*1055 A taxpayer, after being allowed a deduction in a prior year for a loss on the sale of stock, learned in a later year that he could recover his loss from the person who had sold the stock to him because of some representation made at that time. He then reacquired the stock in anticipation of the settlement. But before the settlement was actually entered into, he sold the stock and the cause of action to a newly organized, wholly owned corporation. The sale was on the installment basis. He then made the settlement on behalf of the corporation. Held, the gain from the settlement in its entirety at the time of the settlement was not income to the petitioner. His gain was from the sale to the corporation and was correctly reported by him on the installment basis. Held, further, no part of the deficiency was due to fraud with intent to evade tax.
*314 The Commissioner determined a deficiency of $40,813.31 in the petitioner's income tax for 1933, and also determined that an additional 50 percent of the deficiency was due under section 293(b) of*1056 the Revenue Act of 1932. The issues for decision by the Board are (1) whether the petitioner should have reported the profit from the sale of $5,000 shares of stock of the Oakridge Cemetery Corporation, and (2) whether or not any part of the deficiency is due to fraud with intent to evade tax.
FINDINGS OF FACT.
The petitioner is an individual who filed his income tax return for the calendar year 1933 with the collector of internal revenue for the first district of Illinois.
He purchased 5,000 shares of the capital stock of the Oakridge Cemetery Corporation in 1926 from or through Robert D. Lay at a cost of $100,000. The petitioner sold the 5,000 shares of stock on October 30, 1931, to the John Griffiths Investment Trust for $7,500. He repurchased the stock from the John Griffiths Investment Trust on November 16, 1931, for $7,000 and again sold the same stock to the same trust on December 30, 1931, for $7,000. He reported the sales of the stock on his Federal income tax return for 1931 and claimed a deduction of $92,500 on that return as a loss from the sales. The *315 deduction was allowed and the question of his liability for income tax for that year was closed*1057 by an agreement under section 606 of the Revenue Act of 1928.
The petitioner, in the latter part of 1932, received information which led him to believe that Lay had defrauded him in the transaction in 1926 whereby the petitioner had acquired the 5,000 shares of stock of the Oakridge Cemetery Corporation. He consulted Harry Markheim, an attorney, who made an investigation, and attempted to negotiate a settlement. Markheim became convinced, and so informed the petitioner on or before January 9, 1933, that a settlement would be made. Markheim informed the petitioner that in the proposed settlement the stock would be resold to Lay and a release of the cause of action would also be given to Lay, and that for this purpose the ownership of the stock should be again placed in the petitioner so that he would have both the ownership of the stock and the cause of action against Lay. The petitioner then purchased the stock from John Griffiths Investment Trust for $8,000. He made payment to the trust on January 10, 1933, by his personal check for $8,000 and received a certificate for the 5,000 shares of stock of the Oakridge Cemetery Corporation, which certificate was endorsed in blank.
*1058 Markheim at the same time told the petitioner that he might effect a postponement of the time of payment of income taxes on the profit which would result from the settlement and return of the stock to Lay, and he might also limit the amount of the tax, if he would organize an investment company to which he would sell the stock and cause of action on an installment basis, permitting the investment company to make the settlement with Lay. Markheim told the petitioner that he had organized such a corporation for a client under somewhat similar circumstances and the Bureau of Internal Revenue had made no objection to the method used of reporting the income in that case. The petitioner, prior to 1933, had had some thoughts relating to the formation of an investment corporation or association similar to that known as the John Griffiths Investment Trust. He instructed Markheim on January 9, 1933, to form an investment corporation as Markheim had suggested.
G. W. G. Corporation was organized on January 10, 1933, under the laws of Delaware, through the instrumentality of the Corporation Trust Co., with three of Markheim's associates as directors. The petitioner on that same day paid*1059 $1,000 for all of its capital stock and he has ever since held all of that stock. The directors of the corporation on January 10, 1933, approved a proposition made by *316 the petitioner, and to carry out their agreement the following document was executed:
THIS MEMORANDUM OF AGREEMENT, Made this tenth day of January, 1933, between GEORGE W. GRIFFITHS, of Chicago, Illinois, and G. W. G. CORPORATION, a Delaware corporation.
