1937 BTA LEXIS 810">*810 1. The income tax returns filed by the decedent for 1922 and 1923 were fraudulent and made with intent to evade taxes because of his omission therefrom of distributions of earnings of the Continental Trading Co., Ltd. The deficiencies, resulting, in part, from the action of the Commissioner in including the earnings in gross income of the decedent for the respective years, are approved. The decedent having died prior to the determination of the deficiencies, no fraud penalties are involved.
2. The tax on income of a decedent for taxable periods for which fraudulent returns were filed with intent to evade taxes may be determined, assessed, and collected at any time after it is due, irrespective of a written request of the representative of the decedent's estate that the amount be determined and assessed within one year.
35 B.T.A. 975">*975 This proceeding involves the redetermination of deficiencies in income tax for the years 1922 and 1923 in the respective amounts of $218,973.48 and $111,910.01. The1937 BTA LEXIS 810">*811 petition raises the question of whether assessment and collection of the asserted deficiencies are barred by the statute of limitations. In his answer to the petition the respondent denies that the statutory period of limitation for assessment and collection expired before the issuance of the deficiency notice and affirmatively alleges ahat due to fraud with intent to evade taxes the decedent willfully failed to report as income for 1922 and 1923 the sums of $441,000 and $286,000, respectively, received by him in those years as distributions of profits made in the United States by the Continental Trading Co., Ltd. The reply filed by the petitioner denies the affirmative allegations of the respondent.
FINDINGS OF FACT.
1. The petitioner, a corporation, is the executor of the estate of James E. O'Neil, who died August 24, 1931, a citizen and resident of Garden City, New York.
2. Shortly prior to 1921, the Humphreys Mexia Co. and the Humphreys Texas Co., Texas corporations, of which A. E. Humphreys, a well known oil man with many years of experience, was the dominating spirit, developed and were producing oil from the 35 B.T.A. 975">*976 Mexia district, located about one hundred1937 BTA LEXIS 810">*812 miles from Dallas, Texas. Owing to the necessity of drilling offsetting wells and the making of pipe line facilities, in the summer of 1921 it was necessary for the corporations to obtain financial assistance.
3. The question of financial assistance for the Humphreys companies was taken up with Henry M. Blackmer, an old friend of Humphreys, and president of the Midwest Oil Co. and the Midwest Refining Co., corporations, part of whose stock was owned by the Standard Oil Co. of Indiana, hereinafter referred to as the Standard Co. Blackmer endeavored to interest Robert W. Stewart, president and chairman of the board of directors of the Standard Co., and the decedent, who was president, general manager and a director of the Prairie Oil & Gas Co., a Kansas corporation, hereinafter referred to as the Prairie Co., continuously throughout 1921 and 1922 and until September 11, 1923, when he resigned. In August or September 1921 Stewart, the decedent, and Blackmer inspected the Mexia field with Humphreys, but no deal was consummated as Humphreys desired Standard Co. stock for the properties. Thereafter, but prior to October 28, 1921, the Humphreys companies obtained financial relief1937 BTA LEXIS 810">*813 by selling one-fourth of their stock to the Pure Oil Co. for $7,000,000.
4. In the fall of 1921 Blackmer communicated with Humphreys, with the result that negotiations were resumed for the sale, through Blackmer acting as an intermediary, of oil of the Humphreys companies for cash, if and when delivered. On about November 10, 1921, Humphreys and his son, A. E. Humphreys, Jr., who was associated with him in the oil business, met Blackmer in New York to continue the negotiations. On November 15, 1921, Blackmer informed Harry F. Sinclair, president of the Sinclair Refining Co. and the Sinclair Consolidated Oil Co., for the first time that he had purchased or had arranged to purchase about thirty million barrels of oil from the Humphreys companies. At a meeting of the board of directors of the Standard Co. on November 14, 1921, Stewart learned that Humphreys was in New York for the purpose of selling the unsold production of the Humphreys companies and the other directors suggested that he get in touch with Humphreys in New York with a view of purchasing such oil. Stewart arrived in New York on November 16, 1921, and upon communicating with Humphreys received an invitation from1937 BTA LEXIS 810">*814 him to attend a meeting to be held that day in Blackmer's room at the Vanderbilt Hotel.
5. The meetings in New York lasted two days and were attended by the decedent, Stewart, Sinclair, representing the Sinclair Oil Co. and the Sinclair Crude Oil Purchasing Co., the latter company to be referred to hereinafter as the Sinclair Co., Blackmer, Beaman Dawes, 35 B.T.A. 975">*977 representing the Pure Oil Co., Humphreys and his son, and C. S. Thomas, an attorney for Humphreys. The negotiations were conducted by Blackmer, who acted as an intermediary between Humphreys and the prospective buyers. Blackmer informed Stewart when he entered the meeting that if he wanted any of the oil he could have it for $1.75 per barrel. Blackmer and Humphreys in a personal conference had agreed upon a sales price of $1.50 per barrel for the production of the Humphreys companies. During the late stages of the negotiations, H. S. Osler, hereinafter referred to as Osler, entered the meeting, purporting to be president of the Continental Trading Co., Ltd., hereinafter referred to as the Continental Co., and when it appeared that the conference would result in a sale of the oil, Blackmer informed the prospective1937 BTA LEXIS 810">*815 buyers that if a sale was made they would have to purchase the oil from the Continental Co. Until the announcement was made Humphreys and those interested in purchasing the oil had not heard of the Continental Co.Humphreys then insisted that he receive some assurance that the Continental Co. would carry out any agreement entered into with the Humphreys companies.
6. The negotiations referred to resulted in the execution on November 17, 1921, of the following contracts:
A. For the sale by the Humphreys Mexia Co. and the Humphreys Texas Co. to the Continental Co., delivered at its field tanks, of 33,333,333 barrels of crude oil at the rate of 50 per cent of their production from each field of operation, including such royalty oil as the sellers could control and so much of the remaining production during the life of the contract as the sellers should not require in their own business or for carrying our its existing contracts, all at the price of $1.50 per barrel.
The buyer agreed to proceed with all reasonable diligence to furnish the facilities necessary to take and receive the oil as fast as it was produced.
The Prairie Co. and the Sinclair Co. guaranteed performance1937 BTA LEXIS 810">*816 of the contract on the part of the Continental Co.
B. For the sale by the Continental Co. to the Prairie Co. and the Sinclair Co. of the oil covered by the contract just referred to at the price of $1.75 per barrel, or the sale price of mid-continental crude as posted from day to day by the Prairie Co., less 40 cents per barrel up to but not exceeding a maximum price of $2.50 per barrel, whichever should be the higher price. The buyers agreed to proceed with all reasonable diligence to furnish the facilities necessary for taking and receiving the oil as fast as produced by the producing companies and indemnified and assumed all of the obligations to the seller of the Humphreys companies in connection with the purchase and sale of the oil, excepting the cash price therefor payable by the Continental Co. to the Humphreys companies.
C. For the sale by the Humphreys companies to the Prairie Co. and the Sinclair Co., subject to and effective when the contract referred to in A. was carried out, at the prevailing posted market price in the field where produced, 50 per cent of the oil produced from the same field.35 B.T.A. 975">*978 The price of the oil sold to the Continental Co. was1937 BTA LEXIS 810">*817 payable in cash on the 15th day of each month for deliveries made during the preceding month, and the sale price of the oil sold by the Continental Co. to the Prairie Co. and the Sinclair Co. was payable on the 10th day of each month for all oil delivered during the preceding month, in United States currency at the New York agency of the Dominion Bank (Canada).
The posted price for crude oil of a poorer quality on November 17, 1921, was $2 per barrel. At that time there was a shortage of oil.
