Mitchell v. Commissioner , 32 B.T.A. 1093 ( 1935 )

CHARLES E. MITCHELL, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Mitchell v. Commissioner

Docket No. 74720.

United States Board of Tax Appeals

32 B.T.A. 1093; 1935 BTA LEXIS 843;

August 6, 1935, Promulgated

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1. Taxpayer and his wife exchanged letters purporting to consummate a sale of 18,300 shares of bank stock. The sale price was approximately four million dollars; the wife's total fortune less than one million. Taxpayer by "gifts" provided his wife with sufficient funds in excess of dividends to pay taxpayer the agreed "interest"; no notice of a sale was given to the bank with which the stock was pledged to secure taxpayer's loan; no revenue stamps were affixed; no bill of sale executed; no entry of indebtedness was entered on the wife's books of account. Although taxpayer's wife claimed to have bought in order to resell at a profit, no sale was made notwithstanding there was such an improvement in the market that the stock could have been sold at a profit of three-quarters of a million dollars to her. Taxpayer, without revealing the fact of a sale, made claim against the National City Co. for relief from the burden of the original purchase of the stock, and subsequently when the market price was $45 per share went through the form of a repurchase from his wife at a price of $212 per share. Held, that the transaction was not a bona fide sale and the alleged loss did not constitute an allowable deduction from income.

2. Held, further, that the alleged sale was fraudulent with intent to evade taxes.

3. Held, that a payment from the management fund of the National City Co. received, retained and enjoyed by taxpayer was income, notwithstanding the subsequent signing of a "receipt" by taxpayer acknowledging the payment to have been an overpayment to be repaid from future additions to the fund before any further payments should be made.

4. Held, further, the failure to report such payment for taxation was fraudulent with intent to evade tax.

5. Held, the sale and repurchase by petitioner of stock of Anaconda Copper Mining Co. were bona fide and the loss sustained on the sale constituted an allowable deduction from income.

6. Held, the failure by taxpayer to report for taxation dividends paid in 1930 on the stock which was the subject of the fraudulent sale in 1929 rendered petitioner's return for 1930 fraudulent.

7. Section 146(b) of the Revenue Act of 1928 contemplates criminal prosecution by the United States for the alleged commission of a felony. Section 293(b) allows the imposition of a fraud penalty of 50 percent of a deficiency as an aid in collection of revenues. The indictment and acquittal of taxpayer in a criminal case in the Federal District Court for violation of section 146(b) of the Revenue Act of 1928 do not bar the imposition of the penalty of 50 percent of the deficiency under section 293(b) in a proceeding before the Board.

8. Where respondent in his notice of deficiency determines that a deficiency is due to fraud with intent to evade tax and a petition is filed denying fraud and the case proceeds to hearing, and evidence is introduced by both parties on the fraud issue, no motion having been made for judgment for failure of petitioner to file a reply to allegations of fraud in respondent's answer, and after the close of the hearing, on leave granted, a reply is filed, held, the fraud charges do not stand admitted under the pleadings and the rules of the Board. The filing of the reply, with leave given, satisfied the rules of the Board, and the burden of proof of fraud rested on the respondent.

[This proceeding was heard by a Special Division, consisting of Adams (presiding), Lansdon, and Van Fossan. Lansdon's term expired June 2, 1934, and he ceased to be a member of the Board. Adams died on January 29, 1935.]

William Wallace, Esq., Leonard Moore, Esq., and Robert Reed, Esq., for the petitioner.

Edward S. Greenbaum, Esq., Thomas E. Dewey, Esq., J. D. Head, Esq., and Nathan Gammon, Esq., for the respondent.

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VAN FOSSAN

This proceeding involves income taxes and penalties for the calendar years 1929 and 1930, determined by the respondent as follows:

Year	Deficiency in tax	50 percent penalty	Total deficiency
1929	$728,709.84	$364,354.92	$ 1,093,064.76
1930	121,719.84	60,859.92	182,579.76
Total	850,429.68	425,214.84	1,275,644.52

The pleadings raise the following issues:

1. Are the assessment and collection of the deficiencies, or either of them, barred by the statute of limitations (sections 275 and 276 of the Revenue Act of 1928), or, otherwise stated, did petitioner file false and fraudulent returns for the tax years or either of them?

2. Did petitioner realize a deductible loss upon a sale to his wife of 18,300 shares of the capital stock of the National City Bank of New York on December 20, 1929?

3. Did the amount of $666,666.67 received by petitioner on or about July 1, 1929, as a distribution from the management fund of the National City Co. constitute taxable income to him in that year?

4. Did petitioner realize a deductible loss upon a sale of 8,500 shares of the capital stock of the Anaconda Copper Mining Co., on December 26, 1930?

5. Did petitioner realize income in 1930 in the amount of $54,900 from dividends paid to petitioner's wife on the 18,300 shares of National City bank stock included in the transaction between petitioner and his wife on December 20, 1929?

6. Is the redetermination of petitioner's tax liability for the years 1929 and 1930 barred by the acquittal of present petitioner in the case of United States v. Charles E. Mitchell, that case being a prosecution of petitioner under section 146(b) of the Revenue Act of 1928?

In his answer to the petition, the respondent affirmatively alleged that petitioner's returns for the years 1929 and 1930 were false and fraudulent with intent to evade tax. The petitioner, after leave given, filed a reply August 6, 1934, denying the affirmative allegations of the respondent.

FINDINGS OF FACT.

1. The petitioner, an individual residing in New York City, is a business man and banker of wide experience. For many years prior to 1929 he had been president of the National City Bank of New York and the National City Co. In April 1929 he became chairman (the chief executive officer) of the National City Bank, the National City Co., and also the City Bank Farmers Trust Co., which was then absorbed by the National City Bank. He remained chairman of these institutions until March 1933. In 1929 all the stock of the National City Co. was held by trustees for the benefit of the stockholders of the National City Bank. In December 1929 there were outstanding approximately five million shares of stock of the National City Bank.

2. On March 15, 1930, the petitioner filed his Federal income tax return for the calendar year 1929. This return was filed on the basis of cash receipts and disbursements, and it showed a net loss of $48,899.65. The petitioner did not report in his return of gross income an amount of $666,666.67 received by him on or about July 1, 1929, as a distribution from the management fund of the National City Co., and in computing net income an amount of $2,872,305.50 was deducted as a loss sustained by petitioner upon a sale of 18,300 shares of National City Bank stock to his wife, Elizabeth R. Mitchell, on December 20, 1929.

In determining the deficiency here in question for the taxable year 1929, the respondent included in gross income as additional compensation the $666,666.67 received by petitioner from the management fund of the National City Co. and disallowed the deduction of $2,872,305.50, claimed as a loss on a sale of the 18,300 shares of National City Bank stock to Mrs. Mitchell. Other losses on sales were disallowed in the sum of $3,668.40. The respondent also determined that the deficiency was due to fraud with intent to evade tax and added to the deficiency the statutory penalty of 50 percent of the tax.

3. On March 14, 1931, the petitioner filed his Federal income tax return for the calendar year 1930. This return was filed on the basis of cash receipts and disbursements and showed net income in the amount of $8,552.40. He paid no income tax for that year. Petitioner did not report in his return of gross income an amount of $54,900, representing dividends upon the 18,300 shares of National City Bank stock which was the subject of the transaction on December 20, 1929, between petitioner and his wife. In computing net income an amount of $758,918.25 was deducted as a loss sustained upon a sale of 8,500 shares of the capital stock of the Anaconda Copper Mining Co. to W. D. Thornton on December 26, 1930. In determining the deficiency here in question for the taxable year 1930, the respondent included in petitioner's gross income the $54,900, representing dividends upon said 18,300 shares of National City Bank stock and disallowed the deduction of $758,918.25 claimed as a loss upon a sale of 8,500 shares of Anaconda Copper Mining stock to Thornton. These, with other adjustments not in controversy, resulted in the proposed deficiency. Respondent further determined that the deficiency was due to fraud with intent to evade tax and added the statutory penalty of 50 percent of the tax.

4. From 1913 through 1930 petitioner's income tax returns were prepared by Frank W. Black, a former partner of petitioner. He obtained the information for making out the returns either from petitioner or the latter's secretary. Black, with petitioner's knowledge and consent, computed petitioner's profits and losses on the sale of securities during the taxable years. Petitioner signed and verified the returns prepared by Black and filed them with the collector of internal revenue for the third collection district of New York.

5. Under date of October 1, 1929, the National City Bank and the Corn Exchange Bank Trust Co., pursuant to the action of the directors of both banks, entered into an agreement of consolidation, subject, however, to ratification by the shareholders of both banks at meetings to be held on November 7, 1929. The agreement of consolidation provided for the exchange of four shares of National City Bank stock for five shares of Corn Exchange Bank stock. As part of the agreement, the National City Co. agreed to purchase, at $360 per share in cash, any shares of Corn Exchanges Bank stock which might be tendered it for purchase within 20 days after the date of consolidation. The effect of the agreement to purchase Corn Exchange Bank stock at $360 per share was to place an equivalent price on National City Bank stock of $450 per share.

On October 28, 1929, the National City Co., in an apparent effort to support the price of the National City Bank stock, purchased 71,469 shares of that stock at a cost of approximately $32,000,000. These purchases increased the National City Co.'s holdings in that stock to 83,671 shares. Late in the afternoon of the same day petitioner learned of these purchases and, being of the opinion that the National City Co. should not purchase more of this stock, decided to use his personal credit to support the stock.

6. On the morning of October 29, 1929, petitioner arranged with J. P. Morgan & Co. for a personal credit up to $12,000,000, against which he could buy stock, to be secured by National City Bank stock as collateral, at a value for the purpose of not more than $200 per share. A special account was opened on the books of the National City Co. for shares of the National City Bank purchased for petitioner's account. Petitioner advised the president of the National City Co. of his arrangement with Morgan & Co. and authorized him to buy for his account.

7. On October 29, 1929, the National City Co. bought in the market for petitioner's account an aggregate of 28,300 shares at an average cost of $367.0028 per share, totaling $10,386,179.50. These shares were registered in the name of Taff & Co., as nominee of the National City Co. The shares so purchased were delivered to Morgan & Co., who charged the cost thereof against petitioner's credit of $12,000,000.

8. About November 4, 1929, the National City Co. sold for petitioner's account 4,000 of the 28,300 shares of National City Bank stock at $435 a share, and 1,000 shares at $425 a share. About November 6, 1929, it sold 5,000 additional shares thereof at $425 a share. The aggregate price of the 10,000 shares sold was $4,290,000. This sum was credited by Morgan & Co. against petitioner's loan account, leaving a balance due from petitioner on the 18,300 shares remaining of $6,096,179.50, for which sum Morgan & Co. held as collateral 30,000 shares of National City Bank stock registered in petitioner's name and the remaining 18,300 shares registered in the name of Taff & Co. Morgan & Co. continued to hold this collateral for petitioner's loan at all times hereinafter referred to. The National City Co. made no further sales from the stock it had purchased for petitioner's account on October 29, 1929. The petitioner realized a profit of $655,726 from the 10,000 shares sold, which profit was reported on his income tax return for 1929.

9. On December 4, 1929, a stock purchase plan was put forth by the directors whereby National City Bank stock was offered to employees at the price of $200 per share. On or about December 20, 1929, 50,000 shares of National City Bank stock were allotted to the plan. Over 100,000 shares were applied for. Thereafter 10,000 additional shares were allotted to officers of the National City Bank and affiliated companies at $220 per share. This offering was also oversubscribed.

10. Prior to December 20, 1929, petitioner had realized profits from the sales of securities during the year 1929 of $1,388,237.97, which amount included the profit of $655,726 realized on the sale of the total of 10,000 shares of the 28,300 shares of National City Bank stock. In addition to these profits from the sales of securities, petitioner received during the year 1929 from the National City Bank and the National City Co. salaries and payments from management funds, in the sum of $1,206,195.02, exclusive of the sum of $666,666.67 received on or about July 1, 1929, from the management fund of the National City Co.

11. Prior to the middle of December 1929 petitioner determined that he would not report as taxable income the payment of $666,666.67 received as a distribution from the management fund. Petitioner realized that he would have a very large gross income for the taxable year 1929. This income was in an amount in excess of $2,800,000. The market price of National City Bank stock was $212 per share on December 19, 1929. Accordingly, and for the purpose of "registering a loss" he considered ways and means of disposing of the National City Bank stock in order that he might take a deduction of the difference between its purchase price and the then market, which difference amounted to $2,872,305.50 on December 19, 1929.

12. From 1918 to 1930 petitioner had had occasional business transactions with his wife, Elizabeth R. Mitchell, which were recorded in his books of account. In 1919 she had loaned him $23,903.80 which was repaid by him in that year. In 1920 she loaned him $125,000 par value of bonds which were returned to her by him. In 1920 she purchased 35 shares of National City Bank stock from her husband and gave him her check covering the purchase price. From 1918 to 1922 petitioner carried a loan or "special account" with Mrs. Mitchell, paying her 3 percent interest. The loan was repaid in 1922. In 1926 he paid her $2,034.51 in connection with a stock adjustment of International Telephone & Telegraph stock, and purchased from her 250 shares of International Telephone & Telegraph rights for $2,212.50. In 1929 Mrs. Mitchell sold him 500 International Telephone & Telegraph rights for $3,250. From 1918 to 1929 Mrs. Mitchell had participated in a number of underwriting syndicate transactions, in most of which she realized a profit. From 1920 to April 24, 1928, Mrs. Mitchell had accumulated 375 shares of National City Bank stock at a total cost of $101,495. By January 17, 1929, Mrs. Mitchell had sold 275 shares of National City Bank stock and 200 rights for a total of $293,209.02, leaving her with a balance of 100 shares which, by reason of a five to one split-up, became 500 shares of National City Bank stock after January 1929.

13. On December 20, 1929, Elizabeth R. Mitchell had total assets having a then market value as follows:

Bonds	$260,336.19
Stocks	577,630.13
Garage *	21,000.00
Cash in banks	32,027.80
Mortgage participations *	50,000.00
Total	940,994.12

exclusive of jewelry, furniture, objects of art, books, and the cash value of life insurance policies on the life of the petitioner.

14. Petitioner discussed with Mrs. Mitchell the matter of a sale to her of the 18,300 shares of bank stock on the night of December 19, 1929. No definite agreement to buy or sell was made at that time.

On December 20, 1929, petitioner consulted Harry W. Forbes, a member of the law firm of Shearman & Sterling, general counsel for the National City Bank and the National City Co., who had specialized in Federal income tax matters. He advised Forbes that he had a large block of National City Bank stock which represented a big loss and that he had arranged to sell the stock to Mrs. Mitchell, provided he could take a loss for tax purposes by so doing. Forbes informed petitioner that the Treasury Department regarded all such transactions between husband and wife with a great deal of scrutiny and asked him why, if that was stock which he really intended to sell, he did not sell it in the open market so that there could be no question about the sale. To this petitioner replied that it was a large block of stock which he could not sell on the open market without causing the price to decline and, besides that, he felt confident that after the first of the year the stock would increase in value, and for those reasons he wanted to sell the stock to Mrs. Mitchell so he could take his loss on his income tax return for 1929 and she could have the advantage of disposing of the stock at the higher price later on.

Petitioner asked if sales between husband and wife were not recognized for income tax purposes, and was told that they were where a sale was made in good faith for fair market value and the wife was financially responsible. Petitioner said he was making an absolute sale at the current market value and that Mrs. Mitchell had resources of her own. Petitioner did not tell Forbes the amount of Mrs. Mitchell's personal estate. Forbes inquired of petitioner whether Mrs. Mitchell could pay cash and take delivery of the stock, and petitioner told him that she did not have the cash available and that he could not deliver the stock because it was pledged as collateral security for the loan with Morgan & Co. Forbes then asked if Mrs. Mitchell could take over the loan of Morgan & Co. and petitioner said that could not be done because the loan was for a much larger amount; that he would like to sell her the stock and continue to carry it for her in the loan with Morgan & Co. Forbes told him he thought that could be done, but it would require a very carefully drawn agreement and petitioner told Forbes that was what he wanted his advice on. Petitioner told Forbes that usually his transactions with Mrs. Mitchell were handled by letters and, instead of a formal agreement, letters were prepared by petitioner and Forbes as follows:

(a) A letter from petitioner to Mrs. Mitchell:

C. E. MITCHELL, 55 WALL STREET,

New York, December 20, 1929.

DEAR ELIZABETH,

This is to confirm that I have today sold to you for your account and risk 18,300 shares of the capital stock of The National City Bank of New York, ex-January 1930 dividend, at $212. per share which represents the present market.

The stock is in the name of Taff & Co. and is represented by certificates as per the attached sheet. These shares are at present being carried in a loan with J. P. Morgan & Company for my account, and for your convenience I will arrange to so continue the carriage of the stock subject to your payment of the amount due, the debt in any event to be liquidated by you within nine months from date hereof.

Taff & Co. have been notified through The National City Company to remit to you the dividends received on the stock and I will, from time to time, render you a bill for the interest due on the loan. In acknowledging receipt hereof, please confirm your verbal instructions to me with respect to liquidation of the account and oblige.

