Before L. HAND, Chief Judge, and SWAN and CHASE, Circuit Judges.
This is a petition to review a decision of the United States Tax Court, entered September 30, 1948, determining a deficiency in petitioner's income tax for the calendar year 1929 in the amount of $96,790.36. Although a deficiency notice notifying him of the Commissioner's determination of a deficiency for 1929 was not mailed until August 6, 1943, and although I.R.C. § 275, 26 U.S.C.A. § 275, requires assessment of income taxes within two years after a return is filed, under § 276(a) the tax may be assessed at any time in case of "a false or fraudulent return with intent to evade tax or of a failure to file a return * * *." The petitioner filed a return for 1929 but the Commissioner held, and the Tax Court sustained his holding, that petitioner's return was fraudulent with intent to evade tax. Purportedly pursuant to I.R.C. § 293 (b) 26 U.S.C.A. § 293(b), requiring that a 50% penalty "shall be * * * paid" if any part of a deficiency is due "to fraud with intent to evade tax," a penalty in the amount of $50,129.80 was imposed by the Tax Court.
The principal issue is whether there was sufficient evidence to support the Tax Court's finding that petitioner fraudulently failed to report as income for the year 1929 a part (3.50/4.6409) of the value of certain shares of stock in Bagdad Copper Corporation delivered to him pursuant to a contract with that company made that year. A proper determination of this issue requires a consideration of the events leading up to, as well as those occurring after, this transaction.
Petitioner's business for some years before 1929 was, in his words, "mining and oil." One of his interests in 1927 was Bagdad Copper Corporation, which was organized in that year to take over the properties of Arizona Bagdad Company. The assets of Arizona were acquired by Bagdad in exchange for all of its authorized stock, four million shares of $1 par value. 2,800,000 of these shares, however, were turned back to Bagdad by the sellers of Arizona, and thus became treasury stock. Of the 1,200,000 shares remaining outstanding, the transfer books of Bagdad show that petitioner held in his name over 80,000 from and after May 6, 1927 at least until October 27, 1930, at which time the various certificates held by him were cancelled and consolidated.
The newly formed corporation was in 1927 in the development stage only; it owned mining claims on about 2,200 acres of land in the State of Arizona, some buildings and some equipment, but it was not actually engaged in mining operations. Previous churn drilling, tunnelling and surface workings had indicated that a certain tract of 60 acres as to which Bagdad held claims contained an estimated 51,000,000 tons of copper-bearing ore. Further development and exploration work on the adjoining 100 acres of land, it was hoped, would double the estimated amount of ore tonnage. For this purpose, it was thought, $600,000 would be needed. It was also thought that if this work proved successful some $15,000,000 would be necessary to build and equip the plant that would be required for actual mining operations.
In order to raise the $600,000 needed for the development work, Bagdad entered into a contract with petitioner on March 7, 1927. Among other things this contract provided that under what was called "Option A" petitioner or his assigns should have the right to purchase all or any part of 600,000 shares of Bagdad stock at $1 per share, under certain conditions not now relevant. Under what was called "Option B" it was provided that if he or his assigns completed the purchase of the 600,000 shares according to the provisions of Option A, under certain other presently irrelevant conditions, he or his assigns should have the right to purchase at 90% of face value $15,000,000 face value of first mortgage coupon gold bonds, to be issued by Bagdad as required to finance the cost of building the necessary plant. Upon the completion of the purchase of the bonds, petitioner, or his assigns were to have the right to receive the 2,200,000 remaining shares of treasury stock "as a bonus or consideration." Bagdad further agreed not to increase or diminish its authorized capital stock of $4,000,000 for any purpose, and to deposit in escrow two certificates, one for the 600,000 shares covered by Option A, and the other for the 2,200,000 shares covered by Option B. By virtue of this 1927 contract, then, Bagdad in effect tied up all of its treasury stock, and limited itself, contingent upon receiving a preliminary $600,000 from petitioner, to financing the building of its operating plant by the sale of first mortgage bonds.
Petitioner exercised Option A by retaining 100,000 of the 600,000 Option A shares himself and selling the remaining 500,000 shares under what he called a "syndicate plan." Under this plan, at least as it was originally set forth, the 500,000 shares were to be purchased in one or more units of 5,000 shares each at $7,500 per unit, each unit so purchased to carry with it the right to buy, when and if issued, 1% of the total amount of Option B bonds "at a minimum of" 90% of their value and the right to receive as a bonus therewith 20,000 shares of Option B stock for each 1% of bonds so purchased. The stock transfer books of Bagdad show that 151,000 of the Option A shares had been acquired by petitioner in his name as of April 16, 1929. On July 9, 1929 he sold 5,000 of these shares, and he held the remaining 146,000 at least until the end of that year.
