*723 In this proceeding the petitioner seeks the redetermination of a deficiency in income tax for the year 1921 in the amount of $12,301.96, to which the respondent added a 50 per cent fraud penalty in the sum of $6,150.98.
*724 Two issues are presented for our consideration:
1. Whether or not the assessment and collection of the tax are barred by the statute of limitations.
2. Whether or not any part of the deficiency was due to fraud with intent to evade tax as provided by section 250(b) of the Revenue Act of 1921.
FINDINGS OF FACT.
It is stipulated that the petitioner filed its income-tax return for the year 1921 on March 15, 1922, and that the deficiency letter was mailed by the respondent to the taxpayer on December 6, 1927.
W. F. Shawver, Sr., president of the petitioner corporation, first engaged in business about 1893. Individually and in partnership he sold hardware, tinware, stoves, etc. In 1903 he incorporated his business under the name of W. F. Shawver Co. and during the year 1921 owned over 90 per cent of the stock*2043 of that corporation. Following its incorporation the company gradually increased its activities to include those of sheet-metal and roofing contractors and the ownership and renting of buildings. Among the buildings owned by the petitioner was the property known as 507 Capital Street, carried as "Real Estate No. 2" on the books of the petitioner, and consisting of a storeroom and warehouse each four stories in height and a boarding house two stories in height. The storeroom was constructed in 1917. The entire property was sold in the year under consideration and the gain from such sale was returned by the petitioner as $4,421.19. The respondent asserted that the taxable net gain should be increased by $31,173, as hereinafter set forth.
W. F. Shawver, Sr., had charge of the outside work of the company and paid no attention to the office and bookkeeping operations. He had only the most meager knowledge of simple bookkeeping methods and depended upon others for that work. His son, W. F. Shawver, Jr., kept the books of the petitioner. He was not an expert bookkeeper and by the end of 1921 had taken only a few lessons in a course in accountancy. Hence, it was the practice of*2044 the petitioner to secure outside assistance in closing the books at the end of each year.
In 1920 the books were closed by P. M. McCutcheon, a certified public accountant, or his assistants, among whom were one J. C. MacDonald, who was in his employ from January to April, 1921, and Cort Buck, who also was employed by McCutcheon for approximately the same period. W. F. Shawver, Jr., closed the petitioner's books for 1921, with the assistance of MacDonald. Upon the face of the figures a large profit was shown by reason of the sale of the building heretofore mentioned. W. F. Shawver, Sr., was not satisfied *725 that the correct gain from that transaction was reflected on the petitioner's books. During the latter part of February or first of March, 1921, he met Cort Buck on the street and requested him to "check us up" in order to ascertain as nearly as possible the true cost of the building and the proper profit derived from its sale. Shawver, Sr., admitted that he made the request in order to reduce, if possible, the amount of income tax which the petitioner would be required to pay. Thereupon Buck spent two or three weeks in examining the books and records of the petitioner. *2045 He was assisted by MacDonald. During the evenings he requested and obtained from Shawver, Sr., the information concerning the specific items entering into the construction of the building. No suggestions were made to him by Shawver, Sr., or Shawver, Jr., as to the character or disposition of the entries and items found by him, nor was any control exercised over him. There was no discussion as to the amount or effect of the items added by him to the cost of construction. The entire initiative in and responsibility for searching the books and other records of the petitioner and ascertaining the items of cost relating to the store building and designating them as such were entrusted to Buck.
At the conclusion of Buck's investigation and research he included in the cost of construction 53 items. Among those items were some not properly chargeable to the capital account but deductible as expenses in the year expended, others whose character was doubtful, and still others which obviously were capital items. In the last named class were charges for constructing the cornice, fireproofing the penthouse, installing steel ceilings, and other such expenditures. The contract for the*2046 erection of the building had been let to R. P. Given on a cost-plus basis, but the petitioner excluded from that contract the furnishing and installation of the roofing and metal work. One Frank S. Miller, a bookkeeper employed by the petitioner during the period of construction, was unable to secure from W. F. Shawver, Sr., memoranda covering the cost of materials used in the construction work and hence entered no charges therefor to capital account. Buck discovered some such items and included them in his entries. The aggregate of the 53 items was $31,173.44, and included an item of $1,100 representing a premium paid on the repurchase of the capital stock of the petitioner involved in the sale of the building. The remaining $30,073.44 was credited to "accounts payable," because Buck believed he should not credit the surplus account unless authorized by action of the board of directors. Appearing on the page containing the entries is the following notation:
This page rectifying, as far as possible the true cost on Real Estate No. 2, building and improvements, as of January 31, 1921, and estimated costs are furnished by Mr. Shawver, personally.
*726 By adding the said*2047 sum of $31,173.44 to the cost of the building construction the profit on the sale was reduced to $4,421.19, and the income-tax return was made on that basis.
In December, 1923, or January, 1924, while preparing a statement for Dun and Bradstreet, W. F. Shawver, Jr., became imbued with the idea that the entry of the item of $30,073.44 in accounts payable was improper and accordingly entered on the books of the petitioner as of December 31, 1923, the said item as a debit to accounts payable and credited the same amount to surplus. The following explanation of this entry appears on the books:
To correct erroneous entry made by C. Buck, accountant, now discovered entered in error. This original entry was made by C. Buck to reflect additional cost of property sold in 1921, by adding to property account items charged in error to expense accounts in prior years, which originally should have been charged to cost of property.