Yours very truly,

[Signed] C. E. MITCHELL.

MRS. ELIZABETH R. MITCHELL,

934 Fifth Avenue, New York City.

(b) A letter from Mrs. Mitchell to petitioner:

934 FIFTH AVENUE,

New York, December 20, 1929.

Mr. CHARLES E. MITCHELL,

55 Wall Street, New York.

DEAR CHARLES

I acknowledge receipt of your letter of December 20 and confirm purchase from you of 18,300 shares of the capital stock of The National City Bank of New York at $212. per share under the terms as stated in your letter.

You are hereby authorized to sell from time to time or at any time that may seem in your judgment proper all or any part of the said 18,300 shares at markets then prevailing but at not less than $220. per share, the avails over and above the purchase price to be remitted to me as received and to be applied on account of borrowings.

Yours very truly,

[Signed] ELIZABETH R. MITCHELL.

(c) A letter from petitioner to Taff & Co., in whose name the stock was held, to which was attached a list of the certificate numbers of the 18,300 shares of stock:

C. E. MITCHELL, 55 WALL STREET,

New York, December 20, 1929.

TAFF AND COMPANY,

c/o The National City Company,

52 Wall Street, New York City.

GENTLEMEN:

The National City Bank shares in your name (certificate numbers attached) are the property of Elizabeth R. Mitchell, and dividends received by you on account thereof, subsequent to January 2, 1930, should be paid to E. Rend Mitchell, c/o E. F. Barrett, 55 Wall Street.

Yours very truly,

[Signed] C. E. MITCHELL.

On the evening of December 20, 1929, petitioner signed the letter addressed to Mrs. Mitchell and she signed the letter addressed to him. Copies of these letters were thereafter delivered by petitioner to E. F. Barrett who, assisted by his secretary, Mrs. Kline, kept detailed records of Mrs. Mitchell's investment account. Petitioner also signed and delivered the letter to Taff & Co. On or about February 18, 1930, petitioner in his office handed to Lindsay Bradford, vice president of the City Bank Farmers Trust Co., the original letter from petitioner to Mrs. Mitchell, a copy of the letter from Mrs. Mitchell to petitioner, and a copy of the letter from petitioner to Taff & Co. Mr. Bradford gave these papers to H. D. Sammis, vice president of the City Bank Farmers Trust Co., who placed them in a sealed envelope marked "Confidential a/c E. Rend Mitchell - Letters and papers re securities with J. P. Morgan & Co., envelope only to be opened on instructions from Mrs. Mitchell or E. F. Barrett, vice-president, National City Bank, or Lindsay Bradford, vice-president, City Bank Farmers, or H. D. Sammis, vice-president, City Bank Farmers." On February 18, 1930, the Trust Co. gave Barrett a receipt covering this envelope. This envelope was then placed in the vault of the trust company in which records of customers were kept. Forbes had told petitioner that, for Mrs. Mitchell's protection, he ought to notify Morgan & Co. of the sale and arrange with them for Mrs. Mitchell to withdraw the stock on the payment of $212 per share. Petitioner did not notify Morgan & Co. of the transaction of December 20, 1929, and copies of the letters were not shown to Morgan & Co., or any representative of that firm. In or about the month of January 1931 Morgan & Co. received for the first time knowledge or information to the effect that petitioner had, or claimed to have, sold said 18,300 shares of National City Bank stock.

15. Forbes told petitioner that revenue stamps would be required in the transaction. At the time the letters were exchanged no internal revenue or state transfer stamps were attached to them and no bill of sale was executed in connection with the transaction. Subsequently, on or about the 11th of August 1933, on demand of the collector of internal revenue, petitioner purchased internal revenue stamps in the amount of $116.46, which were affixed.

16. Mrs. Mitchell's ledger contains an entry entitled "National City Bank Stock" reading as follows: "1929 - Dec. 20 - Bought at 212 - 18,300 shares - $879,600" (sic). This figure was computed by Mrs. Kline from the copies of the letters of December 20, 1929, delivered to her by Barrett for filing. In Mrs. Kline's handwriting appear, in pencil, the words "See file on securities." No other entries of any kind appear in Mrs. Mitchell's books concerning this transaction. On or about February 18, 1930, Mrs. Mitchell's custodian account at the National City Co. was transferred to the City Bank Farmers Trust Co., which assumed the management of this account. The City Bank Farmers Trust Co. did not, however, assume the management of the 18,300 shares of National City Bank stock, which were treated differently from her other securities, and petitioner alone was the one to advise with respect thereto.

17. Mrs. Mitchell made no payment on account of the purchase price of the stock and gave no note or other evidence of indebtedness therefor.

18. Mrs. Mitchell's account with the City Bank Farmers Trust Co. was credited with dividends on 18,300 shares of National City Bank stock as follows:

April 1, 1930	$18,300
July 1, 1930	18,300
October 1, 1930	18,300
January 2, 1931	18,300
April 1, 1931	$18,300
July 1, 1931	18,300
October 1, 1931	18,300
January 2, 1932	18,300

The dividend rate on said National City Bank stock was $4 per share per annum, payable quarterly, and this was the dividend rate payable on that stock since April 1929. The fact of said dividend rate was published. On April 1, 1930, Mrs. Mitchell also received a dividend on the 500 shares of National City Bank stock owned by her prior to December 20, 1929. The dividend on the 500 shares was credited to Mrs. Mitchell's income account in the City Bank Farmers Trust Co. and remained in that account. The dividend on the 18,300 shares was credited to Mrs. Mitchell's income account and immediately transferred to her principal account. Subsequent dividends on both the 500 shares and 18,300 shares were treated in the same manner, respectively.

19. During the period from December 20, 1929, to March 24, 1932, there were paid to petitioner from Mrs. Mitchell's account sums in the amounts and on the dates as follows:

April 1, 1930	$59,810.50
July 1, 1930	49,033.84
October 1, 1930	49,572.67
January 2, 1931	49,572.67
April 1, 1931	$48,495.00
July 1, 1931	49,033.84
October 2, 1931	49,576.67
January 2, 1932	49,572.50

Mrs. Mitchell made no payments to petitioner between December 20, 1929, and March 24, 1932, other than those above set forth. The payments thus made to petitioner exceeded by $258,267.69 the dividends credited to Mrs. Mitchell's account from the 18,300 shares of National City Bank stock.

20. The dividends from the 18,300 shares of National City Bank stock were not sufficient to meet the so-called "interest payments" from Mrs. Mitchell to petitioner. The first payment was made April 1, 1930. This payment in the amount of $59,810.50 was made out of Mrs. Mitchell's principal account in the City Bank Farmers Trust Co. and created an overdraft in that account of about $19,414.60. Two subsequent payments to petitioner, on July 1 and October 1, 1930, created overdrafts in her principal account.

21. In order to enable Mrs. Mitchell to meet the interest payments to petitioner without depleting her personal fortune petitioner made various payments and gifts of cash or other property to her from time to time during the period from December 20, 1929, to December 31, 1932, as follows:

June 4, 1930, "as a wedding anniversary present" securities having a then market value of $42,500.

July 1, 1930, $25,000. This amount was entered in Mrs. Mitchell's books of account as "Proceeds of loan at 4%."

August 21, 1930, $22,500, given to Mrs. Mitchell on the occasion of her birthday.

January 21, 1931, $25,000, given to Mrs. Mitchell as a Christmas gift.

April 10, 1931, $30,000.

June 30, 1931, $25,000.

August 18, 1931, $5,000, deposited to Mrs. Mitchell's personal account.

August 18, 1931, $10,000, birthday gift.

October 6, 1931, $25,000, given to Mrs. Mitchell on the occasion of petitioner's birthday.

December 24 1931, $1,000, deposited to Mrs. Mitchell's personal account.

December 25, 1931, $30,000, Christmas gift.

August 11, 1932, $5,000.

December 24, 1932, $1,000, deposited in Mrs. Mitchell's personal account.

22. On July 1, 1931, the Trust Co. wrote to petitioner as follows:

In compliance with your request we enclose a check drawn to your order for $49,033.84 and have debited a like amount to Mrs. Mitchell's Investment Management Account.

23. In order to ascertain how his "gifts to Mrs. Mitchell had checked up" and "how much of a burden she had really been under as a result of this purchase" of 18,300 shares of bank stock, petitioner requested his secretary to get from the City Bank Farmers Trust Co. a statement of the receipts and disbursements. As a result of this request the following memorandum was prepared and given to petitioner:

OCTOBER 2, 1931.

Re: Account E. Rend Mitchell
	1931
Receipts	Jan. 2 - National City Co	$18,300
	Jan. 22 - Recd. from Mr. Mitchell	25,000
	Apr. 1 - National City Co	18,300
	Apr. 10 - Recd. from Mr. Mitchell	30,000
	June 30 - Recd. from Mr. Mitchell	25,000
	July 1 - National City Co	18,300
	Aug. 18 - Recd. from Mr. Mitchell	10,000
	Oct. 2 - National City Co	18,300
		$163,200
Disbursements	Jan. 2 - Paid Mr. Mitchell	$49,572.67
	Apr. 2 - Paid Mr. Mitchell	48,495.00
	July 1 - Paid Mr. Mitchell	49,033.84
	Oct. 2 - Paid Mr. Mitchell	49,576.67
		$196,678.18

Difference due Mrs. Mitchell, $33,478.18.

H. M. PETERSON,

Asst. Trust Officer.

On October 6, 1931, petitioner gave Mrs. Mitchell the sum of $25,000 on the occasion of his birthday.

In 1932 petitioner requested his secretary to get from the City Bank Farmers Trust Co. a memorandum showing, from the first of January 1931, the amount of dividends received by Mrs. Mitchell; the total amount of gifts he had made to her; the amount of disbursements by her to petitioner and the amount of premiums paid by her on the life insurance policies. (In the years 1925 and 1926 the petitioner transferred to Mrs. Mitchell certain policies of insurance on his life and thereafter Mrs. Mitchell paid the premiums thereon.) On or about August 11, 1932, the following memorandum was furnished in compliance with petitioner's request:

AUGUST 11, 1932.

In Re: Account E. Rend Mitchell

The figures given below include various receipts and disbursements for the above account - January 2, 1931 to date - including and supplemental to our memorandum of October 2, 1931.

	1931
Receipts	Jan. 2 - National City Co	$18,300
	Jan. 22 - Recd. from Mr. Mitchell	25,000
	April 1 - National City Co	18,300
	April 10 - Recd. from Mr. Mitchell	30,000
	June 30 - Recd. from Mr. Mitchell	25,000
	July 1 - National City Co	18,300
	Aug. 18 - Recd. from Mr. Mitchell	10,000
	Oct. 2 - National City Co	18,300
	Oct. 6 - Recd. from Mr. Mitchell	25,000
	Dec. 29 - Recd. from Mr. Mitchell	30,000
	1932
	Jan. 2 - National City Co	18,300
			$236,500.00
	1931
Disbursements	Jan. 2 - Paid Mr. Mitchell	$49,572.67
	April 2 - Paid Mr. Mitchell	48,495.00
	July 1 - Paid Mr. Mitchell	49,033.84
	Oct. 2 - Paid Mr. Mitchell	49,576.67
	1932
	Jan. 2 - Paid Mr. Mitchell	49,572.50
			246,250.68
Difference			$9,750.68

H. M. PETERSON,

Asst. Trust Officer.

Premiums paid to date	24,240.20
	$33,990.88
Premiums due August 16	3,399.00
Total disbursements	$37,389.88

On the same date, August 11, 1932, petitioner made gifts to Mrs. Mitchell in the amount of $10,000.

24. At the annual meeting of the stockholders of the National City Bank, in January 1930, a stockholder asked petitioner whether he had disposed of any of his stock in the National City Bank. Petitioner replied, "Not a single share, sir. As a matter of fact I am buying all I can possibly get and that I can possibly pay for."

25. After December 20, 1929, the market price of National City Bank stock rose until on February 14, 1930, it reached 255 bid and 257 asked. Thereafter, the price declined until on March 24, 1932, it was 43 3/4 bid and 44 1/4 asked. None of the 18,300 shares here in question were sold at the higher price.

26. From time to time petitioner gave additional collateral to J. P. Morgan & Co. to secure the loan established by him on or about October 29, 1929, in connection with the purchase of National City Bank stock. This collateral included bonds and mortgages on real estate owned by petitioner. After December 20, 1929, the net worth of petitioner, which had approximated $30,000,000 in October 1929, declined until in or about February 1931 he advised Morgan & Co. that he had exhausted all his assets and was unable to furnish any further collateral. Thereafter, petitioner's financial condition became progressively worse and on March 24, 1932, he was insolvent by an amount in excess of $3,000,000.

27. With the decline of the market in 1931 petitioner's loan with Morgan & Co. became undermargined and by the summer of that year the collateral was worth less than the loan itself. Late in the summer of 1931 petitioner discussed this matter with Guy Cary, one of the senior partners of the firm of Shearman & Sterling, and sought to determine whether there was some basis for making a claim against the National City Co. and asking the company to relieve him from the situation in which he found himself as a result of the purchase of the 28,300 shares of National City Bank stock and the loan negotiated on account of that purchase. Cary suggested that petitioner seek the advice of independent counsel.

Petitioner thereon consulted the firm of Cravath, DeGersdorff, Swaine & Wood. As a result they wrote petitioner a letter dated March 5, 1932, in which the following paragraph appeared:

We are therefore of opinion that The National City Company is under obligation to take up from the Morgan loan the 18,300 shares of National City stock at their net present cost with adjustment for interest charged and dividends received.

The above letter recites the fact of the sale of 10,000 shares of National City Bank stock, but makes no mention of the sale of 18,300 shares to Mrs. Mitchell.

Petitioner forwarded this letter, under date of March 11, 1932, to Hugh Baker, president of the National City Co. Baker caused it to be presented to the board of directors of that company at a meeting. Petitioner attended this meeting, but withdrew prior to the presentation to the board of the letter and was not present when the matter was under consideration.

The matters referred to in the letter were the subject of conferences among the directors of the National City Co. and of the National City Bank, both before and after the submission of said letter to the directors of the National City Co., and petitioner attended certain conferences concerning his claim referred to in said letter. An informal committee of directors of the National City Bank and the National City Co. was appointed, to which petitioner's claim was referred. Petitioner discussed his claim with this committee but he did not inform the committee that he had sold the stock to Mrs. Mitchell. The committee secured the opinion of John W. Davis, a member of the New York Bar, to the effect that there was no legal basis for the claim. Thereafter, on June 29, 1932, petitioner wrote a letter to the president of the National City Co. in which he suggested that it "not be further considered now in the light of a claim" but await more favorable conditions in the affairs of the company.

28. In March 1932 petitioner was advised by Guy Cary, of the firm of Shearman & Sterling, who had some knowledge of petitioner's affairs, that a Federal gift tax was liable to be imposed by Congress which would further complicate petitioner's affairs in the event that he contemplated making a gift to Mrs. Mitchell by way of forgiveness of her debt to him. Thereafter, petitioner consulted his personal attorneys, Cravath, DeGersdorff, Swaine & Wood, and letters were prepared by the attorneys and exchanged between petitioner and his wife as follows:

MARCH 24, 1932.

DEAR ELIZABETH,

You now hold 18,300 shares of the capital stock of The National City Bank of New York, together with certain claims against The National City Company in connection therewith, in respect of which you are now indebted to me in the sum of $3,924,862.

This is to confirm my purchase from you of said shares and claims, in consideration of my releasing you of all liability on account of your present indebtedness to me in connection therewith.

Therefore, please sign and deliver to me the enclosed bill of sale of stock, with the necessary tax stamps attached, upon receipt of which I hereby release you from any further obligation whatsoever in connection therewith.

Please also sign and return to me the enclosed dividend order.

Very truly yours,

[Signed] C. E. MITCHELL.

MRS. C. E. MITCHELL,

934 Fifth Avenue, New York, New York.

MARCH 24, 1932.

DEAR CHARLES,

I confirm the sale mentioned in your letter of today and send you herewith, signed and with transfer stamps attached, bill of sale for 18,300 shares of stock of The National City Bank of New York.

The signed dividend order is also returned herewith.

Very truly yours,

[Signed] ELIZABETH R. MITCHELL.

Mr. CHARLES E. MITCHELL,

55 Wall Street, New York, New York.

Mrs. Mitchell also executed the following bill of sale, to which revenue stamps were attached:

NEW YORK, March 24, 1932.

Sold to CHARLES E. MITCHELL eighteen thousand three hundred (18,300) shares of capital stock of The National City Bank of New York

[Signed] ELIZABETH R. MITCHELL.

Mrs. Mitchell also signed the following letter to Taff & Co.:

MARCH 24, 1932.

Messrs. Tefft & Company [sic]

In Care of The National City Company, 20 Exchange Place, New York, New York.

DEAR SIRS:

Please hereafter pay to Charles E. Mitchell, 55 Wall Street, New York City, any and all dividends received by you subsequent to the date hereof on account of The National City Bank shares in your name represented by certificates numbered as per attached list.

