1930 BTA LEXIS 2498">*2498 1. Evidence fails to establish petitioner's ownership of certain bonds alleged to have been sold in the taxable year for an amount less than cost thereof.
2. Statute of limitations had not run as pleaded in Docket Nos. 16901 and 16902.
18 B.T.A. 1225">*1225 This proceeding seeks a review of the acts of the respondent in his determination of income-tax deficiencies for 1921, in the cases consolidated for hearing a follows:
| Taxpayer | Docket No. | Deficiency |
| B. B. Jones | 16847 | $24,676.16 |
| Elliott L. Jones | 16901 | 2,833.41 |
| Robert L. Jones | 16902 | 1,848.07 |
| Montfort Jones | 22289 | 20,305.57 |
In each of these appeals error is alleged on the part of the respondent in disallowing, as deductions from 1921 income, certain alleged losses claimed to have been sustained by the petitioners in the sale of securities in the taxable year. In the appeals of Robert L. Jones, Docket No. 16902, and Elliott L. Jones, Docket No. 16901, it is further alleged that the respondent was without jurisdiction to make1930 BTA LEXIS 2498">*2499 further assessment because of the running of the statute.
FINDINGS OF FACT.
The petitioners are the sole owners of all of the capital stock of the Bermont Oil Co., a Delaware Corporation, hereinafter called the corporation, which throughout the time here involved they held in the following amounts and proportions:
| Shares | Par value | |
| B. B. Jones | 437 1/2 | $43,750.00 |
| Montfort Jones | 437 1/2 | 43,750.00 |
| E. L. Jones | 78 1/8 | 7,812.50 |
| R. L. Jones | 46 7/8 | 4,687.50 |
18 B.T.A. 1225">*1226 In 1917, the petitioners had combined credits with the corporation of approximately $4,000,000. Sometime during said year the corporation issued its checks in payment for a quantity of Federal and municipal bonds in the total amount of $3,014,505. The totals of such checks the corporation charged against the credits of these petitioners by making debit entries in its books against their respective personal accounts, in amounts proportionate to their stockholdings in the corporation.
On December 31, 1917, the corporation, by book entries, took these securities into its property account under recitals showing a sale thereof as of said date by the petitioners to it, and by corresponding1930 BTA LEXIS 2498">*2500 entries credited the personal account of each of the petitioners with amounts equal to the charges made against them when the securities were purchased. On January 3, 1918, the corporation dropped these securities from its property account by book entries, showing a sale back to the petitioners for the same price recorded in the December transaction which in amounts as there shown, it charged against their respective personal accounts. By similar process and book entries of identical import, the corporation recorded transfers from the petitioners to it; and from it back to them of all of these securities (excepting as to a part of the municipal bonds, hereinafter noted), for the years 1918, 1919, 1920, and 1921.
On December 22, 1920, the petitioner, Montfort Jones, sold $250,000 par value of the municipal bonds involved in these transactions, the cost of which was $246,760.64, to the First National Bank of Oklahoma City for the sum of $212,650.
Early in January, 1921, there was a marked decline in the market prices of securities, similar to these involved, and such prices failed to recover to any appreciable extent during the year. On December 15, 1921, the corporation, according1930 BTA LEXIS 2498">*2501 to book entries, again took into its property account the remainder of these securities at a price, for which it gave credit to the petitioners, as follows:
| Account of First Liberty bonds to credits | Account, Oklahoma City Water Works bonds, credit | |
| B. B. Jones | $990,829.22 | $262,788.75 |
| M. Jones | 990,829.22 | 27,788.75 |
| E. L. Jones | 176,933.79 | 46,926.57 |
| R. L. Jones | 106,150.27 | 28,155.93 |
The amount for which the corporation issued its checks in 1917 was carried forward in all of these transactions between it and the petitioners, except the last, as the selling or cost price of the securities sold; and in each instance the charges or credits made by the 18 B.T.A. 1225">*1227 corporation in its books affecting the individual accounts of the petitioners were fixed at such amounts. These amounts, as shown by the corporation's books of record, which evidence the last transfer of January 3, 1921, from it to the petitioners are shown to be as follows:
| First Liberty bonds | Oklahoma City Water Works bonds | |
| B. B. Jones | $1,042.904.94 | $275,940.08 |
| Montfort Jones | 1,042,904.94 | 29,179.44 |
| E. L. Jones | 186,233.20 | 49,275.02R. L. Jones |
| 111,739.92 | 29,564.82 |
1930 BTA LEXIS 2498">*2502 In their respective income-tax returns filed for the taxable year each of these petitioners claimed, as a deductible loss from his gross income for the year, an amount equal to the difference between the amount charged against his account in the books of the corporation on January 3, 1921, for the bonds involved, and that credited to his account in such boods on December 15, 1921, upon the ground that the first amount represented cost to him of securities which he sold to the corporation for the last named sum, and the sum so claimed was a loss to him for the year deductible under section 214(a)(4) of the Revenue Act of 1921. In auditing the petitioners' returns for the year, the Commissioner disallowed the deduction claimed by them as aforesaid, and in letters dated April 12, 1926, notified them of the deficiencies herein asserted.
OPINION.
