Delone v. Commissioner , 34 B.T.A. 1139 ( 1936 )

CHARLES J. DELONE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Delone v. Commissioner

Docket No. 77865.

United States Board of Tax Appeals

34 B.T.A. 1139; 1936 BTA LEXIS 591;

October 20, 1936, Promulgated

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Fraud with intent to evade tax for each of four years established by clear and convincing evidence of deliberate omissions of income which the petitioner knew he had received and which he knew he was required to report.

H. Stanley Hinrichs, Esq., and Oscar P. Mast, Esq., for the petitioner.

John E. Marshall, Esq., and J. L. Deveney, Esq., for the respondent.

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MURDOCK

The Commissioner determined deficiencies in income tax and penalties for fraud as follows:

Year	Deficiency	Penalty under sec. 275(b) Rev. Act 1926, and 293(b) Rev. Act 1928
1925	$11,283.31	$5,641.66
1927	1,812.35	906.18
1928	328.68	164.34
1929	2,255.96	1,127.98

The respondent concedes that the assessment and collection of the deficiencies for 1925, 1927, and 1928 are barred unless the returns for those years were false or fraudulent with intent to evade tax. See section 278(a) of the Revenue Acts of 1924 and 1926, and section 276(a) of the Revenue Act of 1928. The notice of deficiency for 1929 was mailed within the statutory period as extended by consents of the parties. The issue as to whether any part of the deficiency is due to fraud with intent to evade tax is raised as to each year. A few of the many errors assigned by the petitioner have been waived and require no mention here. Some of the remaining errors assigned by the petitioner relate to the same items to which the Commissioner refers in support of his fraud issues, while the others relate to items not directly involved in the fraud issues. The following is a list of the former:

Year 1925.
Interest on bonds of Hanover & McSherrystown Water Co	$600.00
Profit on sale of stock of Hanover Cordage Co	88,958.44
Profit on sale of Hamm property	7,590.26
Year 1927.
Interest on bonds of Hanover & McSherrystown Water Co	600.00
Interest on bonds of Republic of Finland	350.00
Salary received from Revonah Spinning Mills	5,000.00
Profit on sale of Krug property	6,905.27
Profit on sale of stock of First National Bank of Hanover	7,997.00
Year 1928.
Profit on redemption of bonds of Hanover & McSherrystown Water Co	2,580.00
Salary received from Revonah Spinning Mills	5,000.00
Legal fees received from Hanover Engineering Co	1,650.00
Year 1929.
Salary received from Revonah Spinning Mills	5,000.00
Profit on sale of factory sites to Revonah Spinning Mills	26,100.00

The other errors assigned by the petitioner and requiring decision are the failure of the Commissioner to allow deductions for interest paid in 1925 and 1927 (not claimed in the returns), for a loss of $1,800 claimed in the return for 1927 on account of a payment in settlement of threatened litigation, and for loss on worthless stock and bad debts in 1925, 1927, and 1928 (not claimed in the returns).

FINDINGS OF FACT.

The petitioner, a lawyer and resident of Hanover, Pennsylvania, filed joint income tax returns for himself and his wife with the collector of internal revenue for the first district of Pennsylvania, as follows:

Return for	Date filed
1925	On or before March 15, 1926
1927	March 15, 1928
1928	March 15, 1929
1929	March 15, 1930

Each of these returns was false and fraudulent with intent to evade tax.

The notice of deficiencies for these years mailed on August 22, 1934. The time for assessment of taxes for 1929 was extended to June 30, 1935, by several consents timely and properly signed by the petitioner and the Commissioner.

A part of the deficiency for each year in due to fraud with intent to evade tax.

The petitioner was engaged principally in the general practice of law for a number of years after graduating from law school. But for the past ten years his many business interests have taken up the greater portion of his time. He continued to represent several corporations in which he was a stockholder. He was about seventy-two years of age at the time of the hearing.

He kept books which do not form complete records of all of his transactions. The books were kept on the basis of cash received and disbursed. Robert E. Hart has been bookkeeper and clerk for the petitioner for twenty years.

I. - INTEREST AND PROFIT ON REDEMPTION OF BONDS.

The petitioner owned bonds of the Hanover & McSherrystown Water Co. of the face value of $10,000 from 1925 to 1928. The bonds contained a tax-free covenant. The petitioner received interest on the bonds in the amounts of $600 in 1925 and $600 in 1927. He redeemed all of the bonds at par on January 5, 1928, and received at that time $10,000 in redemption of the bonds, plus interest thereon from August 1, 1927, to January 5, 1928, in the amount of $255. He realized a profit of $2,580 on the redemption of the bonds.

