1935 BTA LEXIS 835">*835 1. The D corporation, after selling its property for cash and notes, decided to retire all but a nominal amount of its stock. It distributed the cash and thereafter transferred the notes to a partnership and two other corporations owned by the principal stockholders of D for checks equal to one half of the fair market value of the notes, and it made a further distribution of the amount of the checks so received, which apparently was used to repay the transferees for the amounts advanced to D in the checks. The transferees of the notes distributed them to the stockholders of D in proportion to their stockholdings without receiving any consideration directly from them. Held, that the stockholders of D did not purchase the notes, but acquired them as stockholders of D indirectly from D, and the petitioner, as one of such stockholders, was properly taxed with a gain from a partial liquidation.
2. The petitioner executed formal assignments of stock held in his own name, attached them to the stock certificates, placed them in an envelope marked with his wife's name, together with some bonds and notes, and delivered all of such securities to his wife, with the declaration that1935 BTA LEXIS 835">*836 he was making a gift. The petitioner and his wife immediately deposited them in a safety deposit box to which both had access. Held, that these facts are insufficient to establish a valid gift, since the subsequent acts of the petitioner, including the removal of the securities at will, the use of the stocks as collateral for personal loans, the sale of some of them, and the use of the income and proceeds for his own purposes, indicate that he did not actually divest himself of title, dominion, and control of the securities.
3. A taxpayer on the cash basis is not entitled to deduct interest accrued on indebtedness but not paid in the taxable year.
4. Failure of a taxpayer to contest an adjustment made in determining the deficiency is not an admission or proof of fraud and the Commissioner can not sustain his burden of proof on an issue of fraud by statements made in his notice of deficiency.
5. The facts showing fraud should not only be proved but they should be clearly pleaded.
6. The evidence does not affirmatively establish that the alleged gifts, par. 2, supra, were shams designed to evade tax, and the errors and inconsitencies in the petitioner's return1935 BTA LEXIS 835">*837 respecting the income and the gains and losses from sales of some of the securities given to his wife and the gains from sales of his own securities indicate negligence rather than fraudulent intent.
7. A penalty for negligence is imposed for failure to report a profit on a sale of stock owned by the petitioner, where the only explanation offered is that by mistake it was reported on a return made up by the petitioner for his wife.
32 B.T.A. 1192">*1193 The Commissioner determined deficiencies in income tax and penalties as follows:
| Docket No. | Year | Deficiency | Penalty |
| 47345 | 1924 | $14,935.14 | $7,467.57 |
| Do | 1925 | 1,437.61 | 718.81 |
| Do | 1926 | 819.35 | 409.68 |
| 53509 | 1928 | 1,913.08 | 956.54 |
The issues are (1) whether the petitioner realized any taxable income in 1924 as a result of certain distributions made in that year by the Doric Apartment Co., of which the petitioner was a stockholder, and, if so, the amount thereof; (2) whether interest received on certain bonds and notes and dividends received on certain stocks1935 BTA LEXIS 835">*838 in 1924, 1925, and 1926, which, with one exception, were reported in the separate income tax returns of the petitioner's wife, were income of the petitioner for those years; (3) whether interest received on the Matz Realty Co. second mortgage notes in 1928, which was reported in the income tax returns of his wife and others, was income of the petitioner; (4) whether the petitioner realized any taxable income in 1928 upon the payment of certain of said second mortgage notes; (5) whether the petitioner is entitled to a deduction in the year 1928 for interest paid or accrued on money borrowed; (6) whether, for the years 1924, 1925, 1926, and 1928, any part of the deficiencies are due to fraud with intent to evade tax; and (7) whether any part of the deficiency for 1928 is due to negligence, or intentional disregard of rules and regulations but without intent to defraud.
32 B.T.A. 1192">*1194 FINDINGS OF FACT.
The petitioner, an individual, was a stockholder during the years 1922 to 1924 of the Doric Apartment Co., a Kentucky corporation (hereinafter called Doric). Doric was organized in 1922, and, until May 29, 1924, had outstanding capital stock of $200,300, divided into 2,003 shares of1935 BTA LEXIS 835">*839 the par value of $100 each. The shares of Doric owned by the stockholders hereinafter mentioned were acquired by them for cash at par in 1922 when Doric was organized.