The contracts of the Prairie Co. were signed by the decedent as president, and the contracts of the Sinclair Co. were signed by George H. Taber, Jr., as president. Osler signed the agreements as president of the Continental Co. The guarantee of the Prairie Co. and the Sinclair Co. to the Humphreys companies was signed by the decedent as president of the Prairie Co. Sinclair and Stewart signed the guarantee for the directors of the Sinclair Co. with the knowledge of Humphreys and his attorney that they were not officers or directors of the Sinclair Co. and with the understanding that the guarantee would not be effective until ratified by the directors of the Sinclair Co.
The contracts1937 BTA LEXIS 810">*818 were considered by the board of directors of the Standard Co. at a meeting held November 18, 1921. With knowledge of the difference of 25 cents per barrel in the selling price of the oil covered by the contracts, and after being informed by Stewart that the profit represented by the difference in price would be distributed to somebody unknown to him, the directors authorized the corporation's representatives on the board of directors of the Sinclair Co. to vote for ratification of the contracts. The contracts were ratified by the board of directors of the Sinclair Co. at a meeting held on about November 24, 1921. It is not unusual for oil companies to pay and take premiums for oil.
The board of directors of the Prairie Co. ratified the contracts, including the guarantee, at a meeting held on November 26, 1921. The contracts were explained to the directors by the decedent. He gave no reason for the purchase of the oil by the Continental Co. at $1.50 per barrel and resale of the same oil to the Prairie Co. and the Sinclair Co. for at least $1.75 per barrel. The only thing considered by the Prairie Co. was whether $1.75 per barrel was a fair price for the oil.
At the time1937 BTA LEXIS 810">*819 the contracts were executed, Sinclair realized that the purchase and sale of the oil by the Continental Co. would result in a "commission" of 25 cents per barrel, and informed Blackmer that as a representative of his company he would expect a fair and reasonable amount of it.
35 B.T.A. 975">*979 7. In November 1921 the Sinclair Consolidated Oil Co. and the Standard Co. were equal owners of all of the stock of the Sinclair Co. and each designated one-half of the directors of the Sinclair Co.The so-called Sinclair companies and the Standard Co. were active and vigorous competitors in the manufacture and sale of gas and oil, but for mutual convenience they had a working arrangement in respect to the purchase and delivery of crude oil from oil fields to pipe lines.
8. The application for a charter for the Continental Co. under the laws of Canada was filed on November 16, 1921, by Osler, Hoskin & Harcourt, Toronto, Canada, one of the largest and most prominent law firms in Canada. Osler was the senior member of the firm. The application sets forth that the corporation will carry on business with a capital of not less than $500,000. The applicants for the charter, the subscribers, five1937 BTA LEXIS 810">*820 in number, for one share each of 1,000 shares of no par value stock of the Contintental Co., and the provisional directors thereof were members or employees of the law firm. The charter was granted November 17, 1921. The firm had organized other corporations by the same procedure. It was a common practice among large law firms of Canada to use its members and employees as first subscribing stockholders, directors and officers of corporations. None of the members or employees of the firm of Osler, Hoskin & Harcourt, except Osler, had a financial interest in, or received any of the dividends or profits of, the Continental Co. Such persons, except Osler, in signing corporate documents acted, as a mere office routine, for undisclosed clients.
The prospectus filed with the Secretary of State of Canada on December 8, 1921, by the Continental Co. sets forth that its board of directors are Osler, and Britton Osler and Norman E. Strickland, a member and employee, respectively, of the firm. It also contains the following statement:
Material Contracts.
Under an Agreement, dated the 17th day of November, 1921, this Company acquired from G. Evans Atwood, of the City of Toronto, for1937 BTA LEXIS 810">*821 the sum of $500,000 certain contractorial rights and the said G. Evans Atwood agreed to accept 99,994 shares of the capital stock of the Company, without nominal or par value, in payment and satisfaction of the said sum of $500,000.
The said contract may be inspected at the General Office of the Company, at Toronto, Ontario, at any time during usual business hours.
Interests of Directors.
None of the Directors of the Company are interested in the promotion of the Company or in the property acquired by the Company under the contract hereinbefore mentioned.
35 B.T.A. 975">*980 Atwood received stock of the Continental Co. as a nominee for an undisclosed client, and delivered it to Osler.
The president and secretary of the Continental Co. were, respectively, Osler and Suneva M. Fordyce, his private secretary.
Osler opened a checking account for the Continental Co. in the New York agency of the Dominion Bank (Canada) on about November 21, 1921. The account was under his sole control except during his absence, when his private secretary had power to direct the account. The accounts set up by the bank consisted of ledger accounts showing receipts, disbursements, and daily balances, 1937 BTA LEXIS 810">*822 and a securities account in which entries were made for Liberty bonds purchased by the bank with funds of the Continental Co.
9. Pipe lines were laid to the Mexia field by the Prairie Co. and the Sinclair Co. without delay and large quantities of oil were run into them in January 1922 by the Humphreys companies under their contract with the Continental Co. The selling price therefor was paid by the Continental Co. to the Humphreys companies, and by the Prairie Co. and the Sinclair Co. strictly in accordance with the terms of the sales contracts of November 17, 1921.
10. In 1922 and 1923 the Continental Co. paid the following amounts to the Humphreys companies for oil delivered to it under the contract of November 17, 1921, and by the Western Oil Fields Corporation and A. E. Humphreys, trustees, under other contracts:
| Paid to | 1922 | 1923 | Total |
| Humphreys companies | $9,965,739.77 | $3,134,248.10 | $13,099,987.87 |
| 1 Western Oil Fields Corporation | 1,920,477.30 | 611,134.56 | 2,531,611.86 |
| 1 A. E. Humphreys, trustee | 169,644.37 | 55,557.69 | 225,202.06 |
| Total | 15,856,801.79 |
1937 BTA LEXIS 810">*823 During the same periods the Prairie Co. and the Sinclair Co. paid the following amounts to the Continental Co. for oil purchased under the contract of November 17, 1921:
| Paid to | 1922 | 1923 | Total |
| Prairie Co | $7,507,530.46 | $2,519,263.18 | $10,026,793.64 |
| Sinclair Co | 6,697,587.49 | 1,880,320.72 | 8,577,902.21 |
| Total | 18,604,695.85 |
35 B.T.A. 975">*981 A summarized analysis of all items appearing in the commercial account of the Continental Co. with the Dominion Bank for 1922 and 1923 is as follows:
| Periods ended | ||||
| 12/31/21 | 12/31/22 | 12/31/23 | Totals | |
| Deposit items: | ||||
| Oil sales - | ||||
| Sinclair Crude Oil | ||||
| Purchasing Co | $6,697,581.49 | $1,880,320.72 | $8,577,902.21 | |
| Prairie Oil & Gas Co | 7,507,530.46 | 2,519,263.18 | 10,026,793.64 | |
| Subtotals | 14,205,111.95 | 4,399,583.90 | 18,604,695.85 | |
| Sale of contracts | 400,000.00 | 400,000.00 | ||
| Proceeds of loan | 500,000.00 | 500,000.00 | ||
| Liberty bond interest | 3,465.00 | 5,250.00 | 8,715.00 | |
| Posting errors | 25,000.01 | 18.44 | 25,018.45 | |
| Unidentified items | $5,000 | 5,000.00 | ||
| Total credit items | 5,000 | 14,733,576.96 | 4,804,852.34 | 19,543,429.30 |
| Balances at beginning | ||||
| of periods | 2,500.00 | 120,728.60 | ||
| Totals | 5,000 | 14,736,076.96 | 4,925,580.94 | 19,543,429.30 |
| Withdrawal items: | ||||
| Oil purchases - | ||||
| Humphreys Oil Co | 9,965,739.77 | 3,134,248.10 | 13,099,987.87 | |
| Western Oil Fields | ||||
| Corporation | 1,920,477.30 | 611,134.56 | 2,531,611.86 | |
| A. E. Humphreys, trustee | 169,644.37 | 55,557.69 | 225,202.06 | |
| Subtotals | 12,055,861.44 | 3,800,940.35 | 15,856,801.79 | |
| Liberty bond purchases | 2,015,895.78 | 1,098,651.15 | 3,114,546.93 | |
| Demand loan paid | 500,000.00 | 500,000.00 | ||
| Expenses | 24.68 | 138.65 | 163.33 | |
| H, S. Osler, personal | ||||
| a/c | 9,898.00 | 9,898.00 | ||
| Posting errors | 25,000.01 | 18.44 | 25,018.45 | |
| Unidentified items | 2,500 | 18,566.45 | 15,934.35 | 37,000.80 |
| Total debit items | 2,500 | 14,615,348.36 | 4,925,580.94 | 19,543,429.30 |
| Balances at end of | ||||
| periods | 2,500 | 120,728,60 | ||
| Totals as above | 5,000 | 14,736,076.96 | 4,925,580.94 | 19,543,429.30 |
1937 BTA LEXIS 810">*824 The books of the Continental Co., kept in the office of Osler, Hoskin & Harcourt, reflect like income and expenditures.
