*858 1. Where reply was filed at the hearing without objection of respondent upon permission granted under Rule 19, mere failure to file such reply within 45 days pursuant to Rule 15 of the Board's rules of practice does not constitute an admission under Rule 18 of all the affirmative allegations of fact as to fraud in the answer so as to relieve the respondent of further proving fraud, the commission of fraud being affirmatively denied in the petition and issue thereon being joined by a general denial in the answer preceding the affirmative allegations of fraud.
2. Where the evidence adduced discloses that the bank accounts of husband and wife were in their joint names and all other property was in their separate names and not on an equal basis, the husband exercising control over the same, testimony of the husband that all property was held jointly is a conclusion not supported by the facts and insufficient to overcome the presumptive correctness of respondent's determination to the contrary.
3. Where a husband agreed to transfer certain stock, some of which was in the wife's name, to his son-in-law, and the stock was transferred to him and he executed notes for the purported*859 purchase price, giving such stock as collateral, and such stock remained on deposit with the husband's brokers subject to his control, and within approximately five months the stock was taken back by the husband and the notes canceled, all without any participation by the wife and without loss of control of the stock by the husband, held, such sale was not an actual sale entitling husband and wife to each deduct a loss claimed to have resulted therefrom.
4. The burden of proving fraud rests upon the respondent and neither the determination of a deficiency nor the failure of petitioners through lack of evidence to show such determination erroneous in whole or in part, without other clear and convincing evidence, sufficiently sustains such burden of proof to justify the imposition of a fraud penalty.
5. Where respondent did not determine a negligence penalty or plead negligence affirmatively in his answer, except that he requested therein the imposition of a negligence penalty if the Board should find the taxpayer not guilty of fraud, and where no evidence is adduced on the subject of negligence, no negligence penalty may be imposed.
6. Upon the evidence respondent's*860 disallowance of a claimed loss is approved.
*978 These proceedings, consolidated for hearing and report, are for the redetermination of deficiencies in income tax and penalty as follows:
| Docket No. | Year | Tax | Penalty | Total |
| 66966 | 1929 | $5,516.51 | $2,758.26 | $8,274.77 |
| 66967 | 1929 | 1,334.71 | 1,334.71 |
In Docket No. 66966 it is alleged that the respondent erred:
(a) In increasing the amount of interest received by the petitioner by $683;
(b) In increasing the amount of dividends received by the petitioner by $475.32;
(c) In increasing the amount of interest paid by the petitioner by $70.78;
(d) In disallowing the loss on the sale of stock in the amount of $21,485.13;
(e) In increasing the amount of capital gain realized by the petitioner from the sale of Ellis Adding Typewriter Co. stock from $54,350.75 to $69,000; and
(f) In asserting any penalty under section 293(b) of the Revenue Act of 1928.
In Docket No. 66967 it is alleged that the respondent erred:
(a) In increasing interest received by petitioner by*861 $215.01 and decreasing interest received by petitioner by $449;
(b) In decreasing the amount of taxes paid by $3; and
(c) In disallowing losses in the amount of $21,485.13.
FINDINGS OF FACT.
The petitioners are husband and wife, residing in St. Louis, Missouri. The petitioner, James Nicholson, is a traveling salesman for a handkerchief manufacturer.
Prior to January 31, 1929, petitioner James Nicholson was the record owner of 172 1/2 shares of stock of Ellis Adding Typewriter Co., hereinafter called the Ellis Co., and petitioner Ada M. Nicholson was the record owner of 118 1/8 shares of stock of the same company, which shares were acquired from time to time after 1904.
In January 1929 the Ellis Co. was sold out to the National Cash Register Co., hereinafter called the National Co. On January 31, 1929, each of the petitioners exchanged the stock in the Ellis Co. recorded in his or her name, receiving outright for each share thereof one share of class A (no par) stock of the National Co. and a cash bonus of $400 per share. In addition thereto, and pursuant to the exchange agreement, one half of a share of the same stock of the *979 National Co. was issued in*862 the name of James Nicholson for each share of stock to the Ellis Co. standing in his name and exchanged, and one half of a share of the same stock of the National Co. was issued in the name of Ada M. Nicholson for each share of stock of the Ellis Co. standing in her name and exchanged. These 86 1/4 shares issued in the name of James Nicholson and 59 1/16 shares issued in the name of Ada M. Nicholson were, pursuant to the exchange agreement, placed in escrow until February 1935, by way of indemnity to cover pending and future claims of former stockholders of the Ellis Co. who had sold their stock to the Ellis Co. treasury for less than its real value. No part of the stock issued in the names of the petitioners and so placed in escrow has yet been released to them or either of them by the escrow agent.