The petitioner was treasurer of Doric. The other officers were Alfred S. Joseph, president, H. H. Newmark, vice president, and A. Ph. Stitzel, secretary. These four individuals were also the directors of the corporation and managed its affairs. During 1924 and at all times material hereto, Alfred S. Joseph and the petitioner were architects, doing business as partners under the firm name of Joseph & Joseph. Each owned a one-half interest in the partnership. A. Ph. Stitzel was the president and principal stockholder of the Stitzel Distilling Co., a corporation organized to manufacture whiskey, which was inactive in 1924. H. H. Newmark operated the business of the H. H. Newmark Co., a corporation engaged in the retail merchandise business.
In April 1924 the stock of Doric was owned by four groups of individuals, as follows:
| Stockholder | Shares | Percentage of total |
| owned | outstanding stock | |
| (1) Alfred S. Joseph | 50 6/8 | |
| Helen R. Joseph, wife of Alfred S. Joseph | 200 | |
| May F. Rothchild | 62 1/2 | |
| E. H. Rothchild | 62 1/2 | |
| Leon Rothchild | 62 1/2 | |
| Clementine Rothchild | 62 1/2 | |
| Total | 500 6/8 | 25% |
| (2) Oscar G. Joseph, the petitioner | 50 6/8 | |
| Stella F. Joseph, wife of Oscar G. Joseph | 200 | |
| S. Fuhrman, father of Stella F. Joseph | 100 | |
| R. Fuhrman, mother of Stella F. Joseph | 150 | |
| Total | 500 6/8 | 25% |
| (3) A. Ph. Stitzel | 251 1/8 | |
| Elizabeth Stitzel, mother of A. Ph. Stitzel | 200 | |
| Fannie E. Smadel, sister of A. Ph. Stitzel | 50 | |
| Lillian M. Russell sister of A. Ph. Stitzel | 50 | |
| Alma B. Litzler sister of A. Ph. Stitzel | 50 | |
| Toska E. Borries sister of A. Ph. Stitzel | 50 | |
| Edna K. Mitchell sister of A. Ph. Stitzel | 50 | |
| Ellen E. Stitzel sister of A. Ph. Stitzel | 50 | |
| Total | 751 1/8 | 37 1/2% |
| (4) H. H. Newmark | 50 3/8 | |
| Myrtle B. Newmark, wife of H. H. Newmark | 100 | |
| Marie Newmark, mother of H. H. Newmark | 100 | |
| Total | 250 3/8 | 12 1/2% |
| Total shares outstanding | 2,003 |
1935 BTA LEXIS 835">*840 32 B.T.A. 1192">*1195 The petitioner purchased and gave to his wife the shares owned by her, and he advanced the money for the purchase of the shares owned by the Fuhrmans and received from them their promissory notes of the aggregate face amount of $25,000. All of the persons in the Stizel group were stockholders of the Stitzel Distilling Co., which advanced the money for purchase of the shares of Doric owned by them. The Newmarks were stockholders of the H. H. Newmark Co., which had one stockholder who did not own any of the shares of Doric.