11. On May 26, 1923, the Continental Co. sold its contract of November 17, 1921, to the Prairie Co. and the Sinclair Co., effective May 31, 1923, for $400,000, one-half of which was paid by each corporation. The contract was signed on behalf of the Continental Co. by Lewis Samuel, as president, and by Harold E. Boston, as secretary.
12. From time to time Osler instructed the Dominion Bank to purchase 3 1/2 percent Liberty bonds with credit balances in the checking account of the Continental Co. On November 13, 1922, he instructed the bank without further instructions to continue to invest credit balances in such a way as to leave a cash balance of between $5,000 and $10,000. He also advised the bank as follows: "If any question should arise at any time during my absence [two or three months] with which the Secretary of the Company cannot or does not wish to deal, you are authorized to make all payments and 35 B.T.A. 975">*982 deliver all securities on the order of Mr. H. M. Blackmer of Denver, Colorado." (Words in brackets supplied.)
Whenever the Dominion1937 BTA LEXIS 810">*825 Bank had an accumulation of Liberty bonds purchased with funds of the Continental Co., Osler would have the securities delivered to him at the bank. On one occasion the bank, in accordance with written instructions of Osler, placed the bonds in four parcels of $85,000 each, and $10,000 outside of the packages.
The face value and cost of the bonds purchased by the Dominion Bank with cash credits of the Continental Co., together with the dates on which the bonds, excepting those delivered on July 14, 1922, and June 26, 1923, were physically delivered to Osler, are as follows:
| Delivery date | Face value | Cost |
| 1922 | ||
| Mar. 15 | $196,000 | $191,693.11 |
| 16 | 204,000 | 199,610.10 |
| May 8 | 300,000 | 303,189.16 |
| 16 | 302,000 | 304,499.34 |
| June 7 | 98,000 | 98,804.42 |
| July 10 | 220,500 | 223,118.44 |
| 14 | 6,000 | 6,038.32 |
| Oct. 24 | 473,500 | 481,510.26 |
| Totals for 1922 | 1,800,000 | 1,808,463.15 |
| 1923 | ||
| May 26 | $800,000 | $815,704.99 |
| June 15 | 360,000 | 368,414.33 |
| 26 | 120,000 | 121,964.46 |
| Totals for 1923 | 1,280,000 | 1,306,083.78 |
| Totals for 1922 and 1923 | 3,080,000 | 3,114,546.93 |
The proceeds of the bonds delivered on July 14, 1922, were credited to the personal account, and the bonds1937 BTA LEXIS 810">*826 delivered on June 26, 1923, were transferred to the petty account of Osler at the bank. All of the bonds were purchased with earnings derived by the Continental Co. from sources within the United States.
Of the $3,080,000 face amount of Liberty bonds purchased by the Dominion Bank with funds of the Continental Co. and delivered to Osler, in 1922 and 1923 the decedent received $441,000 and $286,000, respectively, from the Continental Co., with knowledge on his part that the amounts represented a distribution to him of profits of the Continental Co. based upon the interest he, in his individual capacity, had in the earnings of the corporation. Of the other of such bonds, in 1922 and 1923 Blackmer received $727,000, Stewart $759,000, and Sinclair, $750,000 (plus).
13. The decedent clipped the coupons maturing in 1922 and 1923 on the bonds which he received from the Continental Co. In August 1922 and June 1923 he cashed the coupons on at least $162,000 of the bonds and deposited the proceeds in his account to the National City Bank, New York City. On four occasions in 1924 the decedent disposed of a total of $31,000 of the bonds.
A short time before his departure in December1937 BTA LEXIS 810">*827 1923 for France, the decedent delivered three or four packages of Liberty bonds to his son Wayne for safekeeping, and told him that the parcels included 35 B.T.A. 975">*983 $727,000 of bonds which he said were the property of the Prairie Co. and that in case of his death to turn the bonds over to it, or upon his written order. Wayne never counted the bonds in the packages. Thereafter $69,000 of the bonds were used by the decedent to purchase bank stock and to pay personal expenses. The bonds remained in the possession, actual or constructive, of the decedent's son until the summer of 1928, when the original packages, less the portion of bonds removed therefrom, were delivered to the decedent in Boston.
On February 23, 1925, the decedent appeared before a commissioner appointed by a court of France and declined to answer interrogations concerning, among other things, who were the persons financially interested in Continental Co., and whether he was an officer or stockholder therein in 1922, whether he had received any Liberty bonds from the Continental Co., or H. S. Osler, said interrogatories being set forth in letters rogatory issued in the case of 1937 BTA LEXIS 810">*828 United States of Americav. Mammoth Oil Co., Sinclair Crude Oil Purchasing Co., and Sinclair Pipe Line Co., Equity No. 1431, in the ), instituted on March 13, 1924. The court's docket contains other entries made thereafter through May 1925, including an entry made on March 9, 1925, for a deposition of J. E. O'Neil.
At the time the contracts between the Continental Co. and Sinclair Co. and Prairie Co. were assigned in May 1923, United States Senate investigations in regard to oil matters were going on.
14. In May 1925 Clark H. Kountz, secretary to the decedent from 1905 to 1914, and vice president of the Prairie Pipe Line Co. in 1921, 1922, and 1923, visited the decedent in Montreal, Canada, in response to a request from the decedent. A short time after his arrival the decedent requested him to send for W. F. Fitzpatrick, chairman of the board of directors of the Prairie Co. Fitzpatrick complied, and was accompanied by T. J. Flannelly, general counsel of the Prairie Co. The decedent and Kountz had no discussions respecting bonds of the Continental Co. prior to the arrival of1937 BTA LEXIS 810">*829 Fitzpatrick. Thereafter, in the presence of Kountz and Flannelly, the decedent disclosed to Fitzpatrick that he had an interest in the profits of the Continental Co. and had received bonds from it which he desired to turn over to the Prairie Co. The decedent also told Fitzpatrick that he always thought the profits belonged to the Prairie Co.; that he had kept the bonds apart for the purpose of delivering them to the Prairie Co.; that he had clipped some of the coupons on the bonds through error; and that he had never returned the bonds as income to him. The decedent gave no explanation for his failure to make an earlier disclosure to the Prairie Co. of the receipt of the bonds by him, and indicated that he did not want to give Fitzpatrick 35 B.T.A. 975">*984 any information on account of other people. At some undisclosed time prior to this meeting Fitzpatrick learned of distributions of bonds by the Continental Co., but was not aware that the decedent had received part of them until advised by the decedent at the conference above referred to.
The conference resulted in the giving of an order by the decedent to Kountz on his son for $800,000 of 3 1/2 percent Liberty bonds, coupons attached, 1937 BTA LEXIS 810">*830 for delivery to the Prairie Co. The order was given by the decedent with the request that the coupons on the bonds should not be cashed and that the Prairie Co. should not divulge the receipt of the bonds for the reason that it might embarrass somebody else; and, pursuant to an understanding had with Fitzpatrick that the Prairie Co. would pay the decedent's share of any tax imposed against the Continental Co. on account of the profits distributed to him. Prior to the delivery of the order by the decedent, Fitzpatrick and Flannelly concluded that inasmuch as the decedent intended to voluntarily turn the bonds over to the Prairie Co. it was not necessary for the Prairie Co. to determine legal liability of the decedent to pay the securities over to it. O'Neil "wanted to get it settled," The Prairie Co. did not get interest on the coupons which had been cashed.
