*1095 The petitioner, a corporation, whose stockholders consisted of four individuals, owned a theatre property which it leased to operating companies. It maintained no office and its business of collecting rentals, paying expenses and disbursing income was conducted by its treasurer from his own office, or home. In the taxable years it collected substantial rentals, the approximate actual net of which for each year it divided equally among its stockholders, who were also its officers. In its income tax returns for the corresponding years, the petitioner deducted from its gross income as expenses the sums paid stockholders under the head of "Compensation of Officers." Three of the four stockholders rendered no service whatsoever to the corporation and the service rendered by the treasurer was trivial. Held, these amounts were taxable income to petitioner in the related years and the resulting income tax deficiencies are sustained; held, further, that the petitioner's method of reporting its income for the years in issue was a willful understating of income with intent to evade its Federal taxes and constitutes fraud. Imposition of the 50 percent penalties is proper and the*1096 statutory limitation upon assessment and collection does not apply.
*12 This proceeding involves income tax deficiencies aggregating $11,976.81, plus fraud penalties amounting to $5,988.39, which the respondent determined against the petitioner for the years 1921 to 1934, inclusive, as follows:
| Year | Deficiency | Penalty |
| 1921 | $711.62 | $355.81 |
| 1922 | 1,514.92 | 757.46 |
| 1923 | 1,224.99 | 612.50 |
| 1924 | 1,225.76 | 612.88 |
| 1925 | 1,306.98 | 653.49 |
| 1926 | 1,308.78 | 654.39 |
| 1927 | 1,093.78 | 546.89 |
| 1928 | $756.49 | $378.24 |
| 1929 | 584.60 | 292.30 |
| 1930 | 483.48 | 241.74 |
| 1931 | 340.39 | 170.19 |
| 1932 | 638.43 | 319.21 |
| 1933 | 475.25 | 237.62 |
| 1934 | 311.34 | 155.67 |
*13 The petitioner contested respondent's determination as to all years; and, in addition, pleads the statute of limitations upon assessment and collection as to those prior to 1933. The respondent concedes that his proposed assessments are thus barred for all years except 1933 and 1934, unless fraud is established. He determined that the petitioner's income*1097 tax returns for each of the years involved were false and fraudulent and were filed with the intent of evading taxes, in that petitioner deducted, on each such return, certain sums as salaries paid to officers. He disallowed these deductions, restored the amounts so deducted to income, and thus determined the deficiencies in tax proposed for each year. To these deductions he added, in each instance, the 50 percent fraud penalty imposed by section 250(b) of the Reveue Act of 1921, and its subsequent reenactments.
FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation and owns property in Philadelphia, known as the Allegheny Theatre. It has never operated this property except to lease and collect rentals from it. The petitioner's capital stock consists of 400 shares owned in equal amounts by its four officers, the president, vice president, secretary, and treasurer. This corporation has never maintained a separate business office of its own, but, since incorporation in 1911, has at all times conducted its business from the private office of its treasurer, sometimes located in the latter's home.
The petitioner at an early date in its history adopted a system of accounting*1098 which treated all disbursements made to stockholders as salaries paid to them as officials. It entered these disbursements on its ledger as salaries paid to officers and, under the same classification, deducted the amounts from gross income in its Federal income tax returns as business expenses.
On August 24, 1921, petitioner's stockholders concluded arrangements to sell their stock to the Stanley Co. of America, a corporation, hereinafter referred to as the Stanley Co. Payment for their stock was to be made, $10,000 cash, down, and the balance in like installments over a period of 17 1/2 years. In the meantime, the purchaser was to be put in possession of the theatre property through a lease of it from the petitioner. The lease conditions made necessary the petitioner's joining in the sale contract, and, as a result, the agreement set forth below was entered into, to wit:
THIS AGREEMENT made and concluded this 24th day of August 1921, by and between ALLEGHENY AMUSEMENT COMPANY, a corporation (hereinafter called ALLEGHENY,) Party of the first part, and HARRY L. CANTOR, HARRIS J. COHN, JOSEPH E. COHEN and MORRIS MENKUS (hereinafter called CANTOR et al.) Parties *14 *1099 of the second part, and STANLEY COMPANY OF AMERICA, a corporation, (hereinafter called STANLEY) party of the third part, WITNESSETH,
Allegheny is a corporation chartered under the laws of the State of Pennsylvania with a capital stock of Forty thousand dollars, divided into four hundred shares of the par value of One hundred dollars each, one hundred shares being owned by each of the four persons named as parties of the second part, Allegheny being the owner in fee of the premises known as ALLEGHENY THEATRE having leased the same to the Allegheny Theatre Company.
