1935, the respondent, pursuant to the provisions of section 3176 of the Revised Statutes as amended, in March 1937 made a return for the petitioner for each of such taxable years with respect to income received from sources within the United States, using as a basis therefor a statement of the petitioner dated June 26, 1936. Of the returns thus made "Corporation Income Tax Return," form 1120, for each of the years 1930 through 1932, "Corporation Income And Excess-Profits *698 Tax Return," form 1120, for each of the years 1933 through 1935, and "Return Of Personal Holding Company", form 1120H for 1935, were prepared on March 16, 1937, and "Return Of Personal Holding Company", form 1120H for 1934, was prepared on March 23, 1937. The following items and amounts were entered on the returns as income received by the petitioner from sources within the United States:
| Gains from sale of securities | Dividends from domestic corporations | Interest | Total | |
| 1930 | $3,829.82 | $4,604.59 | $8,434.41 | |
| 1931 | 38.40 | 3,813.95 | 3,852.35 | |
| 1932 | 2,478.98 | $217.81 | 2,696.79 | |
| 1933 | 5,955.17 | 2,272.96 | 8,228.13 | |
| 1934 | 4,425.38 | 2,610.00 | 30.00 | 7,065.38 |
| 1935 | 16,165.00 | 3,515.75 | 51.74 | 19,732.49 |
*819 On none of the returns was any amount entered or allowed as a deduction.
Using the income as shown in the returns made by him, the respondent determined the deficiencies in controversy and on March 23, 1937, mailed the notice of deficiency to the petitioner at the address of its principal office. The tazable income shown in the notice of deficiency for the respective taxable years, as well as the detail with respect thereto, was the same as that shown in the respective returns prepared by the respondent. The notice of deficiency showed that the deficiencies were determined by computing income tax liability for each of the taxable years under section 13 of the respective applicable revenue acts; tax liability under section 104 of the Revenue Acts of 1928 and 1932 for the years 1930 through 1933; excess profits tax for 1933 under section 216(a) of the National Industrial Recovery Act and for 1934 and 1935 under section 702 of the Revenue Act of 1934, and surtax liability for 1934 and 1935 under section 351 of the Revenue Act of 1934. In addition the deficiency notice showed the computation of a 25 percent penalty on each of the above taxes.
On June 16, 1937, the petitioner*820 filed with the Board its petition from the respondent's determination. The petition was signed by Valentine B.Havens and Charles B.McInnis, as attorneys for the petitioner, and was verified by Sarah McGowan, as treasurer of the petitioner, before the United States Consul at Montreal. In due course the respondent filed his answer.
Thereafter there were prepared for petitioner, corporation income tax returns for 1930 through 1932, corporation income and excess profits tax returns for 1933 through 1935, and returns of eprsonal holding company for 1934, and 1935. All the foregoing returns were verified on December 12, 1938, by Richard N. Taylor, Jr., as vice president, *699 and Sarah McGowan as treasurer, before a notary public of Kings County, New York. The income and excess profits tax returns for 1934 and 1935 and the personal holding company returns for the same years contain statements that they were prepared by Valentine B. Havens, attorney for the petitioner, on the basis of information furnished him by it. Such returns were also sworn to by Havens on December 12, 1938, before the above mentioned notary public. Said returns for the years 1930 through 1935 were filed*821 with the collector of internal revenue at Baltimore, Maryland, on December 13, 1938.
On October 20, 1938, Havens, as counsel for the petitioner, was notified that the instant proceeding was set for hearing before a division of the Board which would sit in New York City beginning December 5, 1938. On December 13, 1938, the proceeding came on for hearing, at which time Havens appeared as counsel for the petitioner and moved for a continuance to the next New York Circuit Calendar beginning in January 1939, stating that the petitioner would be handicapped without the testimony of its president, one Taylor, whom he represented as then being in Canada and unable to be present because of being incapacitated. The desired continuance was granted and the proceeding was heard on January 16, 1939. At that time Havens did not appear in behalf of the petitiner. The testimony of Taylor was not offered and no explanation was made as to the failure to submit it, nor was there anything said or done to indicate that the petitioner considered that it was under any handicap without it.
