author: Disney :

text:
    Consumers Construction Company (Del.), Petitioner, v. Commissioner of Internal Revenue, Respondent. Utility Management Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Associated Utilities Investing Corporation as the Asserted Transferee of Managing and Investing, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Associated Utilities Investing Corporation (Del.) as the Asserted Transferee of Utility Management Corporation (Del.) (Formerly Managing and Investing, Incorporated), Petitioner, v. Commissioner of Internal Revenue, Respondent. The Utility Management Corporation (Conn.) as the Asserted Transferee of Managing and Investing, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. The Utility Management Corporation (Conn.) as the Asserted Transferee of Utility Management Corporation (Del.) (Formerly Managing & Investing, Incorporated), Petitioner, v. Missioner of Internal Revenue, Respondent.
    Docket Nos. 59549, 59557, 59559, 62246, 62247, 62248, 62249.
    Promulgated April 27, 1937.

      Charles M. Trammell, Esq., Francis J. Sweeney, Esq., and Bradford 8. MagiU, Esq., for the petitioners.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

Disney :

These proceedings, consolidated for trial- by stipulation between counsel at hearing, involve deficiencies as follows:

During the period here in question the New England Gas & Electric Association, a Massachusetts form of trust, .was affiliated with the Associated Gas & Electric Properties, likewise a Massachusetts form of trust. The Associated Gas & Electric Properties was, in turn, affiliated with the Associated Securities Corporation, a Delaware Corporation, which owned all of the class B stock of the Associated Gas & Electric Co., which had full voting rights. The Associated Securities Corporation and the Associated Gas & Electric Co. were, held by the Commissioner to have been nonaffiliated during the period here in question.

The Associated Gas & Electric Co. and the New England Gas & Electric Association were holding companies (to apply that term in a general sense to both) for between 163 and 183 subsidiary operating companies. Most or all of these operating companies were managed by the J. G. White Management Corporation up to 1927. The J. G. White Management Corporation had contracts with some of these corporations, and others it served without any particular contract. In 1927 the situation was reviewed and a new basis entered into. The Consumers Construction Co. was organized March 30, 1927. There had been organized on September 18, 1924, under the laws of Delaware, a corporation called “Managing & Investing, Inc.”; but by amendment to the certificate of incorporation on April 27, 1928, the name was changed to Utility Management Corporation. From the date of incorporation to August 1927 the common stock of this corporation had been individually owned. The J. G. White Management Corporation having a staff of experts who furnished managerial and engineering services, it was arranged in 1927 that the operating companies and the Associated Gas & Electric group enter into a con-. tract with the Utility Management Corporation of Delaware for managerial services for a consideration of 2y2 percent of the gross operating revenues of the operating companies. Likewise these operating subsidiary companies also entered into contracts with the Consumers Construction Co. for supervision of the construction activities of the operating companies, in consideration of 714 percent of the amount expended for construction. Neither the Consumers Construction Co. nor the Utility Management Corporation of Delaware at that time had any employees, nor rendered any services themselves. The services were rendered by the J. G. "White Management Corporation under an arrangement whereby the Utility Management Corporation was to collect the 2*4 percent of gross operating revenue from the operating companies, and therefrom to pay the J. G. "White Management Corporation at the rate of $200,000 per annum for managing the operation of the subsidiary operating companies under contract with the Utility Management Corporation; a generally similar arrangement was made between the Consumers Construction Co. and J. G. White Management Corporation, and thereunder in the fall of 1928 the Consumers Construction Co. paid the J. G. White Management Corporation approximately $80,000 for services rendered by the latter corporation for the operating companies of the Associated Gas & Electric group, the 7y% percent fee for which had been collected by the Consumers Construction Co.

It was the plan at the time the Utility Management Corporation of Delaware and the Consumers Construction Co. were organized and started out in this management work and construction contracts in 1927 and 1928, that there would be charges for the management services and the construction services something in excess of the actual cost thereof.

The New England Gas & Electric Association also had subsidiary operating companies which entered into the management contracts and construction contracts with Consumers Construction Co. and the Utility Management Corporation in the same general manner as the subsidiary operating companies of the Associated Gas & Electric Co. It was calculated that the amount of construction fees contributed by the subsidiary operating companies of the New England Gas & Electric Association was approximately 10 percent and that the remaining 90 percent was to be contributed by subsidiary operating companies of the Associated Gas & Electric Co. or its subsidiaries; likewise it was calculated that approximately 25 percent of the payment for managerial services would be made by the subsidiary operating companies of the New England Gas & Electric Association, while about 75 percent would be contributed by subsidiaries of the Associated Gas & Electric Co. or its subsidiaries. Therefore as to the Consumers Construction Co., 10 percent of the common stock was issued to the New England Gas & Electric Association and 90 percent to the Associated Gas & Electric Co., and its holding company subsidiaries, while in the case of Utility Management Corporation 25 percent of the common stock was issued to and held by the New England Gas & Electric Association, and 75 percent was issued to and held by the Associated Gas & Electric Co., or its holding company subsidiaries. The Consumers Construction Co. issued preferred stock which was held by the Eastern Utilities Investing Corporation, an investment trust, which carried same at $5,000,000 on its books.. The Utility Management Corporation also issued preferred stock, and issued 10,000 shares of common stock to the Associated Gas & Electric Co. as part payment for the management contracts herein involved. The Eastern Utilities Investing Corporation did not issue any bonds until 1929. The Eastern Utilities Investing Corporation sold and transferred to the New England Gas & Electric Association some 14,500 shares of Eastern Utilities Investing Corporation $7 preferred stock. Practically all of the remainder of stock of the Eastern Utilities Investing Corporation, with the exception of such amounts as the public held, was owned by the Associated Gas & Electric Co. or subsidiaries thereof. The New England Gas & Electric Association had to pay for its Eastern Utilities Investing Corporation stock. The Eastern Utilities Investing Corporation issued several classes of preferred stock, some of which was held by the public. H. C. Hopson was treasurer of both the Associated Gas & Electric Co. and the New England Gas & Electric Association, and was the author of the plans carried out as above set forth. He directed the management form of organization of the 163 to 183 operating companies, subject to the board of directors. Actually, neither the Consumers Construction Co. nor the Utility Management Corporation of Delaware had any employees until August 1, 1928, when certain engineering employees were transferred from the staff of the J. G. White Management Corporation to the staff of the Consumers Construction Co. Prior to August 1, 1928, the engineering staff of the J. G. White Management Corporation had been utilized. The Utility Management Corporation never at any time had employees. The J. G. White Management Corporation was paid out of the percentages collected by the Utility Management Corporation, and the Consumers Construction Co. from the operating subsidiaries, but there was a surplus or residual after the payment to the J. G. White Management Corporation. This residual was distributed as dividends by the Consumers Construction Co. and the Utility Management Corporation, respectively, to their stockholders. The Utility Management Corporation and the Consumers Construction Co. were each duly organized corporations with oíñcres, directors, and stockholders.

The Utility Management Corporation and the. Consumers Construction Co. of Delaware had no dealings with anyone outside of the companies in the Associated Gas & Electric system and did not actually render any services to anyone up to August 1928, except as they wrere performed by the J. G. White Management Corporation on their behalf. The Utility Management Corporation and the Consumers Construction Co. of Delaware were set up solely for the use and benefit and service of the Associated Gas & Electric Co. and the New England Gas & Electric Association and holding companies subsidiary to them. The only assets the Utility Management Corporation had were the contracts (to manage the subsidiary operating companies) and some temporary accounts receivable. The Consumers Construction Co. had no assets other than the contracts to render construction services to the subsidiary operating companies, and some little accounts receivable and temporary cash.'

The Utility Management Corporation and the Consumers Construction Co. paid J. G. White Management Corporation in the fall of 1928 for services rendered, covering the period from April 1, 1927, to August 1, 1928. On or about May 1, 1928, the Utility Management Corporation acquired 100 percent of the common stock of the J. G. White Management Corporation, and from that time on the Utility Management Corporation ceased to function, and the dealings were directly between the J. G. White Management Corporation and the operating companies.