The basis for determining gain or loss on the sale or other disposition of stock of the Ellis Co. was $50 per share.
In their respective Federal income tax returns for 1929, each of the petitioners reported the sale of 145 shares of Ellis Co. stock, showing the cost thereof to be $16,699.25, the sale price to be $71,050, and the profit on the sale to be $54,350.75. In the notice*863 of deficiency issued to petitioner Ada M. Nicholson, the profit on the exchange of Ellis Co. stock for National Co. stock and cash was shown to be $47,250, which was the amount of cash which she received in such exchange. In the notice of deficiency issued to James Nicholson, the profit on the exchange of stock of the Ellis Co. for National Co. stock and cash was shown to be $69,000, which was the amount of cash which he received in the exchange.
A check in payment of the above amount of $69,000 wad deposited in the joint account of petitioners in the Bank of Commerce. James Nicholson called this account his account. Although Mrs. Nicholson had the right to draw checks against this account she did not do so generally. The other check was deposited with Scruggs, Vandervoort & Barney to the joint account of petitioners. Both petitioners drew checks against this account, Mrs. Nicholson usually paying the household expenses therefrom. One of these accounts has been held jointly by petitioners since November 16, 1916, and the other since December 8, 1917.
Before leaving St. Louis, James Nicholson made arrangements with Knight, Dysart & Gamble, brokers, who were carrying his*864 loan in a considerable amount, to credit the above amounts against his account leaving quite an amount to his credit on which they were to pay him 5 percent interest until invested. He wished also to deposit this money with the brokers as he intended to buy some National Co. stock. Mrs. Nicholson drew a check against each bank account for deposit with said brokers. When James Nicholson returned to St. *980 Louis, he discovered that the brokers had opened an account in the name of Mrs. Nicholson and had credited both amounts to her account because the checks had been signed by her. James Nicholson did not approve, so the brokers gave him a paper which he took to his wife and had her sign in order to change such account to a joint account of himself and wife.
Prior to October 28, 1929, James Nicholson attended a general meeting of salesmen at San Francisco, California. While there he was advised by the president and general manager of the National Co. not to sell his stock in that company until he received $300 a share for it. When he returned to St. Louis he bought, on October 28, 1929, another 100 shares of that stock. As shown by the records of the brokerage concern, *865 he acquired a total of 500 shares of that stock by purchase as follows:
| Date | Shares | Cost |
| Nov. 5, 1928 | 100 | $9,070 |
| May 17, 1929 | 100 | 12,025 |
| May 21, 1929 | 200 | 23,050 |
| Oct. 28, 1929 | 100 | 10,025 |
| Total | 54,170 |
On November 30, 1929, the "regular" and "safekeeping" accounts of James Nicholson at his brokers were credited with a total of 794 shares, including the above 500 shares of purchased stock, the 290 shares received January 31, 1929, in exchange for the Ellis Co. stock, which were entered in his regular account October 31, 1929, and 4 shares credited January 23, 1929, acquired upon subscription under rights at a cost of $240.
On October 29, 1929, the market price of such stock dropped to 64. This upset James Nicholson considerably and he wanted to dispose of the stock. His son-in-law, Joseph B. Morrill, who had been informed early in the day that there was a break in the market and who, knowing that James Nicholson had recently bought and held a substantial amount of National Co. stock, was very much concerned about it on his behalf, followed the action of the market that day and in the evening called upon the petitioner, James Nicholson. He found*866 James Nicholson quite perturbed about the situation and he expressed his intention of selling on the market all the National stock the next day. The son-in-law was of the opinion it would be a mistake to sell such stock at the time. After some discussion he persuaded James Nicholson to hold 500 shares and asked him whether he would sell the 290 shares to him, 172 of which were in the name of James Nicholson and 118 shares in the name of Mrs. Nicholson. It was agreed that James Nicholson would "sell" the 290 shares to his son-in-law at 64, which was the low on October 29, 1929, taking *981 his note therefor and the shares as collateral on the note. The price was satisfactory to Joseph B. Morrill because he thought the stock would go up and to James Nicholson because he thought it would go down. The following day, October 30, 1929, the son-in-law executed two demand notes, one payable to James Nicholson in the amount of $11,008 with interest at 6 percent from date, secured by 172 shares of National Co. stock and the other payable to Ada M. Nicholson in the amount of $7,552, with interest at 6 percent from date, secured by 118 shares of National Co. stock. The stock was turned*867 over by James Nicholson October 31, 1929, to Knight, Dysart & Gamble and entered in his regular account for transfer to Joseph B. Morrill. When the stock had been so transferred the brokers called Joseph B. Morrill and James Nicholson, to their office, where Joseph B. Morrill endorsed the new certificates.