Doric completed the construction of an apartment house in Louisville, known as the Willow Terrace Apartments, in June 1923. The cost of the apartment house, including the cost of the land, furniture, and equipment, and financing, was $490,411.38, and, at the time of completion, there was an existing first mortgage on the property of $225,000. Doric sold the apartment house, together with the furniture and equipment, to the Matz Realty Co. on April 18, 1924. The latter paid $175,000 in cash, assumed the first mortgage of $225,000, and executed and delivered to Doric 147 promissory notes of varying amounts, of the aggregate face value of $312,500, 1935 BTA LEXIS 835">*841 secured by a second mortgage on the property. The notes were executed by the Matz Realty Co. and Samuel L. Matz, its president and principal stockholder, as joint makers. The notes were divided into four groups, described in the deed of conveyance as series 1, 2, 3, and 4. They were made out in amounts proportionate to the interest of each of the 21 stockholders of Doric, and 21 of them matured on each of the dates and in the aggregate face values following:
| Date of maturity | Face value |
| May 1, 1927 | $37,500 |
| May 1, 1928 | 15,625 |
| May 1, 1929 | 15,625 |
| May 1, 1930 | 15,625 |
| May 1, 1931 | $15,625 |
| May 1, 1932 | 15,625 |
| Feb. 1, 1933 | 196,875 |
The number of notes, the number maturing on each maturity date, and the aggregate face value of the notes, in each series, were as follows:
| Number | Number | Face value | |
| of | maturing | ||
| notes | each date | ||
| Series No. 1 | 42 | 6 | $ 78,125.00 |
| Series No. 2 | 28 | 4 | 78,125.00 |
| Series No. 3 | 56 | 8 | 117,187.50 |
| Series No. 4 | 21 | 3 | 39,062.50 |
| Total | 147 | 21 | 312,500.00 |
32 B.T.A. 1192">*1196 After Doric had sold the apartment house it decided to sell the second mortgage notes as quickly as possible, reduce its capital stock1935 BTA LEXIS 835">*842 to a nominal amount and discontinue its business activities. Its officers tried unsuccessfully to sell the notes. The only offer received was one of $30,000. The directors and stockholders on May 28, 1924, after receiving reports from those who had tried to sell the notes, passed a resolution appraising the notes at 30 percent of their face value. The officers were authorized to sell the notes as soon as possible on the basis of this appraised value or for any price obtainable. The articles of incorporation were amended on May 29, 1924, reducing the outstanding stock to $1,000 par value, divided into 100 shares, and authorizing the retirement at par of the remainder of the outstanding capital stock.
Doric on June 24, 1924, endorsed and transferred the notes in series 1 and 2 to Joseph & Joseph, the notes in series 3 to the Stitzel Distilling Co., and the notes in series 4 to the H. H. Newmark Co., and received from the assignees checks for $46,875, $35,156.25, and $11,718.75, respectively - a total of $93,750, - which were deposited in the bank account of Doric. Within a few days, and without paying any consideration, Alfred S. Joseph received the notes in series No. 1 and1935 BTA LEXIS 835">*843 the petitioner received the notes in series No. 2 from Joseph & Joseph, and H. H. Newmark received the notes in series No. 4 from the H. H. Newmark Co. These three persons held the notes for the stockholders of their respective groups in proportion to their stockholdings in Doric. At the same time, without payment of any consideration, the Stitzel Distilling Co. endorsed the notes in series No. 3 to the stockholders in the A. Ph. Stitzel group in proportion to their stockholdings in Doric.
During the year 1924 Doric retired its capital stock in excess of $1,000, and made distributions of the aggregate amount of $205,750. The first distribution, amounting of $112,000, was made on April 26, 1924, out of the $175,000 in cash received upon the sale of the apartment house, and was paid by checks of Doric payable as follows:
| Alfred S. Joseph | $28,000 |
| Oscar G. Joseph | 28,000 |
| A. Ph. Stitzel | 42,000 |
| H. H. Newmark | 14,000 |
The second distribution, amounting to $93,750, was made on June 24, 1924, on the same day that Doric received checks of that amount for the second mortgage notes, and was paid by checks of Doric payable as follows:
| Alfred S. Joseph, trustee | $22,000.00 |
| Alfred S. Joseph, trustee | 1,437.50 |
| Oscar G. Joseph, trustee | 22,000.00 |
| Oscar G. Joseph, trustee | 1,437.50 |
| A. Ph. Stitzel, trustee | $33,000.00 |
| A. Ph. Stitzel, trustee | 2,156.25 |
| H. H. Newmark, trustee | 11,000.00 |
| H. H. Newmark | 718.75 |
1935 BTA LEXIS 835">*844 32 B.T.A. 1192">*1197 The $51,437.50 received by Alfred S. Joseph was deposited to the credit of Joseph & Joseph, and the indebtedness of the stockholders in his group to him for advances made to purchase stock of Doric was canceled. Of the $51,437.50 received by the petitioner, $5,143.75 was received for his own account, $20,575 was received for the account of Stella F. Joseph, and $25,718.75, for the account of the Fuhrmans. The latter amount was not paid over to the Fuhrmans but was credited to them in a book kept by the petitioner which contained, among other items, a debit for the $25,000 advanced by the petitioner for the purchase of their stock. Of the $25,718.75 received by H. H. Newmark, $5,143.75 was received for his own account, and $10,287.50 was received for the account of Myrtle B. Newmark, and $10,287 for the account of Marie Newmark. The $77,156.25 received by A. Ph. Stitzel was paid over to the Stitzel Distilling Co., which credited the accounts of the several stockholders in the Stitzel group for the amount of their respective shares, as follows:
| A. Ph. Stitzel | $25,718.75 |
| Elizabeth Stitzel | 20,575.00 |
| Fanny E. Smadel | 5,143.75 |
| Lillian M. Russell | 5,143.75 |
| Alma B. Litzlar | $5,143.75 |
| Toska E. Borries | 5,143.75 |
| Edna K. Mitchell | 5,143.75 |
| Ellen E. Stitzel | 5,143.75 |
1935 BTA LEXIS 835">*845 The petitioner reported no profit from the transaction in his income tax return for the year 1924. In determining the deficiency for 1924, the Commissioner valued the second mortgage notes at 85 percent of their face value, and increased the income of the petitioner by the amount of $44,331.25.
