*729 During 1929, the president of the petitioner corporation, by means of fictitious corporate purchases, wrongfully took from the corporation and converted to his own use the sum of $76,939.63. Petitioner has never received anything for such purchases nor has it been compensated in any way, by note, promise, or otherwise, for such wrongful conversions. The president of petitioner, duly authorized to do so, filed petitioner's income tax return for 1929, in which the fictitious purchases were reflected, thus decreasing petitioner's taxable income. More than two years thereafter, respondent determined a deficiency resulting from his increase of petitioner's taxable income by the amount of the fictitious purchases, and his disallowance of petitioner's deduction, in his return, $500of paid the Commonwealth of Pennsylvania as a bonus for an increased stock issue. Respondent also imposed a fraud penalty. Held:
(1) The petitioner's return for 1929 was false and was filed with the intent to evade tax. The assessment of a deficiency is, therefore, not barred. Revenue Act of 1928, secs. 275 and 276.
(2) Petitioner is entitled to a deductible loss in the amount embezzled by its president. *730 Revenue Act of 1928, sec. 23(f).
(3) Since no part of the deficiency, as redetermined, results from "fraud with intent to evade tax", no basis for the imposition of any fraud penalty exists, and the action of respondent in imposing such penalty is reversed. Revenue Act of 1928, sec. 293(b). See Samuel L. Huntington,35 B.T.A. 835">35 B.T.A. 835.
*348 The petitioner seeks redetermination of a deficiency in income tax for the calendar year 1929, in the amount of $8,518.36, and a fraud penalty of $5,789.33. The deficiency arose upon petitioner's understatement of income in its return for the tax year, resulting from an overstatement of purchases, and its deduction of $500 paid the Commonwealth of Pennsylvania, during that year, on an increase of its capital stock. Respondent determined the return was "false or fraudulent with intent to evade tax" solely on the ground of overstatement of purchases and consequent understatement of income, *731 and imposed the disputed fraud penalty.
Petitioner denies the intent to evade tax in the return and pleads the bar of the statute of limitations. It says, alternatively, that even if the assessment and collection of the deficiency for the tax year is not barred by the statute of limitations, it is entitled to deduct, as a loss sustained in that year, the amount of its overstated purchases.
FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation located at Bridgeport, Pennsylvania. During the taxable year 1929 it had outstanding 3,483 shares of common stock and 3,316 shares of preferred stock January 1, 1929, and 3,499 shares December 31, 1929. Of the common stock 2,524 shares were owned by S. L. Gabel, president of the company, 665 shares by E. V. Gabel, wife of S. L. Gabel, and 294 shares by N. H. Wolfe, an official of the company. The preferred stock was owned by 107 persons or corporations. S. L. Gabel, the president, did not own any of the preferred stock, but his wife held 484 shares and N. H. Wolfe 143 shares. The balance was owned by various persons. The company had $36,000 of bonds outstanding, which were held by three banks and the Edgar T. Ward Sons*732 Co.
During the taxable year, 1929, S. L. Gabel, petitioner's president, caused false entries to be made on the petitioner's books, showing *349 purchases of material or merchandise from Edgar T. Ward Sons Co. as follows:
| Aug. 31, 1929 | |
| $5,485.00 | |
| Sept. 25, 1929 | 11,225.00 |
| Oct. 31, 1929 | 16,510.00 |
| Oct. 31, 1929 | 8,425.00 |
| Nov. 30, 1929 | 7,090.00 |
| Dec. 31, 1929 | $9,744.96 |
| Dec. 30, 1929 | 18,459.67 |
| Total | 76,939.63 |
No such purchases occurred but entries were made on the books of the petitioner showing payments of $76,939.63 to Edgar T. Ward Sons Co. for these fictitious purchases. No payments for such purchases were made to Edgar T. Ward Sons Co., but were paid to S. L. Gabel, petitioner's president, who used the funds for his own purposes.