The decedent's son honored the order the next day. None of the bonds delivered to Kountz under the order were the identical bonds received by the decedent from the Continental Co. The coupons on the bonds for 1922 and 1923 were detached but those for subsequent years were still attached to the bonds. Kountz then delivered1937 BTA LEXIS 810">*831 the bonds to Fitzpatrick, who later in the month reported his conference with the decedent in Montreal to the directors of the Prairie Co. and turned the bonds over to the treasurer of that corporation, intending that the coupons be left on the bonds. The Prairie Co. used the bonds some time in 1927 to pay an obligation to the Prairie Pipe Line Co. None of the coupons on the bonds were cashed while they remained in the possession of the Prairie Co. The amount of bonds turned over to the Prairie Co. in excess of $727,000 was intended by the decedent to take the place of the coupons which he had cashed.
15. The Prairie Co. entered the face amount of the bonds in its books in May 1925 as a credit in an account kept for crude oil purchases. The balancing entry was made in an account kept for U.S. Liberty bonds. The supporting voucher for the entries, dated May 27, 1925, and approved by Fitzpatrick, does not disclose the source of the bonds or identify the decedent with the transaction. The net income of the Prairie Co. in 1925 was in excess of $800,000. None of the minutes of the Prairie Co. prior to May 1, 1928, refer to the receipt of the bonds from the decedent.
35 B.T.A. 975">*985 1937 BTA LEXIS 810">*832 In August 1923 John A. Coyle received as a gift from his sister, the widow of decedent, 150 $1,000 Liberty bonds of which at least 148 were part of the original bonds received by the decedent from the Continental Co.
16. On November 26, 1921, Stewart was advised in his office in Chicago by Osler that he was going to be given an opportunity to refuse to accept some of the profits realized by the corporations in carrying out one or more of the contracts of November 17, 1921. Later during the same day Stewart informed Roy J. Barnett, tax commissioner of the Standard Co., confidentially of Osler's statement. Thereafter Stewart drafted in his own handwriting and executed an instrument in the form of a trust for any money or other property which he might receive on his interest in any contract made or to be made by Humphreys or the Humphreys companies for the sale of oil. He named Barnett trustee, and the Standard and Sinclair companies as beneficiaries. Stewart requested Barnett to keep the contents of the instrument a secret. Stewart placed the instrument in a sealed envelope, on the face of which he wrote that it was to be opened in case of his death by his executor or administrator1937 BTA LEXIS 810">*833 in the presence of the directors of the Standard Co. and the Sinclair Co. Stewart retained the instrument in his safe deposit box.
The Liberty bonds in the amount of $759,500 subsequently received by Stewart were delivered to him in New York by Osler in 1922 and 1923 in sealed packages, all of which were opened by Stewart and Barnett in the presence of each other. The bonds were then placed in a safe in a vault in the office of the Standard Co. in Chicago. Stewart gave Barnett the combination to the safe. They did not keep anything else in the safe. Stewart and Barnett clipped the coupons on the bonds maturing in 1922 and 1923, and exchanged them for $38,000, face amount, of Liberty bonds held by Stewart. Neither Stewart nor Barnett clipped any coupons from the bonds after 1923. Barnett did not know the source of the bonds until he heard it related "in a court room."
In 1924 Stewart, after first receiving the consent of Barnett, advised the general counsel of the Standard Co. of the execution of the instrument. At that time Stewart was about to leave the country and "wanted somebody else to know about it" in case something happened to him.
Barnett never made an income1937 BTA LEXIS 810">*834 tax return as to the bonds and Stewart did not include the amount of the Liberty bonds in his personal returns for 1922 and 1923.
17. In February 1928 Stewart declined to testify before the United States Senate Committee on Public Lands and Surveys concerning his dealings with the Continental Co., on the ground that he had 35 B.T.A. 975">*986 testified on the subject before a grand jury and expected to be called as a witness in a criminal proceeding then pending against Sinclair. Stewart was discharged as a witness in the Sinclair case about April 19, 1928. At an informal meeting of the board of directors of the Standard Co. on April 20, 1928, Stewart informed the directors for the first time of the receipt of the bonds from Osler, and the execution of the trust instrument and advised them that he had terminated the trust. After some discussion of the subject, the directors, Stewart not voting, adopted a resolution directing Barnett to deliver the bonds held by him under the trust instrument to the Sinclair Co. Such action was ratified at a called meeting of the board of directors held on April 21, 1928. Thereafter Barnett turned the bonds over to the Sinclair Co.
On April 24, 1928, pursuant1937 BTA LEXIS 810">*835 to a subpoena, Stewart again appeared before the United States Senate Committee on Public Lands and Surveys investigating dealings of the Continental Co. and admitted the receipt of the bonds.
18. At about the same time Sinclair also disclosed to the same committee that he had received $750,000 (plus) of bonds purchased with money of the Continental Co. The bonds were delivered to him in sealed packages by Osler or Blackmer. At the time he received them he was of the opinion that they represented a part of the profits of the Continental Co. Blackmer suggested to him that he not cut the coupons from the bonds. Sinclair delivered the bonds to his "company" in 1928. Humphreys died in 1927.
19. The charter of the Continental Co. was surrendered for cancellation on August 9, 1923, by the firm of Osler, Hoskin & Harcourt. The letter requesting cancellation of the charter states that "All debts and liabilities of the above company have been distributed and it has parted with its property and divided its assets ratably amongst its shareholders." The balance in the checking account of the Continental Co. with the Dominion Bank was not checked out until September 27, 1923.
1937 BTA LEXIS 810">*836 The records of the Continental Co. were kept in the office of Osler, Hoskin & Harcourt. They were destroyed from time to time with the consent of some member of the firm to make room for other things in the vault where they were kept. The last of the records were destroyed in 1924 with the permission of Osler. Osler died December 8, 1933.
During its existence practically the only activity of the Continental Co., aside from the purchase of Liberty bonds with its profits, was the receipt and disbursement of money through the Dominion Bank. Osler directed the activities of the Continental Co. in so far as they related to his law firm.
35 B.T.A. 975">*987 The records of the New York branch of the Dominion Bank relating to its transactions with the Continental Co. were produced before a grand jury and a committee of the United States Senate. The manager of the bank could not locate such records in response to a subpoena duces tecum issued in this proceeding. Prior thereto he believed the records were in his possession.
20. The Continental Co. did not file income tax returns for 1922 and 1923. In March 1928 the Commissioner prepared under R.S. 3176 and subsequently filed returns1937 BTA LEXIS 810">*837 for the corporation and made jeopardy assessments against it for the amount of the tax shown to be due, plus penalty and interest. In April and May 1928 the Commissioner made transferee assessments against the decedent and Blackmer, respectively, for one-fourth each of the unpaid income taxes of the Continental Co. for 1922 and 1923. On May 11, 1928, the Prairie Co. paid the assessment made against the decedent as transferee, for the decedent, and on May 18, 1928, Blackmer paid the assessment made against him. The remainder of the tax liability of the Continental Co. was paid by the Sinclair Co. on May 18, 1928. The Prairie Co. made its payment for the decedent pursuant to an understanding had with the decedent at the time he turned the Liberty bonds over to it, and in accordance with a resolution adopted May 1, 1928, which recites, among other things, that the bonds represented profits accruing to the decedent individually in connection with the contract made by him for the Prairie Co. on the 17th day of November 1921.