The total fair market value of the second mortgage notes, at the time of their receipt by the stockholders of Doric, was $187,500. .
The petitioner purchased the following stocks, bonds, and notes during or prior to 1924 with his own funds:
200 shares Ohio Oil Co.
800 shares Standard Oil Co. of Kansas
315 shares Standard Oil Co. of Indiana
360 shares Standard Oil Co. of New York
184 shares Standard Sanitary Mfg. Co.
100 shares American Locomotive Co.
30 shares West Penn Ry. Co.
100 shares Pan American Petroleum Co.
14 shares Carter Guaranty & Brokerage Co.
200 shares National Theatre
$5,000 mortgage Security Co. of America
5,000 Kingdom of Netherlands
5,000 Western Pacific R.R. Co.
5,000 Bethlehem Steel Co.
5,000 St. Louis & San Francisco R.R.
9,000 real estate notes, on property in Louisville
32 B.T.A. 1192">*1198 1935 BTA LEXIS 835">*846 He acquired the following securities during 1925:
46 shares Standard Sanitary Mfg. Co.
10 shares Majestic Theatre Co.
30 shares Standard Oil Co. of Nebraska
300 shares Tennessee Copper Co.
100 shares Marland Oil Co.
$2,000 Paris & Orleans R.R.
2,500 German Extension Loans
5,000 Color Cinema Co.
3,000 Elk bonds
He acquired additional bonds and some notes in 1926, including the following:
$5,000 City of Berlin
2,000 Paris & Orleans R.R.
5,000 German Government Extension Loan
5,000 Victory Mortgage Co.
8,250 notes of Victor Bullitt
6,000 notes on residence
4,687 notes of Reynolds
The petitioner, prior to 1924, had made no gifts of any securities to his wife other than the gift in 1922 of 200 shares of Doric. She had no separate property or income. The stocks acquired by the petitioner were held in his own name. In January 1924 the petitioner caused to be prepared assignments to his wife of the stock certificates for the stock acquired during or prior to 1924, referred to above. The assignments were prepared on separate sheets of paper, one for each stock certificate, and were attached to the several certificates. The petitioner signed the assignments1935 BTA LEXIS 835">*847 in the presence of two witnesses and his wife, placed them, together with the stock certificates, in an envelope marked "Property of Stella F. Joseph", and delivered them to his wife, declaring that he was making her a present of the stock. The petitioner and his wife thereupon wnet to the bank and placed them in a safety deposit box to which both of them had access. Later in the same year the petitioner's share of the Matz Realty Co. notes and the bonds and notes acquired prior to or during 1924, referred to above, were delivered to his wife in the same manner, except that no assignments were executed for the bonds or notes. In 1925 and in 1926 the securities above referred to as acquired in those years were delivered to his wife in the same way. Again no assignments were executed for the bonds or notes.
The stocks delivered to the petitioner's wife were not transferred to her name on the books of the several corporations until some time in 1928. The petitioner, with the tacit consent of his wife, used the stocks as collateral for loans made on his personal notes at various times during the years 1926. Whenever this was done the petitioner 32 B.T.A. 1192">*1199 detached and destroyed1935 BTA LEXIS 835">*848 the assignment on each stock certificate to be used. When a loan was repaid and the collateral returned, he executed and attached to each stock certificate a new assignment to his wife.