J. B. Morrill had been the son-in-law of petitioners since 1916. He was 50 years of age in 1929. He was employed by the Central Transfer Co. and also the Trorilicht, Derncter Carpet Co. In 1929 he received a salary of $9,300, and owned a house worth about $25,000 and some stock of the Central Transfer Co. of a value of approximately $15,000. This stock was hypothecated at times. The house was mortgaged in a small amount at two different times. There may have been a small mortgage on it at the time. His net income reported on his Federal income tax return for 1930 was $7,720.32. A revenue agent's report stated his net income to be $18,197.88 for another year.
On November 12, 1929, the market price of National Co. stock decreased. Joseph B. Morrill and James Nicholson again discussed the matter and, as James Nicholson expressed his determination to dispose of the rest*868 of such stock he still held, Joseph B. Morrill asked him if he would make the same deal with him as to the remaining 500 shares as he had on the 290 shares. It was so agreed at a price of $61 per share, the low on that date as shown in a newspaper. On November 13, 1929, Joseph B. Morrill executed a demand note payable to James Nicholson in the amount of $30,500 with 6 percent interest from date, secured by the 500 shares of National Co. stock. These 500 shares of stock were deposited with and held by Knight, Dysart & Gamble and remained there, except temporarily, while transfer thereof was being made to Joseph B. Morrill. Joseph B. Morrill, instead of endorsing the new certificates, signed a sort of blanket endorsement which allowed James Nicholson to keep the stock as collateral in his account with such brokers.
Sometime in January 1930 Joseph B. Morrill received a dividend on such stock in the amount of $1,382.50, which he deposited in his bank account. At that time James Nicholson was not in St. Louis and Joseph B. Morrill, upon his own volition, drew his check for *982 the amount of $1,382.50 and deposited it at Knight, Dysart & Gamble to the credit of James Nicholson, *869 later informing him thereof and stating that the deposit was to be credited against the interest he owed him. This amount was credited by endorsement by James Nicholson as of January 16, 1930, upon an unsecured note executed by his son-in-law a number of years prior to 1930 for a loan in the amount of $5,500. Joseph B. Morrill did not report this dividend of $1,382.50 in his 1930 return as he understood at the time that there was no tax due thereon. He paid a state tax thereon, however.
In March 1930 James Nicholson was pressed for money. He told his son-in-law that he needed money. The only way the son-in-law could raise money was to sell his house, or the stock of the company he was working for, or the National Co. stock. Thereupon the 709 shares were turned back to James Nicholson, at the then market price, which, in the meantime, had increased in the aggregate amount of $1,090 over the market price at which it had been transferred by James Nicholson to Morrill. Of this amount $1,086.78 by a notation on the note of $5,500, was credited as of March 22, 1930, by James Nicholson as interest on the three notes of his son-in-law executed by him in the stock transactions and*870 the balance of $3.22 on the above note of $5,500. This endorsement, together with the above endorsement relating to the amount of $1,382.50, are the only endorsements on this note showing payment thereon. James Nicholson reported such items as interest received in his return. The three notes in the stock transaction were marked "Paid 3/21/30" by James Nicholson. Joseph B. Morrill in his 1930 return reported as income the above amount of $1,090 and deducted from gross income as interest paid the amount of $1,086.78.
