*2255 1. Held, on the evidence, that the taxes in controversy have not been paid by others as contended by the petitioner.
2. Held, further, that the statute of limitations does not bar assessment and collection of the deficiencies in controversy, since the returns were false and fraudulent.
*1080 This is a proceeding for the redetermination of deficiencies in income taxes proposed to be assessed against the decedent for the years 1922, 1923, and 1924 in the amounts of $4,301.02, $9,952.94, and $17,835.08, respectively.
The pleadings raise two errors. First, that the Commissioner erred in determining that there is any deficiency due from the petitioner because "said assessments of deficiencies are barred by the *1081 statute of limitations in that the time within which the alleged deficiencies for the years 1922, 1923, and 1924 may be assessed has expired." Second, that the Commissioner erred in determining that there is any deficiency due from this petitioner for the reason*2256 that the amount of $50,000 has been paid to the Commissioner in payment of the taxes alleged to be due.
FINDINGS OF FACT.
The deceased, Robert Jill, was a member of the partnership of Jill Brothers during the years involved. The other members were Frank Jill and Joseph Jill, brothers of the decedent. Frank, Jill, Joseph Jill and Anthony Becker, the accountant for the partnership, and Meyer Bronin, the revenue agent, were indicted for conspiracy to defraud the Government in relation to the partnership and individual returns of jill Brothers and the individuals for the periods covered by this proceeding. Robert Jill, the decedent whose estate is involved in this proceeding, had died previous to the indictments. Frank Jill and Joseph Jill, in settling their tax liabilities with the Government, had guaranteed the payment of the tax due by the decedent in the event the Government could not collect the same from Robert Jill. This guarantee was in the form of a written instrument set out in full as follows:
ESCROW AGREEMENT.
To Whom It May Concern:
The Collector of Internal Revenue for the 1st Collection District of New York, hereinafter called "Collector" does hereby*2257 certify that there have been deposited with him by Frank Jill and Joseph Jill, of 1108 Fleeman Avenue, Brooklyn, New York: Fifty (50) First Liberty Loan 3 1/2% Bonds, Nos. 1508151 to 1508200 inclusive, of par value of $1,000 each, aggregrating $50,000 which said bonds the said Collector undertakes and agrees to hold in escrow to assure the collection and payment of certain income taxes for the years 1922, 1923 and 1924, aggregating $32,089.04, proposed against the Estate of Robert Jill, together with interest thereon as provided by law to the date of final payment, upon the terms and conditions hereinafter stated, that is to say:
WHEREAS by thirty day letters mailed June 24, 1929, the Bureau of Internal Revenue proposed additional income taxes for the years 1922, 1923 and 1924 and penalties thereon aggregating in amount as follows:
| Name | Additional | Penalties |
| taxes | ||
| Frank Jill | $31,597.26 | $15,920.58 |
| Joseph Jill | 32,145.48 | 16,072.74 |
| Robert Jill (estate) | 32,089.04 |
and
WHEREAS the said Frank Jill and Joseph Jill are, together with certain other individuals, under indictment in the United States District Court for the Eastern District of New York upon*2258 a charge of conspiracy; and
*1082 WHEREAS under date of December 7, 1929, the said Frank Jill and Joseph Jill have submitted to the Commissioner of Internal Revenue an offer in compromise, tendering the sum of $115,262.45 in full of all liability, civil and criminal, on account of additional income taxes, penalties and interest for the years 1922, 1923 and 1924, the said amount so tendered being the amount of additional taxes and penalties proposed against Frank Jill and Joseph Jill as aforesaid, together with interest thereon as provided by law, in addition to which the said Joseph Jill agrees to plead guilty to said conspiracy indictment, said indictment to be dismissed as to said Frank Jill; and
WHEREAS the legal representative of the estate of Robert Jill, deceased, contends that the said estate is in no way liable for the additional taxes proposed to be assessed against it for the years 1922, 1923 and 1924 as aforesaid, and
WHEREAS the Commissioner of Internal Revenue has indicated his refusal to accept the said compromise offer of said Frank Jill and Joseph Jill unless and until a provision satisfactory to said Commissioner is made which will assure the ultimate*2259 collection of the full amount of such additional taxes proposed to be assessed against the Estate of Robert Jill as aforesaid, together with interest thereon as provided by law to the date of payment,
NOW THEREFORE, in consideration of the acceptance by the Commissioner of Internal Revenue in due course of the terms of said offer in compromise submitted by Frank Jill and Joseph Jill as aforesaid, the said Collector hereby agrees that if the said additional income taxes for the years 1922, 1923 and 1924 with interest as provided by law shall not be paid by the said estate of Robert Jill or its legal representative, then the said Collector shall at any time upon written notice from the Commissioner of Internal Revenue proceed to sell such portion of said bonds as may be necessary to pay said $32,089.04, or such part thereof as may remain unpaid, together with interest as provided by law and from the proceeds of sale of said bonds liquidate the said $32,089.04 of taxes and interest or any part thereof then unpaid; and the remainder of said bonds and/or the remaining proceeds of sale of said bonds shall be returned by said Collector to said Frank Jill and Joseph Jill, or their nominee.
