*660 Upon the record, held, the Commissioner has not sustained his burden of proof to show that petitioner filed a false or fraudulent return for 1928 with intent to evade tax; held, further, since, the deficiency notice for that year was not mailed to petitioner within two years after the return was filed, the deficiency, if any, is barred by the statute of limitations.
*764 Petitioner contests the determination by respondent of a deficiency of $35,053.88 income tax and $17,526.94 fraud penalty for the calendar *765 year 1928. The basis for the deficiency in tax and penalty is the alleged failure on the part of petitioner to report as income for 1928 the amount of $140,547.13 as part of a fee which petitioner and an associate firm of lawyers received for prosecuting a suit in the Court of Claims in the case of Estate of Ambrose Monell, Deceased, v.United States of America. The Commissioner alleges that petitioner should have reported his entire part of this fee as having been received*661 in 1928. Of this fee, petitioner reported $85,000 as income in 1928 and $90,251.90 as income received in 1929 and paid the tax thereon, but $50,295.23 of the amount received by petitioner was not reported in any year. Petitioner alleges that this latter amount should have been reported as income by the law firm which was associated with him in the case. Petitioner denies fraud, alleges that he properly reported his income in the years in which it was received, and further pleads the statute of limitations as a bar to any deficiency for 1928.
FINDINGS OF FACT.
Petitioner is an individual, residing in Mineola, New York. He is a lawyer by profession, having been admitted to the New York bar in 1904.
On March 15, 1929, petitioner duly filed his individual income tax return for the calendar year 1928 with the collector of internal revenue for the first district of New York. This return was made upon the basis of cash receipts and disbursements. On July 23, 1935, the respondent, in accordance with section 272(a) of the Revenue Act of 1928, as amended by section 501 of the Revenue Act of 1934, sent petitioner a deficiency notice advising him that the determination of his income*662 tax liability for the year 1928 disclosed a deficiency of $35,053.88 in income tax, and $17,526.94 as a fraud penalty under section 293(b) of the Revenue Act of 1928.
In a statement attached to the deficiency notice the respondent determined petitioner's income for 1928 to be $232,758.87 and set it up in tabulated form as follows:
| Net income reported on return | $92,211.74 |
| Add: Fees received from estate of | 140,547.13 |
| Ambrose Monell, Deceased, Adjusted net income | $232,758.87 |
On or about March 1, 1926, petitioner had a talk with Paul Bonynge, of the firm of Bonynge & Barker, relative to the possible employment of petitioner by one of their clients, namely, Maude M. Monell, executrix of the estate of Ambrose Monell, deceased. Ambrose Monell died May 2, 1921, leaving an estate of over five million *766 dollars. His executrix had filed a Federal estate tax return and had paid a tax of over $600,000. Petitioner, if employed, was to analyze this return with a view to determining whether the tax paid was or was not in excess of the amount which should have been legally assessed and paid. As a result of petitioner's interview with Bonynge, petitioner and the*663 executrix entered into an agreement, stated in letter form, as follows:
March 17, 1926.
Arthur S. Barnes, Esq.,
111 Broadway,
New York City, N.Y.
Dear Sir:
As Executrix of the Estate of Ambrose Monell I hereby employ you to analyze the Federal Inheritance Tax Return of the above named Estate for the purpose of determining whether the tax levied, assessed and paid was in excess of the amount which should have been legally assessed and paid.
And you are hereby employed to prepare, present and prosecute a claim for refund of any amounts paid, for any cause, which may be in excess of the amounts which should have been legally paid.
This employment is upon the express agreement however, that you are to be paid no sums, or money, whatsoever unless the Estate receives a refund on account of said tax, and in the event of a refund being received by the Estate, then you are to receive an amount equal to one-half of any such amounts so refunded, the one-half to be computed upon the gross amount received, i.e., including interest as well as principal.
Any amounts accruing, or becoming due to you, as herein set forth, are to be payable within five (5) days after the check*664 from the Government is received.
ESTATE OF AMBROSE MONELL
BY - MAUDE M. MONELL
Executrix.
In less than two months after obtaining this contract of employment petitioner was successful in obtaining a refund of over $44,000, due to the exclusion of certain insurance from the decedent's gross estate. For obtaining such refund petitioner received a fee from the estate of $22,115.97, one third of which, or $7,371.99, he paid over to Bonynge by check dated April 26, 1926.
Later, in the summer of 1926, petitioner was successful in obtaining a second refund of over $134,000 due to the excessive valuation of certain securities included in the gross estate. For obtaining the second refund petitioner received a fee from the estate of $67,141.26, one third of which, or $22,380.42, he paid over to Bonynge by check dated August 18, 1926.