The Consumers Construction Co. acquired some stock of the J. G. White Management Corporation which had been carried by the Utility Management Corporation. Sometime early in 1928 the stock of W. S. Barstow & Co. was acquired by the Associated Gas & Electric Co. or its subsidiaries. W. S. Barstow & Co. had a reputation as an engineering company. The engineering staff, which was transferred to the Consumers Construction Co. by the J. G. White Management Corporation on August 1, 1928, remained with the Consumers Construction Co. until the Associated Gas & Electric Co., or its subsidiaries, acquired the stock of W. S. Barstow & Co. The stock of the Consumers Construction Co. was issued in consideration for the contracts they were permitted to enter into with the subsidiaries. The 14,500 shares of Eastern Utilities Investing Corporation $7 participating preferred stock were acquired by the New' England Gas & Electric Association in either July or August of 1927, in order to be sure that the New England Gas & Electric Association would receive its equitable part of the earnings from the Consumers Construction Co. which went to the Eastern Utilities Investing Corporation. The purpose of the issuance of preferred stock by the Consumers Construction Co. was to arrange for additional income to the Eastern Utilities Investing Corporation, so that there would be no possibility that the charges on the securities which were held by the public, which ranked ahead of the securities issued by the Eastern Utilities Investing Corporation and owned by the- Associated Gas & Electric Co., would fail to be determined and paid. That protected, or assisted in protecting, the investment of the Associated Gas & Electric Co. in the Eastern Utilities Investing Corporation; likewise, some of the junior preferred stock of the Eastern Utilities Investing Corporation was acquired by the New England Gas & Electric Association. The additional income to the Eastern Utilities Investing Corporation was an element of protection of the New England Gas & Electric Association’s investment in the junior preferred stock, so that the Eastern Utilities Investing Corporation would always be in a position to have enough of the flow of earnings to them to be sure that they could take care of the charges or income on securities that ranked ahead of the securities owned by the Associated Gas & Electric Co., or subsidiaries, and the New England Gas & Electric Association.

The number of shares of the $7 junior preferred stock of the Eastern Utilities Investing Corporation was calculated to be an amount that would carry enough income to the New England Gas & Electric Association to give them their proper proportion of the distribution of Consumers Construction Co. preferred stock which would fall to them indirectly through the Eastern Utilities Investing Corporation.

The corporations involved in these cases originally filed a consolidated return. This was refused acceptance by the Commissioner of Internal Revenue. The Commissioner’s ruling has been accepted, and the question of affiliation is no longer an issue herein, and the amounts of deficiencies, if any are found by the Board, were stipulated upon trial by counsel for petitioners and respondent. It was further agreed that the transferee liability asserted in Docket No. 62246 is a duplicate of that set up in Docket No. 62248, and that if a deficiency is sustained against the Utility Management Corporation of Connecticut in Docket No. 62248, no liability shall be found in Docket No. 62246; likewise it was stipulated that if a deficiency is sustained against the Utility Management Corporation of Connecticut in Docket No. 62249, no liability shall be found in the case of the Associated Utilities Investing Corporation, Docket No. 62247.

Petitioners announced that no claim for relief is made under section 45 of the Revenue Act of 1928, or section 240 (f) of the Revenue Act of 1926.

The only question which remains for consideration, therefore, is whether the percentages collected by the Utility Management Corporation and the Consumers Construction Co. from operating companies subsidiary to the New England Gas & Electric Association and Associated Gas & Electric Co. were income in the taxable years to the Utility Management Corporation and the Consumers Construction Co., or whether it was income to the holding companies, the New England Gas & Electric Association and the Associated Gas & Electric Co., which received dividends by virtue of their stock holdings in the Utility Management Corporation and the Consumers Construction Co., and in the Eastern Utilities Investing Corporation through its ownership of preferred stock in said corporations.

The question is essentially one of a conflict of corporate entity as against theory of agency on the part of the Utility Management Corporation and the Consumers Construction Co. for and on behalf of two holding companies (using that term in a general sense), the Associated Gas & Electric Co. and New England Gas & Electric Association. Petitioners argue that the two taxpayer corporations acted as a mere instrumentality, agent, or adjunct of the holding corporations.

We find ourselves unable to agree with this view. The various authorities cited do not control a case involving the situation here at hand, in which we find nothing to overcome the Commissioner’s determination. The corporate entities are as to form not denied. The corporations were set up for business purposes, and “Where a corporate cloak is resorted to for its business benefits, the burdens, if any, must also be assumed.” Broadway Strand Theatre Co., 12 B. T. A. 1052. This is not, we think, a mere example of conduit, or simple agency, passing benefits to a principal. These two corporations each entered into contracts to render services for a large number of operating companies; in turn, they employed the J. G. White Management Corporation to perform these services — with the exception of those which were rendered by the employees which the Consumers Construction Co. had after August 1, 1928. Large amounts of money were collected on the one hand and expended on the other in connection with these contracts. Each corporation did have assets consisting of the contracts, which netted them large sums, and other assets of small value. The Consumers Construction Co. issued large amounts of preferred stock to a company not entirely owned by the holding companies here involved, to wit, the New England Gas & Electric Association and Associated Gas & Electric Co., for it appears that the public held stock in the Eastern Utilities Investing Corporation, the holder of preferred stock in the Consumers Construction Co. The Utility Management Corporation also issued preferred stock, the ownership of which is not shown to be entirely in the holding companies. The residual after the payment for services of the J. G. White Management Corporation can not be said to be simply transferred to the holding companies as owners of the common stock in the taxpayer corporations, since it is apparent from the record that preferred stock, at least in the case of the Consumers Construction Co., must first receive its dividends, and that some at least of the dividends from such preferred stock were received by the public, as owners of stock in the Eastern Utilities Investing Corporation, and never reached the holding corporations; while in the case of the Utility Management Corporation there is no showing as to whether preferred stock was held by others than the above named holding companies. Some part of the dividends may have reached the public as owners of such preferred stock. If the Consumers Construction Co. was a mere agent for the holding companies, it was also a mere agent for the public, which held stock in the Eastern Utilities Investing Corporation, the holder of its preferred stock. Such use of the taxpayer corporations is inconsistent with the theory that they were mere conduits or simple agencies for the holding corporations. We have already noted that, for a period at least, the Consumers Construction Co.'had employees.

We find it impossible to believe that corporations entering into the extensive contracts and liabilities, and receiving the large amounts of money under such contracts as in this case, are mere bookkeeping entries or shells, as petitioners denominate themselves. Corporate entity is to be disregarded only in extraordinary cases. Usually it is done to meet some fraudulent intent. There is no convincing reason for deviation from the usual recognition of corporate entity in favor of holding corporations which, according to their own theories and claims herein, set up corporate entities and caused them to enter into obligations with the public, not only by way of contract, but as to one of them by way of sale of preferred stock. The conduit through which the contributions of the operating companies reaches the holding companies is too indirect for purposes as practical as is taxation. There may be stoppages in this conduit in its way through two successive issues of preferred stock, and some of the contents of the conduit is diverted to the- public. It may be that there was no preferred stock issued to the public by the Utility Management Corporation, but the petitioners, with the burden, have not so shown. Regardless thereof, we believe that all of the facts indicate that these taxpayer companies, parties to extensive contracts, the proceeds of which reached the holding corporations only by way of dividends, are not mere bookkeeping entries, but are to be accorded the usual recognition of corporate entity. The cases cited by petitioners do not convince. There are, of course, situations as above indicated where corporate entity is disregarded; and generalities along that line of thought are of little or no value in a consideration of a particular situation.

In re Muncie Pulp Co., 139 Fed. 546, cited by petitioners, was a case of common ownership of two corporations by two men where no separate books were kept, no creditors shown, and the question arose in bankruptcy when the receiver for the first corporation demanded the properties of the second, which liad received its properties without consideration from tire first. This was a question of title, not faxes.

The case of Helvering v. Gordon, 87 Fed. (2d) 663, involved common ownership of two corporations by Gordon and wife. The second corporation performed no services and furnished no goods to the first one, or to anyone else. The record does not indicate that dividends were paid by it. The idea of mere conduit can not be escaped in that case. Moreover, section 45 of the Revenue Act of 1928 was relied on for the decision, whereas herein reliance thereon is expressly disallowed.

In Ansco Photo Products, Inc. v. Clark, 34 Fed. (2d) 568, the question was merely one as to whether the one corporation was a mere conduit when it transferred, immediately or soon after receipt, certain moneys to the stockholders of a subsidiary, to correct an error, the money not belonging to the corporation sought to be charged with taxes.

We have examined the other decisions cited by petitioners and find r.hem of no assistance to the solution of the question here.

Upon consideration of all of the facts involved herein, we conclude and hold that there is no sufficient reason for disregarding corporate entity, and therefore hold and render decision that the taxpayer corporations are respectively liable for the deficiencies, the amounts of which have been stipulated as follows: in Docket No. 59549, Consumers Construction Co. (Del.), in the amount of $49,953.63, for the period from August 1 to December 31, 1927; in Docket No. 59559, Consumers Construction Co. (Del.), in the amount of $51,841.42, covering the period from January 1 to October 31, 1928; in Docket No. 62248, the Utility Management • Corporation (Conn.) as the asserted transferee of Managing & Investing, Inc., in the amount of $65,339.99, for the calendar year 1927; and judgment of no liability at law or in equity is therefore rendered in Docket No. 62246, Associated Utilities Investing Corporation as the asserted transferee of Managing & Investing, Inc.; in Docket No. 62249, the Utility Management Corporation (Conn.) as the asserted transferee of Utility Management Corporation (Del.) (formerly Managing & Investing Inc.), in the amount of $19,089.41, for the period from January 1 to April 3, 1928; and therefore judgment of no liability at law or in equity is rendered in Docket No. 62247, Associated Utilities Investing Corporation (Del.) as the asserted transferee of Utility Management Corporation (Del.) (formerly Managing & Investing, Inc.); in Docket No. 59557, Utility Management Corporation, (Conn.), in the amount of $40,602.31 for the period April 4 to September 30, 1928.


source: Caselaw Access Project

author: Disney:

license: Public Domain

text:
    The National City Bank of New York, Executor, Estate of James E. O’Neil, Deceased, New York, N. Y., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77333.
    Promulgated April 27, 1937.

