*17 Decision will be entered for the respondent in Docket No. 19856. Decision will be entered in Docket No. 20352 that petitioner is liable as a transferee in the amount of $ 191,760.55 for unpaid income, declared value excess-profits, and excess profits tax, and penalties of the Aviation Electric Corporation, together with interest as provided by law.
Petitioner, sole owner of the stock of a corporation, withdrew amounts out of earnings of the corporation under the guise of salaries of designated officers of the corporation, and by other fraudulent means. The amounts paid by the corporation as salaries were included in income tax returns of the officers and the tax thereon was paid by them with money withheld from delivery to petitioner under his directions. None of the distributions was included in income tax returns filed by the petitioner. The fictitious salaries and other amounts distributed to petitioner were deducted by the corporation as business expenses or entered in the books as capital expenditures. Held, that the distributions to petitioner constitute dividends taxable to him in the year of receipt, notwithstanding transferee liability for unpaid income taxes*18 subsequently determined against the corporation, and that the returns of petitioner and the corporation were false with intent to evade tax.
*331 These proceedings were consolidated for hearing and involve deficiencies in income tax, fraud penalties thereon, and liability as a transferee for unpaid taxes of the Aviation Electric Corporation, as follows:
| Individual Liability, Docket No. 19856 | ||
| Year | Deficiency | 50% penalty |
| 1941 | $ 17,418.94 | $ 9,191.36 |
| 1942 | 28,438.35 | 14,219.18 |
| 1943 | 21,641.51 | 10,820.76 |
| 1944 | 30,421.48 | 15,210.74 |
| 1945 | 36,007.53 | 18,003.77 |
| 1946 | 26,308.28 | 13,154.14 |
| Transferee Liability, Docket No. 20352 | ||
| Income Tax | ||
| 1941 | $ 7,234.38 | $ 4,434.08 |
| Declared Value Excess-Profits Tax | ||
| 1941 | $ 991.82 | $ 495.91 |
| 1943 | 4,122.23 | 2,179.92 |
| 1944 | 4,932.42 | 2,703.81 |
| Excess Profits Tax | ||
| 1941 | $ 12,634.82 | $ 8,424.51 |
| 1942 | 23,703.39 | 13,118.76 |
| 1943 | 27,107.27 | 15,018.09 |
| 1944 | 24,040.10 | 13,903.33 |
| 1945 | 28,920.24 | 19,408.76 |
*332 The issues being contested by the petitioner in Docket No. 19856 are the inclusion in income*19 of amounts for dividends from the Aviation Electric Corporation and the fraud penalties. The general issue in Docket No. 20352 is the liability of petitioner as a transferee for the deficiencies and penalties proposed against the Aviation Electric Corporation.
FINDINGS OF FACT.
The petitioner, an individual residing in Halesite, New York, filed his returns for the taxable years with the collector of internal revenue at Baltimore, Maryland, on the cash basis. He entered the United States Army in 1917 as a private and was discharged about July 1945 as a major general. Petitioner was stationed at Wright-Patterson Air Force Base, in Dayton, Ohio, from 1938 until September 1940; in Washington, D. C., thereafter until 1944, and at Wright-Patterson Air Force Base thereafter until his discharge from the service. During part of his assignment in Washington he lived in an apartment in Hotel 2400.
As the result of discussions commencing in 1938 or 1939 among petitioner, Robert L. Pine, and David E. Johnson in Dayton, petitioner agreed to finance the production by a corporation to be organized by him of a "walkie-talkie" apparatus perfected by Johnson. The corporation, known as the Aviation*20 Electric Corporation, hereinafter referred to as the Corporation, was organized in September 1939 under the laws of Ohio, with an authorized capital of 250 shares of no par value, for all of which petitioner paid $ 500, and on September 29, 1939, caused 224 shares to be issued in the name of June A. Ballou, a young woman working as a secretary at the Wright-Patterson Air Force Base; 25 shares in the name of Pine; and 1 share in the name of Johnson. No additional amount was paid in at any time for stock of the Corporation. It was the desire of petitioner that his name not appear in the records of the Corporation as having an interest in its affairs.
The Corporation manufactured electrical aviation equipment at a plant located in Vandalia, Ohio. Petitioner placed Johnson in charge of the plant and office of the Corporation, but retained exclusive control over all of its affairs. The services of Johnson were unsatisfactory to petitioner and in October 1939 he initiated action to replace him by Bleriot H. Lamarre, an accountant, then 27 years of age, whom petitioner had known for more than a year and who was then employed by an aircraft manufacturer in California. During an interview*21 with Lamarre in California in December 1939, petitioner indicated to Lamarre that his salary would be between $ 40 and $ 50 a week, and as an inducement to enter the service of the Corporation, informed him that *333 he "would get more than I [Lamarre] had ever got before." Lamarre accepted the offer of petitioner and arrived in Dayton about January 10, 1940, to enter the employment of the Corporation. Petitioner informed him that in the beginning he would be secretary and treasurer of the Corporation, sign checks, keep the books of account, and in general watch all financial transactions.
Petitioner caused June A. Ballou and Johnson to surrender the stock certificates outstanding in their names, and on January 11, 1940, had the shares reissued in the name of Lamarre. Thereafter petitioner caused Pine to surrender the stock certificates issued in his name and on December 29, 1940, had 23 shares thereof issued in the name of Lamarre and one each in the name of T. E. Readnower, a brother-in-law of Lamarre and at that time 23 years old, and Marcella Weaver, whom Readnower subsequently married. On and at all times after December 29, 1940, certificates for 248 of the 250 shares*22 of outstanding stock of the Corporation were in the name of Lamarre and one share each in the name of Readnower and Marcella Weaver. The stock certificates were endorsed in blank and delivered to petitioner, who was at all times the real and actual owner of all of the outstanding stock of the Corporation.