The records of the New York Stock Exchange show the opening, low, high, and closing prices of National Co. (no par) A stock to have been as follows on the dates shown below:
| Open | Low | High | Close | |
| October 29, 1929 | 72 | 64 | 76 | 76 |
| October 30, 1929 | 76 | 75 | 85 | 85 |
| November 12, 1929 | 67 | 61 | 67 5/8 | 61 |
| November 13, 1929 | 63 | 59 | 64 7/8 | 63 |
| March 20, 1930 | 75 1/2 | 71 1/2 | 76 | 72 |
| March 21, 1930 | 70 | 64 3/4 | 71 | 65 3/8 |
The records of Knight, Dysart & Gamble show that on October 31, 1929, the regular account of James Nicholson was long 794 shares, that on December 5, 1929, 290 shares were transferred to his safe-keeping account, that on*871 March 19, 1930, his regular account was long 700 shares and his safe-keeping account was long 94 shares, that on April 10, 1930, 600 shares were transferred to the joint account of *983 petitioners, and that thereafter the following sales and purchases were made:
| Date | Sold | Purchased | Cost | Sale price |
| Shares | Shares | |||
| Mar. 24, 1930 | 100 | $6,678.50 | ||
| Apr. 28, 1930 | 100 | 5,728.50 | ||
| Apr. 30, 1930 | 100 | 5,728.50 | ||
| May 6, 1930 | 100 | $5,367.50 | ||
| May 20, 1930 | 100 | 5,517.50 | ||
| June 17, 1930 | 100 | 5,367.50 | ||
| June 17, 1930 | 100 | 5,317.50 | ||
| June 26, 1930 | 100 | 4,681.00 | ||
| July 21, 1930 | 100 | 5,528.50 | ||
| July 21, 1930 | 100 | 5,728.50 | ||
| Nov. 11, 1930 | 100 | 2,931.00 | ||
| Nov. 11, 1930 | 100 | 2,906.00 | ||
| Dec. 28, 1930 | 100 | 2,981.00 |
At the end of 1930 James Nicholson's "regular" account with his brokers was long 290 shares and the "safekeeping" account was long 4 shares.
In 1920 or 1921 the petitioners acquired 6,600 shares of stock of the Industrial Process & Engineering Co., a Delaware corporation, at 50 cents per share. The company extracted oil from shale. It had a patent called the "Johns patent" covering such process. *872 The company built a plant in Colorado and later a small experimental station below St. Louis. In 1929 James Nicholson tried to find the officers of the company, but was unable to do so. He wired the Secretary of State of Delaware and under date of September 12, 1931, received the following telegram: "CARBONIZING PROCESS CORPORATION VOID APRIL 1, 1928. PROCLAIMED BY GOVERNOR JANUARY 1929 FOR NONPAYMENT OF TAXES."
Both petitioners deducted a loss of $21,485.13 for the year 1929, which was disallowed by respondent. In schedule F, item 18, attached to the income tax return for 1929 of James Nicholson this amount of $21,485.13 is shown to consist of the following items:
| Sold 145 shares National Cash Register stock for | $9,280.00 | |
| Cost of above | 13,050.00 | |
| $3,770.00 | ||
| Sold 250 shares National Cash Register stock for | 15,250.00 | |
| Cost of above | 27,085.00 | |
| 11,835.00 | ||
| Sold 100 shares Anaconda Copper for | 7,330.50 | |
| Cost of above | 11,550.00 | |
| 4,219.50 | ||
| Sold 8,500 Liberty Bonds 4th, 4 1/4 for | 8,448.52 | |
| Cost of above | 8,459.15 | |
| 10.63 | ||
| 3,300 shares Industrial Processing & Engineering Co. for which was paid | 1,650.00 | |
| Total | 21,485.13 |
*984 OPINION.
*873 MCMAHON: In Docket No. 66966, in the statement attached to the notice of deficiency it is stated that "Loss on sale of National Cash Register Co. stock disallowed. It is held that the sale was not bona fide." It also appears that the respondent increased James Nicholson's net income for 1929 from $40,424.66 to $73,435.38 and that he added to the deficiency of $5,516.51, as determined by him, "50% penalty as provided by section 293(b) of the Revenue Act of 1928" in the amount of $2,758.26.
In the petition it is alleged, among other things, that the respondent erred in asserting such penalty and that the petitioner did not file or cause to be filed a personal income tax return for the year 1929 which was false or fraudulent or filed with intent to evade tax and prays that the Board find that he is not guilty of violating the law so as to be subjected to any penalty under section 293(b), supra.
