Appeal from the Board of Tax Appeals
Before SWAN, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
This is a petition by Charles E. Mitchell, a taxpayer, to review a decision of the Board of Tax Appeals determining a deficiency of $728,709.84 and a 50 per cent. penalty of $364,354.92 in income taxes for the year 1929.
The questions raised by the petition to review relate to a loss taken by Mitchell and an income item omitted by him in his 1929 income tax return and are the following:
(1) Was an alleged sale by the taxpayer to his wife in 1929 of 18,300 shares of National City Bank at $212 per share a real sale that justified his deduction of a loss of $2,872,305.50 from his gross income in computing taxes?
(2) Was the payment of $666,666.67 by the National City Company which was made to the taxpayer in 1929 from the so-called management fund as compensation for services, but omitted from his return for that year, taxable income?
(3) Was the deduction of $2,872,305.50, or the omission of $666,666.67, due to a fraudulent attempt to evade taxes which justified the 50 per cent. penalty imposed by the Commissioner?
(4) Was the finding of a tax deficiency by the Commissioner on account of the error in dealing with deduction and omission of the above items by the taxpayer precluded by his acquittal under the indictment for fraudulent tax evasion which was based upon those very items?
(5) In any event, could the 50 per cent. penalty properly be imposed where the taxpayer was acquitted under such indictment?
The Commissioner determined the tax deficiency of Mitchell for the year 1929 because of the omission of $666,666.67 from his return, and the inclusion therein of the alleged loss from the sale of 18,300 shares of National City Bank stock to Mrs. Mitchell. The Commissioner surcharged his return with the former item, disallowed the latter, and imposed the 50 per cent. penalty under section 293 (b) of the Revenue Act of 1928, 26 U.S.C.A. § 293 (b) and note, for "fraud with intent to evade tax." The tax deficiency based upon these items and the 50 per cent. penalty which had been assessed by the Commissioner were affirmed by the Board of Tax Appeals. Four members of the Board agreed with the result, but held that the item of $666,666.67, though taxable income, was not shown to have been fraudulently omitted from the return. One member, McMahon, held that the evidence did not establish fraud as to that item or as to the loss taken for the sale to Mrs. Mitchell, and both members McMahon and Smith held that by the decision of the Supreme Court in Coffey v. United States, 116 U.S. 436, 6 S. Ct. 437, 29 L. Ed. 684, the acquittal of Mitchell under the indictment barred a finding of fraud and consequently the determination of the tax deficiency.
It must be borne in mind that our power to review the Board of Tax Appeals is confined to questions of law and that we are bound by its findings of fact in support of which there is any substantial evidence. McCaughn v. Real Estate Co., 297 U.S. 606, 56 S. Ct. 604, 80 L. Ed. 879; General Utilities Co. v. Helvering, 296 U.S. 200, 56 S. Ct. 185, 80 L. Ed. 154; Hulburd v. Commissioner, 296 U.S. 300, 306, 56 S. Ct. 197, 200, 80 L. Ed. 242; Helvering v. Rankin, 295 U.S. 123, 131, 55 S.Ct 732, 736, 79 L. Ed. 1343. We think there can be no doubt that there was substantial evidence before the Board that the item of $666,666.67 was income of the taxpayer, that the loss incurred through the alleged sale to Mrs. Mitchell was not a genuine loss, and that the omission of the first item and the deduction of the loss were fraudulent attempts to evade taxes.
There was ample evidence that the sale of 18,300 shares of stock to Mrs. Mitchell did not represent a genuine transaction. It was prompted by the realization by Mitchell during that year of an income from which some loss had to be deducted if the payment of a huge tax was to be avoided. Mrs. Mitchell's assets aside from chattels and the cash value of certain insurance policies on the life of her husband amounted to $940,994.12, of which only $32,027.80 was cash. Yet Mitchell purported to sell to her 18,300 shares of bank stock at $212 a share, aggregating a total obligation to him on her part of $3,879,600. His offer to sell was evidenced by a letter on December 20, 1929, in which he stated that the shares were at present carried in a loan with J. P. Morgan & Co. for his account and that for her convenience he would arrange so to continue the carriage of the stock subject to her payment of the amount due, "the debt in any event to be liquidated by you within nine months from the date hereof." The same day she wrote confirming the purchase and authorizing him to sell the shares whenever it seemed proper at not less than $220 per share. No notification of the transaction was then given to J. P. Morgan & Co., nor was any arrangement made with them to withdraw the stock from the collateral loan at $212 per share, though Mitchell's counsel had advised him that such an arrangement ought to be made. The same day he notified Taff & Co., in whose name the certificates were registered, that dividends received from the stock subsequent to January 2, 1930, were to be paid to Mrs. Mitchell. No payments on account of the purchase price of the stock were ever made. Certain so-called "interest payments" were made by Mrs. Mitchell to the taxpayer out of her bank account. These interest payments were in excess of the dividends received from the stock by $258,267.69. In order to make them without depleting her personal estate, she received from her husband between December 20, 1929, and December 31, 1932, various large sums of money purporting to be birthday, wedding anniversary, and other gifts. The illusory nature of a purchase in a case where the seller furnishes the money to meet interest on the purchase price is manifest. The purchase of the stock by Mrs. Mitchell as an investment at a contract price of $3,879,600, payable within nine months and with no means to meet the obligation, is in itself highly improbable, if not fantastic. The transaction is much more explicable as an ostensible, even if fraudulent, means of registering a deductible loss than as a way of making an investment. In January, 1932, at the annual stockholders' meeting of the National City Bank, Mitchell was asked by a stockholder whether he had disposed of any of his stock and 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." Later, on March 5, 1932, he forwarded to the National City Company a letter from his counsel advising that in their opinion that company was under obligation to take up from the Morgan loan "at their net present cost" the 18,300 shares of stock that he was carrying in order to relieve him from the loss he had already incurred in making a market for stock of the National City Bank. No suggestion was made in the letter that the 18,300 shares of stock had theretofore been sold to Mrs. Mitchell. The letter was presented to the board of directors of the company who conferred about Mitchell's claim and secured an opinion from John W. Davis, Esq., that it had no legal basis. On March 24, by another exchange of letters, Mrs. Mitchell purported to resell the 18,300 shares of stock to her husband at the original purchase price of $212 a share, although the then market price was $45 a share and Mitchell was insolvent to the amount of $3,000,000. Just as in the transaction of December 20, 1929, no cash passed between Mitchell and his wife. Under the letters exchanged on March 24, 1932, Mrs. Mitchell was released from any further obligation in connection with the transaction. Thus we find an arrangement having no practical object other than to escape income taxes -- an arrangement whereby a husband purports to sell stock to his wife without obtaining either note, security, or cash payment, and finally purports to buy it back at a time when he is seeking to have his company relieve him from the Morgan collateral loan. Under the circumstances, it may be reasonably supposed that he assumed to buy back the stock so as to have unquestionable title if the National City Company should prove willing to take up the shares. Both in case of the alleged sale and repurchase Mitchell made the initial offer to his wife and throughout the transactions treated the stock as essentially his own. It should also be noted that at the time of the alleged sale to Mrs. Mitchell on December 20, 1929, no internal revenue or state transfer stamps were attached to the contract of sale, no bill of sale was ever executed, nor were the certificates of stock ever out of the possession of J. P. Morgan & Co., by whom they were continuously held as collateral for Mitchell's indebtedness.
It is clear that there was substantial evidence in support of the finding by the Board of Tax Appeals that "the transaction was not a bona fide sale and the alleged loss did not constitute an allowable deduction from income" and that "the ...