Very truly yours,

[Signed] ELIZABETH R. MITCHELL

To this letter was attached a list of the numbers of the certificates and the number of shares evidenced by each certificate, totaling the 18,300 shares of stock.

The price named as a basis of the above transaction between petitioner and his wife was $212 per share, the same price named at the time of the first transaction between the parties. At the date of the last transaction the market price on the stock was approximately $45 per share. Mrs. Mitchell never paid to petitioner any part of the purchase price of the 18,300 shares of stock, and no cash was passed between them in either the transaction of December 20, 1929, or that of March 24, 1932. At this later date petitioner was insolvent in amount of $3,000,000.

29. On March 25, 1932, the day following the exchange of letters between petitioner and his wife, petitioner sent the following letter to Lindsay Bradford, vice president of the City Bank Farmers Trust Co.:

MARCH 25, 1932.

PERSONAL & CONFIDENTIAL

DEAR MR. BRADFORD,

You may want to put into a sealed envelope, to be carried in Mrs. Mitchell's files, the enclosed papers having to do with the passage of title of 18,300 shares of National City Bank stock and a release from debt thereon.

You will note that from this time on there will be no interest payments due from her or dividend entries.

A brief acknowledgment sent to me under confidential cover will be appreciated.

Yours very truly,

[Signed] C. E. MITCHELL.

Mr. LINDSAY BRADFORD, Vice President,

The City Bank Farmers Trust Company,

22 William Street, New York, New York.

The enclosures referred to in said letter were the original of petitioner's letter of March 24, 1932, to Mrs. Mitchell and a copy of Mrs. Mitchell's letter of that date to him.

This letter was acknowledged by Mr. Bradford as follows:

CITY BANK FARMERS TRUST COMPANY,

22 WILLIAM STREET,

NEW YORK, March 25, 1932.

PERSONAL AND CONFIDENTIAL

DEAR MR. MITCHELL:

This will acknowledge your letter of March 25, 1932, enclosing a certain letter from you to Mrs. Mitchell, together with other papers, all of them apropos of the transfer of title of 18,300 shares of National City Bank stock from Mrs. Mitchell to yourself.

We have made due note of the fact that previous arrangements in regard to interest payments and dividend receipts are no longer in force.

For your information, we have placed the papers which you enclosed in a sealed envelope and placed the envelope in Mrs. Mitchells files.

Yours very truly,

[Signed] LINDSAY BRADFORD,

Vice President.

Mr. CHARLES E. MITCHELL,

55 Wall Street, New York, New York.

30. On February 8, 1921, the board of directors of the National City Co. adopted a resolution providing for additional compensation to certain of its officers as provided in the minutes of the meeting on that date creating a "management fund." Certain changes were made therein by resolution of the board of directors on January 24, 1927, and the plan so modified was in effect during the year 1929.

The management fund plan provided that there be set up a reserve account out of current earnings. The term "current earnings" is defined as constituting the net operating income of the month, after current charges for depreciations or write-offs, taxes, or other reserves authorized by the board of directors. From the current earnings so determined there was first to be deducted each month an amount figured at 8 percent per annum on the average quarter year aggregate of capital, surplus, and undivided profits. An amount equal to 20 percent of the remainder of such current earnings for the month was then credited to the management fund.

At the close of the current year or at any time, or from time to time during the year, the executive committee was empowered to make distribution of the management fund to operating executive officers of presidential or vice presidential rank, one half "in accordance with fixed percentages to be forthwith established", the remaining one half to be distributed to executives of similar class "holding office at the close of the year, in such proportion as in the unrestricted judgment and discretion of the committee may seem wise and proper as representing the ratable contribution of each such executive to the development and progress of the company during the year." An exception was made as to the president in order that the executive committee might have the benefit of his unbiased opinion and advice with respect to the distribution of the fund referred to in the foregoing sentence. The percentage of the participation of the president in the entire fund was to be fixed forthwith. Petitioner was president of the company at the time of both resolutions and did not become chairman until 1929.

31. Distributions from the management fund were made semiannually as follows:

Date	Amount	Total
7/13/21	$196,351.55
12/22/21	400,000.00
		$596,351.55
7/5/22	375,000.00
1/5/23	615,000.00
		990,000.00
7/5/23	150,000.00
1/8/24	116,000.00
		266,000.00
7/8/24	175,000.00
1/7/25	785,142.92
		960,142.92
7/6/25	305,000.00
1/5/26	649,237.50
		954,237.50
7/1/26	$186,000.00
1/5/27	508,000.00
		$ 694,000.00
7/1/27	540,000.00
1/4/28	1,010,000.00
		1,550,000.00
7/2/28	650,000.00
1/3/29	1,450,000.00
		2,100,000.00
7/1/29	1,860,000.00	1,860,000.00
1/2/31	140,938.98	140,938.98

32. At a meeting of the board of directors of the National City Co. held on January 2, 1929, the president reported that the figures with respect to the management fund and his recommendations for distribution thereof had been submitted to the executive committee and approved.

Thereafter, on January 3, 1929, the National City Co. deposited $1,450,000 with the Bankers Trust Co. of New York for the account of the management fund, and a distribution of this sum was made as payments from the management fund. Of the amount so distributed petitioner received $483,333.33. After this distribution there remained in the management fund a balance of $140,938.98.

33. At a meeting of the board of directors of the National City Co. on January 8, 1929, the plan for the establishment of management funds as set forth in the board's resolution of January 25, 1927, was reapproved and adopted for the year 1929, "in each and every respect including method of distribution thereof", and the officers were "authorized and instructed to set up monthly reserves therefor." On the same date there was a meeting of the executive committee of the National City Co. At these meetings the percentage allotment of the president in the management fund for the year 1929 was definitely determined and fixed at 33 1/3 percent.

34. At a meeting of the board of directors of the National City Co., June 25, 1929, the chairman reported that the accumulation in the management fund for the first six months of the year 1929 would aggregate approximately $2,900,000, whereupon a resolution was passed authorizing a distribution from the accumulation according to the fixed percentages and the treasurer was authorized, upon the approval of the chairman and/or H. F. Mayer, vice president, to make disbursements to the eligible officers on July 1, 1929.

On June 27, 1929, the chairman and vice president signed the following memorandum:

JUNE 27, 1929

Mr. S. W. BALDWIN, TREASURER:

In accordance with the resolution passed by The Board of Directors at the meeting held June 25, 1929, will you please make disbursement from the Management Fund at this time, of the following amounts:

Mr. C. E. Mitchell	$666,666.67
Mr. H. B. Baker	220,000.00
Mr. R. M. Byrnes	170,000.00
Mr. G. K. Weeks	110,000.00
Mr. P. V. Davis	80,000.00
Mr. L. E. Olwell	70,000.00
Mr. S. A. Russell	170,000.00
Mr. G. S. Rentschler	100,000.00
Mr. G. D. Buckley	73,333.33
Mr. J. P. Ripley	150,000.00
Mr. W. R. Morrison	50,000.00
Total	$1,860,000.00

C. E. MITCHELL, Chairman.

H. F. MAYER, Vice President.

Thereafter, on July 1, 1929, the National City Co. deposited $1,860,000 with the Bankers Trust Co. for the account of the management fund and a distribution of this sum was made from the management fund. The amount received by petitioner was $666,666.67.

35. In computing the amounts available for payments to the participants in the management fund, computations were made at the end of each month and credited to the account kept for that purpose, entitled "Reserve for other deductions", in those months in which there were accretions to the fund. In those months in which the company suffered losses this account was correspondingly reduced. Credits were made to this account during every month of 1929 through the month of October. For the months of November and December there were no credits to this account, and the losses of the National City Co. during the said months exceeded the profits which it made during the first ten months of the year.

36. Sometime about the latter part of November 1929 petitioner asked R. M. Byrnes, a vice president of the National City Co., to make a study of the management fund for presentation to the board.

On or about December 13, 1929, F. H. Mayer, vice president and comptroller of the National City Co., consulted Harry W. Forbes of the law firm of Shearman & Sterling. Forbes was familiar with the management fund only in a very general way and Mayer told him of the payment that had been made in the middle of the year, but owing to subsequent losses it was apparent that it was going to result in an overpayment and that he thought he ought to have some sort of voucher from the officers who had received the money, acknowledging it. Certain officers objected to such a procedure.

Within a day or two thereafter Mayer called Forbes on the telephone and asked if he would get up a form of receipt which had been mentioned. Forbes told him that he would get up a receipt but would not attempt to pass on the effect of it. A form of receipt was drawn up by Forbes and transmitted to Mayer, December 13, 1929. Receipts in this form were signed by all of the participants in the distribution of the management fund of July 1, 1929. Petitioner signed a receipt in the following form:

RECEIVED on July 1, 1929, from The National City Company $666,666.67, which represents an overpayment to me of my share for the year 1929 in the Management Fund, and which is to be repaid by me from future additions to the said Management Fund, before I become entitled to any further payments therefrom.

C. E. MITCHELL.

These receipts were placed in an envelope marked "Accounts Receivable S. W. Baldwin, Treasurer, Special Management Fund 1929", which envelope remained thereafter in the vaults of the National City Co.

37. At a meeting of the board of directors of the National City Co. held on December 30, 1929, petitioner, who was chairman of the board, discussed the management fund with particular reference to the distribution made of this fund July 1, 1929, and the status of the fund after the results of the whole year were taken into account. After discussion of the matter the following resolution was duly adopted:

RESOLVED that the share which each of the executives of this Company received in the distribution of the first half of the Management Fund for 1929 be debited against each of such officers respectively on the books of this Company to be repaid by each of them out of any distributive share of the Management Fund which each of such officers may be entitled to receive in any year subsequent to the current year 1929.

38. As of December 30, 1929, there was set up on the accounts receivable and payable ledger of the National City Co. a debit to "Accounts Receivable and Payable" and a credit to "Reserve for other Deductions" in the amount of $1,860,000. This entry was carried forward to the year 1930.

39. At a meeting of the board of directors of the National City Co. January 9, 1930, the chairman discussed the management fund for 1930 and the following resolutions were passed:

RESOLVED that the basis of division as between the executive officers with reference to the first half of the fund during 1929 be continued during 1930 as to those officers receiving advances from management funds in July 1929 and until rescinded and revised by this Board. Further

RESOLVED that after the distribution made among the executive officers in July 1929 has been repaid to the Company out of the Management Fund accumulated and distributed subsequent to December 31, 1929, the Board again consider the Management Fund in all its phases and reestablish the basis for future distributions as at such time seems just and equitable.

Thereafter, on or about January 18, 1930, petitioner sent a letter to each of the participants in the management fund distribution of July 1, 1929. This letter was in part as follows:

The events of the last quarter year have wiped out the accumulation of the management fund, and accordingly you have been debited on the books with the amount advanced to you in July, and this debit will stand until it can be paid from distribution to you of future accumulations in management fund.

40. Prior to March 15, 1930, petitioner received the following memorandum from the National City Co., which he gave to Sweeney, his secretary, to be handed to F. W. Black, who was preparing petitioner's Federal income tax return:

Confidential Memorandum for Mr. Mitchell

We will report to the Commissioner of Internal Revenue, Washington, D.C., and to the New York State Income Tax Bureau, Albany, New York, that compensation in the amount of $510,629.28 was paid to you by this company during the year 1929. This is in compliance with the Income Tax Laws.

This memorandum was handed by Sweeney to Black.

The National City Co. on its Federal income tax return for the calendar year 1929 did not deduct any part of the management fund distributed July 1, 1929, as compensation to its officers or otherwise. Without the benefit of such deduction the Federal income tax return of the National City Co. for 1929 showed a net loss of several million dollars in excess of $1,860,000, the amount distributed July 1, 1929.

41. In January 1930, after the meeting of the board of directors of the National City Co. on December 30, 1929, Gerrard Winston, a director, and a member of the law firm of Shearman & Sterling, consulted Forbes of the same firm, concerning the matter of the 1929 midyear distribution from the management fund from the tax standpoint of the National City Co. A few days later Winston saw petitioner and stated to him that he and Forbes had come to the conclusion that the midyear payment made out of the management fund was, as a result of the action of the board at its December 30 meeting, not a proper deduction for the National City Co. to take from its income tax return; that the company should not report those payments as compensation to officers; and that it followed, from the fact that it was not a deduction from the company income, it was not income to the petitioner.

42. At the meeting of the board of directors of the National City Co. on December 30, 1930, the following resolution was adopted.

RESOLVED, That the undistributed part of the Management Fund for the year 1928, amounting to $140,938.98, shall be distributed not later than January 2, 1931, to such officers as were eligible for participation at the close of the year 1928 and are still in the employ of the Company, and distribution thereof to individual officers shall be in the same proportion as the balance of such 1928 fund was distributed and the share of any officer not now eligible shall be also distributed in such proportion, as may be determined by a special committee consisting of Messrs. Swenson, Winthrop and Winston;

FURTHER RESOLVED, That the payments made to eligible officers out of the Management Fund accruals in July 1929 shall continue to be considered as advances made from an expected accrual in Management Fund for the year 1929 which failed to materialize and that amounts so advanced will be continued as "debts owing" by the officers to whom such advances were made, payable only, however, from amounts which may be distributed to such officers from future accruals in Management Fund account, and

FURTHER RESOLVED, That the Chairman is authorized to advise the officers of the foregoing, and to give assurance that, as early as may be found convenient in January 1931, this Board will adopt resolutions pertaining to the Management Fund for the year 1931, that in their judgment will be fair and of a reassuring character.

Thereafter, on or before January 2, 1931, payments aggregating $140,938.98 were made from the management fund out of the account known as "Reserve for Other Deductions", this sum being the balance left in this account in January 1929 after all distributions had been made. The payments were made as follows:

Mitchell	$ 50,515.53
Baker	16,670.41
Byrnes	15,154.46
Davis	6,061.78
Olwell	5,556.47
Russell	13,639.51
Rentschler	$12,123.56
Buckley	6,061.78
Ripley	7,577.77
Seboepperle	4,546.82
Sylvester	3,030.89
	140,938.98

No part of this distribution was applied against the payments made from the management fund July 1, 1929, and the share of G. K. Weeks, who had participated in the distribution of July 1, 1929, to the extent of $110,000 but was no longer connected with the company, was split up among the other officers.

43. At a meeting on January 9, 1931, the board of directors of the National City Co. adopted a resolution approving a balance sheet of the National City Co. as of December 31, 1930, which, according to the minutes of the meeting, shows, among other things, "reserves aggregating $10,256,072.28 set up against accounts and notes receivable which, based upon the study of the individual items represented, in the opinion of Vice President Mayer and the comptroller of the company, is sufficient to make the net figure a collectible amount." These reserves included the sum of $1,859,999, this figure being the amount ($1,860,000) distributed from the management fund on July 1, 1929, less $1. No investigation was made of the ability to pay of the officers to whom the distribution of July 1, 1929, had been made, and it was known that at the time of the meeting some of them had assets in substantial amounts.

44. At a meeting of the board of directors of the National City Co. December 28, 1931, the following resolution was passed:

WHEREAS, this Company now holds the receipt of Mr. J. P. Ripley reading as follows:

"Received on July 1, 1929, from The National City Company $150,000, which represents an overpayment to me of my share for the year 1929 in the Management Fund and which is to be repaid by me from future additions to the said Management Fund before I become entitled to any further payments therefrom.

(Signed) J. P. RIPLEY"

and

WHEREAS, it is desirable to recognize the special services performed by J. P. Ripley during the current year in connection with the reorganizations in which The National City Company was interested;

Now, THEREFORE, BE IT RESOLVED that, in recognition of such special services and in addition to his regular compensation, this Company does release J. P. Ripley from any further obligation to repay to the Company, out of any future additions to the Management Fund to which he might become entitled, the amount specified in the foregoing receipt, and do cancel and return said receipt to J. P. Ripley.

Thereafter on December 31, 1931, on the books of the National City Co. accounts receivable ("Treasurer's Account Special") was credited, and "Surplus and Reserves" was debited in the sum of $150,000, the amount of Joseph Ripley's participation in the management fund distribution of July 1, 1929, thus reducing the "Treasurer's Account Special" as shown on the books, from $1,860,000 to $1,710,000. Adjustments were made on the books of the National City Co., "Supplementary as of December 31, 1931", to reduce the reserve set up on account of the management fund payments from $1,859,999 to $1,709,999.

45. At a meeting of the board of directors of the National City Co., October 10, 1932, the petitioner presented the following resolution:

WHEREAS, Lee E. Olwell, formerly Vice President of this Company, has resigned and he is indebted to this Company for loans and advances made to him to the extent of $393,111.65, plus interest from July 1, 1932, which indebtedness is now carried on the books of the Company at $212,500 and is secured by certain collateral of a present market value of about $75,000; and

WHEREAS, it is believed that if this indebtedness be reduced to $200,000 and interest is fixed at 3% Mr. Olwell in his new employment will be able to meet the interst payments and ultimately to pay the $200,000 principal of his indebtedness to this Company;

NOW, THEREFORE, BE IT RESOLVED that this Company reduce the value on its books of Mr. Olwell's indebtedness to $200,000, cancel all of said indebtedness in excess of said sum and receive from Mr. Olwell his note for $200,000 payable on or before two years from October 1, 1932, with interest at 3% per annum payable quarterly and secured by the same collateral as is now held as security for his existing indebtedness.