He did not report in his returns for 1925 and 1927 any of the interest received on the bonds in those years. He reported in his return for 1928 interest received on tax-free covenant bonds in the amount of $255, but did not report any gain or loss from the redemption of the bonds. The Commissioner, in determining the deficiencies, increased the petitioner's income by the amounts of $600 for 1925 and $600 for 1927, as "interest on bonds", and increased his income for 1928 by the amount of $2,580, as "profit on redemption of bonds." He also allowed credits for "tax paid at source" of $12 for 1925, $12 for 1927, and $5.10 for 1929.

The petitioner owned 7 percent bonds of the Republic of Finland in 1927 of the face value of $5,000. He received interest on the bonds in 1927 in the amount of $350. He did not report in his return for 1927 any of the interest received on the bonds. The Commissioner, in determining the deficiency for 1927, increased the petitioner's income by the amount of $350.

II. - PROFIT ON SALE OF STOCK OF HANOVER CORDAGE CO.

The petitioner owned 296 shares of the stock of the Hanover Cordage Co. on March 1, 1913, which had cost him $29,600 and had a fair market value on March 1, 1913, of $120.11 per share. He purchased 42 shares in 1915 for $6,500. He sold 100 shares on February 1, 1919 for $20,000. His 238 shares were increased to 595 shares in 1920 by the distribution of a stock dividend of 150 percent. He purchased 395 shares in 1925 for $200 per share. He sold his 990 shares in August 1925 for $200 per share, or $198,000. The proceeds of this sale consisted of $98,000 in cash, and $100,000 in 10 notes of the purchasers for $10,000 each, dated August 24, 1925, payable in 6 months, and secured by 595 shares of the stock sold. The fair market value of the notes at the time received was $100,000. The petitioner did not report the sale of the shares nor any profit therefrom in his return for 1925. The Commissioner determined that the petitioner realized from the sale in 1925 a capital gain of $88,958.44. That determination of the Commissioner is correct.

III. - PROFIT ON SALE OF HAMM PROPERTY.

The petitioner purchased a piece of real estate in Hanover, known herein as the Hamm property, on April 1, 1920, for $17,100. Thereafter he expended $1,525.57 in improving the property. He sold the property on April 1, 1925, to the Community Hotel Co. for $25,000 in cash. Depreciation allowable on the property while owned by the petitioner amounted to $1,215.83. The petitioner realized a capital gain of $7,590.26 in 1925 from the sale of the property. He did not report either the sale or the profit from it in his return for 1925. The Commissioner determined that the petitioner realized in 1925 a capital gain of $7,590.26 from the sale.

IV. - SALARY FROM REVONAH SPINNING MILLS.

The petitioner was an officer of Revonah Spinning Mills (hereinafter referred to as Revonah). His clerk and bookkeeper, Hart, was secretary of Revonah. The petitioner received and reported a salary from Revonah of $15,000 in 1927 and $20,000 in 1928 and 1929. Hart received the following amounts from Revonah and reported them as salary in his returns:

1927	$5,250
1928	5,000
1929	5,000

Hart issued his check for $5,000 to Revonah in payment for 50 shares of Revonah stock on the same day in 1927 on which he received the check of Revonah for the $5,250. He used $2,500 of the amount which he received in 1928 and $3,125 of the amount which he received in 1929 to pay personal obligations of the petitioner or to pay cash directly to the petitioner. The balance of the amount which he received in 1928 and 1929 - $2,500 in 1928 and $1,875 in 1929 - was used by Hart to purchase additional stock of Revonah. Some of the stock certificates thus obtained by Hart were endorsed in blank and delivered to the petitioner. Neither Hart nor the petitioner kept any record to distinguish, as between the two of them, their separate holdings of Revonah stock. Together they owned 50 percent of the stock of that corporation. The petitioner owned a much larger part than that owned by Hart. The petitioner did not report any part of the amounts paid by Revonah to Hart nor any part of the amounts paid by Hart to or for the benefit of the petitioner. The Commissioner held that the $5,000 paid each year by Revonah to Hart was additional salary of the petitioner and increased the income of the petitioner for each year by $5,000. That action by the Commissioner was not erroneous.

