*2427 1. In 1920 the petitioner received $100,000 in consideration for the sale of 24 shares of stock of the Ohio Mattress Co., and the execution of a quitclaim deed to certain property. The March 1, 1913, value of the 24 shares of stock was $6,910, which was in excess of the cost thereof to the petitioner. The real estate with respect to which the quitclaim deed was executed cost the petitioner nothing. The petitioner contends that $64,000 of the $100,000 received was a gift from his father and not taxable income. Held, the $64,000 was not a gift to the petitioner.
2. At the hearing of this proceeding counsel for the respondent claimed an addition to the deficiency of 50 per centum of the amount thereof for the filing of a false and fraudulent return by the petitioner for 1920. Held, the return filed was false and fraudulent.
*1220 This is a proceeding for the redetermination of a deficiency in income tax for 1920 of $34,035.24. The point in issue is whether the petitioner derived taxable income from the sale in 1920 of 24 shares of stock of the Ohio*2428 Mattress Co., and for quitclaiming his title to certain real estate for which he received a consideration of $100,000, the petitioner contending that at least $64,000 of this amount was a gift to him by his father. At the hearing counsel for the Commissioner claimed an addition to the deficiency of 50 per cent of the *1221 amount thereof provided by law for the filing of a false and fraudulent return for 1920.
At the hearing it was stipulated that the March 1, 1913, value of the 24 shares of stock of the Ohio Mattress Co. sold was $6,910 and that the petitioner realized a taxable profit of $29,090 on the sale.
FINDINGS OF FACT.
The petitioner is a resident of Cleveland Heights, Ohio. At the beginning of 1920 he was secretary and treasurer of the Ohio Mattress Co. of Cleveland, Ohio, which corporation was owned and operated by him, his father, Moris Wuliger, and his brother, Frank Wuliger. The business of the Ohio Mattress Co. was acquired by the petitioner's father in 1907 and the petitioner obtained a partnership interest therein in 1910. The business was incorporated in 1913. The petitioner was trained in bookkeeping and accounting and had practiced law for a*2429 period of two years from August, 1910, to some time in 1912, after which he devoted his entire time to the business of the Ohio Mattress Co. As secretary and treasurer he looked after the financing and was legal counsel for the corporation. During the latter part of 1919, while the petitioner's father was in California, the petitioner and his brother, Frank, acting for the Ohio Mattress Co., entered into negotiations for the purchase of the plant of the Champion Bed Spring Co. It had been the practice in previous instances where real estate had been acquired for the corporation for the petitioner to take legal title to the property in the first instance and later to transfer it to the corporation by quitclaim deed. On January 2, 1920, the property known as the Champion plant was purchased for the Ohio Mattress Co. from one Joseph P. Macbeth and title thereto was taken in the name of the petitioner. The purchase price of this property was $160,000 and the first payment of $35,000 was made by the petitioner from funds furnished by the Ohio Mattress Co. The amount paid was charged to the petitioner on the books of the Ohio Mattress Co. Petitioner, on January 2, 1920, obtained for*2430 the Ohio Mattress Co. a loan of $100,000 from the First National Bank of Cleveland, Ohio. At the request of an assistant cashier of the bank, the petitioner personally endorsed the company's note.
About January 20, 1920, the petitioner became ill, but attempted to carry on his business until February 2, when he was confined to his bed until about the end of the month. He did not visit the plant of the Ohio Mattress Co. again until March 6, 1920. At or about that time the petitioner was ordered by his doctor to stop working and to take a rest, which he did. On or about March 18, 1920, the petitioner had a violent quarrel with his brother, Frank. He then told his father, Moris Wuliger, who had returned from *1222 California, that either Frank must sever his connections with the Ohio Mattress Co. or that he would himself. The petitioner's father sided with his brother, Frank, whereupon the petitioner left his father's home. At that time the Ohio Mattress Co. was under heavy obligations. It had to meet its note to the First National Bank at Cleveland, and was also under heavy obligations to make payments upon the purchase price of the Kroehler Manufacturing Co. Its contract*2431 provided for payments of money in April and succeeding months. The petitioner assigned his interest in the Kroehler contract to the Ohio Mattress Co. on March 26, 1920. His account on the books of the Ohio Mattress Co. was credited on March 31, 1920, with the $20,000 which had been charged to him in connection with the purchase of the Kroehler Manufacturing Co. plant. The Ohio Mattress Co. subsequently made additional payments on the Kroehler contract and for merchandise in connection therewith, which payments increased the equity of the company in this deal to about $36,000.