21. The income tax returns filed by the decedent for 1922 and 1923 on June 8, 1923, and June 9, 1924, respectively, disclosed net income, on which he paid the1937 BTA LEXIS 810">*838 proper amount of taxes. Neither return contained any of the $727,000 face amount of Liberty bonds distributed to him as profits of the Continental Co. nor contained any disclosures or information respecting the Liberty bonds received by him from the Continental Co. No part of the profits of the Continental Co. received by the decedent was reported in income tax returns of the Prairie Co. for 1922 and 1923. None of the bonds received by Stewart, Blackmer, and Sinclair was included in income tax returns filed by them for 1922 and 1923. On February 23, 1928, attorneys for Blackmer disclosed to the Bureau of Internal Revenue and the United States Senate Committee on Public Lands and Surveys, for the first time, that Blackmer had received $727,000 of Liberty bonds from the Continental Co. Thereafter the Commissioner made a jeopardy assessment against Blackmer and sent him a deficiency notice for income taxes on the bonds. He filed an appeal with this Board. The proceeding was terminated as the result of a motion in which Blackmer consented to an assessment of the deficiencies set forth in the deficiency notice.
35 B.T.A. 975">*988 22. The decedent filed false and fraudulent income tax1937 BTA LEXIS 810">*839 returns for the years 1922 and 1923 with intent to evade taxes.
23. On August 26, 1929, the Commissioner mailed a 30-day letter to the decedent in which he proposed to make an assessment of taxes, penalties and interest on account of the receipt by the decedent of profits of the Continental Co. The decedent replied to the letter on October 28, 1929, by filing a protest.
24. On March 29, 1932, the petitioner requested that all taxes on income received by the decedent during his lifetime be determined and assessed within one year therefrom. The Commissioner acknowledged receipt of the letter on April 8, 1932. The deficiency notice forming the basis for this proceeding was mailed to the petitioner on July 11, 1934.
OPINION.
DISNEY: The parties are in agreement (except for an alternative question raised by the petitioner, hereinafter discussed) that assessment and collection of taxes involved herein are barred by the statute of limitations unless the decedent filed fraudulent returns for the taxable years with intent to evade taxes. In such cases the "amount of tax due may be determined, assessed, and collected, * * * at any time after it becomes due." Sec. 250(d), Revenue1937 BTA LEXIS 810">*840 Act of 1921. The decedent having died prior to the determination of the deficiencies, fraud penalties are not involved.
The respondent having asserted fraud, he is charged with the duty of establishing it by more than a mere preponderance of the evidence. The evidence must be clear and convincing. ; ; ; ; affd., ; ; ; .
Fraud is "essentially a matter of motive and intention." . One alleging fraud is rarely able to prove it by direct evidence. Generally the true nature of the matter in controversy can be determined only from a careful examination of all of the circumstances relating to the transaction. The range of inquiry is broad.
In 1922 and 1923 the Continental Co. derived large earnings from the sale of oil under the contract of November 17, 1921, practically1937 BTA LEXIS 810">*841 all of which were invested in Liberty bonds, and distributed to the decedent, Blackmer, Sinclair, and Stewart in substantially equal amounts. The remainder of the bonds, or their proceeds, were delivered to Osler. The petitioner admits that of these bonds the decedent in 1922 and 1923 received a total of $727,000 principal amount from 35 B.T.A. 975">*989 the Continental Co. and does not question the distribution of the securities as earnings of the corporation. The decedent did not report or disclose the receipt of the earnings or bonds in his income tax returns, and the respondent was not aware of the distributions until about six years later. The decedent was required to make a full and complete disclosure of all items of gross income. Sec. 223(a), Revenue Act of 1921. His intentional failure to include in a return, or otherwise reveal to the Government, large amounts admittedly received as profits of a corporation is evidence of a fraudulent purpose. ;; 1937 BTA LEXIS 810">*842 ;
Persons guilty of fraud seldom fail to allege justification for their acts. Here the petitioner seeks to justify the failure of the decedent to report the income in question on the ground that O'Neil "never considered the bonds received by him as his property and there was never any adverse claim as between him and his company with regard to them and he never received or held the bonds under any claim of right" and that he "never intended to keep the fund represented by the bonds, and in fact did not keep it." The petitioner contends that these facts are proved by direct testimony in the record, all of which was offered by respondent's witnesses.
The testimony relied upon in particular is that of Fitzpatrick, Kountz and Wayne O'Neil, son of petitioner's decedent, based upon statements made to them, or in their presence by the decedent himself, as to the receipt of the bonds and his intentions; especially his statement that he considered the bonds as belonging to the Prairie Co. and intended that they be delivered to the company. These statements were obviously self-serving in their nature. They1937 BTA LEXIS 810">*843 are to be weighed as against evidence indicating a contrary intent on his part. They were made after the decedent had had an abundance of time in which to contemplate the full import of the transaction, and largely when the activities of the Continental Co. were the subject of inquiry by the Government. The remarks of the decedent, all of which were made after the Continental Co. had dissolved, most of them about two years later, in the light of other acts of the decedent with reference to the profits, seem to be nothing more than a belated effort to advance some sound reason for failing to make an earlier disclosure of the gains to the Prairie Co.
The decedent was president of the Prairie Co. until after the charter of the Continental Co. was surrendered for cancellation. If during such period he ever entertained doubt as to real ownership of the bonds he had received from the Continental Co., a desire to deal honestly with his employer would have caused him to make a full and complete disclosure of the facts to it for a final determination 35 B.T.A. 975">*990 of the question. He resigned as president of the Prairie Co. in September 1923 and shortly thereafter left the United States, 1937 BTA LEXIS 810">*844 going to France. Any reasonable consideration indicates that at that date he would have settled the matter with his employer. No reasonable explanation appears as to why, after resigning, he continued to hold possession of these bonds, which, under petitioner's theory, did not belong to him and were not claimed by him. He did retain possession. Possession is prima facie evidence of title to both personalty and realty. Ownership is presumed from possession. Jones Com. Evidence, 2d ed., vol. 1, pp. 496, 498. Not only was he in possession, but it was without disclosure to the Prairie Co. He made no such disclosure during the period of his presidency of the Prairie Co., nor until May 1925, and then the facts were not "discussed elaborately", to use the language of Fitzpatrick. In the meantime the decedent used at least part of the bonds as if they were his own property. He cut the coupons maturing in 1922 and 1923 on the identical bonds, some of which coupons he cashed, actually disposed of $31,000 of the bonds in 1924, and during 1923, $148,000 principal amount of the bonds reached his brother-in-law as a gift from the decedent's wife. If the identical bonds received from1937 BTA LEXIS 810">*845 the Continental Co. were ever set aside for delivery to the Prairie Co., when, if ever, it suited the convenience of the decedent, at least a part of them was removed for other purposes, and none of the bonds delivered to the Prairie Co. in 1925 were the identical bonds received from the Continental Co. Aside from those just referred to, we do not know what disposition the decedent made of the actual bonds which he received from the Continental Co.
Petitioner's theory is that O'Neil's delivery to the Prairie Co. in 1925 of other bonds in lieu of those received by him indicates that he never claimed personal ownership. But does it not reasonably indicate just the contrary? Though possession is, as above seen, prima facie proof of ownership, it is obvious that logically there is still stronger presumption of ownership of property from acts or dealings which are consistent only with ownership. Therefore, does not the fact that O'Neil delivered in 1925 not the original bonds received by him, but a substitute, indicate strongly that he had dealt with the original bonds as his own? He is thus seen not to be delivering property to its owner, but making settlement because of having1937 BTA LEXIS 810">*846 treated or disposed of as his own the original bonds. Such dealings with these bonds can not fairly nor reasonably be explained upon any theory except claim of ownership; they are not satisfactorily so explained by self-serving declarations reported by a son as a witness, the weight of whose testimony is naturally and properly to be carefully considered, nor equally self-serving 35 B.T.A. 975">*991 statements of intention made by O'Neil later in connection with some sort of settlement with the Prairie Co.