Thereafter, petitioner filed a third claim for refund on behalf of the estate for the entire balance of the taxes on the ground that the decedent died from a disease contracted while in the military forces of the United States and that, therefore, under section 401 of the Revenue Act of 1918 the estate taxes imposed by the laws then in effect*665 did not apply to the transfer of the decedent's net estate. This *767 claim was denied and suit was brought in the Court of Claims. On February 20, 1928, the Court of Claims ordered "Judgment for the plaintiff for $524,598.90, with interest thereon at the rate of 6 per cent per annum until date of judgment." See .
On June 20, 1928, Maude M. Monell drew a check on the Bankers Trust Co. for $351,094.26, payable to the order of "Fulton Trust Company for a/c Arthur S. Barnes." Petitioner learned that the check was being held in the office of Bonynge & Barker, the attorneys who were associated with him in the suit. He went to the office and was informed that Bonynge, who was then in Europe, left instructions not to deliver the check for $351,094.26 to petitioner unless he executed an assignment of one half of the amount to Bonynge & Barker, as their share of the fee. This petitioner refused to do on the ground that it was his understanding that the agreement between Bonynge & Barker and himself was for a division of one third and two thirds, respectively; that such had been the percentage division on prior refunds; *666 and that there had been no change in the agreement to warrant a departure in the division of this particular fee.
Petitioner then engaged Townsend Morgan to bring suit against Maude M. Monell, and paid Morgan $6,000 for his services. Before the suit came on for trial, the parties, petitioner and Bonynge & Barker, agreed to arbitrate the matter before Robert Van Iderstine. Van Iderstine had been a friend and client of both parties. The arbitration hearing was held Saturday, October 27, 1928. On the following Monday, Van Iderstine signed the following:
MEMORANDUM OF SETTLEMENT AGREEMENT BETWEEN BONYNGE & BABKER AND ARTHUR S. BARNES.
The parties not being able to agree as to a division of the Monell exemption claim fee, did place the decision of the same in the hands of Robert Van Iderstine, and as a condition precedent, did consent that the fund be placed in his hands.
The following conclusion is reached and agreed to by the parties.
The fee is to be equally divided between the parties.
That is, Arthur S. Barnes is to receive the sum of $175,547.13, and Bonynge & Barker are to receive the sum of $175,547.13.
However, as such amounts do not fairly represent an*667 even division of the fee due to the fact that said Barnes has borne all of the expenses directly incident to the preparation, presentation and prosecution of the exemption claim, and also, inasmuch as Barnes represents that he has for upwards of nine years last past, maintained not only his office in New York City but also headquarters in Washington, D.C., spending the major part of his time there (thereby incurring substantial amounts of expense in excess of any amounts which could be deducted on account of his income tax) which has enabled said Barnes to become highly specialized in Federal Government Departmental procedure, it is therefore only fair that Bonynge & Barker (participating equally in the fee) should participate equally in the expense. Bonynge & Barker should, therefore, reimburse said Barnes the proportionate amount of said capital expenditure.
*768 The amount of said reimbursement is fixed at $50,000.00 and said Bonynge & Barker are to pay said Barnes as a reimbursement to his expenditure said amount, and without claiming said amount, so paid, as a deduction on account of income tax, either Federal or State.
[Signed] ROBERT VAN IDERSTINE.
Prior to*668 the arbitration hearing petitioner addressed a communication dated October 27, 1928, to the Fulton Trust Co., the contents of which are as follows:
I hereby assign and request you to transfer to the order of Robert Van Iderstine the sum of $351,094.26, represented by a check for that amount payable to you drawn by Mrs. Maude M. Monell, to be deposited simultaneously herewith.
This communication was acknowledged on October 30, 1928, before a notary public. The check for $351,094.26 was not delivered to Van Iderstine until several days after the arbitration decision. Bonynge was incensed at the award of the arbitrator and threatened to sue to upset it. But in a few days he yielded to the judgment of his partner, Barker, who had agreed to the arbitration, and decided to accept the award.
After the arbitration decision on October 29, 1928, petitioner asked Van Iderstine if he could let him have his money and Van Iderstine replied that he could not, but that petitioner should call him at the end of the week. On Friday, November 2, 1928, petitioner called Van Iderstine on the telephone and asked if he could have his money and was again told that he could not. Petitioner then*669 said "I need money; let me have $75,000; you can do that with no more work than drawing a check." Van Iderstine replied that he would let him have it; that petitioner should come and get it; and that he would leave it with his secretary. On the same day, petitioner went to the office and was given a check for $75,000. While at the office Van Iderstine said to petitioner, "By the way, what will I do with this $50,000 coming from Bonynge & Barker to you?" Petitioner said, "Why not buy government bonds with it", to which Van Iderstine replied "That might be a good idea", and went on out.
