*2234 1. Held that certain payments to the petitioner by the corporation of which he was the principal stockholder were income to him.
2. Held that in failing to include these amounts in his returns for the years 1920 and 1921, the petitioner fraudulently misrepresented his true income with intent to evade the tax, and the respondent's assertion of the 50 per cent fraud penalty is upheld.
*853 This is a proceeding for the redetermination of deficiencies in income taxes and asserted penalties for the years 1920 and 1921 as follows:
| Year | Deficiency | Penalty asserted |
| 1920 | $183,146.10 | $91,573.05 |
| 1921 | 66,238.83 | 33,119.42 |
| Total | 249,384.93 | 124,692.47 |
The petition also raised issues as to the years 1919 and 1922, but the proceedings as to those years were dismissed for the reason that the respondent made no determination of deficiencies for those years.
The errors alleged in the petition are as follows:
YEAR 1920
(c) The Commissioner*2235 erred in his determination of April 19, 1928, by including as additional taxable income to this petitioner for the calendar year 1920, an item of $25,000 representing cash turned over to this petitioner during said year by H. W. Dubiske and Company, a corporation, for the specific purpose of making on its behalf, loan to its client corporation the Stevens-Duryea Company, and in holding that such corporate loan made to the Stevens-Duryea Company was a personal loan of this petitioner and not a corporate loan of H. W. Dubiske and Company.
(d) The Commissioner erred in his determination by including as additional taxable income to this petitioner for the year 1920, an item of $350,000.00 representing cash turned over to this petitioner during said year by H. W. Dubiske and Company, a corporation, for the specific purpose of making on its behalf, loan to its client corporation the Metropolitan 5 to 50 Cent Stores, Inc., and in holding that such corporate loan made during the years 1920 and 1921 to the Metropolitan 5 to 50 Cent Stores, Inc., was a personal loan of this petitioner and not a corporate loan of H. W. Dubiske and Company.
*854 (e) The Commissioner erred in his determination*2236 by including as additional income to this petitioner for the calendar year 1920, an item of $93,665.13 representing a portion of the amount of $150,000 cash turned over to this petitioner during said year 1920 by H. W. Dubiske & Company, a corporation, for the specific purpose of making on its behalf, payment to Hoyt and Little as commission for services in connection with Dayton Rubber Manufacturing Company stock issue transactions, and in holding such corporate payment made through this petitioner to Hoyt and Little, represented in part a purchase of stock and was not a corporate payment for commissions. He further erred in allowing as a deduction to this petitioner, only one-half (1/2) of that proportion of $150,000.00 admitted by the Commissioner to represent commissions for services rendered.
(f) The Commissioner erred in his determination by including as additional taxable income to this petitioner for the calendar year 1920, an item of $17,120.00 representing direct payment from H. W. Dubiske & Company for Class A Common Stock of the Dayton Rubber Manufacturing Company to unknown person or persons and in holding that in the absence of an identified recipient of such payment, *2237 it constituted income to this petitioner.
(g) The Commissioner erred in his determination by the inclusion as an addition to the deficiency determined for the year 1920, a 50% penalty amounting to $91,573.05 for the reason that the petitioner has not made any attempt to evade income tax justly due the government for said year but on the other hand this petitioner has overpaid the correct amount of tax due for that calendar year.
YEAR 1921
(h) The Commissioner erred in his determination by including as additional taxable income to this petitioner for the calendar year 1921, an item of $75,000.00 cash turned over to this petitioner during said year by H. W. Dubiske and Company, a corporation, for the specific purpose of making on its behalf, loan to its client corporation the Stevens-Duryea Company, and in holding that such a corporate loan made to the Stevens-Duryea Company was a personal loan of this petitioner and not a corporate loan of H. W. Dubiske and Company.
(i) The Commissioner erred in his determination by including as additional taxable income to this petitioner for the year 1921, an item of $104,900 of notes executed by H. W. Dubiske and Company, a corporation, *2238 for the reason that such notes were not delivered or paid to said petitioner during the calendar year 1921 and of which amount of notes, $100,000 remains to this date in possession of G. W. Dubiske and Company unpaid and so reflected by the books of said corporation.