After making this entry Shawver, Jr., told his father what he had done. Shawver, Sr., did not think the action was proper and a few days later questioned Buck about the matter. Buck instructed him to have the item returned to the original account and therefore*2048 Shawver, Sr., ordered his son to make a reverse entry to accomplish that end. Corresponding entries were made in the control accounts in the general ledger so that the item of $30,073.44 appeared in six places on the books of the petitioner, namely: (1) in the journal entry in detail; (2) in the real estate account in detail; (3) in the journal entry transferring the item from accounts payable to surplus; (4) in the journal reversal entry; (5) in the surplus control account of 1923; and (6) in the surplus control account for 1924.
Buck was not a certified public accountant, but had done senior accounting work and had been recommended to Shawver as a man qualified to do the work requested.
Shawver, Sr., had several conversations with friends, who happened to be accountants, with respect to the entries made by Buck, but the accuracy of such entries and the fact that the amounts stated therein were actually expended were not questioned. The propriety of their inclusion in accounts payable rather than in surplus or expense accounts was the only point in controversy.
In 1927 Joseph Drasnin, an internal revenue agent, examined the books of the petitioner, discovered the alleged*2049 improper entries therein, and called the attention of W. F. Shawver, Sr., to them. Thereupon Shawver, Sr., stated that Buck "had done it," referring the matter to Norman Fitzhugh, a certified public accountant, for negotiation and "left everything in his hands."
The reputation of W. F. Shawver, Sr., in Charleston for integrity, honesty and uprightness was good.
*727 No part of the deficiency alleged by the respondent was due to fraud with intent to evade tax.
OPINION.
VAN FOSSAN: The controlling question presented in this proceeding is whether in filing its tax return for 1921 petitioner was guilty of fraud with intent to evade tax. If no fraud existed, the alleged deficiency in tax is admittedly barred by the statute of limitations.
The hearing in this case having occurred since the passage of the Revenue Act of 1928, the burden of proof rests on respondent. Moreover, in order to sustain the charge of fraud the evidence must be clear and convincing. ; .
Petitioner frankly admits that the "comedy of errors" in bookkeeping reflected in the findings of fact had its inception*2050 in the conviction that the profit originally computed by his son on the sale of certain property was too large and would entail an excessive tax. There is nothing reprehensible in an honest effort to reduce taxes to the minimum required by law. Theoretically, at least, there can be but one correct amount of tax due. The precise ascertainment of this amount is seldom free from difficulty, however, and in the divergence of views as to what constitutes such correct amount most tax cases and controversies have their origin.
In some respects this case is typical of many others. Petitioner's business had grown from small beginnings until it attained considerable size and many ramifications. W. F. Shawver, Sr., petitioner's president and principal owner, was an "outside man" who looked after the contract jobs in progress. He had no knowledge or understanding of bookkeeping, but employed his son in such capacity. The son was inexperienced and had to depend largely on his judgment as to classification of items and the propriety of entries. Periodically a more experienced man was consulted or called in to close the books.
In the course of its activity petitioner had a building*2051 erected on a cost-plus contract. Being engaged in the roofing business, petitioner built the roof, added a cornice, and did many other things within its ability, all tending to lessen the contract cost.
In recording the expenditures in its books these and many other items of similar character were charged to expense. Whether deductions on tax returns were taken accordingly does not appear and is not here material. When petitioner sold the building and the son made a computation of profit, the elder Shawver was convinced that the cost had not been properly computed and that the profit *728 was unreasonably high. He, accordingly, employed an accountant of some experience in whom he had confidence and entrusted him with the task of examining the books and ascertaining true cost. The accountant proceeded to this task, determined that many capital cost items had been charged to expense and made various entries calculated to correct the books in accordance with his views.
Petitioner made no attempt to control or direct the accountant in his work and, when he could, furnished such information as was requested. He gave the accountant full and free access to all books and*2052 records and concealed nothing. There is no evidence whatever of any conspiracy or collusion in this work to the end of building up a false cost. From the evidence before us there seems little doubt that many items of true cost had been charged to expense and were not properly reflected on petitioner's books. The ascertainment of the true character of the individual items, however, need not detain us in view of the conclusion we have reached as to the issue of fraud.
Following the audit the accountant credited "accounts payable" with $30,073.44, being the aggregate of the items improperly, so he determined, charged to expense. This entry confused the younger Shawver and on his own motion he charged surplus with the amount, explaining his reason for the alteration by a note on the records. Thereafter, he told his father what he had done. The father again consulted the same accountant and was told to reverse the entry and leave the item where he had entered it and this was done.
In this muddled state of accounts the revenue agent scented fraud and petitioner was charged accordingly.
The record shows inefficiency and ignorance of proper accounting, but it fails to reveal*2053 any fraudulent intent or design to evade taxes. The proof offered by respondent does not establish the charge of fraud.
Judgment will be entered for the petitioner.