Cantor et al being the owners of all the said stock, agree to sell the same to Stanley for the total consideration of Three hundred and fifty thousand dollars, each of the four parties of the second part to receive the sum of Eighty-seven thousand five hundred dollars, the sum of Twenty-five hundred dollars to be paid to each of the parties upon the execution of this agreement and the further sum of Twenty-five hundred dollars every six months thereafter for a further period of seventeen and one-half years, Stanley to have the right after the sum of Two hundred thousand dollars has been paid on account, to pay the balance*1100 then due and demand the delivery of the shares of stock. The said stock in the meanwhile is to be assigned to and held by Max Herzberg representing Cantor et al, and Morris Wolf representing Stanley, In Trust to vote the same and to assign to Stanley or re-assign to Cantor et al the said stock in accordance with the terms of this agreement. In the event of the death of either the said Max Herzberg or Morris Wolf, or of his refusal, neglect or inability to act, or for any other reason, the parties represented by either the said Herzberg or Wolf who desire to have a new Trustee to represent them, they the said parties shall have the right or privilege to nominate, appoint and substitute any other person to act for and in place of their representative above named.
The lease to the Allegheny Theatre Company is to be surrendered and cancelled and a new lease is to be made by Allegheny to Stanley for a period of seventeen and one-half years from the Fifteenth day of August, 1921, at a rental for the first six months based upon six per cent of Three hundred and forty thousand dollars, and thereafter six per cent upon the balances thereof as shown semi-annually as payments are made to*1101 Cantor et al, the rentals being paid in advance, Allegheny to have the option of cancelling the said lease in default of the payment of the rentals or in default of the payment of the amount stipulated to be paid on account of the purchase price of the said stock, Stanley in addition to pay as rental, all taxes, water rents and fire insurance upon the said premises, the rent and taxes for the first six months to be apportioned for the year 1921 as of August 15, 1921, the fire insurance now existing to be apportioned.
Stanley agrees to keep the building in good repair and to make all required changes and alterations. On delivery of the said shares of stock after the payment in full thereof vendors agree that the real estate belonging to the Allegheny shall be free and clear of all encumbrances and that there shall be no debts or liabilities of Allegheny and that they and each of them will indemnify and save harmless Stanley of and from all debts or liabilities of Allegheny including claims for State and Federal taxes due, owing or payable at the time of such final delivery on the said stock, such taxes for the current year in which such delivery shall be made, to be apportioned.
*1102 In the event of the default of Stanley of any semi-annual instalments agreed to be paid for the said stock, Cantor et al, after sixty days from the time of such default, shall be privileged to retain all the moneys so paid as liquidated damages for Stanley's failure to perform all the terms of the agreement, and *15 to declare this agreement abrogated, cancelled and ended or at the option of the said Cantor et al, they may proceed to recover forthwith the entire balance which shall, in the event of such default, become immediately due and payable notwithstanding the other terms herein contained.
Cantor et al, and Allegheny agree not to sell, charge or encumber the property of the said Allegheny without the consent or approval of Stanley and that until said stock shall have been fully paid Cantor et al shall continue as the Board of Directors and Officers of Allegheny.
It is further understood and agreed that at the time of the final transfer of the said stock, the entire assets of Allegheny will consist of the Allegheny Theatre with its contents and appurtenances, free and clear of all encumbrances, liabilities, debts or charges.
IN WITNESS WHEREOF, ALLEGHENY and*1103 STANLEY have respectively caused to be hereunto affixed, their common or corporate seals duly attested, and Cantor et al, have set their respective hands and seals, this day and year first above written.