(j) The Commissioner erred in his determination by excluding from taxable income of this petitioner for the calendar year 1922, the amount of $4,900 of these notes of H. W. Dubiske and Company and transferring and including such amount of notes in the taxable income of this petitioner for the calendar year 1921 for the reason that this $4,900 of notes was actually delivered and paid to this petitioner in 1922 and has been reported and included in the figures of his taxable income for said calendar year 1922.
(k) The Commissioner erred by deducting from the taxable income of this petitioner for the calendar year 1921, the amount of $19,500 representing the unused portion of the fund of $350,000 established or set-up during the calendar year 1920 by H. W. Dubiske & Company for the purpose of loans to its client corporation the Metropolitan 5 to 50 Cent Stores, Inc., and by including this amount of $19,500 in the total*2239 fund of $350,000 as taxable income to this petitioner *855 in the calendar year 1920 for the reason that this unused portion of the loan fund was actually received and became income to this petitioner in the calendar year 1921.
(l) The Commissioner erred in his determination by including as an addition to the deficiency determined for the year 1921, a 50% penalty amounting to $33,119.42 for the reason that the petitioner has not made any attempt to evade income tax justly due the government for said year but on the other hand this petitioner has overpaid the correct amount of tax due for that calendar year.
At the hearing the respondent was granted leave to amend his answer to affirmatively allege that there was additional income to the petitioner in the year 1920 of $25,000, this being the U.S. Automotive Corporation loan, and that there was additional income to the petitioner in the year 1921 in the amount of $77,334.89, this being another loan to the U.S. Automotive Corporation.
FINDINGS OF FACT.
The petitioner is an individual with place of business at Chicago, Ill. He was president and general manager of H. W. Dubiske & Co., a Delaware corporation, from the*2240 time of its organization in March, 1917, until it discontinued doing business in the year 1925. He owned more than 75 per cent of the $100,000 authorized capital stock of the corporation.
H. W. Dubiske & Co. was formed for the purpose of marketing to the public at retail prices through personal solicitation of salesmen the stocks of growing and going industrial and merchandising concerns. The stock contracted to be sold was to be offered to the public in units composed of both preferred and common stock. The greater portion of the stock was sold on the time payment plan although some of it was for cash. Many of the sales contracts ran for a period of from two to five years. Sometimes stock issues were brought to H. W. Dubiske & Co. by brokers and sometimes by individual representatives of the corporation issuing the stock.
Dubiske & Co. sold stock of the United States Mortgage Co. in 1917 and 1918. It started the sale of stock of Peters Home Building Co. and the Metropolitan 5 to 50 Cent Stores, Inc., in 1918 and concluded the sales in the late summer of 1919. In 1919 there was sold stock of the Dearborn Truck Co. and stock of Stevens-Duryea, Inc. The sale of Stevens-Duryea, *2241 Inc. stock was concluded in 1920. Dubiske & Co. also, in 1920, sold stock of the Dayton Rubber Manufacturing Co., Steelcraft Corporation of America, and Rausch & Lang, Inc. During 1919 and 1920 the stock issues of the United States Automotive Corporation and Continental Clay Co. were sold. In 1921 stock of the West Indies Fruit Importing Co., the Davis *856 Sewing Machine Co. and the Di Giorgio Fruit Corporation were sold. The sales of these stocks were completed in 1922 and 1923.
When H. W. Dubiske & Co. began business in 1917, it started with one office. At the end of 1918 it had 18 offices, at the end of 1919 it maintained about 49 offices, and at the end of 1920 it had more than 100 branch offices. In 1921 this number was reduced to less than 70 offices, in 1922 it was reduced to less than 30 offices, and in 1923 all branch offices were closed.