The total gains on sales of securities by petitioner within the United States which resulted in gains, the total*822 losses on sales which resulted in losses, and the net gain or loss on sales of securities were as follows for the respective years:
| Year | Total gains | Total losses | Net gain or loss |
| 1930 | $10,732.86 | $6,266.89 | $4,465.97 |
| 1931 | 117.65 | 8,079.40 | -7,961.75 |
| 1932 | 515.02 | 4,968.34 | -4,453.32 |
| 1933 | 8,396.61 | 32,162.48 | -23,765.87 |
| 1934 | 3,136.42 | 5,612.94 | -2,476.52 |
| 1935 | 10,132.51 | 16,576.73 | -6,444.22 |
Dividends received by petitioner from domestic corporations were as follows for the years indicated:
| 1930 | $4,604.59 |
| 1931 | 3,813.95 |
| 1932 | 2,478.98 |
| 1933 | $2,272.96 |
| 1934 | 2,885.00 |
| 1935 | 3,515.75 |
Using the amounts of net gain or loss from the sale of securities shown above (except as to the years 1934 and 1935, when the amount of $2,000 was used because of the statutory limitation) and the amounts *700 set out above with respect to dividends, and for 1934 and 1935 certain small amounts as interest and exchange, the petitioner reported in the returns total income (or loss) as shown below for the respective years, from which it took deductions as indicated and reported the indicated net income (or loss):
| 1930 | 1931 | 1932 | 1933 | 1934 | 1935 | |
| Total income (or loss) | $9,070.56 | -$4,147.80 | -$1,974.34 | -$21,492.91 | $953.11 | $1,576.52 |
| Deductions: | ||||||
| Interest | 813.94 | 482.81 | 2,592.27 | 1,237.93 | 1,035.67 | |
| Exchange | 102.11 | |||||
| Dividends | 4,604.59 | 3,813.95 | 2,478.98 | 2,272.96 | 2,885.00 | 3,515.52 |
| Financial service | 1,101.00 | 354.41 | 176.17 | 623.63 | 458.86 | 483.48 |
| Legal and accounting fees | 125.00 | 50.00 | 200.00 | 150.00 | 150.00 | |
| Sundry expense | 161.24 | 7.07 | 15.96 | 194.92 | 86.29 | 23.62 |
| Total deductions | 6,680.77 | 4,885.35 | 2,721.11 | 5,883.78 | 4,818.08 | 5,207.29 |
| Net income (or loss) | 2,389.79 | -9,033.15 | -4,695.45 | -27,376.69 | -3,864.97 | -3,630.77 |
*823 The returns filed by the petitioner contain balance sheets as at the beginning and close of the respective years and an analysis of sales of securities showing date acquired, date sold, cost, selling price, and amount of gain or loss on each sale. Each of the returns contains a statement showing the names of the domestic corporations and the amount of dividends received from each during the taxable year covered by the return.
OPINION.
HILL: Every corporation subject to income taxation is required to make a return, stating specifically the items of its gross income and deductions and credits allowable. The returns of a corporation having no principal office or principal place of business in the United States are required to be filed with the collector at Baltimore, Maryland, and in the case of a foreign corporation which has no office or place of business in the United States and files its returns on the calendar year basis, the returns are to be filed on or before June 15 following the close of the calendar year. In case of failure to file the return within the time prescribed by law or by the Commissioner, which is not due to reasonable cause, an addition of 25 percent*824 of the amount of the tax is imposed. Secs. 52, 53, 235, and 291, Revenue Acts of 1928, 1932, and 1934. Where a return is not made within the time prescribed by law or by regulation, the Commissioner is authorized to make such return from such knowledge as he has or from such information as he can obtain, and the return so made is prima facie good and sufficient for all legal purposes. Sec. 3176 of the Revised Statutes as amended. "Gross income" includes gains, profits, and income derived from sales or dealings in property, *701 interest, and dividends. Allowable as deductions from gross income in computing the net income of a corporation are ordinary and necessary expenses paid or incurred in carrying on business or trade, interest paid or accrued during the taxable year except on indebtedness incurred to purchase or carry obligations the interest upon which is wholly exempt from the income tax, losses sustained during the taxable year and not compensated for by insurance or otherwise (subject to such limitations as are otherwise prescribed), and dividends received from domestic corporations. In the case of foreign corporations gross income includes only the gross income*825 from sources within the United States and the deductions are allowable only as and to the extent that they are connected with income from sources within the United States. Secs. 22, 23, 232, and 233, Revenue Acts of 1928, 1932, and 1934.
Respecting the allowance of deductions and credits in the case of foreign corporations, section 233 of the Revenue Acts of 1928, 1932, and 1934 provides:
A foreign corporation shall receive the benefits of the deductions and credits allowed to it in this title only by filing or causing to be filed with the collector a true and accurate return of its total income received from all sources in the United States, in the manner prescribed in this title; including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits.