On September 20, 1939, the Corporation opened with the $ 500 paid in by petitioner for stock, and thereafter maintained a checking account in The Winters National Bank and Trust Company, Dayton, Ohio, hereinafter referred to as the Bank. Until January 11, 1940, money in the account was subject to withdrawal by checks signed by petitioner or June A. Ballou, who was designated treasurer of the Corporation. On January 11, 1940, the account was made subject to checks signed by petitioner or Lamarre, designated as secretary and treasurer. On July 29, 1941, the account was, by a corporate resolution, made subject to checks signed by petitioner, Lamarre as president and treasurer, or Readnower as secretary. Pursuant to a desire of petitioner that his name not appear on any of the records of the Corporation, petitioner's name was deleted from the resolution and not certified to the *23 Bank as an individual authorized to sign checks drawn on the account.
The Corporation kept its books on the calendar year basis in accordance with an accrual method of accounting. It filed its returns with the collector of internal revenue at Cincinnati, Ohio.
At the time of his transfer to Washington, D. C., in September 1940, petitioner instructed Lamarre to handle all routine affairs of the Corporation, to communicate with him as to other matters, and to render reports to him on the affairs of the business. In December 1940, when the Corporation had practically filled the orders on hand, petitioner instructed Lamarre to endeavor to obtain an order from *334 the Bell Aircraft Corporation. An order was obtained and during the war it had contracts amounting to over $ 500,000 from that corporation.
Between September 1940 and July 1942 the Corporation paid a total of $ 59,836.05 to petitioner for money borrowed from him.
Readnower worked part time for the Corporation during the summer of 1940 and began full time employment for about $ 25 a week in February 1941, when he was given the title of vice president and secretary, although his chief duties consisted of work on the corporate*24 books and records. He entered the United States Army in October 1942, and continued therein until discharged in February 1946.
Prior to May 15, 1941, petitioner devised a plan to obtain earnings of the Corporation under the guise of salary paid to Lamarre. Thereafter in 1941 he caused Lamarre to issue checks of the Corporation, totaling $ 17,972.14, to himself and charge the amounts to the account kept by the Corporation for executive salaries as salary of Lamarre. The transactions were handled in that manner so that petitioner's name would not appear in the books of the Corporation as the recipient of the money. Lamarre, as directed by petitioner, endorsed the checks payable to him and used the proceeds to purchase checks of the Bank payable to petitioner, who deposited them in his individual checking accounts.
In 1941 Lamarre issued 6 checks of the Corporation for a total of $ 10,000 in favor of Neta Davis upon instructions of petitioner, who informed him that the payee was the interior decorator of his apartment at the Hotel 2400. The checks were charged to "Sales Expense" at the request of petitioner. When Lamarre informed petitioner that auditors employed by the Corporation*25 refused to approve the entries because the amounts were not supported by vouchers, the charges, under direction of petitioner, were transferred to the Executive Salaries account as salary of Lamarre. The payee of the checks never performed any services for the Corporation as consideration for the payments made to her.
On October 16, 1941, Lamarre at the direction of petitioner, issued a check of the Corporation for $ 700 in favor of E. F. Droop & Sons Co., Washington, D. C., in payment of an invoice rendered to the Corporation for "Radio and radio supplies." The radio was installed in petitioner's apartment in Hotel 2400 and was never used by the Corporation in connection with any of its business activities. Petitioner directed Lamarre to charge the payment to "Experimental Expense," but because he believed the Corporation's auditors would not approve such a charge, Lamarre charged the payment to an account kept by the Corporation for office furniture and equipment. *335 Deductions were claimed for depreciation on the property in returns filed by the Corporation.
On August 27, 1941, Lamarre, pursuant to a request of petitioner, issued a check of the Corporation in favor of*26 the Combustioner Corporation for $ 825.40 in payment of air-conditioning units installed in petitioner's apartment in Hotel 2400, and charged the amount to "Engineering Experimental Expense" on the books of the Corporation. The amount was claimed as a deduction in the income tax return filed by the Corporation for 1941.
Upon the direction of petitioner, Lamarre issued a check of the Corporation on December 30, 1941, to the order of the Capitol Cadillac Company in the amount of $ 2,995.70 and mailed the check to petitioner in Washington. Petitioner informed Lamarre that the check would be used to purchase a Cadillac passenger automobile and it was used for that purpose. The automobile will be sometimes referred to hereinafter as the blue Cadillac. The amount of the check was charged to "Trucks and Automobiles," a capital account, on the books of the Corporation, and thereafter deductions were claimed in income tax returns of the Corporation for depreciation on the property.
Title to the blue Cadillac was in the name of the Corporation. The car was driven from Washington to Dayton when petitioner was transferred to Wright-Patterson Air Force Base in 1944, and thereafter petitioner*27 caused title to be transferred to R. A. Curnutt, his father-in-law, in connection with which Curnutt gave the Corporation his note for $ 1,500. After his discharge from the Army in 1945, petitioner had the car delivered to him at his residence in Long Island, New York. The automobile was at all times used by petitioner in his individual capacity and was never intended to be, and was never used by the Corporation in connection with any of its activities.