      II. B. MoGawley, Esq., and E. W. Shinn, Esq., for the petitioner.

      DeWitt M. Evans, Esq., and John M. Morawski, Esq., for the respondent.
   OPINION.

Disney:

The parties are in agreement (except for an alternative question raised by the petitioner, hereinafter discussed) that assessment and collection of taxes involved herein are barred by the statute of limitations unless the decedent filed fraudulent returns for' the taxable years with intent to evade taxes. In such cases the “amount of tax due may be determined, assessed, and collected, * * * at any time after it becomes due.” Sec. 250 (d), Revenue Act of 1921. The decedent having died prior to the determination of the deficiencies, fraud penalties are not involved.

The respondent having asserted fraud, he is charged with the duty of establishing it by more than a mere preponderance of the evidence. The evidence must be clear and convincing. Lalone v. United States, 164 U. S. 255; M. Rea Gano, 19 B. T. A. 518; Drawoh, Inc., 28 B. T. A. 666; Henry S. Kerbaugh, 29 B. T. A. 1014; affd., 74 Fed. (2d) 749; Budd v. Commissioner, 43 Fed. (2d) 509; Charles E. Mitchell, 32 B. T. A. 1093; Harry Feldman, 34 B. T. A. 517.

Fraud is “essentially a matter of motive and intention.” Wood v. United States, 41 U. S. 341. One alleging fraud is rarely able to prove it by direct1 evidence. Generally the true nature of the matter in controversy can be determined only from a careful examination of all of the circumstances relating to the transaction. The range of inquiry is broad.

In 1922 and 1923 the Continental Co. derived large earnings from the sale of oil under the contract of November 17, 1921, practically all of which were invested in Liberty bonds, and distributed to the decedent, Blackmer, Sinclair, and Stewart in substantially equal amounts. The remainder of the bonds, or their proceeds, were delivered to Osier. The petitioner admits that of these bonds the decedent in 1922 and 1923 received a total of $727,000 principal amount from the Continental Co. and does not question the distribution of the securities as earnings of the corporation. The decedent did not report or disclose the receipt of the earnings or bonds in his income tax returns, and the respondent was not aware of the distributions until about six years later. The decedent was required to make a full and complete disclosure of all items of gross income. Sec. 223 (a), Revenue Act of 1921. His intentional failure to include in a return, or otherwise reveal to the Government, large amounts admittedly received as profits of a corporation is evidence of a fraudulent purpose. M. Rea Gano, supra; D. C. Clarke, 22 B. T. A. 314; Charles E. Mitchell, supra; Harry Feldman, supra.

Persons guilty of fraud seldom fail to allege justification for their acts. Here the petitioner seeks to justify the failure of the decedent to report the income in question on the ground that O’Neil “never considered the bonds received by him as his property and there was never any adverse claim as between him and his company with regard to them and he never received or held the bonds under any claim of right” and that he “never intended to keep the fund represented by the bonds, and in fact did not keep it.” The petitioner contends that these facts are proved by direct testimony in the record, all of which was offered by respondent’s witnesses.

The testimony relied upon in particular is that of Fitzpatrick, Kountz and Wayne O’Neil, son of petitioner’s decedent, based upon statements made to them, or in their presence by the decedent himself, as to the receipt of the bonds and his intentions; especially his statement that he considered the bonds as belonging to the Prairie Co. and intended that they be delivered to the company. These statements were obviously self-serving in their nature. They are to be weighed as against evidence indicating a contrary intent on his part. They were made after the decedent had had an abundance of time in which to contemplate the full import of the transaction, and largely when the activities of the Continental Co. were the subject' of inquiry by the Government. The remarks of the decedent, all of which were made after the Continental Co. had dissolved, most of them about two years later, in the light of other acts of the decedent with reference to the profits, seem to be nothing more than a belated effort to advance some sound reason for failing to make an earlier disclosure of the gains to the Prairie Co.

The decedent was president of the Prairie Co. until after the charter of the Continental Co. was surrendered for cancellation. If during such period he ever entertained doubt as to real ownership of the bonds he had received from the Continental Co., a desire to deal honestly with his employer would have caused him to make a full and complete disclosure of the facts to it for a final determination of the question. He resigned as president of the Prairie Co. in September 1923 and shortly thereafter left the United States, going to France. Any reasonable consideration indicates that at that date he would have settled the matter with his employer. No reasonable explanation appears as to why, after resigning, he continued to hold possession of these bonds, which, under petitioner’s theory, did not belong to him and were not claimed by him. He did retain possession. Possession is prima facie evidence of title to both personalty and realty. Ownership is presumed from possession. Jones Com. Evidence, 2d ed., vol. 1, pp. 496, 498. Not only was he in possession, but it was without disclosure to the Prairie Co. He made no such disclosure during the period of his presidency of the Prairie Co., nor until May 1925, and then the facts were not “discussed elaborately”, to use the language of Fitzpatrick. In the meantime the decedent used at least part of the bonds as if they were his own property. He cut the coupons maturing in 1922 and 1923 on the identical bonds, some of which coupons he cashed, actually disposed of $31,000 of the bonds in 1924, and during 1923, $148,000 principal amount of the bonds reached his brother-in-law as a gift from the decedent’s wife. If the identical bonds received from the Continental Co. were ever set aside for delivery to the Prairie Co., when, if ever, it suited the convenience of the decedent, at least a part of them was removed for other purposes, and none of the bonds delivered to the Prairie Co. in 1925 were the identical bonds received from the Continental Co. Aside from those just referred to, we do not know what disposition the decedent made of the actual bonds which he received from the Continental Co.

Petitionér’s theory is that O’Neil’s delivery to the Prairie Co. in 1925 of other bonds in lieu of those received by him indicates that he never claimed personal ownership. But does it not reasonably indicate just the contrary? Though possession is, as above seen, prima facie proof of ownership, it is obvious that logically there is still stronger presumption of ownership of property from acts or dealings which are consistent only with ownership. Therefore, does not the fact that O’Neil delivered in 1925 not the original bonds received by him, but a substitute, indicate strongly that he had dealt with the original bonds as his own? He is thus seen not to be delivering property to its owner, but making settlement because of having treated or disposed of as his own the original bonds. Such dealings with these bonds can not fairly nor reasonably be explained upon any theory except claim of ownership; they are not satisfactorily so explained by self-serving declarations reported by1 a son as a witness, the weight of whose testimony is naturally and properly to be carefully considered, nor equally self-serving statements of intention made by O’Neil later in connection with, some sort of settlement with the Prairie Co.

Moreover, the evidence is plain that he had such income. The subject of conversation between O’Neil and the president and general counsel of the Prairie Co. was the profits that he made in a deal of that kind. O’Neil told the Prairie Co.’s officers that the bonds came to him “as part of the profits of the Continental Trading Company”, and that “he had this interest in the profits.” The Prairie Co. carried out his request for secrecy, and as to payment of the tax, and in connection therewith, and before paying the tax, passed a resolution on May 1, 1928, which recites that O’Neil delivered on May 18, 1925, $800,000 in U. S. Liberty bonds “representing the profits to the said J. E. O’Neil accruing to him individually” in connection with the Continental Trading Co. contract*, and that the tax be paid “on account of the agreement made with the said J. E. O’Neil.” Petitioner objects to this resolution as hearsay, incompetent, irrelevant, and immaterial. But, upon petitioner’s own theory that the Prairie Co. was O’Neil’s principal, it is at once seen that the resolution is a declaration by the principal as to the matters of agency; while upon the theory of trusteeship in O’Neil it is a declaration by the cestui que trust, and admissible as such. Jones on Evidence, vol. 2, p. 1663; 1 Greenleaf on Evidence, ¶¶ 179, 180. There is such privity between O’Neil and the Prairie Co. as makes this declaration or admission by the Prairie Co. competent here. It was made in intimate connection with the request by O’Neil that the tax be paid. The Prairie Co. was simply carrying out an agreement with O’Neil himself and we think its corporate records entered in carrying out a contract are competent declarations to the parties to such contract. The Prairie Co. had been by O’Neil by this contract constituted his agent for payment of this tax in his stead, and O’Neil is therefore bound by its declaration, which accompanied and was in the course of the performance of the agency. Jones on Evidence, vol. 2, p. 1741.