V. - PROFIT ON SALE OF KRUG PROPERTY.

The petitioner on March 1, 1913, was the owner of an undivided one-half interest in a piece of improved property in Hanover called the Krug property. The cost to him of his interest in the property was $2,550. He purchased the remaining one-half interest in the property on September 3, 1920, for $4,250. The improvements consisted of a one-story brick and frame building containing machinery, boilers, and equipment for bending wood, a lumber warehouse, an open lumber shed, a barn, and a railroad siding. These improvements were not new on March 1, 1913. The petitioner had been renting the property prior to January 22, 1926. He entered into an agreement on January 22, 1926, with the Moul Manufacturing Co. to sell the property to the latter for $12,000, with interest on that amount from the date of the agreement. He received $3,500 from the Moul Manufacturing Co. in 1926 and $500 on February 1, 1927. He conveyed the property on February 4, 1927 to the Farmers State Bank for $8,000. The conveyance was subject to the agreement with Moul Manufacturing Co. The petitioner did not report this transaction nor any profit therefrom on his return for 1927. The Commissioner determined that the petitioner realized a profit of $6,905.27 in 1927 from the disposition of the property and added that amount to income reported for 1927. The Commissioner did not err in including the profit of $6,905.27 in the petitioner's income for 1927.

VI. - PROFIT ON SALE OF STOCK OF FIRST NATIONAL BANK OF HANOVER.

The petitioner sold some shares of stock of the First National Bank of Hanover in 1927 for cash in an amount which exceeded his basis for gain or loss on the stock by $7,997. The record does not disclose the number of shares sold, their cost or March 1, 1913, value, whichever was greater, or the selling price. The petitioner did not report this transaction nor any gain therefrom on his return for 1927. The Commissioner determined that the petitioner realized a gain of $7,997 in 1927 from the sale and included that amount in the petitioner's income for 1927. The Commissioner did not err in taking that action.

VII. - LEGAL FEES AND EXPENSES.

The petitioner organized the Hanover Engineering Co. in 1926 for@ the purpose of having it acquire some real estate and assets of the General Gas Electric Co. He paid $530 in 1926 as charter and filing fees on behalf of his corporation. He owned all of its stock and completely controlled the corporation. The corporation acquired a part of the General Gas Electric Co. properties in 1926 and, on December 31, 1928, sold some of those properties to the petitioner for $68,250. It set up on its books on December 31, 1928, a personal account for the petitioner in which he was debited with the purchase price and credited with several items which reduced but did not wipe out the debit. The credits included one of $1,650 made up of the $530 advanced in 1926, and $1,120, representing compensation for legal services rendered the corporation by the petitioner up to December 31, 1928. The petitioner did not report the $1,650 or any part thereof as income in his return for 1928. The Commissioner included the $1,650 in the petitioner's income for 1928 as "legal fees." The correct amount of income realized by the petitioner in 1928 from the credit of the $1,650 to his account is $1,120.

VIII. - PROFIT ON SALE OF FACTORY SITES.

The General Gas Electric Co. in 1926 owned two tracts of land in Hanover, on each of which was situated a brick factory building. They were separated by a railroad switch. The company sold one of the tracts, comprising a unit of the plant (hereinafter referred to as Unit one) to the petitioner on August 2, 1926, for $75,000. The petitioner leased Unit one to the Revonah Spinning Mills at a rental of $4,500 per year, with an option to purchase the property for $90,000. The General Gas Electric Co. sold the remaining tract (hereinafter referred to as Unit two), which included the switch, and all of its remaining assets to the Hanover Engineering Co. on December 1, 1926, for $125,000. The Hanover Engineering Co. sold Unit two to the petitioner on December 31, 1928, for $68,250. The petitioner conveyed Units one and two to the Revonah Spinning Mills on June 29, 1929, for $165,000, of which $5,000 was paid in cash. The Revonah Spinning Mills executed a mortgage on Units one and two on July 1, 1929, to secure a bond issue of $160,000, and it issued all of the bonds to the petitioner to complete its payment for both units. The fair market value of the bonds at the time of their receipt by the petitioner was $160,000. The petitioner realized a profit of $26,100 in 1929 from the sale of the two units.

The word "None" appears in the schedule provided for reporting profits from the sale of real estate in his income tax return for the year 1929. The Commissioner increased the petitioner's income by the amount of $26,100 representing a profit on the sale of the factory sites to the Revonah Spinning Mills.