An enlisted man of the Army was assigned as chauffeur to petitioner from about February 1942 to October 1945, when he delivered the blue Cadillac to petitioner at his residence in Long Island. Petitioner sought to bribe the chauffeur to testify falsely before a committee of Congress in 1947, and in a criminal proceeding against petitioner in a Federal court in 1948 concerning the use of the car.
In his return for 1941 Lamarre reported $ 30,987.52 for salaries and other compensation for services rendered, an amount which included the payments totaling $ 17,972.14 to petitioner, the checks totaling $ 10,000 to Neta Davis, and $ 2,987.52, which represented Lamarre's actual salary for 1941. The tax liability of $ 10,145.20 shown on*28 the return was paid by personal checks of Lamarre, $ 2,536.30 in March 1942, and the remainder of $ 7,608.90 on June 12, 1942. The amount of $ 10,145.20 used to pay the tax had been withheld from petitioner by Lamarre in 1942 under the "Meyers Plan," hereinafter described, *336 and since a portion of the money so used paid the last two quarterly installments of tax on Lamarre's actual salary for 1941, Lamarre refunded the amount, totaling $ 97.75, to petitioner by his personal checks, which were deposited by petitioner.
During 1941 the actual salary of Readnower as an employee of the Corporation was $ 1,272.16 which, less deductions for social security, was paid to him. Early in 1942 petitioner instructed Lamarre to issue a check of the Corporation, antedated December 31, 1941, to the order of Readnower for $ 13,750, less $ 17.28 for social security taxes, net amount $ 13,732.72, and charge the amount on the corporate books as executive salary of the payee, and he complied with the instructions. Readnower deposited the check, less $ 7,838.68 cash paid to him out of its proceeds, on March 7, 1942, in his personal bank account, and a few days later he delivered the $ 7,838.68*29 of cash to petitioner in Washington, D. C. The amount of $ 5,894.04 actually deposited was retained and used by Readnower to pay income taxes on the $ 13,750 by the inclusion thereof in his individual income tax return. Upon delivery of the money to him, petitioner gave Readnower a gratuity of $ 1,000, which amount Readnower deposited in his savings account on March 10, 1942.
In his return for 1941 Readnower included the $ 13,750 and his actual salary of $ 1,272.16 in gross income as compensation received for personal services.
The Corporation reported on Form 1099 that $ 14,987.52 was paid to Lamarre in 1941 for salary. In its income tax return for that year salary deductions were claimed in the amount of $ 30,987.52 for Lamarre as president, and $ 15,022.16 for Readnower as secretary, a total of $ 46,009.68. In his determination of the tax liability of the Corporation, respondent allowed as deductions the actual salaries of Lamarre and Readnower, totaling $ 4,259.68, and disallowed the remainder of $ 41,750 claimed in the return.
Petitioner did not include in his return for 1941 the payments made to him for fictitious salary of Lamarre and to Neta Davis for decorating, or the*30 cost of the radio, air-conditioning equipment, and the blue Cadillac, a total of $ 32,493.24. In his determination of the deficiency for 1941, respondent included the amounts in gross income as "Dividends and other income omitted" in the return. The amounts were paid out of earnings of the Corporation and constitute taxable dividends to petitioner.
On December 29, 1941, petitioner drew a check against his account with the Riggs National Bank, Washington, D. C., for $ 15,000, payable to the order of Lamarre. The amount of the check was credited to a notes receivable account of the Corporation which contained a charge on October 31, 1941, for a like amount.
*337 About October 1942 petitioner instructed Lamarre to employ Curnutt at a salary of $ 12,000 a year, and suggested that he be given the title of "Vice-president in charge of Production," which was done, and he continued on the payroll of the Corporation at that salary until March 1945. Curnutt was not qualified by education or experience to perform the duties of a position indicated by the title given to him. At first he had no specific duties other than to observe plant operations with the view of offering suggestions*31 for improvement. Later, in compliance with a request of Curnutt for something to do, Lamarre assigned him to clerical work.
In November and December 1942 the Corporation issued 3 checks, totaling $ 1,980, to the order of Curnutt in payment of salary, less deductions. Upon receipt of the first check, Curnutt asked Lamarre how he should make delivery of it to petitioner.
The Corporation claimed as deductions in its income tax returns and the respondent disallowed amounts as follows for salary of Curnutt:
| 1942 | 1943 | 1944 | 1945 | |
| Claimed | $ 2,000 | $ 12,000 | $ 12,000 | $ 12,000 |
| Disallowed | 1,350 | 8,100 | 8,100 | 11,025 |
| Allowed | 650 | 3,900 | 3,900 | 975 |
The checks issued by the Corporation for the salary in 1943 and 1944 were deposited by Curnutt to the credit of his account in the Vandalia State Bank, Vandalia, Ohio.