The petitioner deducted on his income tax return for 1924 a loss of $1,039.75 from the sale of 100 shares of Pan American Petroleum Co. stock, and he reported on his return for 1925 a profit of $3,656 on the sale of 100 shares of AmericanLocomotive Co. stock. The 200 shares were among those delivered to his wife in 1924.
The petitioner prepared, signed, and filed on behalf of his wife, Stella F. Joseph, separate income tax returns for the years 1924, 1925, and 1926. The dividends and interest received from the foregoing stocks, bonds and notes held during the years 1924 and 1925, including interest on $39,062.50 in face value of the Matz notes, were reported on the returns of Stella F. Joseph for those years. In her return for 1926 interest on the said bonds and notes, including interest on $26,562.50 in face value of the Matz notes, was reported. The dividends received in 1926 on the stocks delivered to her amounted to $6,239.98. They were not reported in her return but were reported in1935 BTA LEXIS 835">*849 the return of the petitioner for 1926. The petitioner received all of the above mentioned interest and dividends.
In determining the deficiencies for 1924, 1925, and 1926 the Commissioner included in the income of the petitioner interest and dividends received on the foregoing securities in the following amounts:
| Year | Interest | Dividends |
| 1924 | $3,389.88 | $4,284.01 |
| 1925 | 7,184.50 | 4,921.99 |
| 1926 | 5,950.62 |
The petitioner did not make a complete gift in 1924, 1925, or 1926 of any of the securities which he owned in those years.
The Matz Realty Co. paid the interest and principal on the second mortgage notes as they became due, and, in addition, made advance payments of principal of $100,000 in 1926 and $100,000 in 1928. All of the payments by the Matz Realty Co. were made by checks payable separately to the petitioner, Alfred S. Joseph, A. Ph. Stitzel and H. H. Newmark. The petitioner received one fourth of the payments made. He deposited them in his personal bank account and credited the Fuhrmans for their proportionate share in a little book which he kept showing debits and credits arising out of their holdings of the Doric stock and the Matz notes. 1935 BTA LEXIS 835">*850 During the year 1928 the interest payments received by the petitioner on the notes amounted to $4,231.49. Stella F. Joseph reported one 32 B.T.A. 1192">*1200 half of that interest in her income tax return for 1928, and the Commissioner excluded it from income in determining her tax liability. In determining the deficiency against the petitioner for 1928, the Commissioner included the entire amount of $4,231.49 in the income of the petitioner. In determining the deficiency for 1928 the respondent included in the income of the petitioner the amount of $4,410.93 as profit realized by him in that year from payment of the Matz notes. The petitioner did not report in his return for 1928 any profit from the payment of any of those notes, but his wife reported a profit of $10,292.18 in her return.
In 1924 the petitioner began to keep an informal account of his transactions with the Fuhrmans relating to their interest in Doric. The opening entry was a debit of $25,000 for the notes given in 1922 for advances to purchase the Doric stock. As the petitioner received distributions from Doric and payments of principal and interest on the Matz Realty Co. notes for the account of the Fuhrmans, he1935 BTA LEXIS 835">*851 deposited the amounts received in his personal bank account and credited the account of the Fuhrmans therefor. Entries for interest were made on both sides of the account. In 1927 and 1928 the account showed a balance due the Fuhrmans. Interest due Fuhrmans for 1927 is shown as $381.60 and for 1928 as $780.25. The petitioner did not pay the Fuhrmans any amount, either as principal or interest, in the year 1928, or in any other year on account of any of the items in the account. The notes originally given by the Fuhrmans were returned to them at the time when the petitioner received for their account certain payments of the principal on the Matz notes.
The petitioner kept no regular books of account during the year 1928, and his income tax return for that year was made up from his check book and notations made respecting his income. In his return for that year he claimed a deduction for interest, of which the Commissioner disallowed the amount of $1,689.85, on the ground that it represented unpaid accrued interest due to the Fuhrmans.