In 1917 the company started business with 20 employees. At the end of the year it had about 100 employees, at the end of 1918 it had 300 employees, at the end of 1919 it had over 800 employees, and in 1920 there were over 2,500 employees. In 1921 this number was reduced to less than 1,000, in 1922 there were about 300*2242 persons employed and in 1923 all employees were dismissed. A. O. Eberhart was employed by H. W. Dubiske & Co. in 1918. His duties were to obtain permits for selling securities in the various States. He remained with the company until 1923.
The gross volumes of sales completed by H. W. Dubiske & Co. were as follows:
| 1917, approximately | $700,000 |
| 1918, approximately | 3,000,000 |
| 1919, more than | 9,000,000 |
| 1920, more than | 19,000,000 |
| 1921, approximately | 10,000,000 |
| 1922, approximately | 3,000,000 |
| 1923, approximately | 1,500,000 |
H. W. Dubiske & Co. was compensated for its services in selling these stock issues by the issuing corporations or the owners for whom they had sold the stock. Sometimes brokers and individual representatives assisted in carrying out the negotiations which would be favorable to H. W. Dubiske & Co. and would pay them for such services.
From the date of organization of H. W. Dubiske & Co. up to July, 1919, the officers, executives and attorneys of the company were paid directly by check of the company. After that time they were compensated at intervals by notes of H. W. Dubiske & Co. referred to as "escrow notes."
From the inception*2243 of the company until July, 1919, H. W. Dubiske & Co. was paid a direct commission for the sale of all stocks and its expenses were borne by the corporation issuing the stock.
After the expansion campaign of H. W. Dubiske & Co. was instituted, offices were established in various States, some of which States restricted the commission to be paid on the sale of securities. In most States the maximum commission allowed by law was 15 per cent, which was considerably less than had been previously obtained *857 by H. W. Dubiske & Co. H. W. Dubiske & Co. could not compensate its executives and salesmen and leave a reasonable profit for the corporation on a maximum commission of 15 per cent. Many of these States objected to the expens involved in selling the stock on the plan employed by H. W. Dubiske & Co. and it was feared by the company that if the books of H. W. Dubiske & Co. were examined by the officials of those States, the large expenditures shown would result in the issuance of few permits to sell stock in the various States. In order that the books might not reflect such large expenses a plan was devised whereby "escrow notes" were employed. The books of the company*2244 would then show notes receivable and payable but would not show that they were actually used for the purpose of compensating officials of the company and salesmen.
H. W. Dubiske & Co. found that the best way to market issues of preferred stock was in conjunction with a like number of shares of common stock. In most cases the 15 per cent limitation did not apply to the sales of common stock obtained from individual owners of the stock. Arrangement was usually made by H. W. Dubiske & Co. to purchase from the individual owners their common stock. The cost of such common stock was determined, including all expenses such as compensation of executives, attorneys and other expenses that could not be paid out of the allowed 15 per cent, and notes covering the entire cost were executed several weeks in advance of the beginning of the stock sales campaign. These notes were made by H. W. Dubiske & Co. to "ourselves" at the expiration of a stated time varying from 30 days to 6 months after date. These notes were indorsed by H. W. Dubiske & Co. and were placed in a safe-deposit box at the Harris Safety Deposit Co. This box was rented in the name of H. W. Dubiske & Co. and at least one*2245 officer other than the petitioner had access to it at all times. None of the notes bore serial numbers or were otherwise identified with any particular stock issues. If they were not paid at maturity they were renewed. The petitioner had personal charge of the notes and determined when these notes were to be delivered to executives and attorneys of the company as compensation. None of the notes were ever delivered and paid until the stock contracted to be sold was actually subscribed and paid for.
Up until July, 1919, the petitioner was compensated weekly by the company in the form of a commission because he was, up to that time, also director of sales. After July, 1919, he received compensation at intervals in the form of these notes of the corporation.