*2260 Upon written notice from said Commissioner that full and final payment of all of said additional taxes due from said estate as aforesaid, with interest as provided by law, has been made, beyond the possibility of recovery by said estate or its legal representative, then the said Collector shall deliver to said Frank Jill and Joseph Jill the aforesaid bonds.
A copy of this escrow agreement shall be made a part of an additional offer in compromise to be submitted by said Frank Jill and Joseph Jill to said Commissioner of Internal Revenue supplementing said offer of December 7th, 1929, and such supplemental offer shall be accepted by said Commissioner, coincident with the acceptance of the original offer of December 7th, 1929.
The Commissioner of Internal Revenue shall cause the usual steps to be taken toward the assessment and collection of said tax from said estate, as he may be advised by counsel, including the defending of any proceeding which may be brought by said estate before the Board of Tax Appeals with reference to said tax or any part thereof, and any appeal by said estate from the decision of said Board.
It is further understood that the said Collector shall deliver*2261 to said Frank Jill and Joseph Jill the interest coupons upon said bonds, from time to time as the same shall become due, until such time as the said Commissioner may demand the sale of said bonds as aforesaid.
*1083 It is expressly to be understood that said Frank Jill and Joseph Jill deny any legal liability to the estate of said Robert Jill to make payment of said additional taxes and interest, it being the intention of this agreement that, in consideration of the acceptance of said offer and supplemental offer of Frank Jill and Joseph Jill in compromise as aforesaid, and merely for the purpose of inducing such acceptance the said Frank Jill and Joseph Jill unconditionally guarantee the payment of said additional taxes proposed against the said estate of Robert Jill, with interest, in the event same shall not be collected from said estate and that they, the said Frank Jill and Joseph Jill deposit said bonds with said Collector to cover said guarantee, not as a payment of said liability but merely to cover said guarantee, under the conditions above stated.
WITNESS my hand and seal this 18th day of December, 1929.
COLLECTOR OF INTERNAL REVENUE,
First District of*2262 New York,
By HUGH G. NEALY,
Chief Office Deputy.
FRANK JILL and JOSEPH JILL hereby consent to and empower and direct the Collector to sell upon written demand of said Commissioner of Internal Revenue the aforementioned bonds, subject to the terms of the foregoing escrow agreement.
WITNESS our hands and seals this 18th day of December, 1929.
FRANK JILL [SEAL]
His
JOSEPH X JILL [SEAL]
Mark
(Certificate of notary omitted.)
The books and accounts of the partnership of Jill Brothers were deliberately and designedly falsified for the purpose of fraudulently reducing the amount of taxable income as shown therein and for the purpose of defrauding the Government in the collection of the proper amount of taxes. This scheme took the form of fictitious expenses entered in the books. The accountant, Becker, was directed by the decedent to prepare the books in such way as to reduce their taxes. The income-tax returns were made in accordance with the books. However, correct monthly statements were made and secretly maintained. The books contained fictitious figures. The individual income-tax returns were prepared for the decedent for the years involved with his*2263 knowledge that the income shown therein was not the proper amount of income upon which the tax should have been paid. The accountant discussed the matter with the decedent at the time of the preparation of his individual income-tax returns and explained to him that the income shown in those returns was understated and told him what the tax without the fictitious charges would have been and the amount of the saving that was being made by the use of this fictitious scheme.