IX. - DEDUCTION OF LOSS UPON SETTLEMENT OF JOHNS LITIGATION.

The petitioner became one of two trustees of the S. L. Johns estate in 1903. The estate owned two frame dwelling in McSherrystown, Pennsylvania, which, for some reason unknown to the petitioner, were omitted from an omnibus deed conveying the entire property of the estate to the trustees. The petitioner obtained possession of the dwellings and collected the rents therefrom. During the period from 1903 to 1927 Johns were continually threatening the petitioner with a suit for an accounting as trustee, and the petitioner from time to time made advances to Johns from his personal funds. The petitioner and Johns had a final settlement on July 25, 1927. The petitioner had advanced to or paid on behalf of Johns up the date of the settlement amounts which, together with interest charges, totaled $3,161.48. The petitioner at that time paid Johns an additional $500 and Johns conveyed the two frame dwellings to the petitioner for a stipulated consideration of $1,800, and executed a release of all other claims against the petitioner. The petitioner sold the dwellings on July 26, 1927, for $2,000.

The petitioner, in his return for 1927, deducted the amount of $3,661.48 as a loss from a payment to obtain a release from threatened litigation over the management of a trust estate. The Commissioner disallowed $1,800 of the deduction claimed and also determined that the petitioner realized a profit in 1927 of $200 (not in dispute) from the sale of the houses. The Commissioner did not err in disallowing $1,800 of the deduction claimed.

X. - ALLEGED LOSSES AND BAD DEBTS.

The petitioner purchased 50 shares of stock of the Magnetic Motors Car Co. for $2,500 in 1918 and 1919. He did not claim any deduction in his return for 1925 and the Commissioner has not allowed any deduction for 1925 with respect to his investment in this stock. The stock did not become worthless in 1925.

The petitioner loaned $2,500 to the Hanover Motor Car Co. in 1922 on its promissory note payable 90 days after date. The loan was never repaid. The debt was not ascertained to be worthless in whole or in part in 1925 and was not charged off in 1925. The petitioner did not claim any deduction on his return for 1925 and the Commissioner has not allowed any deduction for 1925 with respect to this debt.

The petitioner and his two sisters were accommodation endorsers on a note of Delone Produce Co. and E. M. Delone, a first cousin of the endorsers. The endorsers paid the note at maturity in July 1925, the petitioner paying $833.34. He took at that time a note of the Delone Produce Co. and E. M. Delone for $833.34 payable one day after date. The latter note has never been paid. These transactions were not entered into by the petitioner for profit. The debt of $833.34 was not ascertained to be worthless in whole or in part in 1927 and it was not charged off in 1927. The petitioner did not claim any deduction in his return for 1927 and the Commissioner did not allow any deduction for 1927 on account of this debt.

The petitioner loaned $420 to H. W. Stine in May 1926 and received two notes for the amount, one given by Stine and one given by John E. Tanfield. Neither note has ever been paid. The debt of $420 was not ascertained to be worthless in whole or in part in 1927 and was not charged off in 1927. The petitioner did not claim any deduction in his return for 1927 and the Commissioner did not allow any deduction for 1927 on account of this debt.

The petitioner purchased 10 shares of stock of Hanover Printing Co. in August 1924 for $500. The transaction was not entered into by the petitioner for profit. The stock did not become worthless in 1927. The petitioner did not claim any deduction on his return for 1927 and the Commissioner did not allow any deduction for 1927 on account of the petitioner's investment in this stock.

The petitioner sold 150 shares of stock of the Garman Wheel Co. to C. S. Garman in 1918 for $15,000, $10,000 of which was paid in cash and for the balance the purchaser gave his note for $5,000 secured by the stock. The record does not show how the note was treated for income tax purposes in 1918. A renewal note payable one month after date was received by the petitioner on April 1, 1925. The note has never been paid. The petitioner still holds the stock. The debt was not ascertained to be worthless in whole or in part in 1927 and was not charged off in 1927. The petitioner did not claim any deduction on his return for 1927 and the Commissioner did not allow any deduction for 1927 on account of this debt.

OPINION.

MURDOCK: There are two fraud issues in this case. The first is whether the returns for 1925, 1927, and 1928 are false or fraudulent with intent to evade tax within the meaning of sections 278(a) of the Revenue Acts of 1924 and 1926 and section 276(a) of the Revenue Act of 1928. If the returns are not false or fraudulent, then the statute of limitations on assessment and collection of the deficiencies and penalties for those years bars recovery by the Commissioner, and decisions for the petitioner as to those years would be proper. The second fraud question is whether any part of any one or more of the deficiencies is due to fraud with intent to evade tax so as to justify imposition of the penalty of 50 percent of the deficiency, as provided in sections 275(b) of the Revenue Act of 1926 and 293(b) of the Revenue Act of 1928. The burden of proof in respect of these issues is upon the Commissioner. Sec. 907(a), Revenue Act of 1924, as amended by sec. 601, Revenue Act of 1928. See also . The petitioner, of course, has the burden of showing error in the amount of the deficiencies, wherever that issue is involved. ; . Therefore we have considered the evidence as it relates to fraud separately from such part of that same evidence as may relate to the deficiencies. The two fraud issues in any one of the years 1925, 1927, and 1928 need not be considered separately, for here, if there was a false or fraudulent return, then a part of the deficiency for that year must have been due to fraud with intent to evade tax. Each year must be considered separately, although evidence particularly relevant to one year may also have some bearing upon the question of fraud in another. Is there a preponderance of clear and convincing evidence of fraud in each year or in any year? That question has been decided upon the evidence to support the fraud issues alleged in the answer, without any benefit to the Commissioner from his determination or from evidence relating to matters not alleged in the answer as supporting fraud.