The indebtedness of Lee E. Olwell, vice president of the National City Co., referred to above, represented moneys borrowed from the company and did not include $70,000 received by Olwell from the distribution from the management fund made in July 1929. Olwell withdrew from the National City Co. in 1932, and was not in its employ October 10, 1932.

46. At a meeting of the board of directors of the National City Co., December 27, 1932, at which petitioner presided, the following resolution was passed:

RESOLVED, that the reserve of $1,709,999, now standing against an equal amount of Accounts Receivable on the books of the Company, representing obligations to the Company from participants in the Management Fund in 1929, be applied against such Accounts Receivable and that the obligations of participants in the Management Fund in 1929 be carried on the books of the Company at $1.00, without, however, in any respect releasing these participants from their obligations to the Company.

Adjustments were made on the books of the National City Co. in conformity with this resolution, and the "Reserve for Doubtful Accounts" was charged with $1 to close the "Treasurer's Account Special."

On December 30, 1932, after the "Treasurer's Account Special" had been written down to $1 and closed out of "Accounts Receivable and Payable", entries were made by Frank W. McGuire, assistant secretary of the National City Co., on a loose leaf memorandum book, as follows:

Accounts Receivable - Management Fund 1929
Date	Name	Dr.	Cr.	Balance
July 1929	C. E. Mitchell	$666,666.67
	H. B. Baker	220,000.00
	G. S. Rentschler	100,000.00
	G. D. Buckley	73,333.33
	R. M. Byrnes	170,000.00
	P. V. Davis	80,000.00
	L. E. Olwell	70,000.00
	Jos. P. Ripley	150,000.00
	S. A. Russell	170,000.00
	W. R. Morrison	50,000.00
	G. K. Weeks	110,000.00		$1,860,000.00
Dec. 28, 1931	Resolution by Board of Directors
	for Special Services of Jos. P.
	Ripley, he is released from the
	obligation and the receipt
	returned to him		$150,000.00	1,710,000.00
Dec. 27, 1932	Resolution by Board of Directors
	to establish these accounts at one
	dollar, without releasing in any
	way, the participants from their
	obligations to the Company Amount
	written down		1,709,999.00	1.00

All of the above entries were made at the same time, aside from the receipts given by those who participated in the distribution, July 1, 1929, of the management fund. This was the only breakdown in the books and accounts of the National City Co. showing the items included in the "S. W. Baldwin Treasurer Special Account", or the names of the individuals involved.

47. From 1921 to 1930 inclusive, petitioner received a salary of $25,000 per annum from the National City Co. His salary from this company up to that time never exceeded $25,000 per annum.

At a meeting of the board of directors of the National City Co. held on June 22, 1931, petitioner's salary was raised to $75,000 per annum.

Other officers, besides petitioner, who had participated in the distribution of the management fund July 1, 1929, received increases in salaries.

48. During the year 1930 petitioner received a payment from the management fund of the National City Bank in the amount of $383,000.

During the years from 1929 to 1933, inclusive, petitioner received the following sums from the National City Co.:

Year	Salary	Management fund
1929	$ 25,000	$ 1,150,000.00
1930	25,000	0.00
1931	75,000	50,515.33
1932	75,000	0.00
1933 for two months	Same rate	0.00

Subsequent to the year 1929 there were no further accumulations to the management fund of the National City Co. and no distribution was made from such fund, except the sum of $140,938.98, which sum remained in the management fund after the payment of the distribution made in January 1929. No portion of the distribution of $140,938.98 was applied against the payments made in July 1929 from the management fund. The National City Co. never demanded or received of, or from, any of the parties who received payments from the management fund distribution made in July 1929 any part of that distribution, except that action was taken in regard to Joseph P. Ripley as set forth in the minutes of December 31, 1931, and that on December 10, 1933, Gordon Rentschler voluntarily paid to the National City Co. $100,000, the amount which he had received from the distribution of July, 1929. No payment has been made by petitioner to the National City Co. of any part of the sum received by him from the July 1, 1929, management fund distribution.

49. With petitioner's knowledge and consent, F. W. Black, in preparing petitioner's Federal income tax return for the calendar year 1929, did not include the item of $666,666.67 which appeared in petitioner's books as having been received by petitioner from the management fund of the National City Co. on or about July 1, 1929.

50. Petitioner filed a false and fraudulent tax return for the year 1929 with intent to evade tax. The deficiency in tax, or part of it, is due to fraud with intent to evade tax.

51. On December 24, 1930, and prior thereto, petitioner was one of the directors of the Anaconda Copper Mining Co. John D. Ryan was chairman of the board of directors of the same company and had been a friend of petitioner for many years. Ryan was also a member of the board of directors of the National City Bank.

52. On December 24, 1930, petitioner owned 10,000 shares of Anaconda stock, which he had acquired between January 15, 1929, and June 18, 1929, at a cost of $1,163,104.38, or $116.31 per share. The market price of this stock in December 1930 was slightly less than $30 per share.

53. William D. Thornton in December 1930 was president of the Green Cananea Copper Co., a subsidiary of the Anaconda Copper Mining Co. Mr. Thornton was a friend and business associate for thirty years of John D. Ryan, and had known petitioner for some years.

54. In December 1930 petitioner determined to sell 8,500 shares of Anaconda stock because he had a substantial income that would be wiped out by "the registration of the loss" incident to the sale of such shares in that year. On or about December 20, 1930, petitioner saw John D. Ryan and discussed the matter with him. Ryan was disturbed because petitioner proposed to sell the stock in the open market and asked petitioner if he would be willing to sell the stock to a private buyer if he (Ryan) could find one for him. Petitioner told him he thought he would.

55. On December 24 petitioner consulted Forbes, of Shearman & Sterling, as to whether or not a sale of an active listed stock to a private individual rather than on the market would affect adversely the establishing of a loss for income tax purposes. Forbes advised him that a loss could be established by a private sale if an actual sale were made before the end of the year.

While Forbes was in his office, petitioner called Ryan on the telephone and was informed by Ryan that W. D. Thornton would buy his stock.

56. About noon of December 24, 1930, Ryan came to petitioner's office and told him that Thornton would want to borrow some money to pay for the stock and inquired if the National City Bank would lend him the money on the security of the 8,500 shares of Anaconda and additional shares of the same stock which he was prepared to put up. Petitioner declined to make the loan because of his personal connection with it and agreed to ask J. P. Morgan & Co. to make the loan.

Following this conversation with Ryan, petitioner telephoned to George Whitney of J. P. Morgan & Co. concerning a loan to Thornton from J. P. Morgan & Co. of $229,500, to be secured by 11,000 shares of Anaconda Copper Mining stock as collateral. Whitney agreed to make the loan and on December 26, 1930, petitioner wrote the following letter to Whitney, in longhand:

12/26.

Dear George:

This is as arranged with you on Wed.

Thornton will send you signed loan agreement and 2500 sh additional probably today but certainly not later than Monday.

Yours,

[Signed] C.E.M.

57. On December 26, 1930, petitioner also wrote to J. P. Morgan & Co. as follows:

DECEMBER 26, 1930.

J. P. MORGAN & COMPANY,

23 Wall Street, New York City.

GENTLEMEN:

I have sold to and will ask you to deliver from collateral in my loan with you 8500 shares of stock of Anaconda Copper Mining Company to Mr. William D. Thornton, 25 Broadway, New York City upon payment by him of $229,500, which amount, less stock transfer tax, please apply to the reduction of my loan.

Advice that this transaction has been completed will be appreciated.

Very truly yours,

[Signed] C. E. MITCHELL.

On the same day petitioner wrote to Ryan as follows:

DECEMBER 26, 1930.

Mr. JOHN D. RYAN,

25 Broadway, New York City.

DEAR JOHN:

Pursuant to our conversation of Wednesday, I enclose a copy of a letter which I have addressed and delivered to J. P. Morgan & Company today. Also a draft of a letter for Mr. Thornton to send to J. P. Morgan & Company. Will you be so good to see that Mr. Thornton writes and signs this letter, and that it is sent with the loan contract agreement and the additional stock to J. P. Morgan & Company not later than next Monday.

I appreciate very much indeed your own auspices in this matter.

Very truly yours,

[Signed] CHARLES.

The enclosure referred to in petitioner's letter to Ryan was the letter to J. P. Morgan & Co. , set out above, and the following draft of a letter to be written by Thornton to J. P. Morgan & Co.:

DRAFT

DECEMBER 26, 1930.

J. P. MORGAN & COMPANY

23 Wall Street, New York City.

Attention Mr. George Whitney

GENTLEMEN:

I have purchased from Mr. C. E. Mitchell, 55 Wall Street, 8500 shares stock of Anaconda Copper Mining Company and am advised that delivery will be made through you. In accordance with oral arrangements please accept delivery for my account, making payment therefor in the amount of $229,500. I hand you herewith 2500 shares of Anaconda Copper Mining Company stock which, with the 8500 shares covered by the first mentioned transaction, making a total of 11,000 shares, please place as collateral to the enclosed loan contract agreement.

I would appreciate receiving word from you that the aforesaid transaction has been completed.

Very truly yours,

This draft was delivered by Ryan to Walter P. Adams, the accountant for both Thornton and Ryan, who caused a copy of it to be made, signed by Thornton and sent to J. P. Morgan & Co.

58. On December 26, 1930, the 2,500 shares of Anaconda Copper Mining stock referred to in petitioner's letter to Whitney of December 26 (set out above) and in the letter signed by Thornton and sent to J. P. Morgan & Co. (draft set out above) were sent to J. P. Morgan & Co. as additional collateral for Thornton's demand loan of $229,500. Said 2,500 shares were the property of John D. Ryan and stood in the name of Hornblower & Weeks and were endorsed in blank.

59. The rate of interest charged by J. P. Morgan & Co. on this loan was 5 percent per annum. In December 1930 Thornton had collateral loans with two banks. During the latter part of 1929 and the early part of 1930 the interest rate on these loans had been 6 percent and was thereafter reduced to 5 1/2 percent, 5 percent, and finally on June 20, 1930, and June 27, 1930, to 4 1/2 percent, which rate continued in effect through 1930. Prior to December 26, 1930, Thornton, individually, had never had any business with J. P. Morgan & Co.

60. Thornton had 17,000 shares of free Anaconda stock at Hornblower & Weeks and up to the time Ryan talked to him concerning the purchase of the 8,500 shares from petitioner he never thought of buying an additional large block of Anaconda. When Ryan suggested that he buy the Anaconda stock he immediately agreed.

All the arrangements for the transaction were made with Thornton by Ryan. Petitioner did not see Thornton nor talk with him about the transaction in any way.

61. On December 26, 1930, J. P. Morgan & Co. wrote to Thornton as follows:

DECEMBER 26, 1930.

W. D. THORNTON, ESQ.,

25 Broadway, New York, N.Y.

DEAR SIR:

We have today received for your account, from Mr. C. E. Mitchell, 8500 shares of Anaconda Copper Mining Company stock against payment of $229,500.

To cover cost of the above-mentioned stock we have today made you a demand loan for $229,500. with interest at 5% and will hold the stock as collateral together with 2500 shares of Anaconda Copper Mining Company stock received from you today.

Kindly advise us in what name you wish the 8500 shares of Anaconda Copper Mining Company stock registered.

Your very truly,

On the same date J. P. Morgan & Co. acknowledged receipt of petitioner's letter, advising him of the delivery of the 8,500 shares of Anaconda stock to Thornton and that they had used the $229,500, received from Thornton by paying $170 for stock transfer stamps and applying the balance of $229,330 as a credit upon petitioner's demand loan.

62. The Thornton loan, with the collateral of 11,000 shares of Anaconda stock, was set up on the books of account of J. P. Morgan & Co. On December 29, 1930, Thornton replied to the letter of J. P. Morgan & Co. of December 26, 1930, and asked that the 8,500 shares of Anaconda stock be registered in the name of Morgan's nominee. Thereupon J. P. Morgan & Co. had the 8,500 shares transferred to the name of their nominee, "C. S. Hawkins", and endorsed in blank by him.

63. In the latter part of January or the early part of February 1931, Ryan and Thornton left for California and did not return until the end of April 1931.

64. On February 16, 1931, J. P. Morgan & Co. received $5,312.50, representing a quarterly dividend of 62 1/2 cents per share on the 8,500 shares of Anaconda Copper Mining Co. stock, which was applied on account of the principal of Thornton's demand loan. Morgan & Co. wrote to Thornton as follows:

FEBRUARY 16, 1936.

W. D. THORNTON, ESQ.,

25 Broadway, New York City.

DEAR SIR:

We have today received check for $5,312.50 representing dividend on 8,500 shares Anaconda Copper Mining Company stock which we hold as part collateral to your demand loan dated December 26, 1930.

As instructed we have applied the above mentioned check on account of the principal of your demand loan.

Yours very truly,

The same dividend on 2,500 shares of Anaconda Copper Mining Co. stock held by J. P. Morgan & Co. as collateral on Thornton's loan, but still registered in the name of Hornblower & Weeks, was received by Hornblower & Weeks and credited to the account of John D. Ryan. Ryan was advised by Hornblower & Weeks of this credit. On April 23, 1931, he advised Hornblower & Weeks to credit the quarterly dividend on his 2,500 shares of Anaconda stock, payable on May 18, 1931, to his account.

65. On March 28, 1931, J. P. Morgan & Co. was requested to increase the principal of the loan by the amount of the interest due. On March 31, 1931, J. P. Morgan & Co., wrote to Thornton that they had so increased the principal of his loan by $2,996.40 in lieu of payment of the interest.

66. During the period between December 26, 1930, and May 4, 1931, the market price of Anaconda stock on the New York Stock Exchange had a price range of 25 7/8 as the low and 43 1/4 as the high, the high point being reached on February 27, 1931, and the low point on May 4, 1931. At no time after December 26, 1930, and prior to May 1, 1931, did the stock sell as low as 27, which was the price of the stock to Thornton.

Sometime prior to April 28, 1931, when Anaconda stock went up, Thornton discussed the matter of a sale with Ryan. He told Ryan he had a handsome profit, about $100,000 on the 8,500 shares, and suggested it would be a good time to take it. Ryan advised him not to sell at that time. About April 30, 1931, when Thornton returned to New York, he suggested to Ryan that the stock ought to be sold. It was agreed that the stock would be sent over to Hornblower & Weeks to be sold under Ryan's instructions. Thornton understood before Hornblower & Weeks sold the stock that petitioner wanted to repurchase it.

67. Shortly after Ryan returned to New York from California, in the latter part of April, Ryan talked with petitioner about bringing his Anaconda holdings up to his original 10,000 shares, calling his attention to the fact that the market had receded to a point very close to that at which petitioner had sold the 8,500 shares, and offering to furnish Anaconda stock for such additional collateral as might be necessary in making a loan for that purpose.

When petitioner expressed apprehension that his order would put the market up against him unless he might be sure that the stock was there to meet the order, it was arranged that he would put the order through Hornblower & Weeks and Ryan would have the stock there to meet the order. Petitioner had never had business transactions with Hornblower & Weeks.

68. On May 4, 1931, Thornton signed the following letter to J. P. Morgan & Co.:

MAY 4TH, 1931.

Messrs. J. P. MORGAN & Co.,

23 Wall Street, New York City.

DEAR SIRS:

Will you please deliver to Messrs. Hornblower & Weeks, 42 Broadway, New York City, for my account eleven thousand (11,000) shares of Anaconda Copper Mining Company stock which you are holding as collateral security for my loan, and receive from them $228,256.71, principal and interest due on my note.

Thanking you, I am

Very truly yours,

[Signed] W. D. THORNTON.

On the same day Thornton signed a letter to Hornblower & Weeks asking them to pay the sum of $228,256.71 to J. P. Morgan & Co., and to accept the 11,000 shares of Anaconda stock for his account. Both letters were prepared by Adams. Ryan told Thornton petitioner wanted to buy the stock back.

69. On May 4, 1931, J. P. Morgan & Co. delivered the 11,000 shares to Hornblower & Weeks, and received from Hornblower & Weeks the amount of Thornton's debit balance to J. P. Morgan & Co. in the sum of $228,256.71, which amount was charged to Thornton's account by Hornblower & Weeks. Certificates representing 2,500 of these shares were the same certificates which had been delivered to J. P. Morgan & Co. as part of the collateral for Thornton's loan, and such shares on May 4, 1931, were still the property of Ryan.

70. On May 4, 1931, Ryan placed an order with Hornblower & Weeks to purchase 8,500 shares of Anaconda stock for an account to be opened with Hornblower & Weeks for the petitioner, and at the same time to sell 8,500 shares of Anaconda stock for Thornton's account. Ryan and Thornton transacted most of their brokerage business through that firm.

