*3248 Petitioner's return for 1919 held to have been false with intent to evade tax, and additional tax and penalty asserted by respondent are not barred.
*417 Petitioner asks a redetermination of a deficiency in income tax for the year 1919 in the amount of $13,528.79 and a 50 per cent *418 penalty of $6,764.39. It is alleged that the respondent erroneously found that the petitioner made a false and fraudulent return with intent to evade tax, and that the assessment of tax is barred by the statute of limitations.
FINDINGS OF FACT.
Petitioner, an individual residing at Marietta, Ohio, in 1919 was a stockholder in the Producers Supply & Tool Co., an Ohio corporation, hereinafter referred to as the corporation. In the early part of 1919 the capitalization of the corporation was increased from $100,000 to $150,000. The shares of stock of the corporation were owned as shown by the following table:
| Number of shares owned | ||
| Name | Feb. 1, 1919 | Aug. 25, 1919 |
| L. Ginsburg (petitioner) | 439 1/2 | 623 1/2 |
| E. Brachman | 449 1/2 | 633 1/2 |
| S. Brachman | 100 | 170 |
| Charles A. Ward | 0 | 25 |
| Beman A. Plumer | 0 | 25 |
| Mrs. D. Ginsburg | 10 | 10 |
| George H. Crawford | 0 | 5 |
| Jas. K. Bruner | 0 | 5 |
| J. Brachman | 0 | 2 |
| Mrs. E. Brachman | 0 | 1 |
| B. B. Best | 1 | 0 |
| Total outstanding shares | 1,000 | 1,500 |
*3249 About 1919 officers of the corporation decided to engage in business in the State of Texas. They were advised by an attorney in Texas that the laws of that State were not favorable to foreign corporations. The stockholders therefore decided to and did form a partnership for the purpose of engaging in business in Texas. A partnership agreement was entered into, reciting that it was effective as of February 1, 1919, and listing as members thereof all the stockholders shown above as holding stock after the increased capitalization, and providing that the members should contribute and share obligations and profits in the same proportions as their stock holdings in the corporation. None of the partners ever invested or contributed anything to the partnership.
The corporation opened a ledger account on its books designated "Producers Supply & Tool Co., Fort Worth, Texas," in which it charged to the partnership all materials shipped and advances made to it, and credited all payments received from the partnership. At the end of each month a balance of the account was taken, but it was not until the end of the year 1919 that an inventory was made and the amount of profits determined.
*3250 During the course of the year the corporate stockholders were advised that legislative acts of the State of Texas had removed some of the laws unfavorable to foreign corporations. The stockholders *419 thereupon, about June or July, cast about for some means of absorbing the profits that the partnership had earned. They decided, after some discussion among themselves, to increase the capital stock of the corporation and to issue stock to the partners for the partnership assets, which consisted solely of partnership earnings. They then sought the advice of an attorney in Marietta as to whether the receipt of the proposed increase in stock would result in taxable income to them. The attorney had not handled the organization of the partnership and was not familiar with the details of its operations. He was not a specialist in Federal income-tax matters. He advised the partners that in his opinion the receipt of corporate stock would not result in taxable income to them.
At stockholders' and directors' meetings held in August of 1919 it was voted to increase the capital stock of the corporation to $500,000 and to purchase, in accordance with an offer of the partners, *3251 all the assets of the partnership and assume its liabilities, paying therefor by the issuance to the partners of $300,000 par value of stock in proportion to their interest in the partnership. The resolution further instructed the secretary to secure permits to enable the corporation to do business in the States of Oklahoma and Texas. The transaction was consummated as authorized by the resolutions and on September 12, 1919, there were issued to the partners 3,000 shares of stock, of which the petitioner received 1,247 shares. During the remainder of the year the Texas branch account was carried on the books of the corporation in the same manner as it had been theretofore, and at the close of 1919, upon taking inventory, the combined profits of the partnership and Texas branch of the corporation were determined.
On February 26, 1920, petitioner filed with the collector at Columbus, Ohio, his individual income-tax return for the year 1919. In that return he reported as gross income $5,000 salary as president of the corporation, $200 profit on sale of stock in another corporation, and dividends amounting to $1,758. The total tax disclosed was $82.60. The return contained no*3252 item of income resulting from the partnership operations or the receipt of corporate stock in 1919.
The corporation filed its income and profits-tax return for 1919 with the collector at Columbus in March, 1920, disclosing a net income of $59,944.48.
In 1924 a revenue agent examined the books of the corporation and determined that the amount of $300,000 should be included in income, making a net income as disclosed by the corporate books of $359,994.48. From this amount he deducted various amounts, the largest being for inventory adjustment, and found the correct net income to be $208,388.56. About the time of the examination by the revenue agent, the corporation engaged the services of a firm of accountants, *420 who confirmed the finding of the agent that a taxable profit had been realized from the partnership operations, but recommended that an appeal be filed on the ground that the income was not taxable to the corporation. The corporation did file a brief which, together with the revenue agent's report, was forwarded to the Commissioner's office. The Commissioner, on the basis of the net income found by the revenue agent, advised the corporation under date of*3253 October 17, 1924, of a deficiency of $72,621.35, and of its right to file a protest in 30 days. Under date of December 18, 1924, the treasurer of the corporation executed an affidavit setting forth, among other items, that the net income of the partnership was $137,824.08, and that the petitioner's distributive share thereof was $57,288.92. This statement he forwarded to the Commissioner, saying in the letter of transmittal that it was being submitted pursuant to a conference held on December 9, 1924.