The evidence shows clearly that the petitioner received but did not report interest on Hanover & McSherrystown Water Co. bonds belonging to him. This interest amounted to $600 in 1925 and $600 in 1927. Likewise it is clear that he realized a profit on the redemption of those bonds in 1928 which he did not report. The amount of his profit has not been proved by the Commissioner, but the fact that there was some profit has been established. The petitioner has admitted that he owned some bonds, received some interest, and had some profit from the redemption. He also received and did not report in 1927 $350 of interest on Republic of Finland bonds which belonged to him. This is admitted by the petitioner.

The evidence leaves no doubt that the petitioner sold his Hanover Cordage Co. stock in 1925 for an amount greatly in excess of the cost of the stock to him and greatly in excess of his basis for gain or loss, i.e., cost of that acquired after February 28, 1913, and cost or fair market value as of March 1, 1913, whichever is greater, of that acquired before March 1, 1913. Sec. 204, Revenue Act of 1926. The only difference between the parties at the hearing as to the factors in the computation of the gain was over the fair market value of the stock which the petitioner held on March 1, 1913. The evidence, including the opinions of the witnesses, shows clearly that the value on March 1, 1913, was much less than the amount realized in 1925 for the same corporate interest. The petitioner gave his unsupported statement that the value was a certain amount which was double the figure mentioned by his other witness as the highest value which the stock possibly might have had on March 1, 1913. But other evidence shows that the actual value was much less. Even if the petitioner's figure were used, a profit would result. The petitioner knew in 1925 that he had a very substantial profit from the sale of this stock. This case differs from , where there was a range in reasonable differences of opinion as to the value of notes sufficient to absorb the actual profit. Here, there was clearly a large profit under any reasonable opinion as to the value of the stock on March 1, 1913. Since the hearing (which was once continued for four days to aid the petitioner), new counsel for the petitioner has tried to make the point that the notes given by the purchaser in 1925 were of so little value as to wipe out the profit. Not only was that point not made at the hearing, but the evidence is the other way. The makers of the notes were responsible business men with whom the petitioner had been associated for many years, they had been running the company successfully, and their notes were secured by a sufficient part of the stock sold.

The petitioner realized but did not report a substantial profit in 1925 from the sale of the Hamm property. The Commissioner has proven the basis (cost of $17,100 in 1920) and the amount realized in 1925 ($25,000 in cash). The petitioner made some improvements to the property, but the cost of the improvements did not approach the difference between the amount realized and the original cost of the property. Furthermore, minimum reasonable allowances for depreciation on this business property for the period of the petitioner's ownership would reduce the basis for gain by a substantial amount. Thus, giving the petitioner the benefit of every doubt, the conclusion is inescapable that he had a substantial profit which should have been reported.

The Commissioner has proved convincingly that a part of the amount paid in 1928 and 1929 by Revonah to Hart was paid over to the petitioner or was used by Hart to pay obligations of the petitioner. The petitioner also benefited from the amount used by Hart to purchase Revonah stock, but since the evidence on that is not clear and convincing, it will not be considered as supporting the fraud charges. The petitioner testified that he had some kind of an arrangement with Hart in regard to these matters, but he refused to explain what it was. Two thousand five hundred dollars used in 1927 for the petitioner's benefit to paid to him and $3,125 used in 1928 in the same way represented income to the petitioner under the general definition of income given in the revenue acts. He knew about these matters, but failed to report these amounts in his income tax returns.

The petitioner realized more from the sale of the Krug property than the cost of the property. But the evidence does not show the fair market value of his interest on March 1, 1913. Thus the Commissioner has not shown clearly and convincingly that the petitioner realized any profit in 1927 from the sale of the Krug property. This item has been disregarded in considering the proof of fraud, even though the strongest claims made by the petitioner do not completely eliminate a profit.