Both orders were executed on the floor of the New York Stock Exchange on May 4, 1931, at 26 5/8. The transaction was handled in accordance with the rules of the New York Stock Exchange, which required that cross orders be executed by offering the stock for sale on the market at one eighth of a point higher than the existing market price before such sale could be consummated at the market price. Such offers were public offers and might be accepted by any member of the Exchange under the rules of the New York Stock Exchange then in force. The sale of 8,500 shares of Anaconda stock at 26 5/8 was recorded on the ticker tape which reported transactions on the Exchange on said date.

71. On May 6, 1931, Hornblower & Weeks tendered delivery to petitioner of 11,000 shares of Anaconda stock to be taken up against the payment of the purchase price of 8,500 shares, aggregating $227,587.50. Petitioner advised Hornblower & Weeks that he did not have the money ready on that day to take up the stock, but that he would take it up the following day. The stock was thereupon returned to Hornblower & Weeks.

72. On May 6, 1931, petitioner arranged with the Guaranty Trust Co. for a loan of $200,000 against suitable collateral, and wrote the Guaranty Trust Co. as follows:

MAY 6, 1931.

GUARANTY TRUST COMPANY,

140 Broadway, New York City.

Attention - Mr. W. P. Conway, Vice President.

GENTLEMEN:

Pursuant to our telephone conversation today, there will be delivered to you for my account tomorrow 11,000 shares Anaconda Copper Mining Company stock by Hornblower & Weeks, against which delivery please pay them $200,000, carrying said amount in loan for me.

Yours very truly,

[Signed] C. E. MITCHELL.

The same day petitioner signed a loan application, in the usual form of the Guaranty Trust Co., as follows:

NEW YORK, May 6, 1931.

GUARANTY TRUST COMPANY OF NEW YORK

Please loan the undersigned jointly and severally under the terms of agreement dated on file with you, $200,000 payable demand with interest at 4 per cent. secured by the following collateral:

Eleven thousand (11,000) shares Anaconda Copper Mining Co. stock.

[Signed] C. E. MITCHELL

Petitioner also signed a power of attorney for the collateral.

On the same date he also wrote to Hornblower & Weeks as follows:

HORNBLOWER AND WEEKS,

MAY 6, 1931.

42 Broadway, New York City.

GENTLEMEN:

Please deliver tomorrow, Thursday, to the Guaranty Trust Company for my account 11,000 shares of Anaconda Copper Mining Company stock against payment of $200,000.

In addition to the above, I am enclosing my check to your order for $27,628.60, which represents payment of balance of my account.

Yours very truly,

[Signed] C. E. MITCHELL.

With this letter petitioner enclosed his check for $27,628.60 to the order of Hornblower & Weeks. This sum represented the difference between $200,000 and the purchase price of the 8,500 shares of Anaconda stock.

73. In accordance with the petitioner's instructions of May 6, 1931, Hornblower & Weeks delivered 8,500 shares of Anaconda Copper Mining Co. stock, together with the 2,500 shares of Anaconda stock which were the property of John D. Ryan, to the Guaranty Trust Co. on May 7, 1931. The certificates for 2,500 shares so delivered to the Guaranty Trust Co. by Hornblower & Weeks were the same certificates that had been received by Hornblower & Weeks from J. P. Morgan & Co. for Thornton's account. The certificates for 8,500 shares so delivered were not the same certificates that had been received by Hornblower & Weeks from J. P. Morgan & Co.

74. On May 7, 1931, the Guaranty Trust Co. advised petitioner that it had received from Hornblower & Weeks 11,000 shares of Anaconda stock against the payment by it of $200,000, and on the same day Hornblower & Weeks advised petitioner of that delivery against $200,000, and acknowledged receipt of petitioner's check for $27,628.60, being the balance of the total purchase price of the 8,500 shares plus $41.10 interest.

75. On May 7, 1931, petitioner wrote the following letter to John D. Ryan:

MAY 7, 1931.

DEAR JOHN:

This is to thank you sincerely for your loan to me of 2,500 shares of Anaconda Copper Mining Company stock, which was delivered by Hornblower and Weeks today, together with the 8,500 shares of stock which was purchased by them for my account. Your stock is, of course, loaned to me to be returned on your demand.

Yours very truly,

[Signed] C. E. MITCHELL.

At the bottom of this letter appears the following notation in the handwriting of Ryan:

This refers to a loan of 2500 Anaconda to C.E.M. without payment or consideration of any kind.

May 8/31 J.D.R.

76. On May 18, 1931, J. P. Morgan & Co. sent to Thornton their check for $3,187.50 covering a dividend of 37 1/2 cents a share on 8,500 shares of Anaconda stock, which dividend had been declared prior to May 4, 1931, and was not payable until May 18, 1931. On May 22, 1931, Thornton enclosed in a letter to Hornblower & Weeks his check for $3,415.02, the balance due on the account.

77. Prior to May 18, 1931, Adams, accountant for Thornton and Ryan, prepared a memorandum which was handed to petitioner by Ryan. This memorandum shows the gain or loss occasioned by the transaction and is as follows:

J. P. Morgan & Co. Loan
8500 Anaconda bought at 27		$229,500.00
Feb. 16th dividend		5,312.50
Mch. 31st interest		2,996.40
May 4th interest		1,072.81
Total		$228,256.71
Hornblower & Weeks W. D. Thornton a/c
8500 shares recd for		$228,256.71
8500 shares sold at 26 5/8	$226,312.50
Stamps - commission	1,445.00
		224,867.50
W.D.T. Loss		$3,389.21
Dividend on 8500 Anaconda to be
received May 18, 1931 at 37 1/2		3,187.50
W. D. T. Loss		$201.71

This memorandum was handed to petitioner by Ryan, and petitioner turned the same over to F. W. Black, who prepared petitioner's income tax returns. The memorandum remained in Black's possession.

78. In Thornton's Federal income tax return for the calendar year 1931, which return was prepared by Adams, Thornton reported a purchase of 8,500 shares of Anaconda stock on December 26, 1930, and a sale of 8,500 shares of Anaconda stock on May 4, 1931, resulting in a loss on the transaction in the amount of $201.71, after taking into account interest paid and dividends received.

79. In the calendar year 1930, dividends of $73,200 were paid on the 18,300 shares of National City Bank stock registered in the name of Taff & Co. and held by J. P. Morgan & Co. as collateral for petitioner's loan account. In his 1930 Federal income tax return petitioner reported $18,300 of this sum, being the dividend declared December 3, 1929, and payable January 1, 1930, to stockholders of record on December 7, 1929, and in her return for the calendar year 1930 Elizabeth R. Mitchell reported the balance of $54,900, as dividends received from 18,300 shares of National City Bank stock. For the same year Mrs. Mitchell deducted as interest paid to petitioner during said year the sum of $158,417.01. Petitioner did not report the item of $54,900 as dividends received in his return for 1930.

80. For the calendar year 1931 Mrs. Mitchell reported on her individual tax return the sum of $73,200 as dividends received from 18,300 shares of National City Bank stock. For the same year Mrs. Mitchell deducted as interest paid to petitioner during the year the sum of $196,678.18.

81. Petitioner filed a false and fraudulent return for the year 1930, with intent to evade tax. The deficiency in tax, or part of it, is due to fraud with intent to evade tax.

82. On April 25, 1933, an indictment was returned against petitioner by a grand jury of the District Court of the United States for the Southern District of New York. The indictment contained two counts. The first count charged that petitioner "unlawfully, wilfully, knowingly, feloniously and fraudulently did attempt to defeat and evade an income tax of, to-wit, $728,709.84 upon his net income for 1929." The second count charged that petitioner "unlawfully, wilfully, knowingly, feloniously and fraudulently did attempt to defeat and evade an income tax of, to-wit, $121,719.84 upon his net income for the calendar year 1930." To both counts in that indictment petitioner entered a plea of not guilty.

The item of $728,709.84 set out in the first count of said indictment and the item of $121,719.84 set out in the second count are identical with the deficiences asserted by the Commissioner for the years 1929 and 1930 and claimed by the respondent in this proceeding, but do not include the 50 percent penalty asserted here. Said items and deficiencies arose from the same transactions of petitioner, i.e., for 1929 the deduction of $2,872,305.50 as a loss sustained upon the sale on December 20, 1929, of 18,300 shares of the stock of the National City Bank to his wife, Elizabeth R. Mitchell, and the failure to include in his income for 1929 the sum of $666,666.67 received by petitioner from the management fund of the National City Co. on July 1, 1929; for 1930, the deduction by petitioner of the sum of $758,918.25 as a loss from the sale of 8,500 shares of Anaconda Copper Mining Co. stock to W. D. Thornton, and the failure of petitioner to include in income for 1930, $54,900 representing dividends upon 18,300 shares of National City Bank stock.

83. Thereafter, petitioner was tried upon the charges contained in the said indictment before Judge Henry W. Goddard and a trial jury in the said United States District Court, the trial commencing May 11, 1933, and terminating on June 22, 1933.

84. On June 22, 1933, a verdict of not guilty was returned by the jury on all counts of the indictment.

OPINION.

VAN FOSSAN: In this case the Government charges that for each of the tax years 1929 and 1930 petitioner filed a false and fraudulent return with intent to evade tax. The years stand separately. The establishment of fraud in the particular year is a prerequisite to further consideration of the case for that year. If there was no fraud, the statute of limitations has run against any deficiency for such year. If fraud be proven the case is before us on all issues for the year in question. Sec. 276(a), Revenue Act of 1928.

Under the revenue laws every taxpayer is, in the first instance, his own assessor. He determines the amount of tax due. This privilege carries with it a concurrent responsibility to deal frankly and honestly with the Government - to make a full revelation and fair return of all income received and to claim no deductions not legally due. This responsibility is not properly discharged by resolving all doubts against the Government, or by giving effect to studied efforts to wipe out taxable income by secret and questionable practices. It is a maxim of our law that, in dealing with the Government, taxpayers must turn square corners.

The responsibility of making a tax return is personal and rests squarely on the shoulders of the taxpayer. When he makes oath to the correctness of his return he assumes responsibility therefor. Only in rare instances can the consequences incident thereto be delegated to another.

Section 293(b) of the Revenue Act of 1928 provides:

SEC. 293. ADDITIONS TO THE TAX IN CASE OF DEFICIENCY.

* * *

(b) Fraud. - If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.

To determine whether or not fraud exists, a case must be studied, not alone for conformity to definition, nor with a blind adherence to syllogistic reasoning. Fraud is a fact to be proven by clear and convincing evidence. Seldom does all the evidence point one way. There are usually facts that tend to support petitioner's theory of the case - that tend to clear him of any fraudulent intent; and there are other facts that point in the opposite direction and tend to prove fraud. Likewise, the proof of fraud by the citation of one single specific act is seldom possible. It is usually to be determined by viewing a whole course of conduct involving many acts and inferences. In this process of analysis the old illustration of the strength of a bundle of sticks is apt. Separate facts may be reasoned away and their force broken by plausible explanations, but when all of the facts in proof are bound together, the weak with the strong, they may create such an aggregate of strength as to defy refutation.

Nor is the absence of fraudulent intent necessarily established by the protestations of innocence of the parties, however vigorous. ; affd., ; . It is to be gleaned from all the facts and the normal and reasonable inference therefrom. Though intent is a state of mind, its character is to be established, as other facts are established, by weighing all of the evidence and applying the proper measure of proof.

In this situation the trier of the facts is charged with the responsibility of passing on the credibility of the evidence. This duty involves the winnowing of the wheat of truth from the chaff of untruth - the sorting of the real from the seeming. This duty is not without its inherent difficulty. In cases such as this, almost without exception, the taxpayer testifies categorically to the purity of his motives and the absence of fraudulent intent. And if, on the whole record, he convinces those charged with decision of his forthrightness of purpose, his innocence of improper motive, the impenetrable honesty of his position - if neither contradictory circumstance nor inherent lack of probability weakens his credibility, he must prevail. On the other hand, if, after listening to the taxpayer's protestations of innocence and hearing his explanations of his conduct, the trier of the facts is unable to give such protestations full weight and such explanations full credence, if on the whole record of fact, inference, and circumstance there abides in the mind of the trier a conviction, based on clear and convincing evidence, that fraud has been committed, then the decision must be against him. ; .

The specific items in controversy for the year 1929 are the alleged sale by petitioner to his wife and the failure to report as income the large payment from the management fund.

The transaction with Mrs. Mitchell had its inception in an admitted desire and a purpose to reduce or obviate the payment of taxes. It has been said many times that there is nothing illegal or reprehensible in an honest effort to reduce taxes to the minimum required by law. ; ; . Theoretically, at least, there can be but one correct amount of tax due and it is in the ascertainment of this correct amount that most tax controversies have their origin. But the courts and the Board have also often said that a transaction solely designed to save taxes, especially one between husband and wife, will be subjected to strict scrutiny to determine whether the transaction is real or is merely a pretense. ; ; .

Before he took up with Mrs. Mitchell the question of a possible sale to her of the stock, petitioner had come to the conclusion, by whatever process of reasoning employed, that the payment of $666,666.67 received from the management fund was not income. There remained approximately $2,800,000 in income which he desired to wipe out. He determined to accomplish this end by "registering a loss" (to use his words) on the 18,300 shares of National City Bank stock. He decided on a sale to his wife, subject to getting the advice of his attorney. In this matter petitioner protests that he would not have gone ahead had his attorney advised against such procedure, but here we are unable to give full weight to his declarations.

There are conceivable instances in which a taxpayer may shield himself behind the advice of counsel, but the facts in this case do not present such a situation. Petitioner was fully experienced in the business of making sales. It is not to be believed that he did not know the basic essentials of such a transaction, and that "A sale must rest on a genuine intention to dispose of property without reservation or evasion of mind." Moreover, despite his contention that he sought legal advice, intending to rely thereon, the record does not sustain such contention. Counsel told him the necessary requirements of a valid sale, and were these elements present in the facts we should hold the sale valid. However, petitioner did not reveal to counsel all of the necessary facts to enable him to advise definitely as to this particular sale, nor did counsel, with full knowledge of the facts, attempt or purport to advise petitioner to make the sale. By clear inference counsel suggested doubt as to the proposed sale. Moreover, petitioner did not choose to follow such advice as was given. Although counsel told him that a very carefully drawn agreement was necessary, petitioner determined to follow his usual practice and exchange letters with his wife. We are convinced that he had chosen his course of action and that he proceeded to follow it, notwithstanding the cautionary advice of counsel. "Advice of counsel" affords him no shelter from the consequences of his conduct under the facts in this case.

The record reveals many facts of consequence. At the time of the alleged sale Mrs. Mitchell's total resources amounted to less than a million dollars. The sale price of the stock approximated four million dollars. The total amount of cash in Mrs. Mitchell's hands consisted of some $32,000. The so-called "interest" due to petitioner on account of the alleged sale amounted to approximately $196,000 per year. The dividends on the stock amounted to but $73,200 per year. The difference between these sums was furnished by petitioner to his wife, who in turn paid the same, and all money received as dividends, to petitioner. The stock was all pledged to secure a large loan with Morgan & Co.; therefore, no delivery was made or was possible. Though advised to notify Morgan & Co. of the alleged sale petitioner did not do so. Though advised that internal revenue stamps were required, no stamps were affixed. No bill of sale was executed. No payment on account of principal was ever made. There was no entry by Mrs. Mitchell on her books of any indebtedness to petitioner. Although Mrs. Mitchell claims to have bought in order to resell at a profit, she did not sell although the market improved to such an extent that she could have sold at a profit of three quarters of a million dollars, thereby nearly doubling her fortune.

That petitioner deemed himself the owner of the stock at all times appears by clear inference in his efforts to have the National City Co. recognize the validity of his claim for relief and assume his obligation Co. recognize the validity of his claim for relief and assume his obligation business associates during these negotiations the alleged disposition of the stock nor suggest that the claim had been sold to his wife.

The alleged repurchase corroborates the plain deduction from the above facts. Though the market had fallen to $45 per share, the price at which petitioner "reacquired" the stock was $212 per share, the price at the time Mrs. Mitchell was alleged to have bought. This transaction occurred at a time when petitioner was insolvent to an amount of $3,000,000. Had the sale been real, the relief of Mrs. Mitchell from the burden of interest could more simply have been accomplished by releasing Mrs. Mitchell from the alleged obligation to pay interest.

Over against this array of circumstances, stand the protestations of petitioner that the entire transaction was bona fide; that the sale was actual; that title passed; and that the repurchase arose solely from petitioner's desire to protect his wife's separate estate. Explanations of some plausibility are offered of each step. But on the entire record of the transaction, according to each fact such weight as in our judgment it deserves, drawing such inferences as logically flow from each circumstance, we find ourselves impelled to the conclusion that petitioner never intended to part with title; that no real sale was made; and that at all times he was the true owner of the stock. We are of the opinion that the Government has proved by clear and convincing evidence that the transaction between petitioner and his wife was a sham, a mere pretense conceived and carried out for the fraudulent purpose of evading taxes. The petitioner sustained no loss on the transaction and the alleged loss is disallowed. See , and cases there cited; .