Early in January 1942 petitioner instructed Lamarre to discontinue the method followed in 1941 of purchasing bank drafts and cashier's checks by corporate checks for transmission to him of fictitious salary payments, and thereafter to issue the corporate checks for such salaries to himself and Readnower and deliver the proceeds to him in currency, less an amount sufficient*32 to pay petitioner's share of income taxes resulting from the inclusion of his money in their personal income tax returns. Lamarre and Readnower agreed to participate in the plan. Petitioner's reason for the change of procedure was that the bank checks were traceable under the old method and the payments would not be traceable under the new plan. The new method was followed in 1942, 1943, 1944, and 1945. Accompanying each delivery of currency by Lamarre to petitioner was a statement showing the amount of fictitious salary withheld, the amount withheld by Lamarre to pay the taxes on the amounts, and the net amount of currency being delivered, so that petitioner would know that he was getting the proper amount of money. The full amount of the checks made payable to Lamarre or Readnower was charged as salary of the payees in the Executive Salaries account of the Corporation and deducted in income tax returns of the Corporation as actual salaries *338 paid to them. The fictitious salary payments made to Lamaree and Readnower were included in their individual income tax returns and the tax thereon was paid out of petitioner's money which Lamarre had withheld from delivery to *33 him. As part of the scheme, Readnower gave Lamarre a power of attorney to withdraw money from his personal account in the bank, make deposits therein, and prepare his income tax returns. At various times while he was in the Army, Readnower, at the suggestion of petitioner, endorsed blank checks of the Corporation to enable Lamarre to cash them after they were issued. At the hearing herein, the term "Meyers Plan" was adopted for the fraudulent scheme just described to avoid unnecessary repetition and will be used hereinafter for the same reason. Lamarre maintained a personal record of the payments made to petitioner in cash under the Meyers Plan.
During 1942, 1943, 1944, and 1945, the Meyers Plan was used as follows:
| Salary | 1942 | 1943 | 1944 | 1945 |
| Lamarre: | ||||
| Actual salary | $ 4,358.40 | 2 $ 5,000.16*35 | $ 5,000.00 | $ 5,000.00 |
| Fictitious 1*34 | 15,000.00 | 15,000.00 | 15,000.00 | 15,000.00 |
| Readnower: | ||||
| Actual salary | 2,725.00 | 2 1,200.00 | 1,200.00 | 1,200.00 |
| Fictitious 1 | 15,000.00 | 3 17,400.00 | 4 17,400.00 | 4 17,400.00 |
On December 5, 1944, Lamarre, upon the request of petitioner, issued two checks of the Corporation for $ 2,500 each, to the order of N. Davis. One of the checks, endorsed in the name of the payee and "For deposit to Bennett E. Meyers," was deposited on December 22, 1944, to the credit of the account of petitioner and his wife, Ila Rae Meyers, with the Cleveland Trust Company, Cleveland, Ohio. Petitioner informed Lamarre that the purpose of the checks was to pay for interior decorating work in his apartment at Wright-Patterson Air Force Base. *339 No interior decorating work was performed by Neta Davis for the Corporation. In connection with the transaction, petitioner had Curnutt give the Corporation his note for $ 5,000.
Respondent included in the income of petitioner for 1942 the amount of $ 13,732.32 paid to Readnower by a check issued by the Corporation in 1942, antedated December 31, 1941. In 1942 the Corporation paid $ 116.16 for accessories; also*36 in that year and in 1943 it paid $ 101.17 and $ 152.16, respectively, for insurance, on the blue Cadillac. These amounts, and $ 22.37, representing an unexplained payment made to Lamarre in 1942 as salary for the account of petitioner, do not constitute deductible expenses of the Corporation, and were properly included in taxable income of petitioner by the respondent as "Dividends and other income omitted," from the return.
Early in 1945 Lamarre prepared and signed on behalf of the Corporation at the request of petitioner an instrument, antedated to November 2, 1942, purporting to provide for the services of Curnutt for the period from November 2, 1942, to December 31, 1948, at a salary of $ 12,000 per annum, and a letter, antedated to October 30, 1942, addressed to Curnutt, informing him that the document would be ready for his signature on November 2, 1942. The instrument was signed by Curnutt during the early part of 1945. Petitioner had Lamarre prepare the document to serve as a basis for a lump-sum payment to Curnutt, at the time he left the employment of the Corporation, of the amount payable thereafter according to the terms of the instrument, and "as a means of getting*37 some additional money out of the corporation."
Curnutt left the service of the Corporation on March 15, 1945. On March 31, 1945, the Corporation issued 3 checks payable to the order of Curnutt for a total of $ 29,280.01. One of the checks, in the amount of $ 389.40, was for salary during the last half of March 1945; another, in the amount of $ 7,099.20, was for the remainder of 1945, less deductions. The other check, in the amount of $ 21,971.41, was for the remaining term of the alleged employment contract, less deductions for withholding taxes, $ 5,000 for the note given in connection with the payment of a like amount to Neta Davis on December 5, 1944, and $ 1,500 for the note given when title to the blue Cadillac was transferred to him. Curnutt gave to the Corporation in connection with the transaction two notes in amounts not shown by the evidence. Curnutt used the checks on April 2, 1945, to purchase two cashier's checks in his name for a like total amount, one of which was for $ 2,639.40 and the other for $ 26,640.61. After endorsement by Curnutt and petitioner's wife, the check for $ 26,640.61 was deposited on April 5, 1945, to the credit of the joint account of petitioner*38 and his wife with the Cleveland Trust Company.
*340 Auditors of the Corporation objected to the entries made in its books for the notes as receivables. Thereafter, on instructions given by petitioner, Lamarre drew a check of the Corporation on February 1, 1946, payable to himself for $ 21,000, which he used on the same date to purchase a cashier's check for a like amount payable to petitioner. The cashier's check was used on February 7, 1946, by petitioner with $ 7,360.80 of personal funds to purchase a bank draft payable to the Corporation in the amount of $ 28,360.80. The bank draft was deposited to the credit of the Corporation and the notes given by Curnutt in connection with the transaction were eliminated from the books.