During the year 1921 the company's business required that a new department be organized to investigate new stock issues to be sold and to maintain closer contract with the corporations that had been *858 previously financed. The attorney for H. W. Dubiske & Co. advised that such service department would render better service if it were an organization separate from H. W. Dubiske & Co. The result was that the Industrial*2246 Credits Corporation was formed in the spring or summer of 1921. The petitioner owned about two-thirds of its stock and A. O. Eberhart owned about one-third of the stock. There were also some small stockholders.
J. M. Hoyt and C. B. Little interests, of which the Central Bond & Mortgage Co. was a part, were stock and bond brokers who had a number of clients seeking additional finances. The Dayton Rubber Manufacture Co. was one of such clients. Representatives of Hoyt and Little approached H. W. Dubiske & Co. with a view to interesting that company in selling an issue of the stock of the Dayton Rubber Manufacturing Co.
H. W. Dubiske & Co. made an investigation, decided that the Dayton Rubber Manufacturing Co. was a desirable company to finance, and then entered into a contract with that company for the sale of its stock. A contract was also entered into between H. W. Dubiske & Co. and the Hoyt and Little interests, whereby the latter were to be compensated for their services by the payment to them of certain stock and money. By the terms of this agreement Hoyt and Little were precluded from selling any of the stock of the Dayton Rubber Manufacturing Co. to which they were*2247 entitled by the contract.
On August 10, 1920, Hoyt and Little entered into the following agreement for the sale of the stock and commissions to which they were entitled under the contract with H. W. Dubiske & Co.:
This agreement made and entered into this tenth day of August, 1920, by and between C. B. Little and J. M Hoyt parties of the first part, and H. W. Dubiske and A. O. Eberhart, parties of the second part, WITNESSETH:
That said first parties in consideration of the sum of One Hundred Fifty Thousand Dollars, to be paid as hereinafter stated do by these presents sell, assign, transfer and set over to said second parties all their right, title and interest in and to the following:
1. 1102 shares of the Class A Common stock of the Dayton Rubber Manufacturing Company as evidenced by stock certificates numbered C5320, C5321, C5322.
2. 13,357 shares of the Class B Common Stock of the Dayton Rubber Manufacturing Company as evidenced by stock certificates numbered C37, C43, C44 and C45, said Class B Common Stock certificates being subject to an escrow agreement which second parties accept and assume.
3. All the right, title and interest of the said first parties in*2248 and to certain proceeds from the sale of all the Class A Common stock of the Dayton Rubber Manufacturing Company sold by H. W. Dubiske & Company, said proceeds amounting in all to $95,000 and payable as collected from the proceeds of such sales.
4. All the right, title and interest of said first parties in and to the proposal of John A. MacMillan and C. E. Hooven dated December 3rd, 1919, and accepted *859 by said first parties and H. W. Dubiske & Company, together with the agreement between said J. A. MacMillan, C. E. Hooven said first parties, and G. W. Dubiske & Company, dated December 3, 1919, and the statement, marked "Exhibit A" thereto attached, as well as the Declaration of Trust executed by said J. A. MacMillan and C. E. Hooven in accordance with said agreement and bearing same date.
It is the express intent and purpose of this agreement to convey to said second parties all the right, title and interest in and to the profits now derived and hereafter to be derived from the entire refinancing operations of the Dayton Rubber Manufacturing Company entered into on or about December 3, 1919.
The payments under this contract are to be made as follows:
$75,000*2249 at the time of the execution of this agreement, the receipt whereof is hereby acknowledged, $12,500 on or before fifteen days thereafter, $12,500 on or before thirty days thereafter, $20,000 on or before sixty days thereafter, and the remaining $30,000 on or before ninety days thereafter, said future payments to be evidenced by promissory notes executed by said second parties to said first parties bearing even date herewith and interest at the rate of 7% per annum.
It is also agreed that said second parties hereby release and forever discharge said first parties and the Central Bond & Mortgage Company, a corporation of Chicago, Illinois, from any and all claims, said second parties and H. W. Dubiske & Company now have or hereafter may have against said first parties and against said Central Bond and Mortgage Company by reason of the execution of any and all agreements herein mentioned and said second parties hereby also agree to discharge any and all of the obligations of said first parties to be by them performed thereunder.