LANSDON: In their respective petitions, Elliott L. Jones and Robert L. Jones plead that the statute of limitations has run against the deficiencies asserted against them. In his answer the respondent joins issue on the facts so pleaded by a specific denial which places the burden of proving them directly upon the pleaders. In these circumstances, 1930 BTA LEXIS 2498">*2503 there is no prima facie showing that the statute has run, as contended for by the petitioners; and, therefore, these proceedings are not within the rule laid down in , and , upon which petitioners rely. Since there is no evidence in the record as to the date of the filing of either of these returns, and the petitioners have introduced no proof otherwise to sustain their allegations as to the running of the statute against assessment, the decision on this issue must be for the respondent.
The single remaining issue, common to all the proceedings, is whether in the alleged sale of certain securities in the conditions 18 B.T.A. 1225">*1228 set forth in our findings of fact each of the petitioners sustained a loss deductible from his income in the taxable year. To establish their claims for deduction it is necessary for the petitioners to prove acquisition, ownership, cost, an actual sale and sales price of the property. In the instant proceeding the only evidence relating to the acquisition of the securities in question shows that they were purchased in 1917 at a total cost in the amount of1930 BTA LEXIS 2498">*2504 $3,014,505, and that payment therefor was made by issuing the checks of the corporation. Without more evidence it would seem that in the first instance the corporation was the purchaser. There is nothing to show how the preliminary negotiations were conducted. We are unable to say that petitioners and the prior owners of the securities arrived at an understanding as to price or whether the deal was effected by the manager or some officer or other agent of the corporation. All we know is that some one or more persons must have agreed to buy the securities from the prior owners and, the minds of vendors and vendees having met, the transaction was effected by the issuance of the checks of the corporation. We conclude, therefore, that in the first transaction the corporation was the purchaser and thereby became the owner of the securities here involved.
Having reached the conclusion that the bonds were purchased and at least temporarily owned by the corporation, it is necessary to determine when and how, and at what cost the petitioners became the owners thereof, if at all. The record shows that after the corporation issued its checks the cost of the bonds so acquired was distributed1930 BTA LEXIS 2498">*2505 to the petitioners by debits to their personal accounts on the books of the corporation ratably with their stockholdings. This procedure could have no effect on the issues here without proof of the actual transactions evidenced thereby. "Determination of net taxable income is the ascertainment of a fact and for this purpose books of account are no more than evidential and are neither indispensable nor conclusive." , citing , and many other cases to the same effect.
Counsel for the petitioners admits and the evidence shows that the book entries made at or about December 31 and January 1 of the years 1918-1919, 1919-1920, and 1920-1921, and purporting to pass title to the bonds to and fro between themselves and the corporation, were mere "wash" transactions for the purpose of avoiding Oklahoma ad valorem taxes and that it was never intended that title to the property should be affected thereby . The only evidence that the bonds were sold to the corporation in 1921 is in the shape of certain vouchers presumably original bookkeeping entries which purport to show the purchase of the1930 BTA LEXIS 2498">*2506 bonds from the several petitioners at the market prices alleged to have prevailed on that 18 B.T.A. 1225">*1229 date. Just how these vouchers and entries are more potent to pass title than the three other sets of such documents and entries which admittedly had no such effect is a little difficult to understand. The first series of transactions is conceded to have been mere "wash" transfers, for the purpose of avoiding state taxes. It does not follow, of course, that the final set of similar transfers in 1921 effected by mere bookkeeping entries was also a "wash" sale for the purpose of avoiding Federal income taxes but that situation and purpose are strongly indicated by the evidence.
Petitioners here rely on the doctrine of corporate entities and insist that each of them could deal as a stranger with the corporation. Even if this is true, bona fide actual sales and transfer of title, dominion and control must be shown. On these vital points the evidence is far from convincing. In this connection it is not improper to call attention to the fact that the hearing of this proceeding was at Tulsa, Okla., within a very short distance of the homes of the then living petitioners. 1930 BTA LEXIS 2498">*2507 Probably most of the doubtful points could have been resolved one way or the other by the testimony of any one of the petitioners, but none testified either orally or by deposition. The failure of the petitioners to testify in their own behalf raises the presumption that if called their evidence would not support their contentions. . On this rule, Lord Mansfield said:
It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced and in the power of the other to have contradicted. Blatch v. Archer, Cowper 66, 98 Eng. Reprint 969.
The transactions here involved were between a close corporation and its only stockholders who were in absolute control of all its affairs and acts. In these circumstances it is apparent that none of the transfers can be regarded as transactions at arm's length between a willing seller and a willing buyer. The corporation had no voice in the matter. By mere book entries it was made to take the bonds in question into its property account at prices over which it had no control. It was entirely within the1930 BTA LEXIS 2498">*2508 power of the petitioners to fix the price at which the ostensible sale of bonds was made just as it had been in previous years to transfer and retransfer at prices that best suited their purposes.
In discussing a somewhat similar situation in , we said:
* * * It can not be too much emphasized that alleged sales of property for the purpose of establishing losses must be real, valid transactions, definitely placing the legal and equitable ownership of the property alleged to have been sold out of the hands and out of the control of the seller. In the case of corporations sales to stockholders in all cases are subject to special scrutiny and 18 B.T.A. 1225">*1230 their good faith must be questioned. The principle of corporate entity can not be used to cloak a transaction which is essentially a fraud upon the public revenue.
In the light of the evidence, all of which at best is inconclusive, a decision of the issue herein adverse to the petitioners is indicated.
Decision will be entered for the respondent.