Another circumstance of vital importance here is this: Had O’Neil in good faith considered himself to have received the Liberty bonds for the Prairie Co. as trustee, it Avould have been his duty to have filed a return as a fiduciary, showing the Prairie Co. to be beneficiary. The petitioner does not contend that any such fiduciary return was filed, makes no attempt to show that the Government was apprized of the situation until several years later, and the testimony of Fitzpatrick discloses that O’Neil told him that he “never had returned any part of that profits with his income.” Had O’Neil filed such a return as fiduciary, without doubt petitioner would so contend. Moreover, the fact that O’Neil delivered the approximate equivalent of the full amount of the bonds to the Prairie Co. demonstrates that he never paid and deducted any tax, as would have been done had he made a fiduciary return, he not having made distribution to his alleged beneficiary until 1925. In Grace H. Crawford,, 30 B. T. A. 832, 836, we considered such a situation, commented on the fact that no return was filed as fiduciary, and further said :

* * * From the returns filed the respondent could not determine that the petitioner’s brother was liable for tax upon any portion of the income deposited to her credit in the joint account. * * *

Here, too, in the absence of a fiduciary return by O’Neil and any return by the Prairie Co. (which only learned of the bonds in' 1925) the respondent could not determine tax against the Prairie Co. All of these considerations can lead us to one conclusion only — that despite any declarations as to what he had intended to do with these bonds, O’Neil received them in his individual capacity and that they constituted income to him. No explanation is even attempted as to any reason why O’Neil should be holding these bonds for his company. Even his directions to his son show intent to retain control until death. Every circumstance of fact contradicts his asseverations of possession for his company. In Jones v. Securities Commission, 298 U. S. 1, 30, Mr. Justice Cardozo says: “Recklessness and deceit do not automatically excuse themselves by notice of repentance. * * *”

Protestations of innocence, however vigorous, by the party involved do not necessarily establish absence of fraudulent intent. Charles E. Mitchell, supra, (1129); Sydney M. Shoenberg, 30 B. T. A. 659, 661. The facts under which O’Neil finally did turn approximately a substitute for the bonds to the Prairie Co. are such as to throw doubt even upon repentance, and to indicate rather an attempt to escape consequences of acts then becoming known. He knew that the United States was inquiring into the matter, for the interrogatories propounded' to him in France in February 1925, some three months before he delivered the bonds to the Prairie Co., showed him plainly that the United States suspected him of having received income from the Continental Trading Co., and, with the matter being investigated in court, it could not reasonably escápe the knowledge of the Prairie Co.

Until publicly disclosed in 1928, the actual recipients of the income of the Continental Co. were unknown to the Government. Prior thereto the decedent not only made no effort to acquaint income tax collecting authorities with the profits distributed by the Continental Co., but endeavored to conceal the fact from the Government. Taxpayers dealing with the Government are required to turn “square corners.” Rock Island, A. & L. R. Co. v. United States, 254 U. S. 141. Contrary dealings, involving active concealment of the taxable income, constitute substantial evidence in the establishment of fraud with intent to evade tax. There was concealment of income which actually was received in 1922-1923. The Prairie Co. did not conceal it in 1922 and 1923, for it did not have knowledge thereof. O’Neil did have that knowledge, did make returns, which did not include this income. He refused to answer direct interrogatories as to this income when questioned by Government counsel under letters rogatory in the case of United States v. Mammoth Oil Co., Sinclair Crude Oil Purchasing Co., and Sinclair Pipe Line Co., supra. He not only did not relate in full to Fitzpatrick in Montreal in May 1925 the activities of the Continental Co., but gave the order on his son for $800,000 of Liberty bonds with the request that the Prairie Co. not disclose the receipt of the securities nor cash the coupons therefrom. The informal manner in which the bonds were recorded ip the books of the Prairie Co. and its failure to cut the coupons maturing on the securities thereafter is evidence of an effort to carry out its part of his request. The foundation for the effort to continue concealment of the bonds is, according to a remark of the decedent testified to by Fitzpatrick, that a disclosure would result in embarrassment to others. Taxpayers are charged with the duty of voluntarily reporting income annually for tax purposes. The obligation fully to disclose the receipt of profits derived legally or illegally can not be voided by a belief, however reasonable it may be, that the recipient or others will suffer embarrassment. Tax on income may not be deferred until a taxpayer concludes his fraudulent operations, or while he protects others. That there was concealment here, from 1925 when the Prairie Co. received the bonds, until 1928 when it paid a portion of the tax due from the Continental Co., is impossible of refutation; moreover, it is equally plain that it was a continuation of previous concealment by O’Neil.

It is well settled that reporting income for tax purposes may not be delayed to a future year on the ground that subsequent events may result in the determination that the recipient was not entitled to it. The rule was stated in North American Oil Consolidated v. Burnet, 286 U. S. 417, in the following language:

* * * If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. See Board v. Commissioner of Internal Revenue (C. C. A.) 51 F. (2d) 73, 75, 76. Compare United States v. S. S. White Dental Manufacturing Co., 274 U. S. 398 * * *.

In Board v. Commissioner, 51 Fed. (2d) 73, affirming 14 B. T. A. 374; certiorari denied, 284 U. S. 658, the petitioner and four other stockholders of tlie corporation took over a contract which, the corporation had entered into for the construction of a pipe line. The pipe line was completed on the joint credit of the individuals and the corporation, and, upon the subsequent sale of the property, the stockholders distributed a portion of the profits among themselves. Other stockholders contested the distribution, but subsequently permitted the petitioner and another stockholder, then acting as liquidating trustees for the corporation, to retain the profits on condition that they waive their right to further compensation for services as liquidating trustees. In holding that the income was taxable when received rather than the year in which the agreement was reached, the court said:

* * * Tlie only claim made is that the contract whereby petitioner purported to secure his interest in the pipe line was illegal and unenforceable by reason of his position as a director of the Old Dominion Oil Company. In this contention the petitioner of course never acquiesced. The payment was never refunded. Possibly it might have been recovered in the litigation which was instituted for that purpose, but it was not, and it is at least unusual that a taxpayer should be heard to assert the possibility of an adjudication of alleged misconduct and breach of trust, as relieving him from tax liability which is predicated upon the assumption of the honesty and legality of his acts. * * *

In Ford v. Commissioner, 51 Fed. (2d) 206, affirming 19 B. T. A. 1143; certiorari denied, 284 U. S. 666, dividends were received in 1922 on stock illegally distributed by an executor in that year. In 1926 the probate court sanctioned the distribution as of the close of 1922 provided the distributees were charged with interest to that date on what they had received. In holding that the dividends were taxable in 1922 the court said:

* * * Certainly they then had complete legal title to the stock and to the-dividends. If taxes regularly assessed could be invalidated, an indefinite number of years later, by a. consent judgment purporting to vacate the title of the taxpayer to- the fund he had reported as income, the necessary system of tax collection would be much impaired. The true normal criterion to be applied in this class of case is the actual receipt and retention during the year-in question of what was then considered to be income, not whether the taxpayer exposed himself to possible personal liability.

For other cases in which the principle has been applied see James P. McKenna, 1 B. T. A. 326; Edgar B. Terrell, 7 B. T. A. 773; Herbert J. Blum, 27 B. T. A. 1033; affd., 74 Fed. (2d) 482; certiorari denied, 295 U. S. 732; Highland Milk Condensing Co. v. Phillips, 34 Fed. (2d) 777; certiorari denied, 280 U. S. 608; Brooklyn Union Gas Co., 22 B. T. A. 507; affd., 62 Fed. (2d) 505; Commissioner v. Darnell, Inc., 60 Fed. (2d) 82; Florence B. Fawsett, 23 B. T. A. 1148; affd., 63 Fed. (2d) 445; certiorari denied, 290 U. S. 641; Erwin R. Effler, 29 B. T. A. 784; D. H. Byrd, 32 B. T. A. 568; Chicago, Rock Island & Pacific Railway Co., 13 B. T. A. 988, 1022; affd., 47 Fed. (2d) 990; certiorari denied, 284 U. S. 618; Lewis v. United States, 17 Fed. Supp. 543.

Tire petitioner argues, however, that the principle running through the above cases has no application here, contending that the decedent received the bonds as the result of a transaction entered into within the scope of his agency as an officer of the Prairie Co., and that receipt by him was receipt by his principal. From this premise it says that whatever the decedent received as profits of the Continental Co. was acquired as agent or trustee for the Prairie Co. and constituted income to it in the years received. Numerous authorities are cited for the settled principle that officers and directors of corporations, and agents, are required to account to their principal for secret profits earned in discharging the duties of their agency.