Coincident with the above contract a lease of the theatre property was made by the petitioner to the Stanley Co. on the exact rental terms provided in the agreement. The lease specifies that all rental payments shall be made to the lessor at 1100 Race Street, Philadelphia, or such other places as it might designate in writing from time to time.
During the taxable years the petitioner collected rentals under its lease from the Stanley Co., out of which it made distributions to stockholders, as shown in the following table:
| Year | Collected | Disbursed |
| 1921 (4 mos.) | $6,800 | $7,900 |
| 1922 | 19,600 | 12,600 |
| 1923 | 18,400 | 9,800 |
| 1924 | 17,200 | 13,500 |
| 1925 | 16,000 | 14,800 |
| 1926 | 14,900 | 13,700 |
| 1927 | 13,500 | 12,700 |
| 1928 | $12,400 | $11,800 |
| 1929 | 11,200 | 10,800 |
| 1930 | 10,000 | 9,450 |
| 1931 | 8,800 | 8,240 |
| 1932 | 7,600 | 7,040 |
| 1933 | 6,400 | 6,306 |
| 1934 | 5,200 | 4,670 |
In its income tax returns for the taxable years, the petitioner reported as gross income all collections*1104 shown above, under classification of "rents" for the years received. From these incomes it deducted, as "Compensation of Officers" for each respective year, the sum above shown to have been disbursed in such year. These returns were prepared by an auditor who obtained his information from the petitioner's books. They were verified and signed by officials of petitioner who did so without reading them. As a result of such methods in reporting its income, petitioner paid no income tax for any of the years in review, except the sum of $48.18 for 1923. The amounts shown above as disbursed in each year by petitioner were paid in equal amounts to each of its four stockholders. Three of these rendered no service of any character to petitioner. The fourth, as treasurer, rendered trivial service.
*16 The income tax returns which were filed for the petitioner for the years 1921 to 1934, inclusive, were false and fraudulent and were filed with the intent of evading Federal income taxes. Part of the deficiency for each such year is due to fraud with intent to evade tax.
OPINION.
LEECH: The respondent contends that the petitioner distributed dividends among its four officer*1105 stockholders, falsely reported these distributions as salaries paid its officers and that this was done with intent to evade its income taxes by securing the benefit of deductions from gross income to which its officers knew it was not entitled.
The petitioner concedes that such distributions did not represent salaries, but now argues that they did constitute money belonging to the stockholders and that its treatment of them as salaries was a harmless error. It alleges in its petition that it erred in the first instance by reporting the proceeds collected under the lease to the Stanley Co., as income. The contention is that these sums, in fact, constituted interest payments due its stockholders from that company on the unpaid balances for their stock, and that in its collection and disbursing of these payments, it merely acted as a conduit through which the money passed from purchaser to seller.
We are unable to find in the record any basis for this position. It is contradictory to the terms of both the original contract among all the parties and the contract of lease between petitioner and the Stanley Co. Both of these instruments characterize these payments as rent for*1106 the use of petitioner's property, and such they were in fact. That the four stockholders of petitioner, under the agreement, received no interest upon deferred payments for their stock is without significance because it is apparent that the agreement whereby they retained the beneficial ownership of their stock during the term over which the payments were being made, compensated them through the dividends which would be received on the stock and provided a return upon their investment.
Petitioner was the owner of the theatre property. The payments which it received were made for the use of its property and constituted petitioner's income, free from any claims on the part of these four individuals, except such as they might have as stockholders of of the corporation. To treat such payments as anything other than rental, requires the utter disregard of the specific provisions of the written contracts. There is no ambiguity in these provisions and we have no authority for holding that they have a meaning entirely different from that conveyed by the language used. *1107 . It is very evident that petitioner, acting through its officers, considered these payments as rental *17 income. It reported them as such, and, on its income tax returns, took deductions from such income on account of depreciation sustained upon the property in each of the taxable years here involved.
Thus, since these payments to petitioner's stockholders, in fact, were distributions of earnings and not deductible expenses, respondent's action in restoring these amounts to income and his determination of deficiency in tax in each year, is sustained.