In his answer the respondent denies that he erred as alleged in the petition and alleges affirmatively that the petitioner "filed false or fraudulent Federal income tax return for the taxable year 1929 and that part of the deficiency found for said year was due to fraud, all with intent*874 to evade tax." The facts upon which such allegations are based are alleged to be that the petitioner filed his return for 1929 on April 20, 1930; that the return showed a net income of $40,424.66 whereas his correct net income was $73,435.38; that he had, with intent to evade tax, understated his income by $33,010.72; and for further facts respondent adopts in his answer, by reference thereto, the notice of deficiency and statement attached thereto, copies of which are appended to the petition, as fully as if incorporated in his answer.
At the time of hearing the petitioner had not filed a reply. Counsel for petitioner stated that while he did not believe it was necessary to file a reply as the answer contained no new matter, it might be advisable to do so for the purpose of completing the record. Counsel for respondent stated that he had no objection to allowing petitioner to file a reply, conceding that he had the right to do so. Upon permission granted by the presiding member the petitioner filed a reply denying all the allegations contained in the answer and alleging that he is not guilty of filing a false and fraudulent return to evade tax.
The respondent contends, however, *875 that by failing to file a reply within 45 days as required by Rule 15 of the Board's rules of practice James Nicholson has effectively admitted the affirmative allegations of fact set up in the answer, thereby relieving the respondent of further proving the fraudulent and evasive intent of petitioner in filing his return for 1929 and understating his income therein.
*985 , cited by respondent, is distinguishable from the instant proceeding. Furthermore, in , wherein the Statler case has also been distinguished, the Board stated:
* * * If the answer merely reiterates affirmatively matters already covered by his notice of deficiency and assailed by the petition, there is no requirement that the petitioner shall as to those matters file a reply, and his failure to do so is not prejudicial. * * *
and denied the respondent's motion for judgment on the pleadings in the full amount of the deficiencies and penalties. The instant proceeding is, in this respect, thereby controlled adversely to the respondent.
In both of those cases no reply had been filed. Here the presiding*876 member, in conformity with the Board's Rule 19, during the hearing, permitted the filing of a reply, after counsel for respondent had stated that he had no objection thereto. The mere fact that petitioner failed to file a reply within the 45-day period provided by Rule 15, when petitioner was thereafter permitted to file it in conformity with Rule 19, can not relieve respondent of the burden of proof placed upon him expressly and in unambiguous terms by section 907(a) of the Revenue Act of 1924, as amended by section 601 of the Revenue Act of 1928, in any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax.
Under Rule 19 extensions of time to file pleadings, except for the filing of the petition, may be ordered by the Board on its own motion or may be granted by it in its discretion on motion of either party. Thus, the Board, under its own rule, could, in its discretion, extend the period of 45 days, after the expiration thereof, within which the reply under Rule 15 could be filed. The principle of , relied upon by respondent, is not applicable*877 here, since there no such discretionary power was reserved to the trial judge by the rule of the superior court.
Rule 19 is a valid rule. See , affirming , and .
Nor can the allegations denying fraud set forth in the petition be deemed of no effect as merely anticipatory of affirmative allegations of fact to be set forth in the answer to be filed by respondent. Here the petitioner did not, in his petition, anticipate a defense; he stated in his petition his defense to the assertions, in the notice of deficiency and attached statement, made by the respondent, including, among others, the determination of a penalty. Everything alleged *986 in the petition was germane to the contents of the notice of deficiency and attached statement which were challenged by petitioner; and petitioner was justified in thus presenting the issues in his petition. Pleadings and proceedings before this Board are dissimilar to those before courts, and general rules and principles as to pleading and practice before*878 courts can not be applied indiscriminately without a recognition of those differences. .
It is claimed by petitioners that the National Co. stock, the Industrial Process & Engineering Co. stock, and all other property involved herein was owned jointly by petitioners.
The record shows that James Nicholson was the record owner of 172 1/2 shares of the Ellis Co. stock, and his wife was the record owner of 118 1/8 shares of the same stock. Of the 290 shares of National Co. stock, 172 shares were in his name and 118 shares in her name. There is no evidence disclosing in whose name the 500 shares of the same stock were carried. James Nicholson testified that he bought them and they were carried originally in his regular brokerage account. He testified that he wanted the moneys received by himself and wife for the Ellis Co. stock deposited with his brokers in part as a credit against his loan, which would leave to his credit quite an amount at 5 percent until he invested it, and also because he intended to purchase some National Co. stock. However, there is no evidence showing that the stock of that company purchased thereafter*879 was paid for out of these funds deposited with the brokers. He also testified that the certificates of stock of another corporation, the Industrial Process & Engineering Co., were not taken out in the name of himself and wife jointly, but that they were divided and some were in the name of his wife and some in his own name, and that he was not positive whether half of them were in his name and half in her name. There is no evidence whatever as to whether Mrs. Nicholson ever regarded any of such property as actually belonging to her. It does not appear that she was ever consulted or that she knew anything about any of the transactions except that she drew the checks for the money to be deposited with the brokers. James Nicholson's testimony that the property was held jointly is a conclusion, which is not binding on the Board and it is not borne out by the evidence. He may have honestly wished and felt that his wife should have an equal share and interest in all the property, but that is not sufficient for the purposes of the income tax law. The burden of proof is upon the petitioners in this respect and from the evidence we are unable to find that the petitioners owned any or*880 all the property involved jointly.