The two partners of the decedent, members of the partnership of Jill Brothers, were indicted in the United States District Court for the Eastern District of New York. Joseph Jill, after first entering *1084 his plea of not guilty, withdrew it and entered a plea of guilty. The accountant, Becker, also withdrew his plea of not guilty and entered a plea of guilty of conspiracy to defraud the Government on account of the part he took in the transaction. While the decedent had died before the indictments were found, he was the investigator and took an active part in the fraudulent scheme.
The income-tax returns of the decedent, Robert Jill, for the years involved were false and fraudulent and made with*2264 the intent to evade tax. The returns were filed for the years involved on March 14, 1923, March 12, 1924, and March 10, 1925, respectively. The decedent died February 8, 1928. The notice of deficiency was mailed by the respondent on January 29, 1930.
OPINION.
TRAMMELL: There are only two issues in this case. First, whether the taxes in controversy have been paid to the respondent by other persons, to wit, Joseph Jill and Frank Jill. Second, whether the statute of limitations now bars the assessment and collection of the tax.
The first issue, whether the taxes have been paid, involves construction of the instrument entitled "Escrow Agreement" set out in our findings of fact. This instrument indicates on its face that the taxes have not been paid and contains nothing to indicate that they have been paid. The instrument provides that the Commissioner of Internal Revenue shall cause the usual steps to be taken toward the assessment and collection of the said taxes from the estate of Robert Jill, including "defending of any proceeding which may be brought by said estate before the Board of Tax Appeals and any appeal by said estate from the decision of the Board." It further*2265 provides that "Frank Jill and Joseph Jill unconditionally guarantee the payment of said additional taxes proposed against the said estate of Robert Jill, with interest, in the event same shall not be collected from said estate and that they, the said Frank Jill and Joseph Jill deposit said bonds with said Collector to cover said guarantee, not as a payment of said liability but merely to cover said guarantee under the conditions above stated."
We think from the evidence it is perfectly clear that the taxes have not been paid. This issue is, therefore, decided against the petitioner.
As to the statute of limitations, the question involved is whether the return of the decedent was false and fraudulent. Section 278(a) of the Revenue Act of 1926 provides:
In the case of a false or fraudulent return with intent to evade tax or a failure to file a return, the tax may be assessed or a proceeding in court for the collection of such tax may be begun without assessment at any time.
*1085 Section 276(a) of the Revenue Act of 1928 is to the same effect.
We think that the evidence that the decedent filed a false and fraudulent return for the purpose of evading the tax*2266 is of such character that no other conclusion can be reached. We think there can be no question in this case that the return was false and fraudulent.
It is contended by the petitioner that the fraud penalty can not be asserted against the decedent's estate and for that reason the evidence of fraud could not be introduced or accepted in this proceeding. We think it is immaterial that the fraud penalty could not be asserted or collected. The only question concerning the statute of limitations is whether the return was false or fradulent for the purpose of evading the tax, and, if that is true, the statute of limitations has not run.
It is further contended by the petitioner that the respondent could not introduce secondary evidence for the purpose of showing the contents of the original documents, that is, the monthly statements which set forth the true expenses and profits, in order to show that the returns were false and fraudulent. It is also contended that there was no evidence to show the destruction of the books and records. On this question the uncontradicted evidence is that the books and records were deliberately taken out of the office of the partnership and burned*2267 very soon after the revenue agent, Cronin, had made his examination thereof. The person who actually threw the books in the fire testified as to the burning of the books and as to hauling them away from the office.
The petitioner also objected to the introduction of secondary evidence upon the ground that the Commissioner did not make formal demand upon the petitioner to produce the books and records. There is no evidence, however, that the decedent or the petitioner was ever in possession of the books and records. They were in possession of the partnership, not the decedent, and the respondent was in possession of evidence long before the trial that the books and records had been deliberately burned, apparently for the purpose of suppressing evidence.
From a consideration of all the evidence in this proceeding we have found as a fact that the returns of the decedent were false and fraudulent and made for the purpose of evading tax. This being true, the statute of limitations has not run and the respondent has the right to proceed to collection.
No issue has been raised in this proceeding as to the correctness of the deficiencies asserted.
Judgment will be entered*2268 for the respondent.