On April 3, 1920, the petitioner resigned as secretary and treasurer of the Ohio Mattress Co. The resignation was accepted on April 13, 1920. At this time the petitioner owned 24 shares of stock of the Ohio Mattress Co.
When the First National Bank of Cleveland learned of the resignation of the petitioner from the Ohio Mattress Co., the assistant cashier of the bank suggested to the petitioner that he quitclaim his title to the Champion plant, since it was largely upon the security of that that the bank had loaned the Ohio Mattress Co. $100,000 on January 2, 1920. This the petitioner refused to do, *2432 upon the ground that he was obligated on the note of the Ohio Mattress Co. for the payment thereof. This note was paid by the Ohio Mattress Co. on April 29, 1920. Knowledge of the payment of the note came to the petitioner on May 17, 1920. During all of this period an attempt was made by Moris Wuliger and Frank Wuliger, through their attorney, one Charles Rosenblatt, to get the petitioner to quitclaim his title upon the Champion realty to the Ohio Mattress Co. and to sell his shares of stock therein. The petitioner refused, however, to execute a quitclaim deed or to dispose of his shares of stock for less than $100,000 cash. Petitioner refused to have any dealings with his brother, Frank, and most of the negotiations were carried on through Rosenblatt, who advised the petitioner's father and brother that, even though the property was purchased for the Ohio Mattress Co., the legal title was in the petitioner and that it would probably be a long, drawn-out court procedure before the Ohio Mattress Co. could acquire legal title. He therefore advised the payment to the petitioner of the $100,000 demanded as the best method of settling the matter. The petitioner's terms were accepted. *2433 The *1223 quitclaim deed was executed by the petitioner on May 28, 1920, and was delivered to Charles Rosenblatt, the attorney, at the First National Bank of Cleveland on June 1, 1920, upon the payment of $64,000 in cash. The petitioner refused to receive a check in payment. The certificate for 24 shares of stock of the Ohio Mattress Co. was to be delivered upon the payment of an additional $36,000 or upon the assignment to the petitioner of the Ohio Mattress Co.'s equity in the Kroehler Manufacturing Co. contract upon which the Ohio Mattress Co. had paid $36,000. The transfer of the shares of stock was made on June 4, 1920, and at or about that time the Ohio Mattress Co. assigned to the petitioner the Kroehler Manufacturing Co. contract of an agreed value of $36,000.
The petitioner's father never advised him that any part of either the $64,000 in cash or the amount of $36,000 representing the value of the corporation's equity in the Kroehler contract was turned over to him as a gift.
In his income-tax return for 1920 the petitioner did not report as income any part of the $100,000 received for his 24 shares of stock in the Ohio Mattress Co. and for quitclaiming his*2434 title upon the Champion plant. The respondent determined that the 24 shares of stock of the Ohio Mattress Co. sold by the petitioner in 1920 had a March 1, 1913, value of $3,200, which was in excess of cost, and that the petitioner received $96,800 profit on the transaction.
The March 1, 1913, value of the 24 shares of stock was $6,910.
OPINION.
SMITH: The deficiency notice upon which this proceeding is brought states that the evidence submitted by the petitioner -
is insufficient to show that you did not realize a profit of $96,800 on the sale of the "Champion & Cleveland plant" and 24 shares of capital stock of the Ohio Mattress Co., and, therefore, no change has been made from the action previously taken.
The allegations of error stated in the petition filed are:
4 (a) The attempt of the Commissioner of Internal Revenue to assess an additional tax against your petitioner by reason of a purported profit claimed by the Commissioner of Internal Revenue to have been made by your petitioner from a purported sale of real estate by your petitioner for an alleged sale price of $224,000 making an alleged profit of $64,000 on an alleged cost to your petitioner of $160,000.