The petitioner not having filed a return for any of the years 1930 through 1935, the respondent on March 23, 1937, consistent with the provisions of section 233 of the applicable acts, determined the deficiencies in controversy on the basis of the returns made by him. At that time the petitioner's returns for those years were from approximately one to six years delinquent. *826 The petitioner on June 16, 1937, filed with the Board its petition from the respondent's determination. Thereafter in due course the respondent filed his answer. On December 13, 1938, and under the circumstances set out in our findings of fact the returns mentioned therein were filed by the petitioner.
The petitioner concedes that under the provisions of section 233, supra, no deductions or credits are allowable to a foreign corporation which does not file a return showing total income from all sources in the United States. However, it contends that as soon as such a return is filed, even though after its due date, the foreign corporation is entitled to the deductions and credits ordinarily allowed and urges that the returns filed by it for the respective years in controversy constitute a sufficient compliance with the provisions of said section to entitle it to such deductions and credits as it would have been entitled to if its returns had been timely filed, citing our decisions in , *702 and Mills, Spence & Co., Ltd. (not published), which followed our decision in the Anglo-American*827 Co. case. The respondent makes no contention that the returns filed by petitioner were so deficient in the information contained therein as to bring them within our decision in where it was held that the return in controversy failed to include "all the information which the Commissioner may deem necessary for the calculation of such deductions and credits" as required by section 233 of the Revenue Act of 1928. However, he does contend that such returns are ineffective to bring the petitioner within the ambit of the Board's decisions relied on by it or to entitle it to the deductions and credits ordinarily allowed corporations.
Neither at the time the petition was filed in this proceeding nor at the time the answer was filed had any returns been filed by the petitioner. In neither the petition nor in the answer was any question presented as to the effect of the belated filing of returns on the allowance to the petitioner of the credits and deductions ordinarily allowable. On the contrary, in the statement of facts in the petition relied on by the petitioner in support of its assignments of error the petitioner specifically*828 alleged that no returns had been filed by it for the years in controversy (which was admitted by respondent in his answer) for the reason that its officers and directors were unaware that it was required to file returns or to pay any tax for the respective years and further that they had been informed that the petitioner was not liable for a return or for any tax for said years (which was denied by the respondent in his answer). At no stage in the proceeding were the pleadings of either party amended to present any question respecting the effect on the respondent's determination of the returns filed in December 1938. Under such circumstances the controversy between the parties respecting the effect of the filing of the returns does not represent an issue presented by the pleadings. However, assuming that the pleadings had been amended to present such an issue, we think it would have to be decided adversely to the petitioner.
In the Anglo-American Co. case, it was held that the phrase in section 233 of the Revenue Acts of 1928 and 1932, "in the manner prescribed in this title", did not mean within the time prescribed in the titles of the respective acts and that the allowance*829 of the credits and deductions otherwise allowable by such acts was not dependent under section 233 on the filing of returns within the time prescribed by said acts. Although in that case a revenue agent propared certain returns for the taxpayer, they apparently were never submitte to or accepted by the Commissioner, since returns filed by the taxpayer with the collector three days later were the subject of an audit by the *703 Commissioner and formed the basis of his determination of deficiencies. Under the circumstances thus presented we held that dividends received by the taxpayer from domestic corporations, reported in income and taken as deductions in the taxpayer's returns, were allowable deductions in determining taxable net income. No such factual situation as existed in that case is presented here, nor did we there decide the question raised on argument here.
Here the question is whether the petitioner, by filing returns after the respondent made his determination of deficiencies under the circumstances presented, relieved itself of the adverse condition in which it was situated by reason of section 233 and is entitled to the benefits to which it would otherwise*830 have been entitled by the timely filing of returns. In our opinion it may not.
While taxpayers may contest before the Board the correctness of the respondent's determination of deficiencies predicated on returns prepared by him under section 3176 of the Revised Statutes, ; ; , any redetermination of such deficiencies must be made on the basis of evidence adduced as to facts existing at or prior to the time of the respondent's determination and the law applicable thereto. The petitioner cites no provision of law or decision, nor are we aware of any, which authorizes a taxpayer, subsequent to the respondent's determination, to enter upon a course of conduct which will materialize into the happening of a fact or set of facts that will operate in and of themselves to nullify the respondent's determination. Such an authorization would reduce the administration of the tax laws to mere idle activity. In view of the foregoing we are unable to conclude that in enacting section 233, supra, it was the intention of Congress that delinquent returns*831 filed by a foreign corporation after the respondent's determination should constitute the returns required as a prerequisite to the allowance of the credits and deductions ordinarily allowable to the corporations. Aside from the provisions of section 233, supra, the allowance of deductions and credits is not a matter of right, but of legislative grace and statutory grant, and the taxpayer must bring himself strictly within the provisions of the statute to be entitled to them. By section 233 the allowance to foreign corporations of the credits and deductions ordinarily allowable is specifically predicated upon such corporations filing returns. In view of such a specific prerequisite it is inconceivable that Congress contemplated by that section that taxpayers could wait indefinitely to file returns and eventually when the respondent determined deficiencies against them they could then by filing returns obtain all the benefits to which they would have been entitled if their returns had been timely filed. Such a construction would put a premium on evasion, since a *704 taxpayer would have nothing to lose by no filing a return*832 as required by statute.