Moreover, the evidence is plain that he had such income. The subject of conversation between O'Neil and the president and general counsel of the Prairie Co. was the profits that he made in a deal of that kind. O'Neil told the Prairie Co.'s officers that the bonds came to him "as part of the profits of the Continental Trading Company", and that "he had this interest in the profits." The Prairie Co. carried out his request for secrecy, and as to payment of the tax, and in connection therewith, and before paying the tax, passed a resolution on May 1, 1928, which recites that O'Neil delivered on May 18, 1925, $800,000 in U.S. Liberty bonds "representing the profits to the said J. E. O'Neil1937 BTA LEXIS 810">*847 accruing to him individually" in connection with the Continental Trading Co. contract, and that the tax be paid "on account of the agreement made with the said J. E. O'Neil." Petitioner objects to this resolution as hearsay, incompetent, irrelevant, and immaterial. But, upon petitioner's own theory that the Prairie Co. was O'Neil's principal, it is at once seen that the resolution is a declaration by the principal as to the matters of agency; while upon the theory of trusteeship in O'Neil it is a declaration by the cestui que trust, and admissible as such. Jones on Evidence, vol. 2, p. 1663; 1 Greenleaf on Evidence, PP179, 180. There is such privity between O'Neil and the Prairie Co. as makes this declaration or admission by the Prairie Co. competent here. It was made in intimate connection with the request by O'Neil that the tax be paid. The Prairie Co. was simply carrying out an agreement with O'Neil himself and we think its corporate records entered in carrying out a contract are competent declarations to the parties to such contract. The Prairie Co. had been by O'Neil by this contract constituted his agent for payment of this tax in his stead, and O'Neil is therefore1937 BTA LEXIS 810">*848 bound by its declaration, which accompanied and was in the course of the performance of the agency. Jones on Evidence, vol. 2, p. 1741.
Another circumstance of vital importance here is this: Had O'Neil in good faith considered himself to have received the Liberty bonds for the Prairie Co. as trustee, it would have been his duty to have filed a return as a fiduciary, showing the Prairie Co. to be beneficiary. The petitioner does not contend that any such fiduciary return was filed, makes no attempt to show that the Government was apprized of the situation until several years later, and the testimony of Fitzpatrick discloses that O'Neil told him that he "never had returned any part of that profits with his income ." Had O'Neil filed such a return as fiduciary, without doubt petitioner would so contend. Moreover, the fact that O'Neil delivered the approximate equivalent 35 B.T.A. 975">*992 of the full amount of the bonds to the Prairie Co. demonstrates that he never paid and deducted any tax, as would have been done had he made a fiduciary return, he not having made distribution to his alleged beneficiary until 1925. In 1937 BTA LEXIS 810">*849 , we considered such a situation, commented on the fact that no return was filed as fiduciary, and further said:
* * * From the returns filed the respondent could not determine that the petitioner's brother was liable for tax upon any portion of the income deposited to her credit in the joint account. * * *
Here, too, in the absence of a fiduciary return by O'Neil and any return by the Prairie Co. (which only learned of the bonds in 1925) the respondent could not determine tax against the Prairie Co. All of these considerations can lead us to one conclusion only - that despite any declarations as to what he had intended to do with these bonds, O'Neil received them in his individual capacity and that they constituted income to him. No explanation is even attempted as to any reason why O'Neil should be holding these bonds for his company. Even his directions to his son show intent to retain control until death. Every circumstance of fact contradicts his asseverations of possession for his company. In 1937 BTA LEXIS 810">*850 , Mr. Justice Cardozo says: "Recklessness and deceit do not automatically excuse themselves by notice of repentance. * * *"
Protestations of innocence, however vigorous, by the party involved do not necessarily establish absence of fraudulent intent. , (1129); . The facts under which O'Neil finally did turn approximately a substitute for the bonds to the Prairie Co. are such as to throw doubt even upon repentance, and to indicate rather an attempt to escape consequences of acts then becoming known. He knew that the United States was inquiring into the matter, for the interrogatories propounded to him in France in February 1925, some three months before he delivered the bonds to the Prairie Co., showed him plainly that the United States suspected him of having received income from the Continental Trading Co., and, with the matter being investigated in court, it could not reasonably escape the knowledge of the Prairie Co.
Until publicly disclosed in 1928, the actual recipients of the income of the Continental Co.1937 BTA LEXIS 810">*851 were unknown to the Government. Prior thereto the decedent not only made no effort to acquaint income tax collecting authorities with the profits distributed by the Continental Co., but endeavored to conceal the fact from the Government. Taxpayers dealing with the Government are required to turn "square corners." . Contrary dealings, involving active concealment of the taxable 35 B.T.A. 975">*993 income, constitute substantial evidence in the establishment of fraud with intent to evade tax. There was concealment of income which actually was received in 1922-1923. The Prairie Co. did not conceal it in 1922 and 1923, for it did not have knowledge thereof. O'Neil did have that knowledge, did make returns, which did not include this income. He refused to answer direct interrogatories as to this income when questioned by Government counsel under letters rogatory in the case of He not only did not relate in full to Fitzpatrick in Montreal in May 1925 the activities of the Continental Co., but1937 BTA LEXIS 810">*852 gave the order on his son for $800,000 of Liberty bonds with the request that the Prairie Co. not disclose the receipt of the securities nor cash the coupons therefrom. The informal manner in which the bonds were recorded in the books of the Prairie Co. and its failure to cut the coupons maturing on the securities thereafter is evidence of an effort to carry out its part of his request. The foundation for the effort to continue concealment of the bonds is, according to a remark of the decedent testified to by Fitzpatrick, that a disclosure would result in embarrassment to others. Taxpayers are charged with the duty of voluntarily reporting income annually for tax purposes. The obligation fully to disclose the receipt of profits derived legally or illegally can not be voided by a belief, however reasonable it may be, that the recipient or others will suffer embarrassment. Tax on income may not be deferred until a taxpayer concludes his fraudulent operations, or while he protects others. That there was concealment here, from 1925 when the Prairie Co. received the bonds, until 1928 when it paid a portion of the tax due from the Continental Co., is impossible of refutation; moreover, 1937 BTA LEXIS 810">*853 it is equally plain that it was a continuation of previous concealment by O'Neil.
It is well settled that reporting income for tax purposes may not be delayed to a future year on the ground that subsequent events may result in the determination that the recipient was not entitled to it. The rule was stated in , in the following language:
* * * If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. See . Compare * * *.
In , affirming ; certiorari denied, , the petitioner and four other 35 B.T.A. 975">*994 stockholders of the corporation took over a contract which the corporation1937 BTA LEXIS 810">*854 had entered into for the construction of a pipe line. The pipe line was completed on the joint credit of the individuals and the corporation, and, upon the subsequent sale of the property, the stockholders distributed a portiom of the profits among themselves. Other stockholders contested the distribution, but subsequently permitted the petitioner and another stockholder, then acting as liquidating trustees for the corporation, to retain the profits on condition that they waive their right to further compensation for services as liquidating trustees. In holding that the income was taxable when received rather than the year in which the agreement was reached, the court said:
* * * The only claim made is that the contract whereby petitioner purported to secure his interest in the pipe line was illegal and unenforceable by reason of his position as a director of the Old Dominion Oil Company. In this contention the petitioner of course never acquiesced. The payment was never refunded. Possibly it might have been recovered in the litigation which was instituted for that purpose, but it was not, and it is at least unusual that a taxpayer should be heard to assert the possibility1937 BTA LEXIS 810">*855 of an adjudication of alleged misconduct and breach of trust, as relieving him from tax liability which is predicated upon the assumption of the honesty and legality of his acts. * * *
In , affirming ; certiorari denied, , dividends were received in 1922 on stock illegally distributed by an executor in that year. In 1926 the probate court sanctioned the distribution as of the close of 1922 provided the distributees were charged with interest to that date on what they had received. In holding that the dividends were taxable in 1922 the court said:
* * * Certainly they then had complete legal title to the stock and to the dividends. If taxes regularly assessed could be invalidated, an indeffinite number of years later, by a consent judgment purporting to vacate the title of the taxpayer to the fund he had reported as income, the necessary system of tax collection would be much impaired. The true normal criterion to be applied in this class of case is the actual receipt and retention during the year in question of what was then considered to be income, not whether the1937 BTA LEXIS 810">*856 taxpayer exposed himself to possible personal liability.