Undoubtedly, part or all of each of the pending tax deficiencies resulted from respondent's restoring these salary deductions to taxable income. Whether petitioner's returns for each of the years 1921 to 1934, inclusive, because these deductions were asserted therein, were false and fraudulent and were filed with intent to evade tax, is a question of fact.
The determination of that fact controls not only the imposition of the disputed fraud penalties for each year involved but also disposes of the contested right of respondent to a deficiency*1108 for any of the years 1921 to 1932, inclusive. .
The respondent has the burden of establishing that fact by clear and convincing evidence. . We think he has fully met that burden here. Certainly, as has been stated, each of the petitioner's returns for the years in controversy was false in the characterization of these distributions to the officer stockholders, as salary payments, and deducting them from income as such an expense. That this was done, in each instance, with the fraudulent intent of evading income tax, is equally clear.
A careful consideration of this record is convincing that petitioner, through its responsible officers and the accountant acting under their direction, caused to be entered upon petitioner's books as salaries for each of the years in review, distributions of taxable earnings made to its four stockholder officers and, in its income tax returns for each of those years, caused such distributions to be similarly reported, when these officers knew that no salary payments were due or had been made. This characterization of such distributions as salary*1109 payments and their deduction on the petitioner's returns as such a business expense were thus asserted with the purpose of securing the benefits of those deductions from gross income, to which petitioner's officers knew it was not entitled, and thus evade the just payment of income taxes. As the Board said in the case of :
A failure to report for taxation income unquestionably received, such action being predicated on a patently lame and untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose.
Such a conclusion here is unavoidable in the face of the evidence. The record contains no indication that salaries were ever voted by *18 petitioner to its officers in any amount or that the sums distributed to them, for which credit was taken as expenses representing salaries paid, in any instance, were fixed and in definite amounts but rather that, in each year, the amount to be distributed to each of the four officer stockholders was determined by taking approximately one-fourth of the corporate gross income of petitioner less actual cash expenditures.
Three of these individuals, *1110 to whom those distributions were made, admittedly performed no service of any kind to the corporation, and the fourth rendered services so trivial in character that reasonable compensation therefor would have been inconsequential. Actually, these four officer stockholders of the petitioner do not seem to have considered the services of their treasurer as deserving of any compensation, since he received in these distributions no more than the amount distributed to each of the other three, who were entitled, admittedly, to no compensation as officers. The treasurer of the petitioner did not even keep the books but employed an accountant for that purpose who merely came at intervals to write up the books from the stubs of the check book kept by the treasurer, whose only duties appear to have been limited to the receipt of rental checks and the distribution of those proceeds to himself and his three associates.
Petitioner attempts to justify its action as an honest mistake, by the argument that this treatment of these distributions on its books and in its returns was only natural if, under the contracts here, it considered this income, in fact, interest due these individuals rather*1111 than rental received by it upon its own account. The answer to that position is obvious. That there was no legal reason for so viewing these rental payments, we have already concluded. The evidence is equally compelling that petitioner's officer stockholders did not, in fact, so consider them. Thus, this same method of treating rental income was established by the petitioner long before the execution of the contracts involved in this proceeding and during the years in which the income received is neither proved nor even alleged to have been considered as anything other than pure rental income. The only personal returns of petitioner's officer stockholders for any of the years in dispute, in evidence, are those of petitioner's vice president. These significantly indicate that the contested payments made to him by petitioner were not treated in his returns as either income or salaries, but as dividends, and that having thus reported them, he took credit against this amount for normal tax, a credit to which he would not have been entitled if the payment had been interest or salary.
Since we have found that petitioner's income tax returns for each of the years 1921 to 1934, inclusive, *1112 were false and fraudulent and *19 filed for the purpose of evading taxes, petitioner's plea of statute of limitations as to all deficiencies for the years 1921 to 1932, inclusive, is overruled. The contested determinations of deficiencies for each of the years, 1921 to and including 1934, together with the 50 percent fraud penalty imposed for each year, are sustained.
Reviewed by the Board.
Decision will be entered for the respondent.