The respondent disallowed a loss of $21,485.13 deducted by each petitioner, part of which petitioners claim was sustained upon the *987 sale of 395 shares of the stock of the National Co., upon the ground that these sales were not bona fide. In Docket No. 66966 the respondent added a fraud penalty of 50 percent of the deficiency determined to be due from James Nicholson. No fraud penalty has been determined against the petitioner Ada M. Nicholson.
Here then we have two questions - one, whether the petitioners sustained deductible losses, and, two, whether James Nicholson has been guilty of fraud with intent to evade tax. .
The first question to be considered here is whether the purported sales of the National Co. stock were actual sales in 1929 entitling the petitioners to deduct any loss sustained therefrom.
A revenue agent who had a conference with James Nicholson in about March 1932 relating to these matters, testified that during such conference James Nicholson stated in substance that the transfers of the National Co. stock to Joseph B. Morrill were made "for the purpose of*881 reducing income tax liability." James Nicholson denied that such had been his purpose and that he had so advised the revenue agents who were making the examination of the return. In ; affirmed in , the Circuit Court for the Second Circuit stated:
We agree with the Board and the taxpayer that a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. * * *
However, in ; affd., , the Board stated:
* * * on the other hand, a mere gesture without the vital intent to change ownership is not to be recognized as a sale merely because superficially it resembles one. * * * [Emphasis supplied.]
There is no evidence whatever as to whether Ada M. Nicholson intended to sell the stock standing in her name. The evidence fails to disclose that these matters were even discussed with her or in her presence. While one of the notes was made payable to her, there is no evidence that*882 she ever saw the note or knew that it had been made. The matter was discussed by her husband and son-in-law and they were the active participants in the transactions. The stock in her name and the stock in the name of her husband were transferred to the name of Joseph B. Morrill and he executed three notes and endorsed the certificates as collateral to such notes.
Joseph B. Morrill testified that the 290 shares of stock were sent by the brokers to the registrar's office for transfer, that "when the stock came back they called me down to Knight, Dysart & Gamble's and Mr. Nicholson - I turned it over to him and endorsed it as collateral *988 on his notes." The certificates were retained by the brokers and remained in the regular account of James Nicholson until December 5, 1929, when 290 shares were transferred to his safe-keeping account, and later, some time before March 19, 1930, retransferred in part to his regular account. As to the 500 shares he testified that "that stock was sent through and transferred to my name, and that stock instead of being endorsed I signed some kind of a blanket endorsement which allowed Mr. Nicholson to keep the stock up as collateral in*883 his account." The certificates for the 500 shares were retained by the brokers and remained in the account of James Nicholson. So far as the record discloses the three notes of Joseph B. Morrill were kept by James Nicholson and were not delivered to the brokers with the stock. Thus the stock which supposedly was given as collateral to these notes may not have been treated as collateral to such notes but was, in fact, separated therefrom and deposited with the brokers to the account of James Nicholson. Furthermore, there is no evidence showing that the brokers had no claim against the stock. The 500 shares when transferred were in the possession of the brokers and remained with the brokers until sold in 1930. At the end of 1930, 290 shares still remained with the brokers in James Nicholson's regular account.
We have not overlooked the fact that the stock was transferred to Joseph B. Morrill. This is not sufficient to establish a bona fide sale in a situation such as is presented in the instant proceedings. , and *884 .
In our opinion the petitioner, James Nicholson, after the transfer had practically the same use and benefit of the stock for whatever purpose he desired as he had had before the transfer. Although the stock was transferred and notes therefor executed, we are not convinced that this was done with mutual intent on the part of the petitioners and their son-in-law to complete an absolute sale thereof. ; .