WITNESSETH:
FIRST: Said GEORGE W. GRIFFITHS hereby sells to said G. W. G. CORPORATION Five Thousand (5,000) shares of the capital stock of Oakridge Cemetery Corporation, an Illinois corporation, and assigns to said corporation any rights said GEORGE W. GRIFFITHS may have against Robert D. Lay to require said Robert D. Lay to purchase said stock, and said G. W. G. CORPORATION hereby purchases said Five Thousand (5,000) shares of the capital stock of said Oakridge Cemetery Corporation, and hereby agrees to pay therefor the sum of Eighty-five Thousand Dollars ($85,000.00), and to assume and perform the obligations of said GEORGE W. GRIFFITHS to E. H. Harrison to pay said E. H. Harrison Fifteen Per cent (15%) of the amount of money (after the payment of*1060 all expenses) received on the sale of said stock to said Robert D. Lay, and in consummation of said sale said GEORGE W. GRIFFITHS has, concurrent with the execution hereof, delivered to said corporation, receipt whereof by said corporation is hereby acknowledged, Certificate No. 1003, evidencing Five Thousand (5,000) shares of said stock, standing in the name of John Griffiths Investment Trust, and endorsed by the Trustees of said John Griffiths Investment Trust in blank.
SECOND: Said G. W. G. CORPORATION agrees to pay said sum of Eighty-five Thousand Dollars ($85,000.00) as follows: The sum of One Thousand Dollars ($1,000.00) concurrently with the execution hereof, receipt whereof is hereby acknowledged; the sum of Eleven Hundred Twenty-five Dollars ($1125.00) on January 15, 1933; and the sum of Twenty-one Hundred Twenty-five Dollars ($2125.00) on the fifteenth day of January of each year thereafter, until said entire sum of Eighty-five Thousand Dollars ($85,000.00) is paid.
Said G. W. G. CORPORATION further agrees to pay interest on said deferred installments at the rate of Three Per cent (3%) per annum from the date hereof, payable semi-annually on the fifteenth day of January*1061 and the fifteenth day of July in each year on the full amount of the unpaid deferred installments.
IN WITNESS WHEREOF, the parties have executed this memorandum the day and year first above written.
[Signed] G. W. GRIFFITHS [SEAL]
G. W. G. CORPORATION,By STEPHEN J. ALLIE
ITS President
[Here are attached $25 of United States documentary stamps, each with the date January 10, 1933, written thereon.]
The directors of the G. W. G. Corporation, on January 11, 1933, authorized the sale of the Oakridge Cemetery Corporation stock to Lay for $100,000, and authorized the petitioner "either in his own name or in the name of the corporation" to do whatever might be necessary or desirable to consummate the sale. The Board also authorized the petitioner as treasurer to invest the proceeds of the sale in a manner consistent with the corporate purposes as stated in the charter.
*317 The settlement with Lay was made on January 11, 1933. The petitioner signed and acknowledged an instrument dated January 11, 1933, which recited that, in consideration of the sum of $180,000 paid to him by Lay, he sold and transferred to Lay:
* * * the following stock certificates*1062 and promissory notes duly endorsed, and all my right, title and interest in and to the same:
Certificate No. 22 for Two hundred fifty (250) shares of the common stock of Oakridge Abbey, issued to George W. Griffiths, and endorsed in blank.
Certificate No. 1003 for 5,000 shares of the common stock of Oakridge Cemetery Corporation issued to John Griffiths Investment Trust, and endorsed in blank.
Promissory note of Oakridge Cemetery Corporation for Fourteen thousand dollars ($14,000), dated February 11th, 1929, payable on demand and made payable to George W. Griffiths.
Promissory note of Oakridge Cemetery Corporation for Fourteen hundred dollars ($14,000), dated August 10th, 1932, due on demand and made payable to George W. Griffiths.