The amounts so paid to S. L. Gabel were not charged to his account, nor to that of any other person. Neither the petitioner nor Edgar T. Ward Sons Co. received anything of value by reason of these transactions. The petitioner has never been repaid or recovered any of these amounts thus paid S. L. Gabel, nor has Gabel ever promised to repay any of such amounts by note or otherwise.
The petitioner filed its income*733 tax return on March 15, 1930, and paid the tax shown to be due, viz., $39,684.04. Subsequently, in 1931, after an examination by a revenue agent, certain adjustments were made, which added $3,060.30 to petitioner's tax. This was paid promptly. In 1931, S. L. Gabel's financial affairs became badly involved and bank creditors of the petitioner requested E. L. Parker, president of Edgar T. Ward Sons Co., to make an examination of petitioner's affairs, for the purpose of ascertaining its condition as to solvency. His investigation disclosed the fictitious purchases from Edgar T. Ward Sons Co. and the conversion of the purported payments therefor to his own use, by S. L. Gabel.
When confronted with the result of Parker's investigation, Gabel admitted both the fictitious purchases and the conversion of the alleged payments to his own use. He resigned as president of the petitioner and E. L. Parker was elected to that position. Early in 1932 E. L. Parker notified the respondent of the irregularities and suggested an examination. The examination was made and under date of September 23, 1933, the respondent issued a deficiency notice determining the present deficiency of $8,518.36*734 and imposing the fraud penalty of $5,789.33. The amount of the penalty was computed by adding to the deficiency the additional tax of $3,060.30 assessed and collected in 1931.
The income tax return of the petitioner, for the calendar year 1929, was filed on March 15, 1930, by its then president, S. L. Gabel, who signed and swore to it. Gabel, as president of the petitioner, then had the authority to make this return. The tax return of *350 petitioner for 1929 was "false or fraudulent with intent to evade tax."
The petitioner sustained a loss of $76,939.63 in 1929, for which it was not compensated by insurance or otherwise.
OPINION.
LEECH: The controlling Revenue Act of 1928, section 275, 1 obviously, bars the assessment of the present deficiency and, a fortiori, the contended fraud penalty (), unless, under section 276 2 of that act, the return for 1929 was "false or fraudulent with intent to evade tax." This issue is separate from that involved in section 293(b), 3 under which the amount, only, of the fraud penalty is fixed, and must be answered before we reach the question of the existence of any deficiency. *735 See . Respondent has the burden of proving by *351 the preponderance of clear and convincing evidence that such intent existed.
*736 The record discloses convincingly that the return for the tax year was filed by its president, who had the authority so to do; that such return was false in its statement of taxable income because that statement reflected its deduction of fictitious purchases in the comparatively substantial amount of $76,939.63. See ; . The authorities are clear that such facts constitute convincing evidence of the intent of the corporation to evade income taxes in the filing of the return. ; . But petitioner, apparently, argues this effect of that evidence is contradicted here by the logical conclusion from the record that, in filing the false return, petitioner's president, Gabel, intended, only, to hide his corporate defalcations from the corporation for what were, obviously, selfish reasons. Ingenuous as this position seems, we do not think it avails petitioner here. Gabel's selfish interest in saving himself by filing the false return is entirely consistent*737 with and does not contradict the concurrent existence of his intent to evade corporate income tax by that return, which the record otherwise clearly reveals.
The request of Parker, who succeeded Gabel as president, to the respondent to audit the corporate records after Gabel's depredations were discovered, discloses, at most, only a change of corporate intent. But the intent with which we are alone concerned was the corporate intent in filing the return, which is reflected here by that of its then president, Gabel, who was authorized to make the return in question.
Consequently, we have found that the return was filed "with intent to evade tax." From this fact, under section 276, supra, it follows that the disputed deficiency is not barred by section 275, supra.
We, therefore, pass to the question of the deficiency. Petitioner has the burden of proof in establishing error in the determination of the deficiency.