A partnership return of income for the year 1919 was executed before a notary public on January 5, 1925, by the petitioner and E. Brachman and filed with the collector for the second collection district of Texas on January 9, 1925. That return disclosed partnership net income of $137,824.08.
By letter of March 13, 1925, the respondent, referring to the corporation's request for special assessment, advised the corporation that he had determined its net income for 1919 by eliminating the partnership profits of $137,824.08 from the amount reported by the revenue agent. The respondent later granted the application for special assessment and found a deficiency against the corporation, *3254 which was paid.
By letter of March 12, 1925, the respondent advised petitioner that an audit of the partnership return for the period February 1, 1919, to September 30, 1919, disclosed that the petitioner's distributive share of partnership income was $57,288.92, which had not been reported by the petitioner, and which, added to the income he returned, resulted in an additional tax of $13,528.79. The letter further advised petitioner that the five-year period for assessment had expired, but that the petitioner might make voluntary payment of the tax or execute a waiver for which purpose a form was enclosed.
By letter of May 12, 1925, (form N P-1, the so-called 30-day letter) respondent advised petitioner of the determination of a deficiency for 1919 in the same amount as that in the letter of March 12, and further that a penalty under section 250(b) of the Revenue Act of 1918 had been added in the amount of $6,764.39, being computed on the sum of the tax originally reported and the additional tax found due.
*421 The 60-day letter, upon which the petition for redetermination is based, bears the date of March 2, 1926.
Petitioner has never filed a waiver permitting*3255 the assessment of tax after five years from the date his return was filed, and no assessment of additional tax for 1919 has been made within the five-year period for assessment.
OPINION.
ARUNDELL: The petitioner does not question the correctness of the deficiency in tax determined by the respondent. He asserts that assessment is barred by the statute of limitations, and that the respondent erred in finding that he made a false and fraudulent return with intent to evade tax. Whether assessment is barred depends upon the determination of the fraud question, for no assessment was made within five years of the filing of the return and the taxpayer has not executed a waiver. This proceeding was heard prior to the enactment of the Revenue Act of 1928, and at that time, under our rules of practice, the burden of proof in all cases (except in respect of new matter pleaded by the respondent) was upon the petitioner and it was incumbent upon him to overcome the presumption of correctness attaching to the respondent's determination. This rule is in line with the numerous decisions which hold that penalty provisions in revenue laws are not penal laws in the sense that requires them to*3256 be construed with great strictness in favor of the defendant. In the case of , it is said:
By the now settled doctrine of this court, (notwithstanding the opposing dictum of Mr. Justice McLean in ,) statutes to prevent frauds upon the revenue are considered as enacted for the public good and to suppress a public wrong, and therefore, although they impose penalties or forfeitures, not to be construed, like penal laws generally, strictly in favor of the defendant; but they are to be fairly and reasonably construed, so as to carry out the intention of the legislature. ; ; ; .
One of the defense of petitioner to the assertion of fraud is that he secured and acted on the advice of counsel in preparing his 1919 return. Whatever may be the consequence of advice of counsel under some circumstances, it can have no extenuating effect*3257 here, for it is quite clear from both the testimony of petitioner and the attorney whose advice he had that the facts set before the attorney were not those upon which the respondent has predicated the additional tax here involved. All of the evidence is to the effect that the only question put to the attorney by the partners was whether the receipt of corporate stock for the partnership assets would result in taxable income, and on that point he advised *422 them. The respondent is not asserting a tax on that transaction, but on the petitioner's distributive share of the partnership income.
It does not appear that the petitioner sought advice on the question of the taxability of his distributive share of the partnership income and of course, advice given on another equestion is of no avail as a refuge from the consequences of his failure to report such income. It does affirmatively appear that the partners knew at September 12, 1919, that partnership earnings had accumulated. At that time the stock was issued for the partnership assets, and it was unequivocally stated by one of the partners that the assets represented simply the earnings of the partnership. Ledger sheets*3258 placed in evidence show shipments of goods in large amounts to the partnership and remittances by it of considerable sums throughout the period of its existence. There is testimony that the amount of the earnings could not have been determined until an inventory was taken at the end of the year and that the amount was not actually determined until 1924. When, at the end of 1919, the inventory was taken, there was ample time to make a segregation between the partnership and corporation earnings before the date for filing returns, and the delay in making the computation affords the petitioner no valid excuse for his failure to make a proper return.
The making of returns of income was no new thing to petitioner when his return for 1919 was due, for, according to his own testimony, he had prepared returns for the years 1917 and 1918. Petitioner is an intelligent business man, and we can not believe but that he knew that the profits of the partnership were taxable to the members of the aprtnership. At the time that the scheme for issuing stock for partnership profits was devised the Revenue Act of 1918 had been enacted, and when petitioner filed his return the Act and been in effect*3259 for more than a year. Section 218 of that Act is quite specific in requiring partners to include in income their distributive shares whether distributed or not. Certainly he did know that his financial condition had changed during the year as a result of the profitable partnership operations, yet he made no disclosure of the fact in his return. The return was false in the omission of a report of the transaction. . The slightest intention of honesty would have compelled a disclosure of financial transactions which resulted in profits to the so-called branch far in excess of the income of the parent concern. At least as early as June or July the partners were aware of the fact that the partnership was a profitable venture, for they were then contemplating the transfer of the profits to the corporation for stock.
*423 Upon consideration of all the evidence, we are of the opinion that the presumption of correctness attaching to the respondent's finding that the understatement of income in petitioner's return for 1919 was false, with intent to evade tax, has not been overcome.
The petitioner's return having been false with intent*3260 to evade tax, assessment is not barred. Section 278(a), Revenue Act of 1926.
Reviewed by the Board.
Judgment will be entered for the respondent.