This agreement shall be binding on the heirs, executors, administrators and assigns of the respective parties hereto.
(Signed) C. B. LITTLE,
J. M. *2250 HOYT,
First Parties.
H. W. DUBISKE, A. I. EBERHART,Second Parties.
Witnesses as to all signatures:
(Signed) B. F. CORSON,
K. B. MULHALL.APPROVED:
(Signed) H. W. DUBISKE & CO.
BY. H. W. DUBISKE,President
Eberhart and the petitioner, in entering into this transaction, were acting in their individual capacities.
The contract was carried out in accordance with its terms and the stock referred to was duly conveyed. The petitioner received it first and sent it to Dayton to be transferred, one-half to him and one-half to Eberhart. Each paid $75,000 of the principal amount involved in the contract. The petitioner paid his $75,000 out of an amount of $150,000 received by him from H. W. Dubiske & Co. After Eberhart received his stock he turned over approximately *860 one-half of it to the Industrial Credits Corporation and received a receipt from that company dated July 14, 1921.
The respondent added to the petitioner's reported net income for the year 1920 an amount of $93,665.13 on account of the Hoyt and Little deal. The deficiency letter contains the following statement:
(c) This office determines that a certain amount of the money*2251 (shown below) constitutes taxable income to you.
| Total payment to Hoyt and Little | $150,000.00 | |
| Less: Commission | 95,000.00 | |
| Purchase price of stock (1102 shares) | 55,000.00 | |
| Dubiske's half of commission | 47,500.00 | |
| Add: | ||
| Loss from sale of stock 551 shares sold for | $18,665.13 | |
| Cost of stock, 1/2 of above | 27,500.00 | |
| 8,834.87 | ||
| Total | 56,334.87 | |
| Amt. included as income | 150,000.00 | |
| Less amt. allowed as deduction | 56,334.87 | |
| Restored to income | 93,665.13 |
During the year 1920, H. W. Dubiske & Co. paid an amount of $17,120 in cash for class A common stock of the Dayton Rubber Manufacturing Co. The books of the company did not show to whom this payment was made.
The respondent, in the deficiency letter, added to net income shown in the petitioner's brief of July 10, 1926, the amount of $17,120. The explanation given in the deficiency letter was as follows: "(d) Paymnet from H. W. Dubiske & Company for Class A Dayton Stock in excess of payment of 'escrow notes,' $17,120."
The books of H. W. Dubiske & Co. for the year 1920 contain entries setting up 6 notes dated May 20, in the amount of $75,189.38, to partially cover cost of 2,725 shares of*2252 class A common stock of the Dayton Rubber Manufacturing Co. at $33,87 1/2 per share.
Schedule D of the petitioner's income-tax return for the year 1920 showed that petitioner had sold to H. W. Dubiske & Co. 2,725 shares of Dayton Rubber Manufacturing Co. stock of $92,309.38, which he had purchased for $76,809.38, resulting in a profit of $15,500. Schedule D also shows that petitioner sold to H. W. Dubiske & Co. 886 shares of Dayton Rubber Manufacturing Co. stock for $10,658.45, which had cost him $8,220, resulting in a profit of $2,428.45.
For the year 1921 the respondent added to the reported income of the petitioner an amount of $104,900 as payment by H. W. Dubiske & Co. of its own notes which petitioner held. The respondent, in the deficiency letter, states with regard to this item:
*861 Inasmuch as the records of H. W. Dubiske & Company show that the notes received by you were paid, the amount of the notes has been considered as taxable income to you in 1921.
The books of the petitioner showed that at the end of 1921 there remained unpaid "escrow notes" in the amount of $104,900. Of this total of notes, $4,900 were paid in 1922, while $100,000 have never been*2253 paid.