For other cases in which the principle has been applied see ; ; ; affd., ; certiorari denied, ; ; certiorari denied, ; ; affd., ; ; ; affd., ; certiorari denied, ; ; ; Chicago, Rock Island & Pacific35 B.T.A. 975">*995 ; affd., ; certiorari denied, ; 1937 BTA LEXIS 810">*857 .
The petitioner argues, however, that the principle running through the above cases has no application here, contending that the decedent received the bonds as the result of a transaction entered into within the scope of his agency as an officer of the Prairie Co., and that receipt by him was receipt by his principal. From this premise it says that whatever the decedent received as profits of the Continental Co. was acquired as agent or trustee for the Prairie Co. and constituted income to it in the years received. Numerous authorities are cited for the settled principle that officers and directors of corporations, and agents, are required to account to their principal for secret profits earned in discharging the duties of their agency.
The effect of the argument is to set up unfaithfulness of the decedent to the Prairie Co. as a means of escaping payment of the taxes involved here. If accepted, it would enable a taxpayer to avoid the consequences of one fraudulent act by showing another one. It is opposed to the maxim that "a wrongdoer will not be heard to urge his own wrongdoing, or the illegality of his own acquisition, 1937 BTA LEXIS 810">*858 in bar of rights of third parties * * *", Under the theory advanced by the petitioner, tax on income could be avoided by deferring payment to the principal until assessment and collection were barred. Revenue acts are designed to collect revenue and not to provide means for tax evasion. The argument assumes that the profits were taxable income to the Prairie Co. in 1922 and 1923, years during which it had no knowledge of the distribution of the bonds to the decedent. While we do not have before us the question of the year or years in which the amount of the earnings is taxable to the Prairie Co., , appears to be directly opposed to the idea that the income was taxable to the Prairie Co. prior to 1925, the year in which it first learned of the receipt of the bonds by the decedent and itself received them.
The petitioner must face the fact that there is no showing here that O'Neil was constituted the agent of the Prairie Co. for the purpose of organizing the Continental Co., making a profit through it, and then distributing that profit to it. The right of the Prairie1937 BTA LEXIS 810">*859 Co., if any, would be established in equity. There appears not even a ratification of O'Neil's acts, but recognition that O'Neil received the bonds in his individual capacity.
The profits distributed by the Continental Co. in 1922-1923 were income to whomsoever was distributee thereof. Were they not income to O'Neil? He was, in fact, the distributee, having actually received 35 B.T.A. 975">*996 the bonds distributed. If he received them under a claim of right and without restriction as to disposition under : if they were "then considered to be income" by him, under , obviously the income was that of O'Neil. The statutory definition of income is not narrow. Can it reasonably be said that as to O'Neil these bonds were not gains or profits "of whatever kind and in whatever form paid", or that they were not "income from any source" whatever, under the statute. We have hereinabove examined the record and have concluded that he received the bonds in his individual capacity with intent to keep the same as his own. "Claim of right" as used in the above citation can mean only1937 BTA LEXIS 810">*860 claim of right to title. His possession and his use and disposition of the bonds, as above seen and concluded, not only raise a presumption of claim of ownership, but convince us fully that he considered himself the owner. He was, in fact, the legal owner. The bonds passed to bearer. He was the bearer. The record herein does not disclose the receipt of the bonds by O'Neil in the capacity of agent, but on the contrary shows a duly organized corporate entity, making a profit on a business contract, purchasing Liberty bonds therewith, and distributing them to him and four other men, including its president. As stated in , "certainly they then had complete legal title * * *", and alleged equities can not in later years by used to affect income. We can not, without good reason, disregard corporate entities such as the Continental Co., an active corporation, and it follows that we can not fail to give at lease prima facie effect to its distributions of profits to O'Neil, and recognize him as legal owner thereof.
Was there any bestriction as to disposition of the bonds in O'Neil's hands? He disposed of or kept not only a part, but1937 BTA LEXIS 810">*861 all of the bonds, for what he delivered in 1925 to the Prairie Co. was other bonds, perhaps an equivalent, but indubitably not the same bonds received by him. Even the equivalence is only approximate. There was a compromise, for the Prairie Co. did not receive interest on the coupons which had been clipped. No reasonable view can be taken that O'Neil considered that there was any restriction on disposition. It would require disregard of the whole complexion of the evidence, as well as its details, to believe that O'Neil was at all times holding these bonds for the Prairie Co. We refuse to close our eyes to facts so obvious as those here involved. We must and do conclude that O'Neil considered these bonds as income to himself and that he considered himself bound by no restriction as to disposition.
The cases cited by petitioner, involving as they do the ordinary situation of agreed relation of principal and agent, have no application here. Of course, income to one who agrees with his principal 35 B.T.A. 975">*997 that he is agent, is income to the principal; but it is not helpful to adduce such cases as authority in a case involving the factual situation here at hand. One whose every1937 BTA LEXIS 810">*862 act belies any intent to recognize himself as an agent can not, by some contractual arrangement with another party at a later time, convert himself retroactively into an ordinary agent and impose the effect of such agency upon the sovereign seeking tax. The agreement between O'Neil and the Prairie Co. may, or may not, have rested wholly on the one idea of breach of trust or agency on O'Neil's part. The Prairie Co. did not recognize O'Neil as its agent in any formal way, to say the least. They paid tax not for themselves, but for O'Neil as transferee of the Continental Co., as the corporate resolution shows. The petitioner has not seen fit to explain O'Neil's reasons, if any there were, for retention until 1925 of bonds which it says belonged in equity to the Prairie Co., or why he delivered the bonds to them when he did. There may have been other contracts or agreements, relations other than ordinary agency or trusteeship between O'Neil and the Prairie Co., which entered the equation and contributed to cause delivery of the bonds. Though the burden of proof is on the Commissioner as to the fraudulent concealment of income, we have found that a prima facie case of ownership1937 BTA LEXIS 810">*863 was established by the possession and disposition in various ways of the bearer bonds obtained by O'Neil from a duly organized corporation. Petitioner has not met such presumption by showing by any sufficient or convincing evidence that such ownership was in the Prairie Co. The mere fact of delivery of bonds alone, without determination of legal rights by any court upon examination of the facts, or even suit filed, by no means is determinative here - most emphatically where the petitioner vouchsafes no explanation of reasons for the apparent prior claim of ownership of bonds by O'Neil, and where, as reason for delivery of bonds to the Prairie Co., we have no judgment, not even a formal agreement, but only a report of O'Neil's statement that he considered they belonged to the company, and had intended to credit them to the company. This question was before the court in There, officers of a corporation delivered to it property instead of moneys received by them, after receivers of the corporation had filed suit alleging that such officers had no authority to receive the moneys as compensation. 1937 BTA LEXIS 810">*864 The case was compromised by the delivery of property. The officers had in the earlier years returned the moneys as income, and, after compromise as above indicated, sued for refund. The court quotes and relies upon , and , and concludes that there having been no determination by a court of competent jurisdiction, the Government as to 35 B.T.A. 975">*998 income tax was not bound by delivery of property in settlement of the amounts received by the corporate officers. We quote:
Plaintiffs make the point that these salaries, commissions, etc., never belonged to the plaintiffs, but were trust funds in their hands as officers of the association. The authorities cited indicate this might be true as between the plaintiffs and the association. That controversy, however, has never been decided by any court or other lawful authority having jurisdiction and is not presented for determination in this litigation. The fact remains that when the plaintiffs received the sums in question they believed themselves legally entitled thereto and later paid them back, not because it had been1937 BTA LEXIS 810">*865 authoritatively decided that they were not entitled thereto, but to settle litigation. The Government cannot be bound by the taxpayers' own decision or opinion that they took this money without right or authority so to do. The association was divested of the legal title, irrespective of the equities arising from the transaction. In effect the plaintiffs ask that the Government be bound by an agreement entered into between the plaintiffs and the receiver of the building and loan association, to which it was a stranger. * * *
* * *
Logically, the plaintiffs' argument is grounded on the premise that the monies which the plaintiffs received from and later returned to the association did not belong to them. That they must fail in this suit is clear, because the premise is not supported by the determination of any court, Board of Tax Appeals, or any authority having jurisdiction to determine that question. In effect we are asked to hold the Government conclusively bound by the voluntary act of the parties in returning this money as a result of a compromise entered into with the receiver on the advice of counsel, in doing which they avoided the legal question, whether they were1937 BTA LEXIS 810">*866 or were not entitled to the money, although the plaintiffs collected the said sums as officers of the association, and believing themselves legally entitled thereto, returned them in the respective years as income.