Other than petitioner, only one of the purchasers of Option A stock, Richard F. Grant, testified at the trial. He testified that he did "not know what arrangements Mr. Bronson made in the sale of the stock"; that he, Grant, thought he "put in $30,000 in 1927" but that he could not say "just how many shares" he received, and that he "paid something more than $1.00 a share" - perhaps $1.25. He said that "There was no document that went along" with his purchase of the shares but that he "understood that there would be something done for the people who were in the original syndicate but I am not sure about that"; and that he "knew that this stuff had been pledged." There is no evidence in the record as to what petitioner paid for the Option A shares he himself received as a result of the 1927 contract, nor is there any evidence as to how many, if any, of such shares he held in the name of nominees. The internal revenue agent, Van Ackere, who examined the Bagdad stock transfer books testified, however, that "Bronson used various nominees," though he did not specify whether Bronson so held any Option A stock, and that the tabulation he made of Bronson's holdings, with one exception, did not include the shares standing in nominees' names. That exception was as to one certificate for 80,000 shares; the tabulation shows only one certificate for 80,000 shares and lists that as from the original issue of 1,200,000 shares, and not from the Option A stock. Petitioner's 1929 return included as income $212,104 profit from the sale of 134,186 shares of Bagdad stock. Yet the Bagdad transfer books show that only 22,691 shares registered in Bronson's name were transferred out in that year, leaving 111,495 shares apparently held in the name of nominees and sold in 1929. This tends to show that petitioner used nominees extensively but still does not show that any of the Option A shares were held by petitioner in the name of a nominee. On the other hand, there is no evidence that none was so held.
In any event, it does appear that Bagdad did receive the $600,000 it had hoped to obtain as a result of the 1927 contract with petitioner. Thus, Bagdad became committed to do any further financing by the issue of bonds up to the amount of $15,000,000 as to which Option B was applicable, and its remaining authorized stock, 2,200,000 shares, became frozen. The $600,000, however, proved inadequate in 1928 to carry out the development program. It was estimated that another $700,000 would be necessary to complete this program and it was thought that this should be done through the sale of some of the 2,200,000 shares then frozen under Option B of the 1927 contract. Although petitioner was the president and one of the directors of Bagdad, he was, according to Grant, who became a vice-president in 1928, "dealing with us at arm's length." Petitioner, Grant testified, "wanted that made perfectly plain that so far as the deal was concerned it was up to us to see that we got the right kind of deal so we did work out a situation under which he insisted on knowing he had 500,000 shares available to him for purchase for $700,000 and it was up to him to decide what kind of package he was going to make out of it, or what the basis would be."
The contract made between Bagdad and petitioner, on September 5, 1929, provided that, conditioned upon petitioner's securing and delivering to Bagdad within thirty days a firm underwriting by responsible persons to take up and pay for 200,000 shares of Bagdad stock at $3.50 per share within ninety days, (1) Bagdad would deliver to petitioner 300,000 other shares and thereupon the 1927 agreement would be cancelled and of no further effect or validity; (2) Bagdad would deposit in escrow a certificate for 200,000 shares to be released upon the payment of $700,000 by petitioner to the escrow agent; (3) petitioner would have an option under certain other presently irrelevant conditions to purchase the remaining 1,700,000 Bagdad shares at $5 per share; and (4) Bagdad would deposit in escrow another certificate of 1,700,000 shares, to be released upon the exercise by petitioner of this last option. In addition petitioner agreed, in consideration of this contract, to protect, indemnify and save harmless Bagdad and the members of its board of directors from any loss, damage, or expense which might be incurred by them in connection with the cancellation of the 1927 agreement and the release or sale or other disposition of the stock deposited in escrow under that agreement.
Petitioner obtained subscriptions for the 200,000 shares at $3.50 per share from seventeen persons, including himself. Some of the subscribers to the 200,000 shares under the 1929 contract had also been unit holders under the 1927 plan; and those who were not received no part of the other 300,000 shares committed to petitioner under the 1929 contract. The seventeen subscribers paid in the $700,000 called for, petitioner paying $3,500.
In 1929, petitioner received, directly, 111,000 of the other shares committed to him but did not report any part of the value of the shares so received as income in that year. Rather, he deducted on his return $40,300 as "paid for services" with the explaination, made subsequently, as will appear below, that this was for at least 40,000 shares of Bagdad stock at a value of $1 per share, transferred to nine persons who had given him legal advice regarding the 1927 contract, aided him in the sale of stock received under that contract, and assisted in the development of a certain metallurgical process. The 40,000 shares so transferred were out of the 300,000 additional shares received under the 1929 contract. Subsequently, however, it appeared that 42,300 shares had been given to some 23 persons for their "services" and the Tax Court considered that 41,000 of them had been received out of the 1929 contract shares.
It is petitioner's failure to report as 1929 income the fair market value of the 111,000 shares received directly by him in 1929 as above, plus that of the 41,000 shares received by the nine persons for their "services," less the value of his rights under the 1927 contract, that the Tax Court held was fraudulent. The Tax Court noted that petitioner held in his own name as of September 5, 1929, 146,000 or about 25% of the 600,000 Option A shares under the 1927 contract; thought that these gave him, under Option B, the right to purchase the same proportion of the to-be-issued bonds and the right thereupon to receive a like proportion of the then remaining 2,200,000 shares of treasury stock; found that he and the others mentioned received 152,000 shares under the 1929 contract in exchange for his surrender of those rights and his performance of services in procuring the $700,000 of additional capital then needed. It held, therefore, that the part of the fair market value of the 152,000 shares thus received directly and indirectly by Bronson that was attributable to his performance of services was income to him in 1929. It held, apparently on the basis of the "National Stock Summary" for April 10, 1929 to October 10, 1929, showing bids for 100 to 500 share lots of Bagdad stock varying from 2 7/8 to 4 ...