Petitioner realized taxable dividends to the extent of at least $ 19,279.81 ($ 26,640.61 less $ 7,360.80) in 1945 out of the fraudulent transaction, as determined by the respondent.
Lamarre and The Aid Company, an alleged partnership consisting of petitioner and his wife and two of their children, entered into a joint venture agreement as of February 11, 1946. The document was signed by Lamarre on April 18, 1946, and by Ila Rae Meyers on June 26, 1946, *39 on behalf of The Aid Company.
The joint venture agreement recited that The Aid Company was the owner of United States Treasury bonds in the principal amount of $ 1,000,000, purchased in part by $ 20,000 advanced by Lamarre for that purpose. The instrument provided, among other things, that Lamarre was to receive 10 per cent of the net income from the bonds, and upon their disposition or his voluntary withdrawal from the venture, he would receive $ 20,000, plus or minus 10 per cent of any increase of or decrease in the then agreed value of $ 1,051,638.81 of the bonds. The power of control of the venture and sale of the bonds to terminate the venture was vested in The Aid Company.
A commercial bank account was opened with the Cleveland Trust Company by petitioner and his wife in the name of The Aid Company on February 11, 1946, with a deposit of $ 10,000. They, or either of them, were the only persons authorized to draw checks on the account and to negotiate loans on behalf of The Aid Company. A loan account of The Aid Company with the Cleveland Trust Company was opened on February 14, 1946, with a loan of $ 2,035,135.32. It had a balance of $ 1,996,000 on February 4, 1948, when*40 it was closed. The loans were made for marginal purchases of United States Treasury bonds.
On February 11, 1946, in anticipation of the dissolution of the Corporation, and pursuant to an understanding with petitioner, Lamarre purchased with a check of the Corporation, payable to himself, a bank draft for $ 20,000, which was deposited with the Cleveland Trust Company as part of an original marginal payment of $ 75,000 when the loan was made to The Aid Company. The amount was to represent Lamarre's capital contribution to the venture and in connection with which Lamarre, acting on instructions of petitioner, gave the *341 Corporation his personal note for $ 20,000. The note was never paid and was in a notes receivable account of the Corporation at the time of its dissolution. Later petitioner informed Lamarre that his interest in the venture would be upon the basis of a contribution of $ 10,000, and in an effort to prevent him from realizing on a greater interest, he had Lamarre give him his personal note for $ 10,000. For a time Lamarre received income from the venture on the basis of a contribution of $ 10,000, but later on distribution to him of earnings was discontinued. *41 Demands made by Lamarre upon petitioner for repayment of his contribution of $ 10,000 to The Aid Company were not honored and a suit instituted by him to collect the amount is still pending.
The commercial bank account of The Aid Company with the Cleveland Trust Company was closed by petitioner on November 25, 1947, by the withdrawal by him in cash of the balance therein of $ 49,868.32. On the same day petitioner withdrew in cash the balance of $ 140,165.50 in the joint bank account of himself and his wife in the Cleveland Trust Company.
The withdrawal, on February 11, 1946, of $ 20,000 of funds of the Corporation for investment in The Aid Company constituted a taxable dividend to petitioner from the Corporation to the extent of at least $ 10,000, as determined by the respondent. Petitioner did not include the amount in his return for 1946 as taxable income.
A certificate of dissolution was filed by the Corporation with the secretary of state of Ohio on September 13, 1946. On October 3, 1946, the checking account of the Corporation in the Bank was closed by a check issued by Lamarre to the order of himself in the amount of $ 23,324.50, which check Lamarre used as a deposit to *42 open a joint checking account in the name of himself and his wife in another bank. Thereafter, two deposits were made in the account, one on November 22, 1946, in the amount of $ 7,174.35, and the other on February 11, 1947, in the amount of $ 100. In January 1947 Lamarre drew a check against the account for $ 16,399.54 in payment of the tax liability shown on the final income tax return of the Corporation. A total of $ 3,246 was withdrawn from the account to pay small bills of the Corporation and for living expenses of Lamarre.
About July 1947 Lamarre received a notice of additional income tax liability of the Corporation in the amount of $ 27,114.97. The balance in the account at that time was only about $ 11,000, in view of which Lamarre asked petitioner to provide sufficient additional funds to pay the taxes. Petitioner complied with the request by sending Lamarre a check for $ 16,200, which was deposited in the account. Thereafter, on July 21, 1947, Lamarre drew a check against the account for $ 27,114.97 in payment of the additional assessment. The amount of the withdrawal left a balance of $ 38.34 in the account.
*342 In his return for 1946 Lamarre reported the receipt*43 of a liquidating dividend of $ 72,523.85 as the sole owner of the stock of the Corporation. After payment of the additional income tax liability of $ 27,114.97, he filed an amended return in which he reduced the dividend by the amount of the tax payment.
The returns filed by the Corporation for the years 1941 and 1943 were signed by Lamarre as president and treasurer and by Readnower as secretary; the returns for 1942 and 1944 by Lamarre as president and Curnutt as vice president; and the return for 1945 by Lamarre as president and treasurer.
In December 1947 an indictment was filed against Lamarre in the District of Columbia for testifying falsely before a committee of the United States Senate in October 1947 in regard to the financial interest of petitioner in the Corporation, the purchase and use of the blue Cadillac, and the source of the funds used to pay for redecorating petitioner's apartment at Hotel 2400. At the same time and place petitioner was indicted for inducing Lamarre to give false testimony before the committee concerning the matters. Petitioner was convicted on all counts in a trial held before a jury in 1948 and was sentenced to imprisonment for a period of *44 20 months to 5 years.