The instrument contained a further assignment of another certificate for 4,250 shares of stock of the Oakridge Cemetery Corporation held by a bank as security for bonds. The instrument further recited that, as part consideration for the payment of $180,000, Griffiths, for himself, his heirs, administrators, and assigns, released and discharged Lay from all actions, causes of action, suits, claims, and demands which Griffiths or his assigns*1063 might ever have against Lay.
Markheim received from Lay two checks payable to the petitioner. One was for $80,000, and had to do with the securities mentioned in the agreement other than the stock here in question. The other, for $100,000, was endorsed by the petitioner and deposited on January 12, 1933, in the bank account of the G. W. G. Corporation. The board of directors of the G. W. G. Corporation on January 18, 1933, approved a report made by the petitioner as its treasurer, showing the sale of the stock to Lay for $100,000. The minutes of that meeting stated that the sale had been made pursuant to authority vested in him by the board and he had executed the transaction in his own name. The board also approved the payment of $14,566.08 representing expenses incurred in connection with the sale.
The payments of $1,000 and of $1,125, which the petitioner was to receive from the corporation in January 1933, were received by him in March 1933. The corporation paid him $1,243.13 in December 1933 on account of interest on the unpaid portion of the purchase price.
The G. W. G. Corporation was licensed to do business in the State of Illinois on February 11, 1933, pursuant*1064 to advice from Markheim that, although a license was not necessary for an isolated transaction, the license would be required if the corporation were to continue business in Illinois. The G. W. G. Corporation in 1933 invested in various stocks other than the stock of the Oakridge Cemetery Corporation.
*318 The petitioner, in his income tax return for the year 1933, reported $1,875 under "Other Income, Installment Sale (Exhibit F)." Exhibit F on his return as filed was as follows:
Sale of Personal Property on Installment Basis Held Less Than Two Years
| (1) 5,000 shares Oakridge Cemetery Corporation Common Stock purchased at Cost of | $8,000.00 | |
| (2) Sold on Installment Basis for Gross Price of | $85,000.00 | |
| Less: | ||
| (3) Legal Fees | 2,000.00 | |
| (4) Net Selling Price on Installment Basis | 83,000.00 | |
| (5) Gross Unrealized Profit | $75,000.00 | |
| (6) Amount Received in 1933 | 2,125.00 | |
| (7) Amount to be Reported in 1933 - | ||
| $75,000.00/$85,000.00 X $2,125.00 | 1,875.00 |
Other items reported on the return were dividends on stock of domestic corporations, $76,628.92, which included $20,000 received as dividends from the G. W. G. Corporation; salaries and commissions, *1065 $14,358.99, which included $10,000 received as salary from the G. W. G. Corporation; and interest, $1,436.15. The record does not show whether or not the interest reported included the interest payment of $1,243.13 received by the petitioner from the G. W. G. Corporation.
The Commissioner, in determining the deficiency, increased the income reported on the return by $73,558.92, representing an understatement of profit from the sale of 5,000 shares of Oakridge Cemetery Corporation stock, with the following explanation:
The alleged assignment of this stock to G. W. G. Corporation (organized on the day of the sale January 10, 1933) has been ignored, and the transaction treated as a sale by you, for your own account.
The Commissioner also made other adjustments which are not in controversy.
OPINION.
MURDOCK: It seems desirable to review briefly some past events before discussing the transactions which give rise directly to the issues in this proceeding. Lay originally prevailed upon the petitioner to purchase the 5,000 shares of Oakridge Cemetery Corporation stock for $100,000. Thereafter, the petitioner sold the stock to the John W. Griffiths Investment Trust and sustained*1066 a loss of $92,500. A deduction of that amount was claimed and allowed on his income tax return for 1931. The petitioner learned late in 1932 *319 that, because of something which Lay had done in the first transaction, a part, or all, of the loss might be recovered from Lay. The petitioner repurchased the stock from the John W. Griffiths Investment Trust in 1933 for $8,000. No question whatsoever is raised as to the propriety for income tax purposes of any of the transactions thus far described. Negotiations for the settlement with Lay had progressed to the point where the parties were all ready to close the transaction. The petitioner was then advised by his attorney of a method whereby he might possibly save himself from the payment of some income taxes. The steps taken to minimize the taxes are the ones and the only ones which give rise directly to the issues in this case.