In 1928 the petitioner owned certain shares of Kansas City Southern stock, which he sold in that year at a profit of $2,971. The profit was1935 BTA LEXIS 835">*852 not reported in his return for that year but was reported in the separate return of his wife, Stella F. Joseph.
The deficiencies for the years 1924, 1925, 1926, and 1928 were not due to fraud with intent to evade tax.
A part of the deficiency for 1928 was due to negligence.
OPINION.
MURDOCK: The first question is, Did the petitioner realize a gain from the liquidation or partial liquidation of Doric in 1924, and, if so, how much was his gain? He reported no gain of that kind. 32 B.T.A. 1192">*1201 The Commissioner added $44,331.25 to his income as a gain from the liquidation of Doric. He computed this gain by assigning to the Matz notes a value of 85 per cent of their face value and by holding that the petitioner was the owner of 500 6/8 shares of the Doric stock at the time of the distributions. The value of the Matz notes at that time was only 60 percent of their face value. , a case heard with the present case and others. The petitioner owned only 50 6/8 shares of the Doric stock at the time of the distributions in question. This finding is required not only by the uncontradicted testimony of several witnesses, but by1935 BTA LEXIS 835">*853 the respondent's Exhibit D. That exhibit was offered and admitted in evidence without qualification. It shows that the petitioner "owned" 50 6/8 shares and the remaining shares were all "owned" by others.
The petitioner received as his own Matz notes of the face value of $7,812.50. He claims that he purchased them and therefore the Commissioner erred in treating the receipt of them by him as a liquidating dividend from Doric. However, the evidence does not support this contention of the petitioner. The record contains many contradictions on this point. It clearly shows that none of the Doric stockholders bought, or paid anything for, the notes which they received and that they received all of the Matz notes in exact proportion to their respective stockholdings in Doric. Doric did not transfer the notes directly to its stockholders. It transferred series 1 and 2 to Joseph & Joseph, series 3 to Stitzel Distilling Co. and series 4 to H. H. Newmark Co. These transferees held the notes in trust for the Doric stockholders and almost immediately transferred the notes to the Doric stockholders without receiving any consideration directly from those persons. Joseph & Joseph, the1935 BTA LEXIS 835">*854 Stitzel Distilling Co., and the H. H. Newmark Co. gave certain checks to Doric at the time they received the Matz notes from Doric. However, the cash distributions from Doric apparently were used to repay to Joseph & Joseph, the Stitzel Distilling Co., and the H. H. Newmark Co. the amount each had advanced to Doric in the checks referred to above. But even if the circumstance of these checks is not entirely consistent with the theory upon which the Commissioner has determined the deficiency, it is not sufficient, when taken with all of the other evidence, to entitle the petitioner to judgment upon this point. The amount of the checks was only one half of the fair market value of the notes. The Commissioner has deducted the amount of the checks from the liquidating distributions. He concedes that that amount should be deducted in computing the amount of the liquidating distributions so that the stockholders will only be taxed on the excess of the sum of the cash and value of the notes over the sum of 32 B.T.A. 1192">*1202 the basis and the amount put back into Doric through the checks. The stockholders of Doric did not acquire the notes in proportion to or because of their interests in1935 BTA LEXIS 835">*855 the makers of the checks. They did not acquire the notes as gifts. They did acquire them as stockholders of Doric indirectly from Doric. The net amount received exceeded the basis. Therefore the Commissioner did not err in taxing the petitioner with gain from the partial liquidation of Doric. Sec. 201(c) and (g), Revenue Act of 1924. He did err in computing the amount of that gain. The basis of the Doric stock for gain or loss to the petitioner is not in dispute and therefore the parties can compute the correct gain in accordance with this opinion.
The Commissioner erred in taxing the petitioner in 1924, 1925, 1926, and 1928 upon interest and gains on the Matz notes which belonged to his wife and the Fuhrmans. Another question is whether the petitioner continued to own the Matz notes of the face value of $7,812.50 which he received as his own. He claims that in 1924 he gave these notes to his wife. He likewise claims that in 1924, 1925, and 1926 he gave other securities, consisting of stocks, bonds, and notes, to his wife and the Commissioner erred in taxing him upon the interest and dividends from those securities. There is no dispute about the amounts involved. 1935 BTA LEXIS 835">*856 The only question is whether the petitioner has shown that he made the alleged gifts. A number of the essential elements of a bona fide gift have been established. Cf. . Yet two of the essential elements of a completed gift are not satisfactorily established. The evidence does not show (1) a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift, in praesenti, and (2) an irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor could exercise no further act of dominion or control over it. Cf. . The Board said in :
The transfer and delivery, of property, including corporate stock, are not conclusive upon the question of intent where change of title is involved from the standpoint of taxation; and surrounding circumstances, including subsequent acts of the taxpayer, often establish intent more clearly than parole1935 BTA LEXIS 835">*857 evidence.