The effect of the argument is to set up unfaithfulness of the decedent to the Prairie Co. as a means of escaping payment of the taxes involved here. If accepted, it would enable a taxpayer to avoid the consequences of one fraudulent act by showing another one. It is opposed to the maxim that “a wrongdoer will not be heard to urge his own wrongdoing, or the illegality of his own acquisition, in bar of rights of third parties * * James P. McKenna, supra. Under the theory advanced by the petitioner, tax on income could be avoided by deferring payment to the principal until assessment and collection were barred. Revenue acts are designed to collect revenue and not to provide means for tax evasion. The argument assumes that the profits were taxable income to the Prairie Co. in 1922 and 1923, years during which it had no knowledge of the distribution of the bonds to the decedent. While we do not have before us the question of the year or years in which, the amount of the earnings is taxable to the Prairie Co., North American Oil Consolidated v. Burnet, supra, appears to be directly opposed to the idea that the income was taxable to the Prairie Co. prior to 1925, the year in which it first learned of the receipt of the bonds by the decedent and itself received them.

The petitioner must face the fact that there is no showing here that O’Neil was constituted the agent of the Prairie Co. for, the purpose of organizing the Continental Co., making a profit through it, and then distributing that profit to it. The right of the Prairie Co., if any, would be established in equity. There appears not even a ratification of O’Neil’s acts, but recognition that O’Neil received the bonds in his individual capacity.

The profits distributed by the Continental Co. in 1922-1923 were ■income to whomsoever was distributee thereof. Were they not income to O’Neil? He was, in fact, the distributee, having actually received the bonds distributed. If lie received them under a claim of right and without restriction as to disposition under North American Oil Consolidated v. Burnet, supra: if they were “then considered to be income” by him, under Ford v. Commissioner, supra, obviously the income was that of O’Neil. The statutory definition of income is not narrow. Can it reasonably be said that as to O’Neil these bonds were not gains or profits “of whatever kind and in whatever form paid”, or that they were not “income from any source” whatever, under the statute. We have hereinabove examined the record and have concluded that he received the bonds in his individual capacity with intent to keep the same as his own. “Claim of right” as used in the above citation can mean only claim of right to title. His possession and his use and disposition of the bonds, as above seen and concluded, :not only raise a presumption of claim of ownership, but convince us lully that he considered himself the owner. He was, in fact, the legal owner. The bonds passed to bearer. He was the bearer. The record herein does not disclose the receipt of the bonds by O’Neil in the capacity of agent, but on the contrary shows a duly organized corporate entity, making a profit on a business contract, purchasing Liberty bonds therewith, and distributing them to him and four other men, including its president. As stated in Ford v. Commissioner, supra, “certainly they then had complete legal title * * and alleged equities can not in later years be used to affect income. We can not, without good reason, disregard corporate entities such as ■the Continental Co., an active corporation, and it follows that we can not fail to give at lease prima facie effect to its distributions of 'profits to O’Neil, and recognize him as legal owner thereof.

Was there any restriction as to disposition of the bonds in O’Neil’s hands ? He disposed of or kept not only a part, but all of the bonds, for what he delivered in 1925 to the Prairie Co. was other bonds, perhaps an equivalent, but indubitably not the same bonds received by him. Even the equivalence is only approximate. There was a compromise, for the Prairie Co. did not receive interest on the coupons which had been clipped. No reasonable view can be taken that O’Neil considered that there was any restriction on disposition. It would require disregard of the whole complexion of the evidence, as well as its details, to believe' that O’Neil was at all times holding these bonds for the Prairie Co. We refuse to close our eyes to facts so obvious as those here involved. We must and do conclude that O’Neil considered these bonds as income to himself and that he considered himself bound by no restriction as to disposition.

The cases cited by petitioner, involving as they do the ordinary situation, of agreed relation of principal and agent, have no application here. Of course, income to one who agrees with his principal that he is agent, is income to the principal; but it is not helpful to adduce such cases as authority in a case involving the factual situation here at hand. One whose every act belies any intent to recognize himself as an agent can not, by some contractual arrangement with another party at a later time, convert himself retroactively into an ordinary agent and impose the effect of such agency upon the sovereign seeking tax. The agreement between O’Neil and the Prairie Co. may, or may not, have rested wholly on the one idea of breach of trust or agency on O’Neil’s part. The Prairie Co. did not recognize O’Neil as its agent in any formal way, to say the least. They paid tax not for themselves, but for O’Neil as transferee of the Continental Co., as the corporate resolution shows. The petitioner has not seen fit to explain O’Neil’s reasons, if any there were, for retention until 1925 of bonds Avhich it says belonged in equity to the Prairie Co., or why he delivered the bonds to them when he did. There may have been other contracts or agreements, relations other than ordinary agency or trusteeship between O’Neil and the Prairie Co., which entered the equation and contributed to cause delivery of the bonds. Though the burden of proof is on the Commissioner as to the fraudulent concealment of income, we have found that a prima facie case of ownership was established by the possession and disposition in various ways of the bearer bonds obtained by O’Neil from a duly organized corporation. Petitioner has not met such presumption by showing by any sufficient or convincing evidence that such ownership was in the Prairie Co. The mere fact of delivery of bonds alone, without determination of legal rights by any court upon examination of the facts, or even suit filed, by no means is deter r minative here — most emphatically where, the petitioner vouchsafes no explanation of reasons for the apparent prior claim of ownership of bonds by O’Neil, and where, as reason for delivery of. bonds to the Prairie Co., we have no judgment, not even a formal agreement', but only a report of O’Neil’s statement that he considered they belonged to the company, and had intended to credit them to the company. This question was before the court in Lewis v. United States, supra. There, officers of a corporation delivered to it property instead of moneys received by them, after receivers of the corporation had filed suit alleging that such officers had no authority to receive the moneys as compensation. The case was compromised by the delivery of property. The officers had in the earlier years returned the moneys as income, and, after compromise as above indicated, sued for refund. The court quotes and relies upon Ford v. Commissioner, supra, and North American Oil Consolidated v. Burnet, supra, and concludes that there having been no determination by a court of competent jurisdiction, the Government as to income tax was not bound by delivery of property in settlement of the amounts received by the corporate officers. We quote:

Plaintiffs make the point that these salaries, commissions, etc., never belonged to the plaintiffs, hut were trust funds in their hands as officers of the association. The authorities cited indicate this might he true as between the plaintiffs and the association. That controversy, however, has never been decided by any court or other lawful authority having jurisdiction and is not presented for determination in this litigation. The fact remains that when the plaintiffs received the sums in question they believed themselves legally entitled thereto and later paid them back, not because it had been authoritatively decided that they were not entitled thereto, but to settle litigation. The Government cannot be bound by the taxpayers’ own decision or opinion that they took this money without right or authority so to do. The association was divested of the legal title, irrespective of the equities arising from the transaction. In effect the plaintiffs ask that the Government be bound by an agreement entered into between the plaintiffs and the receiver of the building and loan association, to which it was a stranger. * * *
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Logically, the plaintiffs’ argument is grounded on the promise that the monies which the plaintiffs received from and later returned to the association did not belong to them. That they must fail in this suit is clear, because the premise is not supported by the determination of any court, Board of Tax Appeals, or any authority having jurisdiction to determine that question. In effect we are asked to hold the Government conclusively bound by the voluntary act of the parties in returning this money as a result of a compromise entered into with the receiver on the advice of counsel, in doing which they avoided the legal question, whether they were or were not entitled to the money, although the plaintiffs collected the said sums as officers of the association, and believing themselves legally entitled thereto, returned them in the respective years as income.
It is well to remember that a compromise (12 C. J., p. 314), is an agreement between two or more persons who, to avoid a lawsuit, amicably settle their differences by agreement. It implies (mutual concessions and the waiver of the respective rights of the parties, but is not an admission of their invalidity.
. We are not cited to any authority, nor can we find any that authorizes the taxpayer to change his tax liability in this manner long after his return is in. Such a rule would be an innovation having far-reaching effects.

The reasoning of the above decision we find to be sound and, together with other cases above cited, controlling here. A purchase by an agent from himself is not absolutely void, but voidable only at election of the principal. We can not here do what the Prairie Co. did not do — have declared void the purchase by O’Neil from hffi own company so far as claiming the profit involved. It is immaterial to our case that in the Lewis case, supra, the corporate officers believed themselves entitled to the compensation and made income return thereof, for herein on the facts we have concluded that O’Neil considered the Liberty bonds as income to him, and that they are to be considered such under the law, petitioner not having shown otherwise, by evidence of a mere settlement or compromise between the parties. There is no more strength in the settlement between O’Neil and the Prairie Co. than there was in the “consent judgment” in Ford v. Commissioner, supra, and, to use the expressions of that case, in 1922-1923 O’Neil “then considered to be income” the bonds he received, used and kept, even though “the taxpayer exposed himself to possible personal liability.”