The substantial part of the deficiency results from petitioner's overstatement of purchases. Respondent concedes that there were fictitious purchases but contends that they were less than the amount claimed by*738 petitioner and that the corporate payments or credits, therefore, were not made or effected until 1930.
It is true the cash book of the corporation contains entries indicating the payment for several items of the fictitious purchases in January 1930. But those entries are not controlling here. . The reconciliation from the books; the evidence that the actual date of cancellation of the only available check given in payment for a fictitious purchase was October *352 1929, while the cash book showed its entry as of January 4, 1930; the established practice of the corporation of reflecting on its books for the first week of a calendar year transactions that occurred during the prior year; respondent's explicit admission in his first amended formal answer to petitioner's petition "that during the year 1929 one Samuel Landis Gabel, took from the petitioner corporation the sum of $76,939.63 in cash which was used in his own personal affairs * * *"; and other evidence establishes to our satisfaction that Gabel, the president of petitioner, during the calendar year 1929, by means of fictitious purchases wrongfully*739 took from petitioner the sum of $76,939.63 and converted the same to his own use. Likewise, it is clear petitioner never received any consideration from those fictitious purchases, nor has it been compensated in any manner, by note, promise, or otherwise, for that amount thus wrongfully taken from it. The conclusion follows that petitioner is entitled to a deductible loss of $76,939.63 for the tax year. Revenue Act of 1928, sec. 23(f). 4; ; ; ; ; .
The allowance of the deduction of the amount of fictitious purchases, $76,939.63, on this record, leaves*740 for our determination, only, the propriety of respondent's disallowance of petitioner's deduction of $500 paid the Commonwealth of Pennsylvania during the tax year as a bonus on its increased issue of capital stock in the computation of the disputed deficiency. The disallowance of this deduction was right. ; affd., . But it is not contended nor does the evidence indicate that the deduction of this item was "due to fraud with intent to evade tax."
Thus, since that part of the deficiency resulting from the petitioner's overstatement of purchases is eliminated from the deficiency by reason of the allowed deduction of a loss in the amount of that overstatement, no part of the deficiency, as redetermined here, was "due to fraud with intent to evade tax." It follows that no basis exists for the imposition of any fraud penalty. Revenue Act of 1928, sec. 293(b), supra. See
Decision will be entered under Rule 50.
Footnotes
1. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.
Except as provided in section 276 -
(a) General rule. - The amount of income taxes imposed by this title shall be assessed within two years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.
(b) Request for prompt assessment. - In the case of income received during the lifetime of a decedent, or by his estate during the period of administration, or by a corporation, the tax shall be assessed, and any proceeding in court without assessment for the collection of such tax shall be begun, within one year after written request therefor (filed after the return is made) by the executor, administrator, or other fiduciary representing the estate of such decedent, or by the corporation, but not after the expiration of two years after the return was filed. This subsection shall not apply in the case of a corporation unless -
(1) Such written request notifies the Commissioner that the corporation contemplates dissolution at or before the expiration of such year; and
(2) The dissolution is in good faith begun before the expiration of such year; and
(3) The dissolution is completed.
(c) Corporation and shareholder.↩ - If a corporation makes no return of the tax imposed by this title, but each of the shareholders includes in his return his distributive share of the net income of the corporation, then the tax of the corporation shall be assessed within four years after the last date on which any such shareholder's return was filed.
2. SEC. 276. SAME - EXCEPTIONS.
(a) False return or no return. - In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.
(b) Waivers. - Where before the expiration of the time prescribed in section 275 for the assessment of the tax, both the Commissioner and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.
(c) Collection after assessment.↩ - Where the assessment of any income tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by distraint or by a proceeding in court, but only if begun (1) within six years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in writing by the Commissioner and the taxpayer before the expiration of such six-year period. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.
3. SEC. 293. ADDITIONS TO THE TAX IN CASE OF DEFICIENCY.
* * *
(b) Fraud.↩ - If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.
4. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * *
(f) Losses by corporations.↩ - In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.