The other item in the 1929 situation is the failure to report for taxation the sum of $666,666.67 received as a distribution from the management fund in July 1929. The primary facts as to this item may be briefly summarized. The National City Co. in 1921 established a bonus system for certain officers of the company under the name "Management Fund." It was continued from year to year and payments or distributions were made therefrom. Under corporate resolution the fund was built up by monthly accretions from profits. At the close of the current year, or at any time, or from time to time during the year, the executive committee was empowered to make distributions from the fund to the beneficiaries, one half in accordance with fixed percentages, and the remaining one half at the close of the year in such proportion as the committee should fix. The percentage of the president was fixed at 33 1/3 percent of the entire fund and was not subject to the discretion of the committee. On January 3, 1929, the sum of $1,450,000 was distributed, petitioner receiving $483,333.33 of such sum. This was reported as income. There remained in the 1928 fund after such payment the sum of $140,938.98.

On July 1, 1929, petitioner received a distribution of $666,666.67 from the 1929 management fund.

There were additional accumulations in the fund through the months following, until November. There were no credits to the fund in November and December and the losses of the company during those months exceeded the profits earned during the first ten months of the year.

After various conferences in December 1929, initiated by petitioner, concerning the status of the fund and the payments therefrom, the recipients, including petitioner, signed the so-called "receipts", by the terms of which the signer acknowledged that the payment "represented an overpayment * * * to be repaid from future additions to said management fund before [he became] entitled to any further payments therefrom." Book entries and corporate resolutions reflecting the action were made.

Petitioner did not report the sum so received from the management fund in his 1929 return.

On January 2, 1931, the sum of $140,938.98 remaining in the 1928 fund was distributed, petitioner receiving $50,515.53. This sum was not credited against the alleged overpayment for 1929. Subsequently the alleged obligation to repay was written down on the books of the company to $1.

That the payment received by petitioner was taxable as income seems beyond question. It was paid not as a loan or advance (cf. ; ), but without apparent qualification or restriction. , and cases there cited. It was received and treated by the recipients as their own. It was not repaid during the taxable year or at any subsequent time. The changed condition in the finances of the company which led to the signing of the receipts was not anticipated and could not have been foreseen. The resolutions creating the fund and providing for its distribution did not provide for such a contingency. Nor did the signing of the receipts or the making of entries on the books of the company characterizing the payment as an overpayment subject to repayment out of future earnings alter the taxable character of the payment so received by petitioner. Its taxability was fixed at the time of payment. , and cases cited therein; ; ; ; ; None of the cases cited by petitioner present parallel situations or are authoritative here. He lays special emphasis on the case of Gallin et al. v.National City Bank of New York et al., a case in the Supreme Court of New York County, New York, in which certain stockholders charged that the directors of the bank and the National City Co. had breached their statutory or common law duty in certain claimed respects, to the damage of the bank and the company. Among the alleged breaches were the establishment and distribution of management funds, it being claimed that the same resulted in the payment of exorbitant sums to officers and the waste and spoliation of corporate assets. Petitioner has culled certain expressions from the opinion of the court in that case which he claims sustain his position here in respect to the management fund. Singularly enough, respondent also points to certain statements of the court as strongly supporting his position.

We have examined the opinion with care and have come to the conclusion that it is neither pertinent nor authoritative in the case before us. There are expressions in the opinion which, taken from their context, seem to lend support to one side or the other in the present controversy but which, if read in their context and considered in the light of the questions involved and decided by the court, are found to be of no help in determining the taxability of the management fund payment.

When the "receipt" is subjected to study, it is readily seen that it created no definite obligation to repay. Any repayment was dependent wholly on the continuance of the fund and its future earnings. But the fund existed only from year to year. It was subject to any corporate action that might be taken either extending it for another year, or, in corporate discretion, abolishing it entirely, The "receipt" was valueless without further action in its support, and was wholly dependent on future earnings. In no sense was it an enforceable, unqualified obligation to repay.

The conferences with counsel and other officers respecting the possibility of repayment, the signing of the receipts, the corporate action and the making of book entries were largely at petitioner's initiation and followed his own decision that the payment should not be considered as income. The springing into existence of these subsequently conceived facts in support of petitioner's determination already arrived at suggests the employment of deliberate artifice to give color to his action in not reporting the payment for taxation. They appear as mere gestures lacking in the spark of reality that distinguishes the genuine from the pretended.

When all the facts pertinent to this item are considered and it is noted that petitioner's tax accounting for 1929 was characterized by an apparent indifference to the right of the Government to receive its toll in the form of taxes; that all doubts were resolved against the Government; that the taxpayer omitted from income a large payment received and enjoyed by him and failed to reveal to the Government the fact of such payment, although, as he testifies, he considered its taxability a close question, and now defends such concealment on the patently lame excuse of a possible obligation to repay - when such a review is made - there can be little doubt as to the intent of the taxpayer. The omission of the item was due to an intention to defraud the Government of taxes. ; ; ; .

We conclude that the omission of the item of $666,666.67 from his tax return for 1929 was fraudulent.

When we examine the proof respecting the sale in 1930 and repurchase in 1931 of Anaconda Copper Co. stock we find a very different situation from that obtaining in the transaction involving National City Bank stock heretofore discussed.

Though the motive suggesting the sale was the reduction of taxes, as already pointed out, this motive alone does not condemn a sale. If the sale be actual, judged by the normal criteria of the law of sales, and there be nothing to indicate a lack of bona fides in the transaction, such a sale may give rise to a lawful deduction. The same law that requires the reporting of profit received on a sale of property allows the deduction of a loss suffered in such a transaction. The test is the reality of the claimed loss and the genuineness of the factors involved.

Although there is a certain parallelism between some phases of the two transactions, there are vital differentiating elements. There was in each case an alleged sale for tax purposes and a subsequent repurchase at approximately the same price. In this the transactions are similar, but there the resemblance appears to end. In the 1929 "sale" the facts failed to integrate with the legal principles on which a sale must rest. In the 1930 sale there is a reasonable and satisfactory integration of the facts and governing principles. The evidence reveals that the several persons concerned in the 1930 sale were motivated by lawful impulses and that the design was to accomplish lawful ends. The repurchase likewise is found to rest on a reasonable and normal basis. It was colosed at the market. It is not shown by fact, circumstances, or inference to have been a part of a preconceived plan by which the semblance of reality was given to a transaction by the implicit terms of which title never was intended to pass.

We find the sale of Anaconda Copper stock to have been bona fide and lawful. Petitioner was, therefore, entitled to deduction of the loss so sustained. It follows that the claim of loss on this item afforded no basis for a finding of fraud.

We have indicated our conclusion that in 1929 petitioner conceived and carried out the alleged sale of National City Bank stock with the fraudulent purpose of evading taxes. This transaction involved various steps. On execution, each step became a part in a fraudulent plan and is stampted with the character of the plan. Among the steps taken were the arrangement to have the dividends paid to petitioner's wife and the return of the same by her for taxation. Since the stock was never sold these dividends at all times belonged to the petitioner. They should have been reported by him for taxation. Their omission from his return in 1930 in conformity with and in support of the fraudulent plan to evade taxes for 1929 is, in itself, fraudulent. Section 293(b) of the Revenue Act of 1928 provides that "if any part of any deficiency is due to fraud with intent to evade tax * * *" the penalty shall apply to the whole of such deficiency. We conclude that the return of petitioner for 1930 was false and fraudulent with intent to evade tax.

We come now to the final issue. Petitioner asserts that the identical matters here in controversy were involved in the case of United States v. Mitchell, in which he was acquitted by a jury in the Federal District Court for the Southern District of New York, and that the verdict in that case constitutes a bar against a decision in this proceeding. He argues, in effect, that the imposition of the penalties prescribed in section 293(b) of the Revenue Act of 1928, supra, would constitute a second punishment for the same offense for which he was indicted and of which he was acquitted under the provisions of section 146(b) of the same revenue act. ¹

A careful study of the two sections convinces us that they are basically different in character and were enacted for wholly different purposes. The language of the two sections differs widely and contemplates situations which may require entirely dissimilar proof.

Section 146(b) is a statute defining a felony and establishing punishment and penalties for the commission of a crime. It is a punitive statute and prosecution thereunder is strictly a criminal proceeding initiated by the United States. Section 293(b) imposes an additional 50 percent of the deficiency if any part of the deficiency is due to fraud with intent to evade the tax. Proceedings thereunder are civil in character and are initiated by the taxpayer. The penalties contained therein are likewise civil and were inserted in the taxing statutes to aid in collecting revenue. ; ; . They become a part of the deficiency in tax and are collected in the same manner as the deficiencies. ; .

In , the situation resembled that now before us, with the exception that the indictment of the petitioner was quashed. We there said:

Even if the quashing of the indictment in the criminal proceeding might be said to be a judgment of acquittal, it is not res judicata in this proceeding. It is not even admissible as evidence of the truth or falsity of the facts decided in the prior proceeding. See ; ; 34 Corpus Juris 971; 15 R.C.L. 1000-1003, and cases cited.

Although the quoted statement was perhaps obiter in view of the question there presented, we believe it to be a correct statement of the law. . We are of the opinion that the indictment and acquittal of petitioner under section 146(b) in the Federal District Court do not stand as a bar to decision in this proceeding.

The respondent, on brief, raises a question of the burden and necessity of proof as to the fraud charges, directing attention to the fact that the petitioner failed to file a reply to the charges of fraud until after the close of the hearing in chief and the filing of respondent's affirmative brief. In this situation he claims that the charges of fraud stand admitted under the pleadings and under the rules of the Board. Although our holding on the merits of the case probably makes this question academic, we deem it worthy of discussion.

The hearing was held April 30 to May 4, 1934. No motion for judgment on the issue of fraud was made at any time and the hearing was had and evidence was produced by the parties as though a reply to respondent's charges had been filed. On July 2, 1934, respondent filed his affirmative brief, in which he took the position that in the posture of the pleadings the charges of fraud stood admitted by petitioner. On July 20, 1934, petitioner filed a motion for leave to conform the pleadings to the proof or, in the alternative, to file a reply nunc pro tunc. On August 6, 1934, hearing with argument was had on the motion, at the conclusion of which the Division hearing the case granted the motion of petitioner for leave to file his reply denying respondent's allegations. The reply was forthwith filed.

We deem the action of the Division in permitting the filing of the reply to have been a proper exercise of its discretion and to dispose effectively of respondent's contention. The rules of the Board were thereby satisfied and the burden and requirement of proof rest normally. The burden of proving fraud rested on the Government. .

Reviewed by the Board.

Decision will be entered under Rule 50.

BLACK, TRAMMELL, ARUNDELL, and LEECH concur in the result reached in the majority opinion and, while agreeing that the item of $666,666.67 received by petitioner as a distribution from the management fund in July 1929 constituted taxable income to him in that taxable year, do not agree that the evidence establishes fraud as to this item.

MCMAHON (Concurring in part)

SMITH, MCMAHON (Dissenting in part)

MCMAHON, concurring in part and dissenting in part:

I.

The parties stipulated as follows:

105. On April 25, 1933, an indictment was returned against petitioner by a Grand Jury of the District Court of the United States for the Southern District of New York. (Ex. 59.) To both counts in that indictment the petitioner entered a plea of not guilty.

106. Thereafter, petitioner was tried upon the charges contained in said indictment before Judge Henry W. Goddard and a trial jury in the said United States District Court, the trial commencing May 11, 1933, and terminating on June 22, 1933. A copy of the court's charge to the jury is contained in Ex. 60.

107. On June 22, 1933, a verdict of not guilty was returned by the jury on all counts of the indictment. A copy of the docket entries is Ex. 61.

They stipulated further upon the same subject:

That the issues so actually tried were those disclosed by the averments of the indictment; that evidence was offered by the Government in support of each of those charges and by defendant against each thereof and was received upon the trial and that for the purposes of this case the Government will not at any stage thereof raise the objection that those issues were not sufficiently identified by the indictment, plea and charges.

Further stipulations on this subject immediately following the foregoing last unnumbered stipulation are omitted herein the interest of brevity as they neither add to nor detract from the foregoing stipulations.

The indictment and the plea of "not guilty" involve the same identical acts and intents of the petitioner and the same identical transactions and the same identical issues of fact as to whether the petitioner committed fraud, and the same identical, essential details and figures.

It is obvious from the findings of the majority and the whole of the record in the instant proceeding that the trial of the issues of fact which were presented in the proceedings in the United States District Court followed the same lines as the trial of the issues of fact in this proceeding. Because of the development of the proof in the District Court, the parties were able to stipulate over 100 paragraphs of items of fact, consisting in the neighborhood of 35 pages of stipulated facts, nearly all of which were printed, and to this extent stipulations were received in evidence, with numerous voluminous exhibits, in addition. With the exception of the testimony of petitioner's wife, who testified in this proceeding but did not testify in the District Court, the proof there and here as to the vital facts was substantially the same; and in some instances testimony of witnesses called in the District Court was by stipulation offered in evidence in this proceeding without producing the witnesses. These stipulations of the parties in this proceeding enabled the Board to commence the taking of evidence in this proceeding on April 30, 1934, and complete it on May 4, 1934, whereas the trial in the District Court was commenced on May 11, 1933, and completed on June 22, 1933.

The pleadings there and here and the charge of the District Court to the jury likewise show the close similarity of the issues of fact which were presented there as compared with the issues of fact which are presented here in respect to whether the petitioner committed fraud.

The statute, section 146(b), Revenue Act of 1928, under which petitioner was indicted, tried and acquitted in the District Court provides that any one that "willfully attempts in any manner to evade or defeat any tax" is "guilty of a felony" and punishable by fine or imprisonment or both. The statute, section 293(b), Revenue Act of 1928, which the respondent involkes in this proceeding provides that if any portion of a "deficiency is due to fraud with intent to evade tax" 50 per centum of the total of the deficiency shall be imposed posed and paid in addition to the deficiency. The language "due to fraud with intent to evade tax" is comprehended by the language "willfully attempts in any manner to evade * * * tax." The language "in any manner" includes a fraudulent "manner." ; . Fraudulent manner comprehends that which is "due to fraud." The language "willfully attempts" comprehends "with intent." He who willfully "attempts" to do a thing does it "with intent." He can not attempt to do it without intending to do it. The words "to evade" are identical in both statutes. To charge a person with a deficiency in tax "due to fraud with intent to evade tax" is comprehended in a charge that he "willfully attempts in any manner to evade * * * tax." All of the charges made by the Government in the District Court and here upon the subject of fraud are to the effect that he is guilty of fraud "to evade tax." In the last analysis this is the issue with which we are confronted in this proceeding and it is the issue which the court and jury were confronted with in the District Court. The purpose "to evade tax" is common to the proceedings there and here and in the last analysis it is the determinative issue there and here. It was incumbent upon the Government there to prove the petitioner guilty of a purpose "to evade tax" and it is likewise incumbent upon the Government here to prove the same purpose. The purpose "to evade tax" is an essential element in the charges made there and here. It is plain that the Government could not have prevailed there without proving such purpose and the Government should not prevail here without proving such purpose. Without proof of such purpose here as well as there, even though all other elements embraced within both statutes be established, the Government should not succeed under either statute. The question there and here of the existence of such purpose involves the same "acts, attempts and intents" and "facts." The indictment charged the petitioner with fraudulently attempting "to evade tax", and the court instructed the jury to the effect that before finding him guilty they must be satisfied from the evidence that he did act fraudulently.

No consequences can be visited upon any person under either statute without a finding of such purpose, by a jury in a United States District Court, or by the Board in a proceeding of this character. No such finding was made by the jury in the District Court and, as more fully pointed out herein, no such finding by the Board is justified by the record in this proceeding. When such finding of such purpose is justified and made and all other elements required by the statutes have been established the consequences that flow from such finding are somewhat different, as pointed out more fully herein; but any differences in such consequences are not determinative here, Coffey v.United States, infra.

The real question here in this respect is as to whether the final adjudication of a court and jury exonerating petitioner of a purpose "to evade tax" is a bar against the making of a finding and adjudication by this Board to the contrary; in other words, whether the adjudication of the District Court with the aid of a jury operates as a bar by way of res judicata here; and under the principles as laid down and the reasoning therefor as expounded by the Supreme Court of the United States in , and elsewhere, as herein pointed out, the adjudication of the District Court with the aid of the jury is a bar by way of res judicata here.

, involved an information filed by the United States against certain distilled spirits and distilling apparatus which were under seizure as being forfeited to the United States under the provisions of sections 3257, 3450, and 3453 of the Revised Statutes of the United States. Coffey filed a claim to all the property except one barrel of the spirits, and by way of answer set up, as a bar, the verdict of a jury finding him not guilty and the judgment of the court acquitting him in a criminal information involving the same acts and circumstances and the same statutes as are above referred to, and, in addition, sections 3256, 3296, and 3452 of the Revised Statutes. The Supreme Court, in holding that the judgment of acquittal operated as a bar to the suit for forfeiture, stated in part:

The principal question is as to the effect of the indictment, trial, verdict and judgment of acquittal set up in the fourth paragraph of the answer. The information is founded on §§ 3257, 3450 and 3453, and there is no question, on the averments in the answer, that the fraudulent acts and attempts and intents to defraud, alleged in the prior criminal information, and covered by the verdict and judgment of acquittal, embraced all of the acts, attempts and intents averred in the information in this suit. The question, therefore, is distinctly presented, whether such judgment of acquittal is a bar to this suit. We are of opinion that it is.