There is close analogy, also, between the situation herein and in Board v. Commissioner, supra. The other stockholders in Board v. Commissioner obviously had and could have no different claim against the liquidating trustees than the claim which petitioner asserts for the Prairie Co. herein — the claim of agency or trusteeship, and the right to profits realized by such agent or trustee. The alleged agent in the cited case made a profit and kept it by surrendering a right to compensation; herein he made a profit and kept it for two or more years, and then settled the liability, if any, in consideration of the delivery not of the original property received, but of other property, not covering or paying interest on a part of the bond coupons which had been clipped. The fact that less than full payment, including said interest, was accepted makes of the deal a settlement. Moreover, O’Neil “wanted to get it settled.” This settlement is parallel to that in the cited case. Both cases involved retention of proceeds of profits made by an alleged agent or trustee, for a consideration. When we add the fact of concealed retention for more than two years by O’Neil, reason requires us to conclude that taxation should be applied in the years when! the profits were received by the person alleged to be agent. The plea of illegality of an agent’s actions was denied effect in the cited case; it must be denied effect here.

The decedent received earnings of the Continental Co. under a claim of right, and possibility that at some future time another taxpayer would assert title to the profits can not, under controlling cases, be used as a refuge for failure to report the income for taxation to the recipient. The revenue act provides a remedy for the recovery of excess tax payments. Income tax liability must be determined on the basis of what occurred and not on what might have happened. Possible claims of the Prairie Co. to all or a part of the earnings of the Continental Co. received by the decedent were a matter for settlement between them.

We can not consider the question of taxation determinable by the conference in Montreal at which the decedent did not make, and the representatives of the Prairie Co. did not, for reasons not fully disclosed, insist upon, a full disclosure of the circumstances under which the decedent received the distributions of profits. Taciturnity such as is exhibited in this matter does not commend the taxpayer. The resolution, of May 1,1928, by the Prairie Co. and the fact that it paid the transferee liability asserted against the decedent for unpaid income taxes of tlie Continental Co. as a liability of tlie decedent to tlie Government, rather than its own, is evidence that until then at least, that company regarded the bonds as profits accruing to the decedent in his individual capacity.

Taxes must be reported on an annual basis. If a taxpayer receives moneys under a claim thereto, treating them as his own, any reasonable regard for the fact that taxation is a practical matter compels us to disregard possible claims in equity still unsettled in the taxable year, and hold such moneys to be income, most particularly where, as here, there is full formal ownership in law, deniable only by disregarding the corporation and the distribution of its profits to O’Neil.

There was concealment of income. It was continued, at O’Neil’s request by the Prairie Co., even after he delivered bonds to the Prairie Co. There was consciousness on O’Neil’s part of liability for tax, for he required the Prairie Co. to agree to pay the tax when he delivered the bonds. He filed a return which did not disclose the receipt of these bonds, and he did not devote any of the bonds to paying income tax as the fiduciary which petitioner now argues he was, although he made no distribution to his alleged beneficiary. These facts not only are amply sufficient for the finding we make of fraudulent return with intent to evade tax, but they positively compel such a finding. To find otherwise would be to disregard the realities of the evidence.

We must and do conclude from evidence which seems to us cogent, clear, and convincing, and hold, that O’Neil received the Liberty bonds for himself individually and that he filed income tax returns for 1922 and 1923 which were fraudulent and made with intent to evade taxes, because of his omission therefrom of reference to distributions to him of profits of the Continental Co.

The petitioner contends in the alternative that assessment and collection of the taxes are barred because of the f aihire of the respondent to determine the taxes in question within one year after it made a written request therefor under section 250 (d) of the Eevenue Act of 1921. It argues that the second proviso limits the operation of the period of limitations generally and has no application to the first proviso. No judicial or executive authority is cited to support the technical ground thus advanced for a favorable decision, and we find none.

Rules of construction are not applied when the language of a statute is clear. South Carolina Produce Association v. Commissioner, 50 Fed. (2d) 742. The provisions of the section, when read together, are free from ambiguity and clearly provide authority for the determination, assessment, and collection of tax at any time after it becomes due in cases like this one where the returns are fraudulent with intent to evade taxes. The Commissioner so construed it, article 1012, Regulations 62, and he had interpreted provisions to the same effect in subsequent acts in a like manner. Art. 1271, Regulations 65 and 69; art. 1201, Regulations 74 and 77; and art. 275-1, Regulations 94. The Commissioner’s practical interpretation of a doubtful statute will not be disturbed except for weighty reasons. Brewster v. Gage, 280 U. S. 327. We find no merit in the point raised by the petitioner.

Assessment and collection of the taxes involved herein are not barred by the statute of limitations.

Reviewed by the Board.

Decision will he entered for the respondent.

       Sec. 250 (d) * * * Provided, That in tlie case of income received during the lifetime of a decedent, all taxes due thereon shall be determined and assessed by the Commissioner within one year after written request therefor by the executor, administrator, or other fiduciary representing the estate of such decedent: Provided further, That in the case of a false or fraudulent return with intent to evade tax, or of a failure to file a required return, the amount of tax due may be determined, assessed, or collected, and a suit or proceeding for the' collection of such amount may be begun, at any time after it becomes due * * *.


author: MoRRis:

text:
    Charles S. Davis, Successor Trustee u/w and of the Estate of Otto Ernst Isenberg, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Helen L. Isenberg Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent. Paul Otto Isenberg Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 74249, 71373, 71374.
    Promulgated April 27, 1937.

      F. Eberhart Haynes, Esq., J. Marvin Haynes, Esq., and Ebert J. Botts, Esq., for the petitioners.

      J. L. Bachstrom, Esq., for the respondent.
   OPINION.

MoRRis:

Petitioner Davis received $387,406.40 on June 21, 1929, being the sum of a judgment for $287,323.40 rendered against the Trust Co. growing out of the sale by the Alien Property Custodian on Januarv 17,1919, of certain corporate shares — 500 shares in which the decedent’s widow had a life interest and 170 shares seized as the property of Paul — and $100,083, being the amount of interest upon such judgment as found by the court to be due. The first and principal issue relates to the inclusion of this judgment money in taxable income for the year in which received.

The argument of the petitioner, in the main, is that the negligence for which damages were awarded did not consist in the “selling” of the 670 shares of Kekaha stock but in the breach of trust by the trustee in failing to prevent the Alien Property Custodian from selling said stock. Therefore, since the income in question did not arise from the sale of the stock in 1919, the amount sought to be taxed was not “derived from capital, from labor, or from both combined”, hence, not “income” within the definition of Eisner v. Macomber, 252 U. S. 189.

The petitioners rely strongly upon Farmers & Merchants Bank of Catlettsburg v. Commissioner, 59 Fed. (2d) 912, reversing the Board at 20 B. T. A. 622. It was the custom of the petitioner in that case, a banking institution, to make a charge for the collection of checks on foreign banks and those drawn on it and sent from other banks. The petitioner was not a member of the Federal Reserve System so that checks drawn on it instead of being cleared through the Reserve Bank were sent directly to it by the holding bank and paid by drafts on Cincinnati or New York. In 1920 the Reserve Bank demanded that the petitioner clear checks at par. Having refused this demand the Reserve Bank notified its members that it would collect without charge all checks sent to it and drawn on the petitioner. Its method was to employ agents who would appear daily at the bank with these checks and demand payment in cash. This practice was followed about eighteen months. During a greater portion of the time collections were effected in such an unusual and unbusinesslike manner as to attract unfavorable public comment and the petitioner claimed that it was thereby “annoyed, embarrassed, and interfered with in the conduct of its affairs.” It brought an action against the Reserve Bank for damages alleged to have been sustained by reason of these tactics, alleging, particularly, that by reason of the wrongful conduct of the Reserve Bank it had been forced to procure and keep in its vaults and with its correspondents unusually large amounts of money; that it had lost the earning power of a great deal of money; that it had lost deposits and depositors, and had failed to gain new ones; that it had been unable to grow and develop new business; and that it had been permanently injured in its reputation, standing, growth and prosperity. Claim for exemplary damages was also asserted. The action was finally compromised in 1925, the petitioner receiving a money judgment which the respondent here held to be taxable income. The Board sustained the respondent, primarily because of the failure of proof. The court found that the petitioner’s action was not predicated upon the loss of profits, as the Board said, but that its claim for damages was based upon “an alleged tortuous injury to the good will of its business”; that “gravamen of petitioner’s action * * * was the injury, inflicted to its banking business generally, and that the true measure of damages was compensation to be determined by ascertaining how much less valuable its business was by reason of the wrongful acts.” In conclusion, the court said: “One may be recompensed, for an injury but it is a rare case in which one should have a profit out .of it”, and it held that the amount so received should not have been treated as taxable income.

Thus, in substantial effect, the court there found that a loss in capital had been sustained by the bank and that the amount received by it constituted a restoration of that loss rather than income upon which the statute might levy a tax. We do not understand the court’s opinion to go so far as to hold that a known profit, susceptible of accurate determination under the terms of the taxing statute — a profit which, under normal circumstances would have been taxed — would be exempt from taxation merely because it was derived from a suit for and was denominated by the court as “damages.”