In the fall of 1920 the Metropolitan 5 to 50 Cent Stores, Inc. became quite embarrassed financially. They had sustained a loss of about $500,000 in a year and in order to save the company it was necessary that money be advanced to them. The petitioner and Eberhart believed that if the Metropolitan 5 to 50 Cent Stores, Inc. failed it would have adversely affected the business of H. W. Dubiske & Co., so each of them in his individual capacity made loans to that company. Eberhart advanced $70,000 in the fall of 1920 and $26,000 in the year 1921. Due to the fact that Eberhart was traveling much of the time, he sometimes made checks payable to the petitioner, who turned them over to the Metropolitan 5 to 50 Cent Stores, Inc. The petitioner advanced a great deal more money to the Metropolitan 5 to 50 Cent Stores, Inc. than Eberhart advanced. His advances were made from an amount of $350,000 which he received from H. W. Dubiske & Co. Each of them received from the Metropolitan 5 to 50 Cent Stores, Inc. promissory notes payable in three months. For a time interest was paid by the Metropolitan 5 to 50 Cent Stores, Inc. on these notes, but later, when the Metropolitan 5 to 50*2254 Cent Stores, Inc. was unable to pay interest, it gave additional notes covering the interest due petitioner and Eberhart. The notes were carried by the petitioner and Eberhart until the Metropolitan Stores issued bonds to replace them.
The respondent added to the petitioner's reported net income for the year 1920, an amount of $350,000, holding that this amount represented loans personally made by the petitioner to the Metropolitan 5 to 50 Cent Stores, Inc. from monies received by him from proceeds of "escrow" notes collected by him during 1920.
During the years 1920 and 1921, Stevens-Duryea, Inc. was also in need of additional money and the petitioner and Eberhart, in order to prevent the failure of that company, made loans to it in their individual capacities during these years.
During the year 1920 H. W. Dubiske & Co. turned over to the petitioner $25,000 and during the year 1921 it turned over to petitioner $75,000. On December 3, 1920, petitioner, by his personal check, paid Stevens-Duryea, Inc. $24,703.33, and on October 5, 1921, he paid to that company, by his personal check, $100,000. During the two years Eberhart personally advanced to Stevens -Duryea, Inc. about*2255 $124,000.
*862 The respondent added to petitioner's income for the year 1920, an amount of $25,000, and in the year 1921, an amount of $75,000, holding that these were amounts which petitioner personally loaned to Stevens-Duryea, Inc. from monies received by him as proceeds of "escrow notes" collected by him during 1920.
The petitioner's income-tax return for the year 1921 shows "interest on bank deposits, notes, mortgages and corporation bonds, $33,805.12."
The work sheet of the revenue agent which was taken from the work sheet of M. D. Block, an accountant, who at one time audited the books of H. W. Dubiske & Co., showed exactly the same amount of interest received by the petitioner. The details of the interest received were shown in the work sheet and included interest on the following notes:
| Stevens-Duryea notes | $6,520.61 |
| Automotive notes | 2,665.11 |
| Metropolitan notes | 9,262.71 |
OPINION.
SIEFKIN: 1 The issues involved in this proceeding are primarily questions of fact. Numerous witnesses testified on behalf of the petitioner and the respondent and the testimony to a large extent is directly in conflict. After a careful consideration of all*2256 the testimony before us we have found the facts as set forth hereinbefore.
The respondent added to the petitioner's reported net income for the year 1920 an amount of $350,000, holding that this amount represented loans personally made by the petitioner to the Metropolitan 5 to 50 Cent Stores, Inc. from monies received by him from the proceeds of "escrow notes" collected by him during 1920.
For the same reason he added to the petitioner's reported income for that year the amount of $25,000 which was loaned to Stevens-Duryea, Inc. For the same reason he added to the petitioner's reported income for the year 1921 an amount of $75,000 which was loaned to Stevens-Duryea, Inc.