On October 19, 1949, two indictments, one for 1941 and the other for the years 1942 to 1946, inclusive, were filed against petitioner in the United States District Court of the District of Maryland, in which he was charged with filing false and fraudulent income tax returns due to his failure to include in his return for each year an amount for dividends received from the Corporation, and other income, all or part of which is in controversy here. Petitioner entered a plea of guilty under each indictment. On conviction he was given a sentence of 1 year and a day in prison and fined $ 15,000, with further commitment in default of payment, under the offense charged for 1941, and a like sentence and fine for the offense charged for other years, the sentences to run concurrently, the fines, however, not to be cumulative.
On May 28, 1948, the respondent determined that Ila Rae Meyers was liable as a transferee of petitioner for the deficiencies and penalties determined against petitioner for the years 1941 to 1945, inclusive. Pursuant to a stipulation of the parties, in which the transferee liability for the deficiencies was shown to be the total amount of $ 28,666.67, *45 this Court entered a decision on October 9, 1952, that her liability was a total of $ 19,000 for the years 1941 and 1945, and that there were overpayments totaling $ 59,912.11 for the years 1942, 1943, and 1944, all of which was paid after the mailing of the notice of deficiency.
During the taxable years petitioner received the following amounts, totaling $ 201,760.55, from the Corporation out of earnings without *343 consideration, all of which constitutes income taxable to him as dividends:
| 1941 | $ 32,493.24 |
| 1942 | 43,972.02 |
| 1943 | 31,015.48 |
| 1944 | 35,000.00 |
| 1945 | 49,279.81 |
| 1946 | 10,000.00 |
| Total | $ 201,760.55 |
None of the amounts was included in income tax returns of petitioner. The income tax return filed by the petitioner for each taxable year was false and fraudulent with intent to evade tax.
The distributions made to petitioner each year were without consideration and rendered the Corporation insolvent and without sufficient money or other property to pay the deficiencies and penalties determined against the Corporation on June 22, 1948, and involved in Docket No. 20352, none of which has been paid. The returns filed by the Corporation for the years 1941 to 1945, *46 inclusive, were false and fraudulent with intent to evade tax. A substantial part of the deficiency determined against the Corporation each year was due to fraud with intent to evade tax.
OPINION.
Individual Liability.
The hearings herein extended over a period of 6 1/2 days, at which petitioner submitted no testimony or documentary evidence, other than through Lamarre, one of the principal witnesses of respondent, who was called for the limited purpose of identifying the books of account of the Corporation. After the submission of such records and two other documents, petitioner rested his individual case with the announcement that he had overcome the presumption in favor of the correctness of the respondent's determination.
On brief petitioner concedes that he "defaulted" on all of the issues raised by his petition except the matter of dividends from the Corporation. The basis for the dividends charged to petitioner was the payment in the name of Lamarre and Readnower each year, and Curnutt in 1945, as salaries of amounts in excess of their actual compensation; the charges on the corporate books for the decorating work, radio, air-conditioning equipment, blue Cadillac, and*47 funds for investment in The Aid Company. The substance of petitioner's contention on brief is that the books of the Corporation show that Lamarre and Readnower were the recipients of the income attributed to him. The source of the other income included in petitioner's taxable income as *344 dividends is not discussed. No contention is made that the Corporation did not have earnings out of which to pay the dividends.
The payments made as salary were entered in the books of the Corporation as such. But the decision must be made from all of the facts, the book entries being no more than evidence on the point. .
The core of the plan initiated and made effective by petitioner was to conceal his identity as the sole stockholder and directing head of the Corporation, an objective he regarded as necessary because of the commission he held as an officer of the United States Army. Not being a stockholder of record, dividends paid directly to him as such would have disclosed his hand. To obtain earnings of the Corporation by other means, he devised and carried out the several schemes which are set forth in*48 detail in our findings and need not be repeated.
The payments to or for the account of petitioner were testified to by Lamarre and Readnower and their testimony is in most respects corroborated by checks, invoices, book entries, and other documentary evidence.
Statements appearing in the brief of petitioner indicate that he is of the belief that the dividends charged to him as income include the $ 59,836.05. The amount represents repayment of loans of petitioner, a return of capital, and no part of it was included in gross income of petitioner by the respondent.
The evidence supports in every respect the determinations made by the respondent on the dividends received by the petitioner each year from the Corporation. Accordingly, his determinations as to the receipt of the income will not be disturbed.
Transferee Liability.
Substantially all of the deficiencies determined against the Corporation resulted from disallowance of all of the fictitious salaries claimed for Lamarre and Readnower, and salary of Curnutt to the extent respondent found it to be unreasonable as compensation for services actually rendered. The remaining items disallowed, all of which were small in comparison*49 with the salary adjustments, consist of expenses of the blue Cadillac, the air-conditioning equipment, excessive depreciation, and loss in equipment scrapped.
The evidence substantiates the disallowance of the fictitious salaries, automobile expense, and air-conditioning equipment. No evidence was offered by the petitioner in an effort to establish error on the part of the respondent with respect to the remaining items. Accordingly, the deficiencies determined against the Corporation will not be disturbed.