In Central Railroad Co. of New Jersey v. Commissioner, 79 Fed. (2d) 697, reversing the Board at 29 B. T. A. 14, one Joyce had been the executive officer of the railroad for a number of years in charge of its marine department. While such an official and in the employ of the railroad, Joyce and another organizó! certain other corporations and through such corporations “surreptitiously carried on business operations which were adverse to the interests” of the railroad. It was found that those corporations, without disclosing Joyce’s relationship, therewith, had been enabled to make advantageous leases and contracts with the railroad for his benefit. The railroad brought a suit in equity against Joyce and one of his corporate interests on the ground of conspiracy to defraud it and sought an accounting of the profits earned by such corporations or for the recovery of damages sustained by the taxpayer in entering into contracts and agreements therewith. The' suit was settled in 1928, the railroad receiving property of considerable value, consisting of certain structures, equipment, and appurtenances which were located on property leased by one of the corporations from the railroad for a term of years. The Board sustained the respondent in his determination that the value of the property so received should have been included in taxable income and in this it was reversed. The court, after reviewing the several instances in which recoveries, such as alimony and separation allowances (Gould v. Gould, 245 U. S. 151), and compensation for injuries or sickness (expressly exempted by section 22 (b) of the Revenue Act of 1928) are not subjected to the tax and holding that the value of this property was likewise not includable in taxable income, said:

* * * It was a penalty imposed by the law on a faithless fiduciary, a gain granted gratuitously because of the necessity of keeping persons in positions of trust beyond the temptation of double dealing. It cannot be said that it was derived wholly or in part from the use of the taxpayer’s capital or labor. The nearest that one can come to that is to say that Joyce and his dummies could not have operated but for Joyce’s position with the taxpayer and its type of business. But Joyce’s ultra vires operations were not carried un by the use of the taxpayer’s capital and labor. They were entirely separate and apart from its business structure.
Moreover, the settlement was not based on a suit by the taxpayer to recover profits of which it had been deprived.

“Farmers & Merchants Bank recognizes the priciple that damages recovered for the loss of profits are taxable just as profits made in the regular course of business.” Central Railroad Co. of New Jersey, supra. As we view the proceedings out of which the damages in question arose, the avowed purpose of the court was to restore to the trust the 670 shares of stock which had been wrongfully sold or in lieu thereof money damages which would restore the corpus to its value had there been no breach of trust and had the sale not taken place in 1919. In substantial, if not in real effect, the money damages received in lieu of stock constituted recovery “for the loss of profits” which would otherwise have been derived by the trust had the stock itself been received and sold in 1929 instead of in 1919. It is true that from the point of view of the court adjudicating that cause for damages, decedent’s estate and its beneficiaries were faced with a loss by reason of that wrongful sale in 1919, but such loss would have been due not to the sale of such shares of stock below their cost or their taxable base, but to the failure to realize the appreciation that had taken place in the value of the stock. The amount awarded represented the realization of that appreciation. If, of course, the Trust Co. had purchased the shares of stock in the open market, under the court’s decree, and had restored them to the trust, instead of paying cash, as it did, different considerations would be here involved. Cash having been received, the transaction in practical effect is as though the stock had been restored and in turn sold by the trust at a profit. See Armstrong Knitting Mills, 19 B. T. A. 318.

The definition of gross income in section 22 of the Revenue Act of 1928 is extremely broad. It “includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.” Therefore, once satisfied that there has been a “gain or profit” as measured by the taxing statute, it must be included in gross income. Even under the much narrower definition in Eisner v. Macomb er, supra, the amount in question, derived as it was from the ownership of “capital”, in the form of corporate shares, falls squarely within that definition.

Examination of Koninklijke Hollandische Lloyd, 34 B. T. A. 830, convinces us of its inapplicability. The Board there merely held that the “damages” awarded to the petitioner, a foreign corporation, did not fall within the very limited scope of the statute applying to the income of such foreign corporations from sources within the United States, hence, could not be taxed, saying:

Section 119 contains no definition of income of a general or all-inclusive nature such as is found in section 22 (a) and, therefore, the income shown to be taxed must come strictly within the limits of the statutory requirements.

In other words the Board merely found that the damages received did not fall within the classification of interest, dividends, personal services, rentals, and royalties, nor sale of property, and, so finding, it had no alternative except to hold that such amount was not income within the meaning of the statute.

Upon the first and main issue we sustain the respondent’s determination.

The second assignment of error is that if the respondent did not err in taxing the aforesaid $287,323.40, he did err in failing to determine that because the income of the trust is distributable annually or oftener the said income is deductible by the trust and taxable to the beneficiaries, relying upon section 162 (b) of the Revenue Act of 1928, which provides in part as follows:

The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
*******
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (e) of this section in the same or any succeeding taxable year.

In short it is contended that this amount should be taxed to the beneficiaries and not to the trust.,

That this sum of $287,323.40 (received in lieu of restoration of the stock itself), less $32,723.40 described as “surcharge” and representing dividends lost because of the sale of the stock, constituted corpus of the estate — as distinguished from income therefrom which would be distributable to the beneficiaries “annually or oftener” under the will of the decedent — is established, we are convinced, in sound reason and upon authority. Had a sale of this stock been made voluntarily by the trustee, certainly no one could contend effectively that the proceeds therefrom constituted income under the will and therefore were distributable to the beneficiaries. To so hold would have resulted in the distribution of the estate corpus prior to the fulfillment of the conditions specified by the decedent and would be in obvious violation of his expressed wishes. The proceeds from the sale of capital stock which was a part of the corpus, just as any other asset of an estate, not otherwise classified by the terms of the decedent’s will or by the terms of the statute governing its administration, became a part of the corpus of the estate and must be so treated. We have been cited to no authority of Hawaii, nor do we find any, which, would justify the application of a different principle from that enunciated in Estate of Richard O’Brien, 31 B. T. A. 149. Furthermore, no actual distribution of the sum received was actually made within the taxable period to the beneficiaries, nor was any specific sum set aside for them by the trustee. It “must be borne in mind that a trust in rendering its income for taxation can only deduct income which has been actually distributed or properly credited to the beneficiaries, or such income as is mandatorily distributable currently by the fiduciary to the beneficiaries.” Estate of Richard O’Brien, supra.

The facts and circumstances and the issues presented in Mary Clark de Brabant, 34 B. T. A. 951, are entirely different from those presented here. In that case the Board held that an amount withheld from distribution by the trustee pending litigation to determine whether such amount constituted corpus of the trust or income, was distributable income taxable to the beneficiary for the year when “mandatorily” distributable by the trustee, whether distributed in such year or not.

The petitioner is sustained as to the deductibility by the trust of $32,723.40, which represented dividends. It was, therefore, income of the trust, which was distributable under the will.

It is the “alternative” allegation and contention of the petitioner that ten separate trust estates were created by the will of the decedent — not one, as the respondent contends — and that “the income in question [presumably the same said $287,323.40] is taxable to ten separate trusts”, such trust estates being one for the widow as to one-third of the estate and one for each of the nine children as to two-thirds thereof.

. The arguments of both parties contain words and phrases extracted from the decision of the Court of Hawaii and of the Ninth Circuit Court of Appeals as they tend to evidence the views of the courts as to whether there was only one or several trusts. We do not find that this question was ever before those courts for consideration in any of the various proceedings and, therefore, words used in their determinations of other questions presented will be of little help to us. Therefore, we shall confine our consideration to an interpretation of the will itself. However, it may be said, in passing, that if we were called upon for a decision based upon the manner in which the courts have treated this question we would, nevertheless, be of the same opinion that we hereinafter reach. See Isenberg v. Trent Trust Co., 28 Haw. 590; 26 Fed. (2d) 609; 31 Fed. (2d) 553.

In the first place, the most potent factor of all in construing the intention of the testator lies in the fact that he did not, as he may well have done, and doubtless would have had he entertained the views urged upon us by the present petitioners, expressly declare separate trusts. Furthermore — and this, too, is of the essence since the burden of proof is upon the petitioner — we find no motive whatsoever on the part of the testator, in the proof before us, for creating ten separate trusts instead of one for the benefit of ten separate beneficiaries.

We find from the instrument itself that the testator, in simple terms, declared “all” of his property “In Trust * * * for the following uses and purposes.” In the paragraphs that follow this simple declaration he very briefly and, in our opinion, clearly set forth those “uses and purposes.” His purpose, of course, was to provide a suitable annual income for his wife for her lifetime and for his children until they became 25 years of age, also the ultimate division of the entire trust corpus among his children. Judging from the conciseness with which his will was drafted he seems to have cared little for the mechanics by which this purpose was to be accomplished. True, he directed, among the uses and purposes provisions of his will, that one-third of the estate (the entirety of which had already been declared in a single trust) should be “set apart” for the “use and benefit” of his wife and that the remaining two-thirds, his trustees should “divide * * * into as many equal portions” as there were children, but these words alone, without others showing an intention to establish separate trusts as to each portion to be set apart or divided, merely express the quantum to which each beneficiary of the principal trust should be entitled. That this is the logical view is supported by the provision of the testator that none of his children should receive his or her portion of the “principal trust property” until reaching the age of 25. Otherwise, if the testator had intended ten separate trusts instead of only one, with one trust res, he might just as well have referred to the “portion”, omitting any reference to the “principal trust property.” It is also significant to note that the testator in the provision empowering the trustees to sell referred not to the property of several trusts, but merely to “the trust property.” Furthermore, notwithstanding some inferences to the contrary, it does not appear that there was any physical apportionment by the trustees under the will, for if there had been, it would have been entirely unnecessary for the trustees to have called upon the court in 1905 for an apportionment in order that distribution could be made to some of the beneficiaries who had qualified under the will. Indeed, the trustees themselves appear to have always regarded the trust with a singleness of purpose.