Furthermore, transactions involving members of the same family or those bearing a close relation to each other should be carefully scrutinized. , and cases cited therein.
The action of the respondent in disallowing these claimed losses must be sustained.
However, this is not tantamount to holding that James Nicholson filed a false and fraudulent return with intent to evade tax or that a part of the deficiency was due to fraud. The deduction may have been taken through a mistaken belief that the transactions entered *989 into were sales, the*885 loss resulting from which he was entitled to deduct. That this was his belief is, in our opinion, shown by the testimony of the revenue agent who had a conference with James Nicholson as to the tax liability of petitioners for 1929. He stated James Nicholson claimed that he had a right to sell the stock, that it was a "perfectly legitimate sale, a bona fide sale", and that he expressed the thought that "he was being abused when other people were being allowed similar deductions - that he was being abused, discriminated against."
In ; affirmed in , the Board stated:
* * * A charge of fraud has always been regarded as a serious matter in the law. Not only is it never presumed, but the ordinary preponderance of evidence is not sufficient to establish such a charge. It must be proved by clear and convincing evidence. * * *
* * * If not admitted it must be proved. * * *
Here fraud is not admitted. The mere fact that his return showed a net income for the taxable year 1929 in the sum of $40,424.66 and the respondent, in recomputing his tax liability, determined that the net*886 income for that year was $73,435.38, by itself, does not establish fraud. If it did, then all taxpayers against whom deficiencies are determined would be guilty of fraud and subject to the imposition of a fraud penalty. Nor does the lack of evidence to sustain the petitioners' contentions prove fraud. As stated in , "both parties may fail through inadequate proof in their several issues, and thus the deficiency would be sustained and the penalty set aside." The burden of proving fraud is upon the respondent and his proof must be clear and convincing. The evidence viewed as a whole is not clear and convincing and hence we must hold that the respondent, upon whom rests the burden of proving fraud, has not discharged that burden and therefore no fraud penalty may be imposed.
The respondent further alleges that, in the event the Board finds from the evidence that James Nicholson was not guilty of fraud "but that part of the deficiency was due to negligence or intentional disregard of rules or regulations, then the Board should find the taxpayer guilty of negligence and the appropriate penalty should be asserted." No determination of negligence*887 was made by the respondent, no penalty for negligence was added to the deficiency in tax as determined, no facts tending to disclose negligence, were pleaded by the respondent, and no evidence was offered by either party upon that subject. On brief respondent, in concluding, states "the Board's attention is drawn to the prayers of the answer of respondent which asks in any event for the assertion of the negligence penalty * * *."
The *990 record as made is insufficient to sustain a finding or holding that a negligence penalty should be imposed. , and authority cited therein.
The next question to be determined relates to the alleged loss of $1,650, being the cost of 3,300 shares of stock of the Industrial Process & Engineering Co., deducted by each petitioner from gross income in 1929. It is claimed by petitioners that this stock became worthless in 1929. The respondent disallowed the deduction upon the ground that such stock was worthless prior to 1929. The petitioner James Nicholson testified that he did not know when the company ceased to do business, but thought it was about 1926, 1927, or 1928, that he*888 tried to find the old officers at the addresses which he had but failed to locate them, and that he finally wired the Secretary of State of Delaware, from whom he received the telegram set forth in our findings.
From the evidence adduced we are unable to determine whether the stock had any value prior to 1929, or whether it became worthless in 1929 or prior thereto. The petitioners argue on brief that the fact that the plants in Colorado and St. Louis were abandoned prior to 1929 does not show that the stock was worthless prior to 1929 as the patent which the company owned was still in existence and believed by petitioners to be very valuable. The record is wholly without any evidence as to the value of this patent or what became of it. There is no evidence showing that the Industrial Process & Engineering Co. is the same as the "Carbonizing Process Corporation" referred to in the above telegram. The petitioners having failed to show that the respondent erred, his determination in disallowing the loss of $1,650 deducted by each petitioner must be sustained.
All other errors assigned in the respective petitions not discussed herein have been abandoned, since no evidence was*889 presented or arguments made in respect thereto. Hence the action of the respondent in respect thereto must be approved.
Reviewed by the Board.
In Docket No. 66966 decision for the respondent for the deficiency without any fraud or negligence penalty will be entered. In Docket No. 66967 decision will be entered for the respondent.