The respondent established that the petitioner received amounts each year, without consideration, as a stockholder of the Corporation. *345 A further burden of the respondent was to prove that the distributions rendered the Corporation insolvent or that it was insolvent at the times they were made. .
As part of his proof of insolvency, respondent submitted a statement, prepared by a qualified accountant, showing the extent to which the Corporation was insolvent. The accuracy of the figures in the statement is not being questioned. The statement starts with an operating deficit of $ 30,354.82 on January 1, 1941, *50 which was claimed by the Corporation and allowed by the respondent in computing the deficiency for 1941 on the basis of net taxable income of $ 65,027.51. From the net taxable income he deducted income tax liability, without penalties, of $ 36,132.58 on the income to arrive at the earnings of $ 28,894.93, a figure of $ 3,598.31 less than the total distributions made to petitioner at various times throughout the year.
A similar computation was made for each taxable year, starting with a deficit, which reflected adjustments properly made for erroneous deductions, and in which deductions were made for accumulated tax liability, including fraud penalty. The result year was a deficit before making any allowance for the distributions made throughout the year for the account of petitioner.
The adjustments made for income tax liability in determining the question of insolvency were proper even though the amounts were unknown at the time of the transfers. ; ; ; .*51
Where, as here, the taxpayer was insolvent at the beginning of the taxable period, the condition is presumed to continue to exist until shown to be otherwise. . Instead of the contrary being shown, proof of the respondent is that the Corporation continued to be insolvent at the close of each taxable year and was liquidated in 1946, leaving no assets for the respondent to proceed against for collection of the taxes.
Finally, the proof made by respondent clearly shows that throughout the taxable years petitioner's purpose was to withdraw assets of the Corporation without regard to its tax liability or the effect it would have on its solvency. The scheme continued into 1946 and was availed of in that year in anticipation of the dissolution of the Corporation. Nothing in the record suggests that petitioner, as sole stockholder, ever intended to continue the life of the Corporation after it had played its part in the war. A reasonable inference from the facts is that the distributions were each part of a series of payments in connection with liquidation shortly after the termination of the war. A series of distributions*52 in liquidation is treated as a whole in determining whether they created insolvency of the transferor. ; . The respondent has made sufficient proof of the liability of petitioner as a transferee of the Corporation.
But petitioner insists that respondent is estopped from asserting that the same money was received by him as income and as a transferee. He relied on the case of , affd. , at the hearing. Thereafter, on April 6, 1953, the ruling of the Circuit Court was reversed by the Supreme Court, , in a proceeding consolidated with , reversing . The cases contained similar controlling facts. Petitioner seeks to avoid the force of the decision of the Supreme Court on the theory that the case was decided on a ground having no bearing on the issue here.
The taxpayers in the Smith*53 and Hartfield cases, supra, who, as here, reported their income on the cash basis, received salary from closely held corporations of which they were officers and stockholders, all of which they reported as taxable income. Thereafter, the Commissioner determined deficiencies against the corporations as the result of disallowances of portions of the salaries as excessive compensation, and held that the taxpayers were liable as transferees for the corporate deficiencies. The transferee liability was based upon the receipt of the excessive salaries.
The question before the Supreme Court was whether the salary should be excluded from income in the year of receipt in view of the fact that the portion disallowed as a deduction to the corporation resulted in transferee liability. The position of the taxpayers was that the adjustment should occur in the year of receipt, whereas the Commissioner contended that it should be deferred until the year of payment of the transferee liability.
The Court held that the salaries were taxable to the taxpayers in the year of receipt of the income. In doing so it pointed out that there must be an annual accounting of income for tax purposes; *54 that "the salaries were received under a claim of individual right -- not under a claim of right as a trustee"; that "Actually it could not have been said at the end of each of the years involved that the transferee liability would materialize"; and that "a potential or dormant restriction, such as here involved, which depends upon the future application of rules of law to present facts, is not a 'restriction on use' within the meaning of North American Oil v. Burnet, supra [286 U.S. 417]." Concerning the argument made that it would be inequitable to treat as income an amount thereafter found not to be income, the Court said:
It would be disruptive of an orderly collection of the revenue to rule that the counting must be done over again to reflect events occurring after the year for which the count is made, and would violate the spirit of the annual accounting system. * * *
*347 It is apparent that the distributions made here were received by petitioner under a claim of right and without any restrictions on the use of the money, and no contention is specifically made to the contrary. The decision of the Supreme Court, just discussed, fully supports the action of the*55 respondent in including the amounts in taxable income of petitioner in the year of receipt and asserting transferee liability against him for additional taxes of the Corporation resulting from the disallowance of the amounts as deductions.
The petitioner received the total amount of $ 191,760.55 as a transferee. That amount, as respondent concedes on brief, limits the transferee liability of petitioner for the deficiencies and penalties determined against the Corporation.
Credits.
Petitioner asserts that under the doctrine of equitable recoupment he is entitled to a credit against the deficiencies for the taxes paid by Lamarre and Readnower upon the income taxed to him here; and the agreed liability of his wife in the amount of $ 28,666.67, as a transferee of his assets. This Court lacks power to require the Commissioner to credit an overpayment of a taxpayer to the account of another taxpayer. , and cases cited therein. Concerning the credit for transferee liability, which is less than the stipulated overpayments, less liability for deficiencies and penalties, respondent has suggested on brief that petitioner*56 make application to the appropriate Director of Internal Revenue for relief.