Upon the foregoing issue we hold that there was but a single trust. Cf. Charles B. Van Dusen et al., Trustees, 33 B. T. A. 662; Huntington National Bank, Trustee, 32 B. T. A. 342; J. C. Wynne et al., Trustees, 28 B. T. A. 125; affd., 77 Fed. (2d) 473; and Johnson v. United States, 65 Ct. Cls. 285; certiorari denied, 278 U. S. 611.

The petitioner alleges and contends that if the respondent did not so err as in the preceding issues disposed of, he erred in his determination that certain of those shares which we have been discussing were not the separate and private property of Paul and the decedent’s widow, and that the income therefrom should be taxed to their separate estates. We find it unnecessary to dwell upon the subject at length. The Circuit Court of Appeals for the Ninth Circuit in Isenberg v. Trent Trust Co., supra, speaking of the 670 shares of Kekaha Sugar under consideration, said:

The Circuit Court [oí Hawaii] found that the stocls was part of the trust estate, and that at the time of the accounting it should have been in the appellee’s [Trust Co.] possession as trustee, and that it had been lost to the estate, through its, negligence in failing to reduce it to possession.

These 670 shares having been held to be the property of the trust estate by the Circuit Court of Plawaii and that court having been sustained in its view by the United States Circuit Court of Appeals, it follows that those shares could not have been the private property of Paul or the widow. The respondent is sustained upon this issue.

Error is alleged in the failure to allow the trust estate to deduct litigation expenses in 1929 aggregating $108,202.38, paid for the recovery of the damages hereinbefore discussed. This claim is based upon the action of the court when it, on January 12, 1931, directed the distribution of the damages to the beneficiaries, saying:

That large sums of money have been expended by the beneficiaries in the matter of the litigation to recover property for the trust estate and that said litigation was for the benefit of said estate and for all beneficiaries and that said expenditures should be borne by them in proportion to their respective interests.

Four hundred seventy-three dollars and twenty cents of that amount was paid by the estate in 1929 as a commission to the trustee “on income collected in the year 1929”, but since this amount has not been specifically pleaded we shall not pass upon its deductibility.

The remainder of said sum of $108,202.38, it appears, Avas paid by the various beneficiaries or their representatives beginning with 1921 up to the year 1930. No part, however, was paid by the trust in the taxable year 1929. All that the court determined was that large sums had been expended by the beneficiaries and that such sums should, in the distribution of the amount recovered, be apportioned against the distributions made to the various beneficiaries. So that, it is perfectly clear, the beneficiaries and not the trust incurred and paid the amount sought to be deducted here. Upon this issue the respondent’s determination must be approved.

The petitioners allege error in the failure of the respondent “to give credit for taxes paid by the Alien Property Custodian to the Collector at Baltimore” in certain stated amounts for the years 1919 to 1924, botli inclusive. Tlie argument advanced is, of course, double taxation.

The taxes for which the petitioner is seeking credit were paid by tire Alien Property Custodian on returns prepared by the Bureau for Paul. Regardless of the equities in the petitioners’ contention in so far as the present deficiencies are based on income included in those returns, it is obvious that taxes paid for one taxpayer may not be credited against deficiencies of another taxpayer.

The respondent has asserted a penalty of 25 percent for the years 1918 and 1924 to 1929, inclusive, because of the failure of the decedent’s estate to file timely returns of income as prescribed by the statute, such returns not having been filed until September 15, 1980.

It is now well settled that where no return is ever filed the 25 percent penalty becomes mandatory (Scranton, Lackawanna Trust Co., Trustee, 29 B. T. A. 698; affd., 80 Fed. (2d) 519; certiorari denied, 297 U. S. 723), but where there is no “willful neglect” and where “reasonable cause” for the failure to file is shown, together with the ultimate voluntary filing of proper returns, the penalty should not be asserted. The Jockey Club, 30 B. T. A. 670; affd., 76 Fed. (2d) 597.

There is nothing whatsoever in the record before us to indicate that the trust estate was ever under the impression that it was exempt from the filing of returns of income. In fact, it seems that the matter of such returns or of the liability of the estate for taxes to the Federal Government, except in so far as the Government itself took the initiative, was completely ignored until Davis, on March 9, 1930, retained the services of an accoxmtant who investigated and reported to Davis that no returns had been filed for the years 1918 to 1929. Conferences followed with the Bureau of Internal Revenue representatives in an effort to determine what the tax liability was for those years. Having requested an audit by the respondent for this purpose, the trustee was informed, on August 27, 1930, that returns would have to be filed before such a course could be taken. Returns for the years 1918 to 1929, both inclusive, were filed by Davis on September 15, 1930, showing the income — principally interest and dividends — and expenses of the estate.

What constitutes reasonable cause, which we- have said “means such a cause as would prompt an ordinarily intelligent and prudent business man to have so acted under similar circumstances” (Charles E. Pearsall & Son, 29 B. T. A. 747), must be determined in the light of the facts of each case. Considering all of the facts and circumstances of this particular case, taking into consideration the many complications caused by the seizure of the trust property, the status of the beneficiaries, the negligence of the Trust Co. during its term of office and the litigation which followed, we find no “reasonable cause” for the failure upon the part of the trust estate to file returns of income for the years prior to 1929. The penalty therefore as to those years must be sustained. See Berlin v. Commissioner, 59 Fed. (2d) 996, and Rogers Hornsby, 26 B. T. A. 591.

We are of the opinion, however, that as to the taxable year 1929 Davis proceeded with due diligence under the circumstances to determine the tax liability of the trust estate and to file returns as required by law. The penalty as to 1929 is, therefore, disapproved.

Docket Nos. 71373 and 71374 pertain to deficiencies of $2,875.03 asserted against each petitioner for the calendar year 1930. The deficiency notices are addréssed to “Helen L. Isenberg Trust, c/o Charles S. Davis” and “Paul Otto Isenberg Trust, c/o Charles S. Davis”, respectively, and the petitions filed in respect thereto are similarly captioned. Such petitions, verified by said Davis, allege that “The petitioner is an alleged trust estate (so-called by the Commissioner of Internal Revenue), with a Post-Office address c/o-Charles S.' Davis, Honolulu, Hawaii.” In both petitions it is alleged and with respect to both, it is contended that no such petitioners exist. The respondent’s deficiency notices state that four returns should have been filed for 1930 “for the estate of Otto Ernst Isenberg” which he proceeds to hold “should not have been taxed as a single taxpayer for the reason that the estate, as such, had been1 closed by proper probate procedure in 1905.” In his brief he states-that it was determined in the deficiency notices that the entire-income of $35,785.91 for 1930 was taxable “to two trusts and being-unable to segregate the income of the two trusts asserted deficiencies for the full amount of the tax or said $35,785.91 against two trusts, designated the Helen L. Isenberg Trust and Paul Otto Isenberg Trust.”

The- respondent’s position upon this issue is inconsistent with the position he has taken, in which we have sustained him, respecting-the trust of Otto Ernst Isenberg for the years prior to 1930. We have-held respecting these prior years that there was but one trust estate operating under the will of Otto Ernst Isenberg, deceased, and that the entire income of the trust is taxable to the trustee thereof. In-his brief the respondent says Davis, trustee of the estate of Otto Ernst Isenberg, kneAv clearly that the income sought to be taxed ■ against the two trusts arose from the property in the estate of Otto Ernst Isenberg, and because he filed petitions the Board should hold that there is a deficiency of $2,875.03 in one of the dockets against said Davis as trustee of the estate of Otto Ernst Isenberg. In other-words, what the respondent is now urging us to do is determine a-deficiency against the trust of Otto Ernst Isenberg although. no-notice of deficiency was sent to that trust for 1930 and it is not before us for that year. The fact that the same individual who is. trustee of that trust filed petitions on deficiencies asserted against two different alleged trusts does not justify the finding of a deficiency against that trust, although the income may have belonged, to it. We are satisfied from the facts and argument of counsel that the respondent’s determination of deficiencies against the so-called “Helen L. Isenberg Trust” and “Paul Otto Isenberg Trust” is erroneous and the respondent’s contention on brief can not be sustained.

Reviewed by the Board.

Judgment will be entered under Bule 50 in Doehet No. 71¡B1¡9, and judgment of no de-;iioieneies will be entered in Doehet Nos. 71373' and 71371¡..