It is true that § 3257, after denouncing the single act of a distiller defrauding or attempting to defraud the United States of the tax on the spirits distilled by him, declares the consequences of the commission of the act to be (1) that certain specific property shall be forfeited; and (2) that the offender shall be fined and imprisoned. It is also true that the proceeding to enforce the forfeiture against the res named must be a proceeding in rem and a civil action, while that to enforce the fine and imprisonment must be a criminal proceeding, as was held by this court in . Yet, where an issue raised as to the existence of the act or fact denounced has been tried in a criminal proceeding, instituted by the United States, and a judgment of acquittal has been rendered in favor of a particular person, that judgment is conclusive in favor of such person, on the subsequent trial of a suit in rem by the United States, where, as against him, the existence of the same act or fact is the matter is issue, as a cause for the forfeiture of the property prosecuted in such suit in rem. It is urged as a reason for not allowing such effect to the judgment, that the acquittal in the criminal case may have taken place because of the rule requiring guilt to be proved beyond a reasonable doubt, and that, on the same evidence, on the question of preponderance of proof, there might be a verdict for the United States, in the suit in rem. Nevertheless, the fact or act has been put in issue and determined against the United States; and all that is imposed by the statute, as a consequence of quilt, is a punishment therefor. There could be no new trial of the criminal prosecution after the acquittal in it; and a subsequent trial of the civil suit amounts to substantially the same thing, with a difference only in the consequences following a judgment adverse to the claimant.

* * *

This doctrine [the doctrine of res judicata laid down in is peculiarly applicable to a case like the present, where, in both proceedings, criminal and civil, the United States are the party on one side and this claimant the party on the other. The judgment of acquittal in the criminal proceeding ascertained that the facts which were the basis of that proceeding, and are the basis of this one, and which are made by the statute the foundation of any punishment, personal or pecuniary, did not exist. This was ascertained once for all, between the United States and the claimant, in the criminal proceeding, so that the facts cannot be again litigated between them, as the basis of any statutory punishment denounced as a consequence of the existence of the facts. * * * [Emphasis supplied.]

The Coffey case, while it may not be followed by some state courts, is binding upon all branches of the Federal Government until the Supreme Court overrules it or Congress enacts legislation to the contrary. In , which follows the Coffey case, it is stated:

* * * In later decisions by the Supreme Court the Coffey case has been referred to, but without modifying or departing from the rule which it established. See , 17 Sup.Ct. 778, 42 L. Ed. 127">42 L.Ed. 127. * * *

The Coffey case was also followed in .

In the instant proceeding we are concerned with a penalty, while in Coffey v.United States the Court was concerned with a forfeiture. However, there is no substantial difference between the forfeiture there involved and the penalty here involved. Both are of a penal nature. Both contain elements of punishment. They are sometimes used synonymously. The word "forfeiture" is defined in Black's Law Dictionary, 3d Ed., as follows:

The incurring a liability to pay a definite sum of money as the consequence of violating the provisions of some statute, or refusal to comply with some requirement of law. .

A thing or sum of money forfeited. Something imposed as a punishment for an offense or delinquency. The word in this sense is frequently associated with the word "penalty". L.Ed.771; . Ann. Cas. 1915B 869; ; ; .

In , the Supreme Court stated:

The term "penalty" involves the idea of punishment, and its character is not changed by the mode in which it is inflicted, whether by a civil action or a criminal prosecution. [Emphasis supplied.]

The case of , is not applicable to this proceeding. The distinction between that case and , there made by the Supreme Court is as follows:

The present action is unlike that against Coffey. This is not suit to recover a penalty, to impose a punishment, or to declare a forfeiture. The only relief sought here is a judgment for the value of property [timber on Government lands] wrongfully converted by the defendant. The proceeding by libel against Coffey, although civil in form, was penal in its nature, because it sought to have an adjudication of the forfeiture of his property for acts prohibited. It was, as we have seen, a case in which a punishment, denounced by statute, was sought to be inflicted as a consequence of the existence of facts that were in issue and had been finally determined against the United States in a criminal proceeding. * * * [Emphasis supplied.]

In , the Supreme Court stated:

There are peculiarities about the character of the action now under consideration which, as will appear later, may bring it under the principles of , rather than Stone v.United States (supra ) the indemnification here sought being a part of the punishment attached to the offense of which the defendant has been acquitted.

In , the United States Supreme Court stated as follows:

* * * A "tax" is an enforced contribution to provide for the support of government; a "penalty", as the word is here used, is an exaction imposed by statute as punishment for an unlawful act. The two words are not interchangeable one for the other. No mere exercise of the art of lexicography can alter the essential nature of an act or a thing; and if an exaction be clearly a penalty it cannot be converted into a tax by the simple expedient of calling it such. That the exaction here in question is not a true tax, but a penalty involving the idea of punishment for infraction of the law is settled by * * *. See also , * * *. There is nothing in * * *, or , * * * to the contrary. The first of these cases was a proceeding to forfeit an automobile because used in violation of law; the other was a suit in equity to enjoin the occupation and use of premises for a year because used in the commission of offenses under the National Prohibition Act, and to abate the maintenance as a nuisance. The distinction made by these four cases is that in the first two, the purpose of the proceedings was punishment; while as to the other two, the purpose in the first case was to enforce a simple tax, not one which had been, as here, converted, by a change of its nature, into a penalty, and in the second case the purpose was prevention. page 632 of 272 U.S. * * *. [Emphasis supplied.]

See discussion of "tax" in .

Section 146(b), supra, expressly provides that the penalties therein prescribed, fine or imprisonment or both, shall be "in addition to other penalties provided by law." (Emphasis supplied.) The only other penalty thus provided for any of that which is denounced in section 146(b) is the penalty of 50 per centum of the deficiency prescribed by section 293(b), supra. Both subsections deal with the same taxation and are a part of the statutory scheme of such taxation.

The case of , is not in point. There was not involved in that case any penalty, punishment or forfeiture such as was involved in , and is involved in the instant proceeding. That case is analogous to , whereas the instant proceeding is analogous to Coffey v.United States.It was held in , that a prior acquittal of the maintenance of a nuisance under the National Prohibition Act was not a bar to a suit in equity for the abatement of a nuisance and an injunction, since the purpose of the latter "is prevention, not a second punishment that could not be inflicted after acquittal from the first." (Emphasis supplied.) Murphy v. United States and Stone v. United States, supra, each involved a civil suit, which is in the latter case distinguished from Coffey v.United States, a quasi criminal proceeding. The instant proceeding, like Coffey v.United States, though civil in form, is quasi-criminal. It involves the recovery of a penalty and as such "is unquestionably criminal in its nature." ; . In Black's Law Dictionary, supra, "quasi crimes" are defined as follows:

This term embraces all offenses not crimes or misdemeanors, but that are in the nature of crimes, - a class of offenses against the public which have not been declared crimes, but wrongs against the general or local public which it is proper should be repressed or punished by forfeitures and penalties. This would embrace all qui tam actions and forfeitures imposed for the neglect or violation of a public duty. A quasi crime would not embrace an indictable offense, whatever might be its grade, but simply forfeitures for a wrong done to the public, whether voluntary or involuntary, where a penalty is given whether recoverable by criminal or civil process. . * * *

The case of , is distinguishable. There the acquittal of the taxpayer relied upon as a bar, under the doctrine of res judicata, to the imposition of fraud penalties with respect to original Federal tax returns, was an acquittal upon an indictment charging willful attempts to defeat and evade with reference to amended returns. As correctly pointed out by the court, there can be no estoppel by judgment where the former and subsequent case do not involve the same claim or demand, or the same point or question. A portion of the opinion of the court in Handy v. Commissioner, supra, deals with the doctrine of double jeopardy, a second question there presented; and is not applicable here, as we are not here confronted with a double jeopardy.

The fact that the present proceeding is an entirely separate proceeding from that against this petitioner in the District Court does not preclude the application of the doctrine of res judicata. The doctrine applies as to the facts, questions, rights or issues involved under the circumstances and conditions here, which are the same facts, questions, rights, or issues involved in that proceeding under the same circumstances and conditions. ; affd., ; and .

It is sufficient if the evidence present in the instant proceeding was available in the criminal proceeding before the court. , supra, and Here there is no showing that any of the evidence presented in the instant proceeding was not available for presentation in the District Court. On the contrary, it appears that some of the testimony in the instant proceeding, but not in the record of the District Court, was just as available at the time of the trial in the District Court as at the hearing before the Board.

Res judicata is a species of equitable estoppel. , and , supra. It embraces estoppel by judgment and by verdict. 34 C.J. 745.

In , we stated in part as follows:

The doctrine of res judicata, the matter adjudged, supposes the finality of the determination so that it may put an end to litigation of the same controversy. [Emphasis supplied.]

In , the Supreme Court of the United States pointed out that this doctrine of res judicata "is peculiarly applicable to a case like the present, where in both proceedings, criminal and civil, the United States are the party on one side and this claimant the party on the other", and after expressly rejecting the contention that the doctrine should not be therein applied on the ground "that the acquittal in the criminal case may have taken place because of the rule requiring guilt to be proved beyond a reasonable doubt."

There may be something of a twilight zone between the rule requiring, of the party bearing the burden, proof of guilt of fraud beyond a reasonable doubt on the one side and the rule requiring, of the party bearing the burden, proof of guilt of the same fraud by a preponderance of evidence and by clear and convincing evidence on the other side. (, infra ); but in view of what the Supreme Court said on this subject in , it is unnecessary to here further explore such twilight zone, if any.

All of the salutary, underlying principles of justice upon which the doctrine of equitable estoppel by res judicata are based, 34 C.J. 743, 744 and 15 R.C.L. 954, 955, and which are grounded in sound public policy, call for the application of that doctrine to the instant proceeding, in view of the record and undisputed facts and circumstances here, which, among other things, discloses fully the record in the District Court in United States v. Charles E. Mitchell, who was the defendant there and is the petitioner here.

Upon the authorities heretofore pointed out and for the reasons heretofore indicated herein, I am constrained to respectfully dissent from the finding and holding of the majority to the effect that the adjudication of that court with the aid of a jury does not operate as a bar by way of res judicata in this proceeding.

The authorities cited by the majority do not justify, much less require, the conclusion they have reached in this respect. No sound reasons have been advanced to justify not following , with all of its implications.

It is elementary that taxation is eminently practical, we are here concerned only with tax statutes; and practical considerations require that when a controversy involving fraud under these statutes, such as was terminated by the District Court with the aid of a jury, is terminated, it remain terminated. The doctrine of res judicata is sometimes called the "doctrine of peace." 34 C.J. 744.

It may not be amiss to observe that, if there had been an adjudication by the District Court with the aid of a jury convicting the petitioner of fraud, such adjudication likewise would have been a bar by way of res judicata here. Assuming such conviction and also imprisonment, and that, while he was serving his sentence, the Board, on substantially the same facts and circumstances upon which the jury convicted him and the court imprisoned him, found and held that he had not committed the fraud found by the jury, an incongruous situation would be presented. The doctrine of res judicata would avert that sort of thing.

II.

Under section 907(a) of the Revenue Act of 1924 the burden of proving fraud on the part of the petitioner in each instance rests upon the respondent; and this burden carries with it the obligation of proving such fraud, as set forth by the Board in ; affd., , as follows:

* * * 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. * * *

Under all of the facts and circumstances presented by the record in this proceeding it can not, with justification, be found or held, as the majority in effect has found and held, that the petitioner was guilty of fraud in the respects stated by the majority, in view of the fact, which is also found as a fact by the majority, that a District Court of the United States, with the aid of a jury of his peers, 12 laymen, acquitted the petitioner of all of the same charges of fraud, upon substantially the same facts and circumstances as are presented here. The verdict of the jury at the very outset must give us pause; and with that verdict in the record, as we have it here, fortified by such facts and circumstances, it can not, with justification, be found and held that the petitioner has been proven guilty of fraud by such clear and convincing evidence as is required by the principles of the Kerbaugh case. These principles should be closely adhered to here; the penalty approved by the majority, in principal alone, for the one year 1929 is approximately 36 times as great as the maximum of the fine which the court could have imposed if there had been a conviction for fraud for that year. This is a drastic penalty.

Too, the petitioner made out a stronger case here, due to the fact that his wife testified fully in the instant proceeding in corroboration of petitioner's testimony and otherwise. Contrary to her desires, she did not testify in the District Court, but she was just as accessible there as here.

It is true that the author of the majority report is at an advantage over all the other members of the Board as now constituted in that the author heard the witnesses and had the advantage of observing them upon the stand, but the twelve jurors had the same advantage; and none of the witnesses was impeached, and considerable of the proof is in the form of stipulations and records; and, in view of the whole record, any advantage in this respect is of little consequence.

So, irrespective of whether the adjudication of the District Court with the aid of a jury is conclusive upon the Board as a bar under the doctrine of res judicata, the respondent, in view of the exoneration of the petitioner of all fraud by the court and jury, has not, under all the facts and circumstances presented here, discharged his burden of proof that petitioner committed fraud by clear and convincing evidence, as required of respondent under the principles of the Kerbaugh case.

III.

I agree with the majority that there was no fraud committed by the petitioner in connection with the sale on December 26, 1930, of the 8,500 shares of Anaconda Copper Mining Co. stock to Thornton. As to this transaction the Board is unanimous in reaching the same result the District Court reached with the aid of the jury. If the vital evidence in that transaction be compared step by step with the vital evidence of the transaction between the petitioner and his wife through the repurchase by the petitioner, such comparison leads to the conclusion that the finding and holding that the petitioner committed fraud in connection with the sale to his wife of the 18,300 shares of National City Bank stock on December 20, 1929, is inconsistent with the finding and holding of the majority that the petitioner was free from fraud in the transaction with Thornton. There are no vital differences between these two transactions. Looking to substance and not to form, as we must do, the vital controlling determinative evidence as to the sale made by petitioner to his wife is similar to that as to the sale through his friend Ryan to their mutual acquaintance Thornton, whose attitude was friendly to both. Petitioner was a party to both transactions. Both sales were made just before the close of taxable years for the purpose of establishing deductible losses by disposing of the stocks. As to each no questions are raised about the acquisition of the stock or the basis of the loss, which is actual cost in money. Both sales were at open market prices. As to each, for all practical purposes, before the sale a real depreciation readily measurable with certainty had been experienced by petitioner in the tax year before us, with the result that petitioner was out of pocket heavily with an asset on hand having a market value considerably below the money cost. Both purchases were made upon the credit of the purchasers. Neither purchaser paid out any unborrowed money of his or her own in payment of the purchase price. Both paid considerable interest at current rates on the amounts of the purchase prices. Both purchasers were owners, previously, of the same kind of stock. Federal stock transfer stamps were ultimately paid for on the transfers of both stocks. Both stocks were carried in the names of the nominees. As to each all dividends paid were paid to the nominees and by them paid over or fully accounted for to the purchaser as owner of the stock purchased. Each purchaser could have sold at a profit but did not choose to do so (and could not have been required to do so), obviously because of the expectation of a better rise in the market. As to each stock petitioner, long after the expiration of 30 days, repurchased the same number of shares of stock from the person to whom he had sold the stock, thereby relieving that person of the stock at a loss to such person. Both repurchases were on a basis whereby petitioner saved the purchasers nearly whole. Petitioner relied upon the advice of the same legal counsel in the making of both sales. Both sales were made with the mutual intention of transferring absolute title to the purchasers. Both sales were made for the purpose of enabling the purchasers to derive a profit therefrom. No bill of sale was used in either sale. Substantially similar formalities were resorted to in both sales; and notices were given to all who had a right to be notified. As to each it was not necessary to publicize the sales. As to both such publicity might have proven disastrous to the stockholders and creditors, including the depositors of the bank, of the corporations involved. All of the delivery of the shares that was possible or necessary was made in connection with each sale. Cf. . All of the control of each stock which petitioner possessed passed from petitioner to the purchaser. In each instance Morgan & Co. held the stock as collateral, and was at the time of the sale adequately secured.

IV.

In some respects the proof as to the bona fides of the sale to petitioner's wife is more favorable. Petitioner's wife reported as income all of the dividends received by her in 1930 and subsequently on the stock which he sold her. In her income tax returns for 1930 and subsequently she deducted all interest paid to him in that year on the purchase price of the stock. An entry of the sale under date of the sale was made in due course in her ledger. She paid him over a quarter of a million dollars on account of the sale made to her in excess of the dividends received by her on the stock and over $6,000 of this excess was exclusive of any gifts received by her from him. She had had numerous previous business transactions with petitioner over a considerable period of time, and had taken losses as well as profits on them. She had had similar transactions with others. She was financially responsible. Her overdrafts upon her bank were covered by securities. Her agreement embodied in the letters to pay the purchase price were just as binding as if she had given promissory notes therefor.