*2435 4 (b) The attempt of the Commissioner of Internal Revenue to assess an additional tax against your petitioner by reason of a purported profit claimed by the Commissioner of Internal Revenue to have been made by your petitioner from a purported sale by your petitioner of 24 shares of capital stock of the Ohio Mattress Co. for an alleged sale price of $36,000 on an alleged cost to your petitioner of $3,200.00; said alleged profit being claimed by the Commissioner of Internal Revenue to have been $32,800.00.
*1224 At the hearing the petitioner and counsel for the Commissioner stipulated that the March 1, 1913, value of the 24 shares of the Ohio Mattress Co. stock sold was $6,910 and that the profit realized by the petitioner upon the sale thereof was $29,090. No part of this profit was reflected in the petitioner's income-tax return for 1920.
The substantial point in issue in this proceeding is whether the $64,000 paid to the petitioner by his father, Moris Wuliger, on June 1, 1920, was a gift or was taxable income. The petitioner contends that it was the intention of his father to make him a gift of $100,000 and that of the amount paid to him $64,000 was a gift. The*2436 petitioner admits that his father never advised him that it was a gift. The petitioner's father denied under oath that it was a gift. The only evidence that petitioner relies upon in support of his contention that it was a gift is a deposition of a friend of his, Arthur H. Pollak, who has deposed that the petitioner's father advised him in May, 1920, that he was going to make a gift of $100,000 to the petitioner.
The weight of the evidence is that no part of the $100,000 paid to the petitioner in 1920 was a gift. The circumstances under which the money was paid all go to show that in 1920 the petitioner and his father were hostile to each other. The Ohio Mattress Co. and Moris Wuliger were not in funds with which to make the payment and $50,000 of the amount was borrowed by them from the Guardian Trust Co. of Cleveland for that purpose. The petitioner had set the price of $100,000 as the consideration for the quitclaiming by him of his title to the Champion real estate and the sale of 24 shares of stock of the Ohio Mattress Co. The petitioner refused to accept any note for the payment of the money or even to receive a check. These circumstances clearly point to the fact that*2437 there was no intention on the part of Moris Wuliger to make a gift to his son. The petitioner admits that his father never stated to him that he was making a gift to him of any part of the $100,000 in question. In addition thereto there is the statement under oath of the petitioner's father that he never intended to make a gift of any part of the $100,000 to his son. From this evidence we must conclude that there was no element of a gift in the payment of the $100,000 in question, but that it was unwillingly paid by the petitioner's father and the Ohio Mattress Co. as consideration for the quitclaim deed and the sale of the 24 shares of stock of the Ohio Mattress Co.
Section 213 of the Revenue Act of 1918, under the provisions of which the petitioner filed his income-tax return for 1920, provides in part:
That for the purposes of this title (except as otherwise provided in section 233) the term "gross income" -
(a) Includes gains, profits, and income derived from * * * professions, vocations, trades, businesses, commerce, or sales or dealings in property *1225 whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, *2438 rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.
Whatever part of the $100,000 represented the sale price of the shares of stock and whatever part represented consideration for quitclaiming title on the Champion property, we are of the opinion that the excess of the total received over the March 1, 1913, value of the shares of stock sold, to wit, $93,090, was taxable income of the petitioner for 1920 within the meaning of the taxing statute. The petitioner derived a gain of $93,090 from the transaction. There is no provision of the statute exempting such gain from tax, unless it be a gift, and we have found specifically that no part of it was a gift.
The petitioner returned no part of the $93,090 received in 1920 as taxable income in his return for that year. At the hearing he admitted that $29,090 of the amount received was taxable income and that his return was in error in not including the same as taxable income. At the hearing counsel for the respondent moved that the respondent's answer be amended so as to include therein the following:
The respondent that*2439 petitioner filed a false and fraudulent return for the year 1920 and asserts the fifty per cent evasion penalty in accordance with Section 3176 of the Revised Statutes as amended by Section 1317 of the Revenue Act of 1918 and the corresponding sections of the subsequent Acts.
The respondent had authority to make such motion by section 274(e) of the Revenue Act of 1926. From the evidence we believe that in this case a false and fraudulent return for the year 1920 was wilfully made and that the deficiency is due to fraud with intent to evade tax. The claim of the respondent for the imposition of the additional 50 per cent is granted. Cf. sections 283(a) and 275(b) of the Revenue Act of 1926.
Judgment will be entered under Rule 50.