The following steps were all taken upon the advice of the petitioner's counsel. The G. W. G. Corporation was formed. The process of incorporation began on the 9th of January and was completed early on the 10th. Resolutions theretofore prepared in blank were adopted by the corporation. These*1067 authorized the corporation to purchase from the petitioner the stock and the right of action. A contract of sale was executed whereby the G. W. G. Corporation became the legal owner of the stock and the right of action against Lay. The petitioner was authorized to make the settlement with Lay in his own name on behalf of the corporation. The settlement with Lay was completed on January 11 by the petitioner in his own name. The record does not show that Lay or his attorneys were advised of the sale to the corporation. The petitioner deposited to the account of the G. W. G. Corporation the $100,000 which he received from Lay.
The petitioner contends that in the settlement with Lay and in depositing the $100,000, he acted as agent for the G. W. G. Corporation, his undisclosed principal. The Commissioner has ignored the G. W. G. Corporation and has treated the transaction as if the petitioner had never sold the stock to the corporation, but had acted entirely for himself throughout the settlement with Lay. Counsel for the respondent contends before the Board that the G. W. G. Corporation should be ignored. His contention is not supported by any showing that the sale from the*1068 petitioner to the G. W. G. Corporation did not take place or that it was in any respect illegal. He makes no showing that the petitioner acted for himself rather than as agent for the G. W. G. Corporation in concluding the settlement with Lay. He contends that the "mission" of the G. W. G. Corporation was "sinful" and that its intervention was a "nefarious tax evasion scheme", but such statements do not help to decide the case. He relies upon the case of , and upon the case of . Those cases dealt with the reorganization provisions of *320 the statute and are not in point here, where the petitioner seeks to apply none of those provisions.
This is another case involving a wholly owned corporation. It requires careful scrutiny to see if there is any sufficient reason to disregard the corporate entity, which normally under the law must be recognized as a separate taxpayer from the petitioner. It is not fatal in such cases that the corporation was used deliberately to minimize income taxes. Here one taxpayer, the petitioner, made an*1069 actual bona fide sale to another. His income tax liability arises under that transaction rather than as a result of the settlement with Lay. This new corporation continued to exist, as indeed was necessary in order to carry out the installment sale contract. It paid a salary and dividends to the petitioner, which he reported in his income tax return. It paid him interest on the unpaid purchase price, which he may have reported on his income tax return. The Commissioner has not eliminated the salary and interest, as should be done if the separateness of the corporation is to be ignored. The steps taken and the reality of the corporation can not be disregarded. Cf. , reversing ; ; ; ; ; affd., ; *1070 ; ; ; ; ; ; affd., ; ; .
This petitioner had sold and transferred his stock and the claim against Lay before the settlement with Lay had reached the stage where it had any income tax significance. That taxpayer, the G. W. G. Corporation, became entitled to the $100,000 paid by Lay as a settlement. The petitioner was not entitled to the $100,000 and the gain from the transaction can not be taxed to him. He correctly reported on the installment basis his gain for 1933 from the sale to the corporation.
The respondent, to sustain his burden of proof on the fraud issue in this case, relies entirely upon the circumstances of the transaction already discussed. He claims that the use of the corporation is evidence that a part of the deficiency is due to fraud with*1071 intent to evade tax. Since the additional income was not properly included by the Commissioner, it follows that no fraudulent intent can be drawn from the use of the G. W. G. Corporation. But even if the petitioner were to lose on the income issue, nevertheless he would still win on the fraud issue because the record fails to indicate any fraudulent intent on his part. He made no effort to conceal the true facts and *321 circumstances from the Commissioner. He acted upon the advice of counsel and, apparently, in the honest belief that it was proper under the revenue act. The Commissioner must make a stronger showing than he has done in this case to support the charge of fraud.
Reviewed by the Board.
Decision will be entered under Rule 50.