Although the determination of the Commissioner is of no benefit to him on the fraud issue and the evidence in the case does not show the details of the sale of the First National Bank stock, nevertheless the petitioner has admitted that he realized a profit in 1927 from the sale of that stock and has conceded the correctness of the figures used by the Commissioner in computing the profit. Yet he did not report any profit.

The Hanover Engineering Co. was completely owned and controlled by the petitioner and used by him for his own purposes. He purchased and received from it in 1928 a valuable property. Instead of paying for the property in some other way, he had the corporation open an account on its books in his name in which he was charged with the purchase price. He was credited in this account in 1928 with an item of $1,120, representing compensation for legal services which he had rendered to the corporation up to that time. That credit, under the circumstances, constituted the receipt of income by him. Cf. ; ; (reversed, ); . He failed to report it his return.

The cost to the petitioner of the property mentioned in the preceding paragraph was $68,250. He had acquired another property in 1926 for $75,000. He sold the two properties in 1929 for $165,000. He thus realized a profit in 1929 of at least $21,750. Reduction of his basis for depreciation allowable would increase his profit. He did not claim, up to the close of the hearing, that the bonds which he received as principal payment for the properties were not worth their face value. The evidence is that they were worth face value. He did not report any profit from the sale on his return for 1929, but instead stated on his return that he had realized no profit from the sale of real estate.

The above paragraphs contain a brief statement of the evidence relating to the omissions to which the Commissioner points in support of his fraud charges. One or two of the omissions might be execused on one ground or another, or at least might not be regarded as clear and convincing evidence of fraud. But most of them can not be ignored or condoned. This is particularly true where, as here, the petitioner was a lawyer, having a familiarity with and knowledge of income tax law greater than the average taxpayer might be expected to possess, and a keen appreciation of the consequences of his own acts. No tax was shown to be due on any of his returns for the four years in question. Even ignorance of the law does not excuse omissions such as this petitioner made. A finding of fraudulent intent must almost always depend upon circumstantial evidence. Here we are satisfied, beyond all reasonable doubts which might arise from the evidence, that the petitioner intentionally omitted income from each of his returns with an intent to evade tax.

He has attempted to explain and make excuse for some of the omissions. His testimony along that line has been carefully considered, but is deemed wholly inadequate to avoid the effect of the statutes. He claimed, for example, that he was entitled to deductions not shown on his return which would more than offset omissions of income. But he failed to establish his right to any such deductions, and failure to claim deductions is no execuse for failing to report income. . The statutes require that all income shall be reported. Deductions are allowed by statutes, but the statute does not allow taxpayers to make a mental calculation and report only a part or the net result of such undisclosed computations. The petitioner knew this. The petitioner had income which required the filing of returns. He knew that and filed returns, but he failed to include all of the income which he knew he had received.

The petitioner testified at length in this proceeding. He is an experienced, keen, alert business man and quite capable as a lawyer of handling his own affairs, including the presentation of all evidence which might help him in this proceeding. He had ample opportunity to make every explanation which might have been proper and helpful to him. He had with him his bookeeper, Hart, and a capable accountant who had familiarized himself with the books and records of the petitioner. The latter gave such testimony as he was called upon to give so that it was clear and to the point. The petitioner and Hart were different. On some questions they were clear enough, but on others they were surprisingly vague and indefinite. They frequently contradicted themselves. They made general statements when they should have been specific. The petitioner understood that there was need of clear and specific explanations of his business transactions. Yet many of his explanations are muddled and wholly unsatisfactory. We do not think that this situation was due to ignorance, indifference, or inability to clarify on the part of the petitioner. Having failed to satisfactorily meet the fraud charges proven by the Commissioner, the petitioner must suffer the consequences.

Taking up each year separately, it appears that the petitioner realized income in 1925 from bond interest, from the sale of his Hanover Cordage Co. stock, and from the sale of the Hamm property, yet reported none of it. All of these omissions can not be condoned, if indeed, any one of them could be. They clearly show a false or fraudulent return and a fraudulent intent to evade tax. The situation in 1927 differs only in detail. He omitted two items of bond interest and the profit from a sale of bank stock. He admits all three of these omissions, at least in part, but has offered no valid excuse for his acts. The items omitted from his return for 1928 are the profit from the redemption of bonds, money paid to him or expended to pay his obligations, and fees for legal services which he received through a credit against the purchase price which he owed for a property acquired in that year. All of these can not be explained except by concluding that he made at least one of the omissions in an attempt and with an intent to evade income tax which he knew was lawfully due. For 1929 he again omitted the money which came to him through Hart or which was expended by Hart in paying obligations of the petitioner, and he also omitted a large profit from the sale of the factory sites to the Revonah Spinning Mills. One or both of these was omitted with intent to evade tax. We think that all of these omissions were made with fraudulent intent, but merely point out that such a conclusion is not necessary to the Commissioner's case. The occurrence of such omissions in other years is corroborative of our conclusion that the petitioner had a fraudulent intent in each separate year.