Being unable to find that the petitioner has brought itself within the provisions of section 233 of the applicable acts, we conclude that it is not entitled to the deductions and credits that it would otherwise have been entitled to. Accordingly, we sustain the action of the respondent (1) in not allowing a deduction for any of the years in controversy for business expenses, (2) in not offsetting losses sustained on sales of securities in the United States against gains on similar transactions in determining the amount of the petitioner's taxable income from such transactions for the years in controversy, and (3) in not allowing as a deduction for the respective taxable years dividends received by the petitioner from corporations organized in the United States. The deductions sought for business expenses are subject to the further infirmity that no evidence has been submitted to show that they are allowable.
At the hearing the respondent filed an amended answer, in which he admitted that in determining the gain from those sales of securities which resulted in gains he erroneously determined the amounts for 1934 and 1935 at $4,425.38 and $16,165, respectively, *833 whereas the correct amounts were $3,136.42 and $10,132.51, respectively. Also, in his amended answer he alleged with respect to the gains from such sales that the correct amounts were, for 1930, $10,732.86; 1931, $117.65; 1932, $515.02; and 1933, $8,396.61; instead of the amounts determined by him, and that the correct amount of dividends received by the petitioner in 1934 was $2,885 instead of $2,610 used in making his determination, and moved for an increase in the deficiencies for the respective years. Since the evidence sustains the respondent's allegations, the motion is granted. In a recomputation of the deficiencies the correct amounts of such gains and dividends will be included in taxable income instead of those determined by the respondent and the deficiencies will be increased or reduced accordingly.
Although in its petition the petitioner assigns as error the respondent's determination that it was liable for excess profits tax for 1933 through 1935 and for surtax for 1934 and 1935, no evidence was submitted on these matters nor is any argument made on brief with respect to them. We therefore conclude that the petitioner has abandoned them and accordingly sustain*834 the respondent's action.
Where a taxpayer fails to file a return the imposition of the 25 percent penalty is mandatory. ; certiorari denied, ; . "It does not matter why he failed to file a return." . Having *705 concluded that the returns filed by the petitioner were insufficient to relieve it of the effect of the respondent's denial under section 233 of credits and deductions which are ordinarily allowable, we are of the opinion that the returns are insufficient to relieve it of the mandatory operation of the statutory provisions imposing a 25 percent penalty. Assuming that we are mistaken in this and that the returns are to be considered merely as delinquent returns, the position as to why the returns were delinquent, and therefore we have no basis for determining whether there was reasonable cause for the as to why the returns were delinquent, and therefore we have no basis for determining whether there was reasonable cause for the delinquency which would relieve*835 it of the penalty. The determination of the respondent, therefore, must be sustained.
Reviewed by the Board.
Decision will be entered under Rule 50.
ARUNDELL, SMITH, and BLACK dissent.
LEECH, concurring: I concur with the conclusion of the Board that respondent was correct in disallowing the contested deduction, solely on the ground that the validity of the purported amended delinquent returns is not raised by the pleadings.
DISNEY, concurring: I concur only in the result reached by the majority opinion. I think that the returns filed by the petitioner after petition was filed with the Board and after the proceeding had been set for hearing and continued, without amendment of the petition which was based upon the fact of no returns filed, should not have been considered by the Board. No attempt was made even to amend to conform to proof. The returns were admitted in evidence over objection, so such amendment if asked should not have been granted. A fair respect for the reasons which form the basis for orderly pleading forbids that returns filed after the pleadings are settled should be regarded as evidence. *836 , did not present the present question, for there the returns were filed prior to deficiency determined and shortly after filing of returns by the Commissioner. I think the filing of a return "in the manner prescribed in this title" under section 233 of the Revenue Acts herein applicable must be considered in connection with those provisions of the same acts providing for adjudication by the Board of Tax Appeals of the matters arising from the returns and deficiencies determined, and that the Board, in adherence to sound rules of evidence and trial procedure, which make for justice, should not consider returns filed during the pendency of proceedings filed before it in accordance with statute.