Another contention of petitioner is that his liability as a transferee should be reduced by $ 16,200 on account of the payment he made to Lamarre in July 1947 to pay an additional assessment made against the Corporation for income taxes. The payment was made before the deficiencies involved herein were determined, and, therefore, did not serve to reduce any of the transferee liability involved herein. Under the circumstances, there is no ground for allowing the reduction.
Petitioner also contends that the dividends charged to him should in any event be reduced by $ 15,000 for the check he gave Lamarre on December 29, 1941, for that amount. All the record discloses respecting the transaction is that the check was endorsed by Lamarre and its amount was credited to a notes receivable account on the books of the Corporation, which contained a charge on October 31, 1941, for a like amount. Lamarre, the only witness who testified concerning the transaction, could not recall the circumstances giving rise to the payment. The proof made by petitioner does not establish a repayment of dividends previously received*57 or other facts warranting us in allowing the amount as a credit against earnings received in 1941 or any other taxable year.
*348 Fraud.
Respondent's claim of fraud against petitioner is based upon petitioner's failure to include in his returns the income derived from fictitious salaries paid in the names of Lamarre, Readnower, and Curnutt, and the distributions made to him as the result of using earnings of the Corporation to pay for decorating his apartments, the blue Cadillac, air-conditioning equipment, and expenses of operating the blue Cadillac. His charge of fraud against the Corporation is confined, on brief, to the deductions taken for the fictitious salaries paid in the names of the individuals. The penalties are opposed by the petitioner upon the general ground that respondent has not sustained his burden of proof by clear and convincing evidence, in connection with which he argues that the testimony of Lamarre and Readnower should not be followed.
The fraud penalties apply to the entire deficiency if any part thereof was due to fraud with intent to evade tax. ; .*58
The pleas of guilty made by the petitioner in criminal proceedings involving the same matter constitute admissions against interest, and without any explanation of the circumstances surrounding the pleas, they are sufficient to establish fraud with intent to evade tax as to him. ; ; , affd. .
There is not only no explanation before us to offset the admission of fact resulting from the pleas of guilt in the criminal proceedings but the proof otherwise made by the respondent was ample to sustain his burden of proof. Detailed discussion of the facts would serve no useful purpose. It is sufficient to point out that the evidence discloses a plan of petitioner, put into effect in 1941 and continued for the remainder of the taxable years with the active cooperation of Lamarre from the beginning, and of Readnower commencing in 1942, and of Curnutt in 1945 as to the fictitious salaries, to obtain earnings of the Corporation under the guise of corporate expenses*59 and capital outlays, and not include the distributions in returns for tax purposes. The scheme and the effort made to conceal the actualities contain all of the essential earmarks of a determination to evade income taxes by false and fraudulent means.
The plan, as conceived by petitioner, required participation by the Corporation, which was no obstacle in view of his complete ownership of its stock, and the obvious willingness of Lamarre, Readnower, and Curnutt, particularly the former, at all times important, to actively participate in the fraudulent scheme. The intent of the individuals under the circumstances is to be imputed to the Corporation. . The amounts were deducted in the returns of the Corporation as salary, with knowledge that no *349 services had been performed for the payments and that the deductions were nothing more than a detail in a general scheme to withdraw profits of the enterprise for the account of petitioner under the guise of legitimate operating expenses. Such action discloses fraudulent returns with intent to evade tax. , affd. *60 .
It follows that no error was committed by the respondent in imposing the fraud penalties against petitioner and the Corporation.
Decision will be entered for the respondent in Docket No. 19856. Decision will be entered in Docket No. 20352 that petitioner is liable as a transferee in the amount of $ 191,760.55 for unpaid income, declared value excess-profits, and excess profits tax, and penalties of the Aviation Electric Corporation, together with interest as provided by law.
Footnotes
2. Readnower had an agreement with petitioner, effective January 1, 1942, that he would be kept on the payroll of the Corporation while in the military service at a salary of $ 1,200 a year, but that the books of the Corporation would record a salary of $ 3,600, his actual salary when entering the service, and $ 15,000 as an officer of the Corporation; that Lamarre would prepare his income tax returns, include therein the entire amount, and retain out of the fictitious salary of $ 17,400 each year an amount sufficient to pay the tax thereon. In 1947 petitioner endeavored, without success, to have Readnower agree to falsely testify before a committee of Congress investigating the affairs of the Corporation that the money in excess of his actual salary was received and used by him. Checks for a total of $ 3,600, less $ 378 for taxes, a net amount of $ 3,222, were issued in 1943 payable to Readnower. Of the net amount, Readnower received $ 1,137.36 for his personal benefit, Lamarre received $ 1,221.32 under petitioner's instructions to circumscribe wartime restrictions against salary increases, and the remainder of $ 863.32 was paid by Lamarre to petitioner under the Meyers Plan.↩
1. No services were performed by the individuals as consideration for the payments. The amounts constitute dividends paid to petitioner out of earnings. They and amounts received for actual salary were included in returns of the individuals. The resulting tax on the fictitious salary was paid by them with money petitioner authorized them to withhold for that purpose. The amounts were deducted by the Corporation as salaries for executives and disallowed by the respondent in determining the deficiencies. They were not reported as income in the returns filed by petitioner, but were included in his gross income by the respondent as "Dividends and other income omitted" in determining the deficiencies.↩
3. The figure includes $ 2,400, which, less taxes, was distributed between Lamarre and petitioner.↩
4. $ 2,400 was retained by Lamarre upon instructions of petitioner as a method of obtaining an increase of salary.↩