It is well to remember that a compromise (12 C.J., p. 314), is an agreement between two or more persons who, to avoid a lawsuit, amicably settle their differences by agreement. It implies mutual concessions and the waiver of the respective rights of the parties, but is not an admission of their invalidity.
We are not cited to any authority, nor can we find any that authorizes the taxpayer to change his tax liability in this manner long after his return is in. Such a rule would be an innovation having far-reaching effects. The reasoning of the above decision we find to be sound and, together with other cases above cited, controlling here. A purchase by an agent from himself is not absolutely void, but voidable only at election of the principal. We can not here do what the Prairie Co. did not do - have declared void the purchase by O'Neil from his own company so far as claiming the profit involved. It is immaterial to our case that in the Lewis case, supra,1937 BTA LEXIS 810">*867 the corporate officers believed themselves entitled to the compensation and made income return thereof, for herein on the facts we have concluded that O'Neil considered the Liberty bonds as income to him, and that they are to be considered such under the law, petitioner not having shown otherwise, by evidence of a mere settlement or compromise between the parties. There is no more strength in the settlement 35 B.T.A. 975">*999 between O'Neil and the Prairie Co. than there was in the "consent judgment" in , and, to use the expressions of that case, in 1922-1923 O'Neil "then considered to be income" the bonds he received, used and kept, even though "the taxpayer exposed himself to possible personal liability."
There is close analogy, also, between the situation herein and in The other stockholders in Board v. Commissioner obviously had and could have no different claim against the liquidating trustees than the claim which petitioner asserts for the Prairie Co. herein - the claim of agency or trusteeship, and the right to profits realized by such agent or trustee. The alleged agent1937 BTA LEXIS 810">*868 in the cited case made a profit and kept it by surrendering a right to compensation; herein he made a profit and kept it for two or more years, and then settled the liability, if any, in consideration of the delivery not of the original property received, but of other property, not covering or paying interest on a part of the bond coupons which had been clipped. The fact that less than full payment, including said interest, was accepted makes of the deal a settlement. Moreover, O'Neil "wanted to get it settled." This settlement is parallel to that in the cited case. Both cases involved retention of proceeds of profits made by an alleged agent or trustee, for a consideration. When we add the fact of concealed retention for more than two years by O'Neil, reason requires us to conclude that taxation should be applied in the years when the profits were received by the person alleged to be agent. The plea of illegality of an agent's actions was denied effect in the cited case; it must be denied effect here.
The decedent received earnings of the Continental Co. under a claim of right, and possibility that at some future time another taxpayer would assert title to the profits can1937 BTA LEXIS 810">*869 not, under controlling cases, be used as a refuge for failure to report the income for taxation to the recipient. The revenue act provides a remedy for the recovery of excess tax payments. Income tax liability must be determined on the basis of what occurred and not on what might have happened. Possible claims of the Prairie Co. to all or a part of the earnings of the Continental Co. received by the decedent were a matter for settlement between them.
We can not consider the question of taxation determinable by the conference in Montreal at which the decedent did not make, and the representatives of the Prairie Co. did not, for reasons not fully disclosed, insist upon, a full disclosure of the circumstances under which the decedent received the distributions of profits. Taciturnity such as is exhibited in this matter does not commend the taxpayer. The resolution, of May 1, 1928, by the Prairie Co. and the fact that it paid the transferee liability asserted against the decedent 35 B.T.A. 975">*1000 for unpaid income taxes of the Continental Co. as a liability of the decedent to the Government, rather than its own, is evidence that until then at least, that company regarded the bonds1937 BTA LEXIS 810">*870 as profits accruing to the decedent in his individual capacity.
Taxes must be reported on an annual basis. If a taxpayer receives moneys under a claim thereto, treating them as his own, any reasonable regard for the fact that taxation is a practical matter compels us to disregard possible claims in equity still unsettled in the taxable year, and hold such moneys to be income, most particularly where, as here, there is full formal ownership in law, deniable only by disregarding the corporation and the distribution of its profits to O'Neil.
There was concealment of income. It was continued, at O'Neil's request by the Prairie Co., even after he delivered bonds to the Prairie Co. There was consciousness on O'Neil's part of liability for tax, for he required the Prairie Co. to agree to pay the tax when he delivered the bonds. He filed a return which did not disclose the receipt of these bonds, and he did not devote any of the bonds to paying income tax as the fiduciary which petitioner now argues he was, although he made no distribution to his alleged beneficiary. These facts not only are amply sufficient for the finding we make of fraudulent return with intent to evade tax, 1937 BTA LEXIS 810">*871 but they positively compel such a finding. To find otherwise would be to disregard the realities of the evidence.
We must and do conclude from evidence which seems to us cogent, clear, and convincing, and hold, that O'Neil received the Liberty bonds for himself individually and that he filed income tax returns for 1922 and 1923 which were fraudulent and made with intent to evade taxes, because of his omission therefrom of reference to distributions to him of profits of the Continental Co.
The petitioner contends in the alternative that assessment and collection of the taxes are barred because of the failure of the respondent to determine the taxes in question within one year after it made a written request therefor under section 250(d) of the Revenue Act of 1921. 1 It argues that the second proviso limits the operation of the period of limitations generally and has no application to the first proviso. No judicial or executive authority is cited to support the technical ground thus advanced for a favorable decision, and we find none.
1937 BTA LEXIS 810">*872 35 B.T.A. 975">*1001 Rules of construction are not applied when the language of a statute is clear. . The provisions of the section, when read together, are free from ambiguity and clearly provide authority for the determination, assessment, and collection of tax at any time after it becomes due in cases like this one where the returns are fraudulent with intent to evade taxes. The Commissioner so construed it, article 1012, Regulations 62, and he had interpreted provisions to the same effect in subsequent acts in a like manner. Art. 1271, Regulations 65 and 69; art. 1201, Regulations 74 and 77; and art. 275-1, Regulations 94. The Commissioner's practical interpretation of a doubtful statute will not be disturbed except for weighty reasons. . We find no merit in the point raised by the petitioner.
Assessment and collection of the taxes involved herein are not barred by the statute of limitations.
Reviewed by the Board.
Decision will be entered for the respondent.
Footnotes
1. The transactions involving these amounts are immaterial except to reconcile the receipts and disbursements of the Continental Co.↩
1. SEC. 250(d) * * * Provided, That in the case of income received during the lifetime of a decedent, all taxes due thereon shall be determined and assessed by the Commissioner within one year after written request therefor by the executor, administrator, or other fiduciary representing the estate of such decedent: Provided further,↩ That in the case of a false or fraudulent return with intent to evade tax, or of a failure to file a required return, the amount of tax due may be determined, assessed, or collected, and a suit or proceeding for the collection of such amount may be begun, at any time after it becomes due * * *.