Our view of the evidence is that the transactions with these companies were entered into by the petitioner and A. O. Eberhart in their individual capacities. From a consideration of all the evidence in the case we must conclude that the amounts which the petitioner received from H. W. Dubiske & Co. were income to him and the respondent's determination with regard to these items in the years 1920 and 1921 will be upheld.
The petitioner*2257 admits that $19,500 of the $350,000 item was income to him but says that it was income in the year 1921. Since we have *863 held that the respondent did not err in including the amount of $350,000 in petitioner's income for the year 1920, it follows that he did not err in refusing to put the amount of $19,500 in income of 1921 rather than 1920.
The respondent also added to the petitioner's reported net income for the year 1920 an amount of $93,665.13 on account of the Hoyt and Little deal. The evidence discloses that the petitioner and A. O. Eberhart, in their individual capacities, each paid Hoyt and Little $75,000 for certain stock and commissions which were owing to Hoyt and Little from H. W. Dubiske & Co. The money which the petitioner paid to Hoyt and Little was from an amount of $150,000 which he had received from H. W. Dubiske & Co. The respondent has included in the petitioner's income the full amount of $150,000, but has allowed as deductions against it one-half of the commission and a certain loss on a sale of stock by the petitioner. The basis for the respondent's action is found in his determination that the transaction was a personal one by Dubiske and Eberhart. *2258 We conclude from the evidence that it was such a transaction, in which each was equally interested. Only one-half of the sum of $150,000, therefore, is taxable to the petitioner. The respondent's inclusion of $93,665.13 in petitioner's income must be reduced by $75,000 taxable to Eberhart.
During the year 1920 H. W. Dubiske & Co. paid an amount of $17,120 in cash for class A common stock of the Dayton Rubber Manufacturing Co. The books of the company did not show to whom this payment was made. They show that a total of $75,189.38 was paid in 1920 in notes as a partial payment for 2,725 shares of class A common stock of the Dayton Rubber Manufacturing Co. at $33.87 1/2 per share. The total purchase price of 2,725 shares of class A common stock at $33,87 1/2 per share would be $92,309.38. The difference between this figure and the total amount of the notes paid would be $17,120, an amount which is exactly the same as the item in question here. As pointed out in our findings of fact, the petitioner sold 2,725 shares of stock of the Dayton Rubber Manufacturing Co. to H. W. Dubiske & Co. for $92,309.38. From this we conclude that the payment by H. W. Dubiske & Co. of notes in*2259 the amount of $75,189.38 and cash in the amount of $17,120 was made to the petitioner. The petitioner, in his return for the year 1920, reported a profit of $15,500 upon this sale of stock to H. W. Dubiske & Co. for $92,309.38. It is our opinion that the amount of $17,120 was received by the petitioner, but we are unable to determine whether or not the respondent has already taken this into account in his determination. The deficiency letter shows that there was added to the net income shown in the petitioner's brief of July 10, 1926, the amount of $17,120 described as follows: "(d) Payment *864 from H. W. Dubiske & Co. for Class A Dayton Stock in excess of payment of 'escrow notes' $17,120."
Upon the redetermination under Rule 50, the amount of $17,120 will be included in the petitioner's income if it has not already been taken into account by the respondent.
For the year 1921 the respondent added to the reported income of petitioner an amount of $104,900 as payment by H. W. Dubiske & Co. of its own notes which petitioner held. The evidence discloses that $4,900 of these notes were paid in the year 1922, while the balance of $100,000 have not been paid. It follows*2260 that the respondent erred in including the amount of $104,900 in income of the petitioner for the year 1921.
At the hearing the respondent was granted leave to amend his answer to affirmatively allege that there was additional income to the petitioner in the year 1920 of $25,000 and in the year 1921 of $77,334.89, representing the amounts which petitioner personally loaned to the U.S. Automotive Corporation. The only evidence that we have as to this item is the statement of the petitioner that the loans to the U.S. Automotive Corporation were made in the same manner as the other loans herein involved, and certain work sheets of the revenue agent who made the investigation. The work sheets of the revenue agent were taken from the work sheets of an accountant who at one time audited the books of H. W. Dubiske & Co., but it was not clearly shown that this accountant prepared the returns of the petitioner for the years in question. The burden of proof as to this item is upon the respondent and he has failed to prove to our satisfaction that these amounts were income to the petitioner in the year alleged.