On or about November 14, 1928, petitioner received a letter from Van Iderstine, the body of which was as follows:
Pursuant to your instructions I have invested in
| Price | Amount | Com'n | Net Amount | |
| 50 M U.S. Treasury 3 7/8% | 99 29/32 | $49953.13 | $15.62 | $49968.75 |
| March 15, 1929 | ||||
| Int. M & S 15 (2 months) | 322.92 | |||
| $50291.67 |
I have placed these certificates in the Custody Department of the Fulton Trust Company in my name, and I shall leave them there subject to your further instructions.
*769 On either November 26 or November 27, 1928, petitioner*670 again called Van Iderstine on the telephone and asked if it would not be possible to "settle" with him, and Van Iderstine said, "No, it is a short week, and I have lots to do."
The next and last time petitioner talked to Van Iderstine during 1928 was about a week before Christmas. Petitioner called him on the telephone and again asked him if he would not "settle" with him, but Van Iderstine said he could not do it. Petitioner then asked if he could have a little money to take him over the holidays and Van Iderstine inquired if $10,000 would be enough. Petitioner said it would and Van Iderstine said he would send him a check for that amount, which he did and which petitioner received during 1928.
On January 8, 1929, petitioner called Van Iderstine on the telephone and asked if he would "settle" with him, and Van Iderstine told him "yes" and for him to come to Van Iderstine's office. When petitioner arrived, the secretary handed him a check for $90,251.90 and told him that Van Iderstine had been unexpectedly called away and that it would be impossible to deliver the bonds to petitioner at that time.
On January 18, 1929, petitioner again called Van Iderstine on the telephone*671 and asked him if he could let him have the bonds and settle up the transaction. Van Iderstine said to meet him at the Fulton Trust Co., which petitioner did, and at that time Van Iderstine handed petitioner the Treasury certificates of the par value of $50,000. At or about this time, petitioner also received from Van Iderstine a statement of his account, which was as follows:
| Due A. S. Barnes - 1/2 of | $351,094.26 |
| 175,547.13 | |
| Add $50,000 due from Bonynge & Barker | 50,000.00 |
| $225,547.13 | |
| Paid A. S. Barnes | |
| Nov. 2 - Check | $75,000.00 |
| 15 - Liberty Bonds | 50,295.23 |
| Dec. 14 - Check | 10,000.00 |
| Jan. 8 - Check to balance | 90,251.90 |
| $225,547.13 |
After the arbitration hearing and before the close of the year Van Iderstine paid Bonynge & Barker by three separate checks the total amount of $125,547.13 as representing their share of the arbitration award.
Van Iderstine received no compensation for his services in arbitrating except about $500 interest, which was credited to Van Iderstine's account at the bank while the fund in dispute was there deposited.
*770 Petitioner reported as income in his 1928 and 1929 income tax returns fees from the Monell estate*672 in the amounts of $85,000 and $90,251.90, respectively. He did not report as income in any year the $50,000 Treasury certificates received by him because of that clause in the arbitration award which reads as follows: "The amount of said reimbursement is fixed at $50,000 and said Bonynge & Barker are to pay said Barnes as a reimbursement to his expenditures said amount and without claiming said amount so paid as a deduction on account of income tax; either Federal or State." Bonynge & Barker did not report as income in any year that portion of the total fee amounting to $50,000 which was paid to petitioner under the award as a so-called capital reimbursement.
The respondent determined that petitioner constructively received in 1928 the $50,295.23 invested in Treasury certificates and the $90,251.90 paid him by check on January 8, 1929; that petitioner should have reported both of these amounts in his income tax return for 1928 in addition to the $85,000 which he did report; and that because of his failure to report these two items his return for 1928 was a false or fraudulent return with intent to evade tax.
Petitioner did not file a false or fraudulent return for 1928 with*673 intent to evade tax.
OPINION.
BLACK: The principal question in this proceeding is whether petitioner filed a false or fraudulent return for 1928 with intent to evade tax. If this question is decided in petitioner's favor, we need go no further as any deficiency that might be due would be barred by the statute of limitations for the reason that the exceptions to the statute provided for in section 276 of the Revenue Act of 1928 would not be applicable and the deficiency notice was not mailed to petitioner within the two-year period of limitations provided for in section 275(a) of the same act.
Congress has provided (sec. 601, Revenue Act of 1928) that "in any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax * * * the burden of proof in respect of such issue shall be upon the Commissioner." In , the Circuit Court of Appeals for the Sixth Circuit said that "* * * it is a fundamental rule of judicial procedure that fraud can not be lightly inferred but must be established by clear and convincing proof." In *674 ; affd., , the Board said:
* * * A charge of fraud has always been regarded as a serious matter in the law. Not only is it never presumed, but the ordinary preponderance of evidence is not sufficient to establish such a charge. It must be proved by clear and convincing evidence. ; ; Budd v. Commissioner, supra.