Most of the adjustments made by the Commissioner in the actual determination of the deficiencies must be approved, either because the evidence shows affirmatively that they are correct or because the evidence does not show that they are incorrect. The petitioner admits that he received some interest on hanover & McSherrystown Water Co. bonds, but denies that it amounted to $600 in any one year. Yet he redeemed $10,000 par value of the 6 percent bonds in 1928 with interest at 6 percent, and for 1927 was shown owner's certificates (form 100) which he had filed claiming credit for 2 percent tax paid at the source, showing the receipt by him in that year of $600 interest on the bonds. He said he was "absolutely unable to explain" the filing of these certificates. He said that some of the bonds delonged to others but he failed to disclose the amounts owned by the others. He used the proceeds of the redemption for his own purposes. He said he did not know how much the bonds had cost him. He stated that some of these bonds and the Finland bonds were up as collateral for bank loans, he did not claim deductions for the interest paid on the loans, and the income offset the deductions. But his statement is unsupported and incorrect. The one did not exactly offset the other and he was allowed deductions for interest paid which may have included the interest on the bank loans. He made no effort to show what it included. He admits receipt of the interest on the Finland bonds.

The evidence fails to show any error upon the part of the Commissioner in computing the profit upon the sale of the Hanover Cordage Co. stock. The petitioner attacked the March 1, 1913, value determined by the Commissioner. He gave an unsupported statement of his own that the value was much higher. Gitt, a witness for the petitioner, gave the value per share as between $200 and $250, but admitted that he was only guessing. The value determined by the Commissioner is supported by the opinion of one witness, by book values, by earnings, and other evidence. The sale was not an installment sale and the Commissioner taxed it correctly.

The petitioner, at times, attempted to tie-up for income tax purposes the sale of the Hamm property and his purchase of Community Hotel Co. stock. There is no such connection. The facts in regard to his purchase of the stock show clearly that that purchase in no way reduced his profit from the sale of the Hamm property.

The corporation known as the Community Hotel Co. was organized in 1924 for the purpose of constructing a modern hotel in Hanover. Residents of the town subscribed and paid for $300,000 par value of its stock during the years 1925 to 1927, inclusive. The petitioner subscribed on January 21, 1925, for 50 shares of the 6 percent $100 par value preferred stock of the corporation. He paid $1,000 on account of his subscription on August 2, 1925, $2,000 on July 10, 1926, and the balance later at a time not disclosed by this record. Thereafter, he purchased $2,000 par value of additional stock. The corporation erected a hotel building at a cost of about $500,000, which it still owns and operates. The petitioner is vice president of the corporation and a member of its executive committee. The stock of the corporation did not become worthless in 1925. The petitioner sustained no loss in 1925 as a result of his subscription and partial payment for the stock of the Community Hotel Co.

The petitioner claimed a somewhat larger expenditure for improvements than the Commissioner allowed on the Hamm property, but failed to substantiate it. The Commissioner proved his figures from the petitioner's books, and the petitioner offered nothing further in support of his claim. The total depreciation by which the Commissioner reduced the basis is not excessive.

The petitioner refused to testify in regard to the items of $5,000 included in his income although received by Hart, except to deny that they were income to him. He said that there was something about the situation that was confidential between Hart and himself, a "life and death" matter, and for that reason he would make no explanation regardless of the consequences. Hart discussed the matter with apparent freedom, even though a clear understanding of the entire situation can not be gained from his testimony. It is clear that the petitioner directly benefited from a large part of the amounts paid to Hart by Revonah in 1928 and 1929. Hart tried to show that these amounts were repayments of loans made to him by the petitioner to purchase the Revonah stock, but his explanation failed when he was remined of his earlier statement that the Revonah stock had been purchased with the rest of his so-called salary. Hart is a clerk or bookkeeper. If he performed services for Revonah worth $5,000 each year, the record fails to show it. The money paid to him was used in part to buy stock which was then endorsed in blank and turned over to the petitioner and in part to pay cash to and obligations of the petitioner. The Commissioner has taxed the entire amount as income of the petitioner. The evidence does not show any error in that action.