In the case of the stock certificates formal assignments were made on separate pieces of paper. Apparently this was done for the purpose of enabling the petitioner to detach the separate assignments and destory them whenever he desired to sell any of the stock or place it as collateral for his own borrowings. He thus was able to use the stock as his own after the dates of the alleged 32 B.T.A. 1192">*1203 gifts. He actually did use the certificates for his own purposes without consulting his wife. Cf. . She said that she knew nothing about the actual transactions but left all of such affairs to her husband. She could remember no details but expressed confidence in her husband and said he had her permission to use the securities as he saw fit. The fact that he had access to the box in which they were kept might not be particularly important were it not for the added fact that he removed them at will. Cf. ;; certiorari denied, 1935 BTA LEXIS 835">*858 ; . He also sold some of the securities and reported the gain or loss in his own return. He likewise reported the dividends on the stock for 1926 while he had it up as collateral on his borrowings. The stock was never transferred to his wife's name on the books of the various corporations until after the Commissioner had raised a question about the alleged gifts. Cf. The notes were never endorsed by the petitioner. Some of them could be negotiated only by his endorsement. See sec. 3720 b-30, Carroll's Kentucky Statutes 1930. The dividends were paid to and received by the petitioner. He also received the interest and all proceeds from sales. He claims that he did not receive such funds for his own benefit, but the evidence is far from convincing on that point. His wife had a separate bank account, but none of the money was deposited in that account. Some of the money was deposited in the petitioner's account. The wife had power to draw on that account, but she never exercised her power. He said he purchased additional securities for his wife from the1935 BTA LEXIS 835">*859 income and proceeds which he received. But he kept no records and could show no specific instances of such use of the funds. Although the securities were worth many thousands of dollars, yet the record does not show one instance where she received income or proceeds from them. The implication from all of the evidence is that the petitioner used the income and proceeds for his own purposes.
Although the forms executed and the acts done by the petitioner at the dates of the alleged gifts would ordinarily show that gifts had been made, nevertheless subsequent acts of the petitioner indicate that he did not actually divest himself of title, dominion, and control so as to relieve himself from tax on the securities. The parties make no point of the difference between the facts relating to the stock and the facts relating to the notes and bonds. The Commissioner has held that the petitioner did not make present gifts of any of the securities in 1924, 1925, and 1926 and the income and 32 B.T.A. 1192">*1204 profits were his during those years and during 1928. The evidence fails to show a valid gift of any of the securities. The interest and dividends for the four years were properly included1935 BTA LEXIS 835">*860 in the income of the petitioner.
The petitioner is taxable in 1928 on interest and gains upon any of the original $7,812.50 face value of the Matz notes which drew interest or were paid in that year. His profit was the excess of the amount received on a note, exclusive of interest, over 60 percent of its face value.
The petitioner was not entitled to a deduction for 1928 representing accrued interest on the amount which he owed the Fuhrmans. He kept no complete books. He was not entitled to use an accrual method in reporting his income. He paid no interest to the Fuhrmans in 1928 on the balance which he then owed them. The Commissioner correctly disallowed that deduction on the ground that the petitioner was on a cash basis.
The remaining issue is whether any part of the deficiency for one or more of the years 1924, 1925, 1926, and 1928 was due to fraud with intent to evade tax. Sec. 275(b), Revenue Acts of 1924 and 1926; sec. 293(b), Revenue Act of 1928. The burden of proof upon this issue is by statute placed upon the Commissioner. Sec. 601, Revenue Act of 1928, amending sec. 907(a), Revenue Act of 1924, as amended by sec. 1000, Revenue Act of 1926.