The sale of the 18,300 shares of National City Bank stock made by the petitioner to his wife on December 20, 1929, was a bona fide sale, and the loss resulting therefrom sustained by the petitioner is deductible under section 23(e) of the Revenue Act of 1928 upon the authority of the following cases: , affirming memorandum opinion of the Board rendered April 20, 1932; ; and . See ; ; ; ; and .

The instant proceeding is distinguishable from the following cases insofar as they bear upon the bona fides of the sales involved therein: ; ; ; ; ; ; ; ; and .

Since the sale of December 20, 1929, was a bona fide sale, the petitioner did not commit fraud in the making of the sale. However, even if we assume for the purpose of this discussion that such sale was not a bona fide sale, there still remains the question as to whether or not the petitioner committed fraud in the making of the sale. The evidence in the record does not justify a finding or holding that the petitioner committed such fraud. As stated in :

Here fraud is not admitted. The mere fact that his return showed a net income for the taxable year 1929 in the sum of $40,424.66 and the respondent, in recomputing his tax liability, determined that the net income for that year was $73,435.38, by itself, does not establish fraud. If it did, then all taxpayers against whom deficiencies are determined would be guilty of fraud and subject to the imposition of a fraud penalty. Nor does the lack of evidence to sustain the petitioners' contentions prove fraud. As stated in , "both parties may fail through inadequate proof in their several issues, and thus the deficiency would be sustained and the penalty set aside." The burden of proving fraud is upon the respondent and his proof must be clear and convincing. * * *

That a sale was made for the purpose of reducing income taxes does not invalidate such sale. It has been so held repeatedly by the Board and the courts. In , the court stated:

We agree with the Board and the taxpayer that a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose the pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes. * * *; * * *.

To the same effect see , affirming ;; and

The fact that the petitioner exchanged letters with his wife in the usual way indicates that he did not have fraud in his mind. Cf.

The majority discredits the petitioner's statement that he would not have gone ahead with the sale to his wife had his attorney advised against it upon the assumption that he did not follow the advice of his counsel in some respects. His counsel assisted him in the preparation of the agreements in the form of letters, and the whole of the record discloses that his counsel finally concluded that it was not necessary for the petitioner to give notice of the sale to Morgan & Co. Furthermore, his failure to give such notice is fully explained and justified by the evidence. His failure to affix revenue stamps was due wholly to oversight. The undisputed proof is that he discussed with his attorney everything that it was necessary for him to discuss or to disclose so as to enable his attorney to render an opinion. While he did not state the precise amount of the net worth of his wife, he did state that she was financially responsible and his attorney accepted that as being true. Bearing in mind that the stock had a market value and that it was expected that the market value would increase, the financial responsibility of Mrs. Mitchell was sufficiently adequate to repel the charge of fraud as against the petitioner. It is common knowledge that property, real and personal, is frequently purchased on credit even by persons with considerably less resources, comparatively, all with the expectation of paying therefor out of future income or out of proceeds on resale; and this does not constitute fraud. A sale made on credit is as valid a sale as one made for cash. No bill of sale was necessary to validate the sale. The petitioner had the right to make gifts to his wife. He had also made gifts to her previous to the sale. In , the Board stated:

* * * If the transfer of funds from the petitioner to his wife were unexplained, that would not afford sufficient reason in this case for denying thelosses to the petitioner. . Here the parties have stipulated, however, that the petitioner made certain gifts of money to his wife. There is a companion case to this one wherein the wife is claiming deductions for losses under similar circumstances. The statement of facts in that case shows that she returned to her husband some of the amounts which he advanced to her and also at times transferred funds from her bank account to his bank account apparently for the purpose of enabling him to make contemporaneous purchases of securities. The fact that this husband and wife aided one another in this way is not, in view of the other facts in the case, a reason for denying the petitioner deductions for his losses. [Emphasis supplied.]

See also ; and

The stock was entered in Mrs. Mitchell's ledger. Whether or not the debt for the purchase price was entered is immaterial in view of the fact that it has not been shown that Mrs. Mitchell kept an elaborate system of books, showing all her liabilities, as well as her investments. Furthermore, it is elementary that the facts are controlling and not the presence or absence of book entries.

The petitioner's further purpose in selling the stock to his wife was to give her an opportunity to make a profit and also to avoid dumping the stock on the market to the detriment of the bank and of the National City Co. He did not want her to sustain a loss and his repurchase at the same price at which he had sold it to her under all the facts and circumstances is such a natural act based upon human experience, that a charge of bad faith or fraud on that score is untenable.

Mrs. Mitchell's failure to sell is founded upon her belief that the stock would regain more of its former value. That she waited too long is an error of judgment and is not indicative of bad faith or fraud on the part of the petitioner.

The record discloses that the petitioner did inform some of his associate directors that he had sold the stock to his wife. Harry W. Forbes of the law firm acting as general counsel for the National City Bank and for the National City Co. knew of the sale and advised petitioner thereon. Guy Cary of the same firm also had knowledge of the sale, as appears from the findings of the majority that he advised the petitioner in reference to the debt of Mrs. Mitchell arising from such sale. Others were so informed. It is not customary and there was no legal obligation resting upon the petitioner to broadcast, or to keep all of his business associates informed, regarding his dealings with his wife or others.

The fact that the petitioner presented a claim for a loss sustained on account of his purchase of the 18,300 shares of National City Bank stock to the National City Co. is not determinative here, under all the facts and circumstances. His financial affairs had become very much involved. In the first instance he merely presented the claim for consideration. His counsel advised him he had a valid claim. The company's counsel advised the company merely that he had no "legal" claim but did question the justice of his claim. Upon the legality of his claim being thus questioned he withdrew it. Furthermore he first discussed the matter of making such claim with Guy Cary, whom the petitioner had previously informed of the sale to his wife.

The cases cited by the majority in support of its finding and holding that fraud was committed by petitioner are distinguishable upon the facts.

Although petitioner repurchased the stock, this is no proof of fraud, nor does a repurchase invalidate a sale. Under the applicable revenue act losses from sales of stock are deductible even if repurchased, except where it appears that within thirty days before or after the date of such sale the taxpayer has acquired or has entered into a contract or option to acquire the same stock. Sec. 118, Revenue Act of 1928. The evidence discloses that the petitioner did not repurchase the stock within thirty days after its sale to his wife or, at any time previous to the repurchase more than two years later, agree to repurchase it.

That a loss sustained upon the sale of shares of stock constitutes a statutory deduction in the years involved in this proceeding can not be questioned even though the sale was made by a husband to his wife. ;; and No question has been raised here about the right of a husband to make sales to his wife or vice versa, under the laws of New York. This deductibility is further shown by the fact that Congress for the first time in the Revenue Act of 1934 provided that in computing net income no deduction shall be allowed in respect to a loss from sales or exchanges of property, directly or indirectly, between members of a family, which include brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants. Sec. 24(6)(A), (D), Revenue Act of 1934.

The purpose of the enactment of this provision is stated in Report No. 558 of the Committee on Finance, 73d Cong., 2d sess., p. 27, as follows:

Experience shows that the practice of creating losses through transactions between members of a family and close corporations has been frequently utilized for avoiding the income tax. It is believed that this provision will operate to close this loophole of tax avoidance. [Emphasis supplied.]

This language discloses that sales between members of the same family had theretofore been regarded as valid to create deductible losses under the revenue acts and as made in tax avoidance, rather than in tax evasion or fraud. Since Congress had, under revenue acts prior to the Revenue Act of 1934, including those applicable here, permitted the deduction of losses resulting from the sale of stock without limitation as to the relationship of the seller and purchaser, except as to sales involving a repurchase within the thirty days, it was within the power of Congress, and that of Congress alone, to prohibit deductions of losses on sales made between husband and wife.

Since there was no fraud committed in the sale of the stock on December 20, 1929, it follows that there was no fraud committed by petitioner in 1930 because of his failure to report as income the dividends paid on the 18,300 shares of National City Bank stock, the stock being the property of the petitioner's wife, and she, and not he being entitled to the dividends thereon.

V.

I agree with the concurring opinion of Members Black, Trammell Arundell, and Leech that the evidence does not establish fraud as to the item of $666,666.67 received by the petitioner as a distribution from the management fund in July 1929. In this view, the statute of limitations has run and hence it is unnecessary to pass upon the issue as to whether it was income to petitioner in 1929, as was concluded by them. Legal counsel, including a former (then recent) Under Secretary of the Treasury of the United States, relied on I.T. 2043, III-2, C.B. 94, in advising the National City Co. and the petitioner that this and other items of the same character were not deductible by it as expense in 1929 or includable in income for 1929 by him or other recipients of such items, on the ground, in effect, that this and other such items were overdrafts and hence debts due to the National City Co. from the recipients by the close of 1929, under all the facts and circumstances. Cf. .

Their concurring opinion well illustrates the rule that acts may be unlawful but free from fraud, and the heavy burden that rests upon the respondent to prove fraud by clear and convincing evidence, which is more than a preponderance of evidence, even where such acts are unlawful.

Even if it be assumed that this item was income to the petitioner and an expense to the National City Co., there is no evidence in the record which justifies a finding or holding that petitioner, in failing to include this item in his taxable income for 1929, committed fraud. The following by a client of a mistaken opinion of competent lawyers does not constitute fraud. The best of lawyers make mistakes of this character.

A taxpayer is not required to disregard the advice of legal counsel at the peril of imprisonment or severe penalties for following it. Counsel here, after full investigation of the law and an exchange of views, concurred in the advice to the National City Co. and the petitioner to the effect that this item of $666,666.67 was not deductible by the former as an expense or includable in income by the latter; and it was not deducted by the former. Both had specialized in the field of Federal income taxation. It was conceded by counsel for the respondent at the hearing that the board of directors of the National City Co., of which this former Under Secretary of the Treasury was one, while not a recipient of any of the management fund, "were distinguished bankers and well-known in the community" and "men of large affairs in the business world." In at least two instances recipients of moneys from the management fund in 1929 who were in a position to do so have since made payment. The payment of the $140,438.98 is fully explained in the proof wholly in keeping with freedom from fraud on the part of petitioner as to the $666,666.67.

VI.

The proceedings of this Board are conducted in accordance with the rules of evidence applicable in courts of equity of the District of Columbia. Sec. 907(a), Revenue Act of 1924, as amended by sec. 601, Revenue Act of 1928.

In , the Court of Appeals for the District of Columbia stated:

* * * The law is that positive testimony uncontradicted and not inherently improbable, is prima facie evidence of the fact which it seeks to establish, and the jury is not at liberty to disregard it. ; , L.Ed. 523; , 11 Sup. Ct. Rep. 733, 851; The City of New York (Alexandre v. Machan ) L.Ed. 84, 13 Sup. Ct. Rep. 211.

To the same effect is .

In , it was stated:

The court is bound to give credence to uncontradicted testimony even from interested persons when it is substantiated as it was here, and is not inconsistent with well-known facts, experience, and reason.

In (C.C.A., 2d Cir), the court said:

* * * When the evidence before the Board, as the trier of the facts, ought to be convincing, it may not say that it is not. (C.C.A. 8); (C.C.A. 1); (C.C.A. 7). And the Board may not arbitrarily discredit the testimony of an unimpeached taxpayer so far as he testifies to facts. [Emphasis supplied.]

To the same general effect as the foregoing cases are (C.C.A., 6th Cir.); (C.C.A., 8th Cir.); (C.C.A., 9th Cir.).

See discussion at page 472 of the opinion in (C.C.A., 2d Cir.).

The burden of proof is not discharged by presenting facts which are susceptible of conflicting inferences. ; ; and .

Upon the foregoing authorities, and the authority of the Kerbaugh case, which requires that fraud shall be proven not only by a preponderance of the evidence but by clear and convincing evidence, the proof in this proceeding requires that petitioner be here exonerated of all of the charges of fraud, as the District Court and jury exonerated him of the same charges, and as the majority has exonerated him of one of those same charges, and all on substantially the same evidence, including his own. If his testimony is credible on one issue of fraud it should not be disregarded as to the others, in view of the whole record. The proof fully and satisfactorily explains everything that occurred in so far as explanation is essential to correct decision here, all wholly consistent with freedom from fraud on petitioner's part. There is no inherent or other improbability in the statements of petitioner or his witnesses and there is nothing in the record to discredit their testimony. They readily produced all the proof they had. The record does not indicate any concealment of any proof before or at the hearing. The respondent has not impeached or rebutted the vital, controlling, determinative full evidence produced by petitioner. Such evidence remains undisputed. The testimony of petitioner and his witnesses is corroborated by writings and voluminous exhibits, and by numerous written and oral stipulations. The testimony of petitioner, his wife and his other witnesses is comprehensive, clear, and consistent throughout. Their testimony is unequivocal and exhibits intelligence and earnestness. There is nothing in the record to show that any of them committed perjury. No adequate reason is given by the majority for discrediting any part of their vital testimony. On the contrary, nearly all of the findings of the majority are founded upon it, the writings produced by them and the stipulations; and the opinion of the majority indicates that at least some of the testimony of the petitioner may have been considered plausible on the issues in respect to which fraud is here found.

If the theory of the respondent as to the facts in this proceeding is correct, then petitioner's wife and other credible witnesses, his friends and associates, were guilty of some elements of fraud, and petitioner deliberately involved her and them in the committing of fraud. Upon the whole record this is incredible.

There is much that is commendable of petitioner in the record as heretofore revealed herein and by the majority. He was in 1929 a member of the board of directors, and of the executive committee thereof, of the Federal Reserve Bank of New York. He not only had the confidence of the community in which he lived to an unusual degree, but he was highly regarded elsewhere. He dauntlessly stepped into and, to the extent possible, saved a critical situation on October 29, 1929, against the advice of a friend and associate. That was the beginning of his reverses financially. He did this to support the market for the stock of his bank, the outstanding shares of which totaled 5,000,000, of which he owned but 35,000, after the National City Co., owned by all the stockholders of the bank, had exhausted its capacity to do more in this respect. If he had not done this there might have been a dumping of the stock of the bank coupled with a run on the deposits; and the bank might have been wrecked. He stayed with it all down to the end of the record in this proceeding. Notwithstanding that his large fortune was gone and he was insolvent by $3,000,000, he was not dismayed and he remained true to his creditors and all those who put confidence in his integrity. There is no evidence that he was even asking any consideration from his creditors. A man of that type is not apt to commit fraud, as charged here; and upon the whole record, and the applicable law, he should not be penalized for fraud as found and held by the majority. Too, the fact that he repurchased the stock from his wife is commendable. He had represented the stock to her for a good investment. It proved disastrous to her. He saved her practically whole and thereby relieved her of anxiety and embarrassment as he should have done. There is no correct test that requires that a husband do differently, notwithstanding the rule that requires close scrutiny of their transactions in question here. The fact that he became insolvent should not be permitted to militate against his repurchase. A man that could make $30,000,000 as he did can retrieve himself. It is common knowledge that this sort of thing has been done often.

The findings of the majority quote from the testimony a portion of what was testified to upon the subject of what was said at the annual meeting of the stockholders of the National City Bank early in 1930 touching upon the subject of the sale of his bank stock. Petitioner does not deny that he made such a statement and it appears that he was then talking about his permanent investments of his own money in such stock, of which he then had 35,000 shares, which he did not sell. The incident is fully and satisfactorily explained by undisputed proof. It is obvious that he parried the question in so far as it touched the 28,300 shares which he had bought temporarily to protect the bank and the National City Co. If he had stated that he had recently bought and sold 28,300 shares to that comparatively large and somewhat panicky meeting of stockholders, it might have proved disastrous. Other evidence could have been set forth in the findings which would, with justification, account for what was said. He had told directors and others about the purchase and sales of the 28,300 shares. Early in 1931 he told his personal counsel about the sale to his wife when he gave him information for the basis of his last will and testament.

Other evidence favorable to the petitioner on all other subjects could be fully pointed out and quoted in support of all of the conclusions here reached.

For the numerous reasons hereinbefore set forth, I respectfully dissent from the findings and holdings of the majority to the effect that the petitioner has been proven guilty of fraud by clear and convincing evidence.

All of the conclusions herein set forth are based on the undisputed proof in the record.

In view of the conclusions herein reached, it is unnecessary to further consider any of the other phases of the questions presented by the parties or suggested by the record, except to state that I agree with the majority that the filing of petitioner's reply was properly allowed.

SMITH, dissenting: I am of opinion that the acquittal by a jury of the petitioner of the charge of fraud in filing income tax returns for the tax years here in question is a complete bar to a finding by this Board of fraud in the filing of those returns. .

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Footnotes

• *. The cost of the garage and the par value of the mortgage participations are as stated above. The market value is unknown. ↩

• 1. SEC. 146. PENALTIES.

  (b) Any person required under this title to collect, account for, and pay over any tax imposed by this title, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisioned for not more than five years, or both, together with the costs of prosecution. ↩