The Commissioner has determined that the petitioner realized a profit of $6,905.27 in 1927 from the sale of the Krug property. The petitioner has contended that the property was worth $12,000 on March 1, 1913, and, therefore, he had no profit when he disposed of it for that same amount. But in fact he owned only an undivided one-half interest in the property on March 1, 1913, since he had sold the other one-half by a fee simple deed and did not reacquire it until 1920, when he repurchased it for $4,250. He failed in his attempt to explain the details of those early transactions in order to show that the other party merely held the property as pledge for an indebtedness. Furthermore, the evidence fails to support his claim that the property was worth $12,000 on March 1, 1913. If it was, he owned only one-half and depreciation would reduce his basis and increase his profit. He undoubtedly had a profit from the sale of that property. The determination of the Commissioner has not been shown to be incorrect.

He concedes that he has failed to show error in the Commissioner's computation of a profit from the sale of his First National Bank stock. The credit for legal fees for services rendered to Hanover Engineering Co. has been discussed sufficiently in connection with the fraud issues, except to state that the correct amount was $1,120, instead of $1,650. The Commissioner determined the latter amount, but $530 of it was shown to have been a return of advances made by the petitioner for organization expenses of the corporation, and, therefore, not income to him. The amount determined by the Commissioner as profit from the sale of the two factory sites to Revonah Spinning Mills was correct. If the Hanover Engineering Co. had a loss on that one of the properties which it sold to the petitioner, that fact would be immaterial here since the corporation was a separate taxpayer. Likewise, if it be a fact, as the petitioner contends, that the General Gas Electric Co. owed him a large debt which was never paid, that fact would not be relevant here, since the profits and losses in such a series of transactions, more or less loosely connected but occurring in different years, can not be summarized on the return for the final year. Income and deductions must be reported upon an annual basis. The transaction was not an installment sale. . The Commissioner did not err in taxing this profit.

The Commissioner disallowed $1,800 of a deduction claimed by the petitioner for 1927. The remainder of the deduction was allowed on some theory because expended in settlement of a claim against the petitioner pressed by S. L. Johns. The $1,800 was disallowed because for that amount the petitioner obtained title to two frame dwellings which he immediately sold for $2,000. The petitioner claims that these properties always belonged to him, but the evidence does not establish that fact. He was one of two trustees of the S. L. Johns estate and these properties were omitted from a deed, but that would not make the petitioner personally the owner of the properties. He was extremely vague on that point and failed to show his right to the deduction of $1,800. He also claims deductions for several alleged losses not claimed on his returns. The first is the cost of Magnetic Motors Car Co. stock. He contends that the stock became worthless in 1925 because in that year, so he says, the company lost its license to manufacture electric transmissions and went out of business. But he disclosed that he had practically no knowledge of the affairs of the company, its assets and liabilities at any time, or any other fact which might show just when the stock became worthless. The stock may have been worthless long prior to 1925 for all he knew or disclosed. The next is an alleged loss in 1925 of the amount of a loan to Hanover Motor Co. The loan was due in 1922 and the petitioner failed to show when he ascertained that the debt was worthless. The company went out of existence in 1925, but the petitioner may have known long before that that his debt was worthless. He was either unwilling to disclose his knowledge of the affairs of that company or was not familiar with its financial condition either in 1922 or in 1925. He did nothing in 1925 towards ascertaining that the debt was then worthless. He asks for a deduction for 1927 representing an amount he paid in 1924 as a result of endorsing the note of his first cousin. He has not shown either that he entered into the transaction for profit or that he ascertained that the note became worthless in 1927. Just why he now picks the year 1927 does not appear. The debt of $420 owned by Stine is next. That seems to have been the accommodation of a friend. But in any event we see no reason to conclude that the debt was ascertained to be worthless in 1927. Another item is a debt of $5,000 owed by C. S. Garman as part of the purchase price of some stock which the petitioner sold to Garman in 1918. There is no showing that the petitioner ever took or should have taken the amount into his income. Cf. . He held collateral. When, if ever, did it become worthless? Garman is still living and in business. The petitioner did nothing about this debt in 1927. The last item is the cost of stock of Hanover Printing Co. The purchase of that stock was not a transaction entered into for profit. The evidence does not show that the stock became worthless in 1927. There is no evidence of the earnings, prospects, or financial condition of the company at any time. These claims all appear to be afterthoughts upon the part of the petitioner. In no instance has he made a complete showing of worthlessness such as might reasonably be expected before a deduction should be allowed.

Reviewed by the Board.

Decision will be entered under Rule 50.