The Commissioner1935 BTA LEXIS 835">*861 in his brief urges that the petitioner's failure to report his full share of the income of the partnership of Joseph & Joseph for each year indicates fraud. The Commissioner introduced no evidence in respect to those items. The notices of deficiencies show that the Commissioner increased the petitioner's share of the partnership income for each year, but they completely fail to show that the failure of the petitioner to return the proper amount was done with fraudulent intent, or even knowingly. Cf. ; . The petitioner did not contest the adjustments of partnership income, but he certainly did not admit fraud thereby. Failure to contest an adjustment made in determining the deficiency is not proof of fraud. The Commissioner can not sustain his burden of proof on a fraud issue by statements made in his notice of deficiency. . Those items must be disregarded in so far as the fraud issue is concerned.
The above items and also the Fuhrman interest item for 1928 ($1,698.85 claimed as a deduction) were not properly pleaded by1935 BTA LEXIS 835">*862 the Commissioner as facts upon which he relied to support the fraud issue. The only reference to them in the answers is in the references 32 B.T.A. 1192">*1205 therein to the notices of deficiencies. This did not properly notify the petitioner and the Board that the Commissioner relied upon those items to show fraud. Furthermore, the answer for 1928 affirmatively indicates that the Commissioner relies upon the failure of the petitioner to report certain income, rather than upon any unwarranted deduction taken. The facts showing fraud should not only be proven, but they should be clearly pleaded. The items mentioned in this paragraph will be disregarded in so far as the fraud issue is concerned. See Rules 14 and 15; ;
The petitioner's failure to report interest and gain on the Matz notes and Doric stock which actually belonged to his wife and the Fuhrmans is, of course, no evidence of fraud. The fact that the Matz notes were valued at only 30 percent of their face value instead of being valued higher does not evidence fraud under the circumstances. 1935 BTA LEXIS 835">*863
There remain for consideration the circumstances surrounding the failure of the petitioner to report for 1924, 1925, and 1926 the interest and dividends upon the securities which he alleges he gave to his wife (including $7,812.50 face value of the Matz notes), his inconsistency in reporting gains and loss from the sale of some of those securities, his failure to report any profit in 1928 on his share of the Matz notes, and his failure to report a profit of $2,971 on the sale of Kansas City Southern stock in 1928. The latter item was reported on his wife's return. The petitioner made up that return. He testified that he had made a mistake in reporting that profit in the way he did and that he could not account for the mistake. This omission indicates negligence, but, standing alone, is not a sufficient basis for imposing the fraud penalty. His failure to report a profit for 1928 on the Matz notes is like his failure to report the interest and dividends on the whole lot of securities involved in the alleged gifts and need not be discussed separately. The respondent contends that the alleged gifts were mere shams, planned to mislead1935 BTA LEXIS 835">*864 the Commissioner as to the ownership of the securities and thus to evade tax lawfully due from the petitioner on the income from those securities. We have already held that the petitioner has failed to establish the fact that actual gifts were made. But the question now is, Does the evidence affirmatively show that the alleged gifts were shams designed to evade tax? Doubts and omissions are now to be held against the Commissioner, upon whom rests the burden of proof. The evidence is not clear and convincing on this point and the petitioner must receive the benefit of the doubt. It is not clear that the petitioner used the income and proceeds from the 32 B.T.A. 1192">*1206 securities for his own benefit after the dates of the alleged gifts. The obvious errors which he committed in his returns may have been due to carelessness rather than to a deliberate intent to evade tax. While at times his errors tended to reduce his tax, at others he included in his return items which, had he been consistent, he would have omitted. His very inconsistency and indifference to the result indicate negligence and carelessness rather than fraudulent intent. The proof is not clear and convincing that a1935 BTA LEXIS 835">*865 part of any deficiency was due to fraud with intent to evade tax.
The respondent contends in the alternative that a part of the deficiency for 1928 was due to negligence or intentional disregard of rules and regulations but without intent to defraud, and, therefore, the penalty provided in section 293(a) of the Revenue Act of 1928 should be imposed. He made no such claim in the proceeding relating to the other years. The petitioner was negligent in failing to include in his return the profit upon the sale of the Kansas City southern stock.
Decision will be entered under Rule 50.