MELLOTT, dissenting: The opinion of the majority holds that on January 10, 1933, there was a sale of the securities by the trust to the petitioner for $8,000, an immediate sale on the installment plan of the same securities by the petitioner to his newly created corporation for $100,000, followed by a sale by the corporation, as an undisclosed principal through petitioner as its agent, to Lay for $100,000. *1072 I can not accept this view.
A substantial portion of the sum paid by Lay was paid because of petitioner's claim against him for fraud. In this connection the testimony of the lawyer who handled the transaction for the petitioner is illuminating. He said:
I told Mr. Griffiths that our rights against Lay consisted of a cause of action involving a breach of trust in the general nature of a tort claim, and that in order to effect the settlement it would be necessary to unite the ownership of the stock and the tort claim, or claim for breach of trust, in the same person. I therefore told him it would be essential for him to reacquire the stock that had been sold to the John Griffiths Investment Trust, and he said he would.
The petitioner testified to the same effect. He stated that the attorney told him "that in order to clean it up I shold buy the stock back from the Investment Trust because of my right of action against Lay, and I believe Lay's attorney wanted it that way because the Investment Trust only had the stock and I had the right of action."
While petitioner assigned to the corporation any rights which he might have against Lay to require him "to purchase said*1073 stock" it is significant that no attempt was made to assign to the corporation his "cause of action involving a breach of trust in the nature of a tort claim, or claim for breach of trust." Perhaps such claim was not assignable under the laws of Illinois. Cf. ; affd., ; ; ; . But even if it were assignable it is significant that Lay was not advised that any assignment had been made and the release was executed by petitioner personally rather than on behalf of the corporation. The release recited that:
* * * as part consideration for the payment to the undersigned by the said ROBERT D. LAY of the said sum of One hundred eighty thousand dollars ($180,000), I, the undersigned, GEORGE W. GRIFFITHS, for myself, my heirs, administrators *322 and assigns, do hereby release and forever discharge the said ROBERT D. LAY, his heirs, executors, administrators, and assigns, from all actions, causes of action, contracts, debts, liabilities, obligations, suits, claims and demands whatsoever*1074 which I, the undersigned ever had, now have, or which I, my heirs, executors, administrators of assigns or any of them, hereafter can, shall or may have for or by reason of any act of omission, cause, matter or thing whatsoever, from the beginning of the World to the date hereof.
The conclusion is inescapable that the major portion of the consideration paid by Lay was for the settlement of the tort action. Under the circumstances I am of the opinion that it constituted income to petitioner. The corporation set up by him was devised merely for the purpose of preventing the amount "paid from vesting even for a second in the man who" was entitled to receive it and the whole transaction is simply an attempt to attribute the fruits "to a different tree from that on which they grew." .
In addition, I am of the opinion that the principle recognized and applied by the court and the Board in connection with the sale of property by the S. A. MacQueen Co. is clearly applicable. See ; affd., *1075 . In that case the corporate owner of real estate had entered into an agreement to convey it to a purchaser for $150,000. The three stockholders of the corporation authorized the conveyance of the property to its president for a lesser sum and he executed a declaration of trust declaring his intention to distribute the profits to the stockholders in proportion to their holdings. The trust was carried out and the profit, being the difference between the sum paid by the president to the corporation and the sum received by him from the sale of the property, was distributed to the stockholders. It was held that substance and not form should control; that although in form there were two sales of the corporate real estate, in substance the transaction was a sale by the corporation through the agency of its president; that the obvious purpose of the procedure was to avoid the payment of tax and, under the facts, that the profit should be taxed to the petitioner.
Under the facts before us, I think finding should be made that although in form there was a sale by the corporation to Lay, in substance the transaction was a sale by the petitioner, through the agency*1076 of the corporation, of securities owned by him, contemporaneous with the settlement by him of his tort action against Lay. "A given result at the end of a straight path is not made a different result because reached by following a devious path." . Cf. ; certiorari denied, .
ARUNDELL, SMITH, TURNER, ARNOLD, and HARRON agree with this dissent.