The petitioner alleges that respondent erred in asserting a 50 per cent penalty*2261 against the petitioner for each of the years 1920 and 1921.
Section 250(b) of the Revenue Act of 1918 provides in part:
If the understatement is false or fraudulent with intent to evade the tax, then, in lieu of the penalty provided by section 3176 of the Revised Statutes, as amended, for false or fraudulent returns willfully made, but in addition to other penalties provided by law for false or fraudulent returns, there shall be added as part of the tax 50 per centum of the amount of the deficiency.
Section 250(b) of the Revenue Act of 1921 provides in part:
* * * If any part of the deficiency is due to fraud with intent to evade tax, then, in lieu of the penalty provided by section 3176 of the Revised Statutes, as amended, for false or fraudulent returns willfully made, but in addition to other penalties provided by law for false or fraudulent returns, there shall be added as part of the tax 50 per centum of the total amount of the deficiency in tax. * * *
We have held that the petitioner, in his returns for the years 1920 and 1921, understated his income.
*865 The petitioner testified that in paying money to Stevens-Duryea, Inc., the Metropolitan 5 to 50 Cent*2262 Stores, Inc., and Hoyt and Little, he was acting on behalf of H. W. Dubiske & Co., the corporation, and that he used money which was advanced to him by H. W. Dubiske & Co. for the specific purpose of making those payments.
A. O. Eberhart, who, during the years in controversy, was employed by H. W. Dubiske & Co., and who was a party to the transactions in question with Stevens-Duryea, Inc., the Metropolitan 5 to 50 Cent Stores, Inc., and Hoyt and Little, testified that these were transactions by himself and the petitioner personally.
After considering all the testimony in the case we must conclude that the payments by H. W. Dubiske & Co. to the petitioner were income to him, that he knew they were income to him, and that, in failing to report them in his income-tax returns for the years 1920 and 1921, he fraudulently misrepresented his true income in his returns for those years, with intent to evade taxes.
The respondent's assertion of the 50 per cent fraud penalty will be upheld, but such penalties should be adjusted in accordance with the adjustments of the deficiencies made necessary by our findings of fact and this decision.
Reviewed by the Board.
Judgment will*2263 be entered under Rule 50.
MURDOCK, dissenting: The above report sets forth that the petitioner has alleged:
The Commissioner erred in his determination by including as additional taxable income to this petitioner for the calendar year 1920, an item of $17,120.00 representing direct payment from H. W. Dubiske & Company for Class A Common Stock of the Dayton Rubber Manufacturing Company to unknown person or persons and in holding that in the absence of an identified recipient of such payment, it constituted income to this petitioner.
Later, in the opinion, in commenting upon this allegation of error, the statement is made:
It is our opinion that the amount of $17,120.00 was received by the petitioner but we are unable to determine whether or not the respondent has already taken this into account in his determination.
In view of the allegation that the respondent erred in including the amount in the petitioner's income, our duty was completely performed when we decided that the amount was received by the petitioner. Our judgment should then have been for the respondent, and we were going beyond anything required of the pleadings in the case when we troubled*2264 ourselves as to whether or not the respondent had included the amount in the petitioner's income or as to *866 whether or not he had taken the amount into account in his determination. If he had not, it was up to his counsel to request at or before the hearing that the deficiency be increased because he had not taken the amount into account. He did not do this.
The opinion in this same connection contains a statement "Upon the redetermination under Rule 50 the amount of $17,120 will be included in the petitioner's income if it has not already been taken into account by the respondent." In my opinion this is not a proper use of a redetermination under Rule 50 and is entirely unnecessary in this case as herein pointed out.
Footnotes
1. This decision was prepared during Mr. Siefkin's term of office. ↩