*771 The respondent contends (1) that the entire amount of $225,547.13 awarded to petitioner by the arbitration award was income to petitioner in 1928, $85,000 being actually received and $140,547.13 being constructively received; (2) that petitioner knew that his tax would be greater, due to the surtax brackets, if the full fee were reported in one year than if it were divided between two years, and, knowing this, caused Van Iderstine to delay paying him the full $225,547.13 during 1928; and, (3) that in any event, petitioner's failure to report as income in any year the amount of $50,295.23 invested in Treasury certificates is sufficient evidence to justify a finding of fraud.
*675 We think that, notwithstanding the $50,295.23 item was denominated in the award as a reimbursement to petitioner for capital expenditures, it should have been included in petitioner's gross income for either 1928 or 1929. This case, in some of its features, is like that of . Whether the $50,295.23 item should have been included in income for 1928 as the Commissioner contends, or in 1929 when petitioner actually received the Treasury certificates into which the $50,000 fund had been converted, we need not decide. We do not have the year 1929 before us in this proceeding and therefore have no jurisdiction as to that year, and we are not called upon to decide that it should be included in 1928 income unless we hold that petitioner's income tax return for 1928 was false or fraudulent with intent to evade tax. If it was not, then the statute of limitations has barred any deficiency. The arbitration award specifically stated that "The amount of said reimbursement is fixed at $50,000 and said Bonynge & Barket are to pay to said Barnes as a reimbursement to his expenditure said amount and without claiming said amount, so paid, as a deduction*676 on account of income tax, either Federal or State." We do not think such a statement as above quoted would make the $50,000 item income to Bonynge & Barker (because they never received it); neither do we think it would relieve petitioner from including such a payment in gross income when he received it. We would so hold if we reached that question for decision.
But notwithstanding we would so hold, we can not hold that its omission from income in 1928 establishes that petitioner filed a false and fraudulent return for that year with intent to evade tax. Even if we assume, as the Commissioner contends, that petitioner constructively received the bonds in 1928 and should have included them in his gross income for that year, we can not hold that his failure to include them was due to a fraudulent intent.
Petitioner seems to have believed in good faith that, because of the recitations in the arbitration award, this $50,000 in question would be returned as income by Bonynge & Barker; that they and *772 not he would have to return it and pay tax on it. Petitioner testified that he did not know until 1934 that Bonynge and Barker had not returned the $50,000 in question as*677 a part of their income. In this state of facts we can not find that petitioner's omission of this $50,000 item from his income tax return for 1928 was due to fraud with intent to evade the tax.
As to the item of $90,251.90, we think there is still less ground for holding that it was fraudulently omitted from petitioner's income tax return for 1928. Cf. This item was not actually received in cash by petitioner until 1929 and, only by holding that it was withheld by Van Iderstine at the connivance of petitioner, as respondent alleges, could we hold that it was income to petitioner and was knowingly omitted from his income tax return for 1928 in order to lessen his income tax for that year.
Van Iderstine was dead at the time of the hearing and did not testify.
There is no evidence whatever that petitioner caused Van Iderstine to delay turning over to him any portion of the Monell fee. In fact, the evidence that was introduced shows that the opposite was true. Petitioner appears to have made every effort within reason to obtain his share of the fee as soon as possible. Petitioner was put on the witness stand by the respondent and testified*678 that from October 29, 1928, until he had actually received his entire fee he continually endeavored to settle with Van Iderstine; that Van Iderstine "always had a reason" why he would not settle but "would not give it to me"; that at no time had he ever asked Van Iderstine not to pay him until after the first of January; that when he filed his return for 1928 he did not know what his income would be for 1929; that the delay in payment was not in any way brought about by himself; that up until January 8, 1929, he did not believe he could get the Treasury certificates simply by calling for them; that when he asked Van Iderstine to "settle" with him, he considered that an indirect request for the delivery of the certificates as well as the balance of the cash; that he knew very little about income taxation; that he never considered himself fit for that type of work as he had no accounting mind; and that he never took an income tax case in his life.
After a careful consideration of all of the evidence, we hold that the respondent has not sustained his burden of showing fraud.
For us to hold that petitioner's income tax return for 1928 was filed falsely or fraudulently with intent*679 to evade tax would have to be based too much on inference. We would have to infer that Van Iderstine, if he were living, would testify in a way which would support respondent's theory of the case. This we may not do.
*773 It is therefore our opinion, and we have so found in our findings of fact, that petitioner did not file a false or fraudulent return for 1928 with intent to evade tax. This finding makes it unnecessary for us to decide whether any part of the $140,547.13 was constructively received by petitioner during the taxable year 1928, for the reason that any deficiency that might be due would be barred by the statute of limitations. Sec. 276(a), Revenue Act of 1928.
Reviewed by the Board.
Decision will be entered for the petitioner.