Clarke v. Commissioner

D. C. CLARKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Clarke v. Commissioner

Docket No. 28257.

United States Board of Tax Appeals

22 B.T.A. 314; 1931 BTA LEXIS 2138;

February 24, 1931, Promulgated

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1. The petitioner employed one Thurman to accompany him to Washington and introduce him to the "authorities." The trip was made by the parties, who got no further than the hotel and who interviewed no one. A deduction of $1,000 was taken by the petitioner as representing the amount paid Thurman for making the trip with him. Respondent's action in disallowing the deduction is approved in the absence of evidence to show that the expenditure was incurred in connection with the petitioner's business.

2. Held, that the amount of $20,000 paid by the petitioner to one Knight in accordance with a contract by which Knight was to assist the petitioner in financing the sale of Camp Taylor and for Knight's services in assisting him in the sale of the camp is an allowable deduction.

3. In 1920 the petitioner purchased certain land which he subdivided into lots and sold all but 12 in that year. The entire purchase price of the land was deducted by the petitioner in his return for 1920. In 1921, the remaining 12 lots were sold and the entire sale price was reported as income for that year. The respondent's action in refusing to allow a deduction of $2,730 in 1921 as representing the cost price of the 12 lots approved where the evidence affords no basis upon which the purchase price can be allocated to the lots sold in that year.

4. Deductions allowable on worthless stocks determined.

5. Amounts reported as "unidentified income" which in fact were cash transferred from two banks held not to constitute taxable income.

6. Held, that respondent did not err in disallowing certain expenses incurred by the petitioner in connection with the sale of his father-in-law's farm in 1922 and deducted in his return for that year.

7. On the evidence, held that the petitioner's returns for 1921 and 1922 are false and fraudulent and were made with the intent of evading tax.

Elwood Hamilton, Esq., for the petitioner.

Arthur Carnduff, Esq., for the respondent.

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TRAMMELL

This proceeding is for the redetermination of deficiencies in income tax and penalties as follows:

Year	Tax	Penalty
1921	$18,436.89	$9,218.45
1922	3,080.15	1,540.08

The matters put in controversy by the petition as amended are the action of the respondent (1) in refusing to allow as a deduction as additional sales expense for 1921 an amount of $1,000 paid M. Bert Thurman for accompanying the petitioner on a trip to Washington for the purpose of introducing the petitioner to the "authorities" and telling of petitioner's business; (2) in refusing to allow as a deduction as additional sales expense the amount of $20,000 alleged to have been paid to E. V. Knight for his assistance to the petitioner in the procurement and financing of a contract for the sale of Camp Zachary Taylor; (3) in refusing to allow as a deduction for 1921 as an additional sales expense an amount of $2,730 representing the cost of real estate bought and sold near Burlington, Lowa: (4) in disallowing as a deduction for 1921 as a loss on stocks that became worthless an amount of $18,290; (5) in including in income for 1922 an amount of $10,117.56 representing gross receipts from the sale of land from which the cost thereof was not deducted; (6) in disallowing as a deduction for 1922 an amount of $1,545.35 representing the advertising cost and sales expenses of a farm sold by the petitioner for his father-in-law; and (7) in asserting the penalty of 50 per cent for filing false and fraudulent returns for 1921 and 1922.

FINDINGS OF FACT.

The petitioner is a resident of Louisville, Ky., and during the taxable years 1921 and 1922 was engaged in the real estate business under the trade name of the Louisville Real Estate & Development Company. He sold real estate on a commission basis and also bought and sold in his own name. Most of his business was on a commission basis. The petitioner carried on business in six or eight States. Nearly all of his transactions were outside of Kentucky so he worked out of the office almost entirely, going into various States making contracts with owners of land which he subdivided, advertised, and sold at auction. During the taxable years, the petitioner had about eight employees. His transactions were many and his average annual gross income for the four years prior to 1921 was approximately $100,000.

Until about June, 1922, the only records kept of the petitioner's business showing receipts and disbursements were from memorandum cards, the bank deposits and the canceled checks. Such records were kept by the petitioner's stenographer who had been working for him since 1917, and who knew nothing about bookkeeping until some time after July, 1922. About June, 1922, the petitioner employed J. T. Holmes as a full-time bookkeeper, who on June 1 of that year installed a system of bookkeeping that required the use of a cash book, journal and ledger. Holmes had charge of the books. However, the petitioner's stenographer made entries therein. The petitioner personally never kept the books nor made any entry in them.

On February 9, 1921, the petitioner entered into a contract with the United States Government whereby he was to sell Camp Zachary Taylor, near Louisville. The contract provided that if the gross returns from the sale of the camp did not exceed $1,000,000 the petitioner was to receive no compensation nor any reimbursement for expenditures. It slso provided that should the gross receipts from the sale exceed $1,000,000 the petitioner would get as full compensation for services and expenditures the excess above $1,000,000, provided, however, that the amount to be paid him should not exceed 15 per cent of the total amount of gross receipts on completion of the sale. At the time the petitioner submitted his bid he submitted a certified check for $100,000, which amount he raised without assistance from anyone. The contract required the petitioner to pay his own expenses and provided that he should spend not less than $25,000 for advertising and publicity. It also provided that neither it nor any interest in it should be transferred by the petitioner to any other party except to the extent permitted in section 3477 of the Revised Statutes of the United States. The contract also contained the following provision:

SEVENTEENTH: Contemporaneously with the execution hereof the said Louisville Real Estate and Development Company, party of the second part hereto, has deposited with the Quartermaster General, a certified check for $100,000 drawn to the order of the Treasurer of the United States, as a guarantee of its faithful compliance with all of the terms provisions and conditions of this contract, and in the event of the failure of the said Louisville Real Estate and Development Company to faithfully comply with and perform its part of this contract, the said sum of $100,000 shall be immediately forfeited to the United States of America as liquidated damages.

The $100,000 referred to in the foregoing provision was the check for $100,000 formerly submitted by the petitioner.

The petitioner completed the sale of the camp in June, 1921, and received $114,000 and "some odd" dollars for the sale. His expenses in making the sale were $60,654.67, exclusive of an amount of $20,000 hereinafter mentioned.

Prior to the time the petitioner entered into the contract for the sale of the camp, he employed M. Bert Thurman of New Albany, Ind., to accompany him to Washington to introduce him to the "authorities" and tell them what he knew about the petitioner's business. For this service the petitioner agreed to pay Thurman $1,000. The trip was made to Washington, but the petitioner and Thurman never got any further than the hotel and never interviewed anyone. On September 27, 1921, the petitioner paid Thurman the $1,000. In determining the deficiency for 1921 the respondent disallowed this amount as a deduction.

After having entered into the contract for the sale of the camp and having borrowed at the bank until he had reached his limit and being in need of the $25,000, which he had agreed to spend in advertising the sale of the camp, the petitioner executed the following instrument:

APRIL 22, 1921.

It is hereby agreed by and between D. C. Clarke and E. V. Knight, that for and in consideration of the said E. V. Knight agreeing to furnish one-half of such sum as is required by the Government to insure faithful performance of contract and for other services rendered the D. C. Clarke agrees to pay to said E. V. Knight, forty (40) per cent of whatever net profits accrue from the sale of Camp Zachary Taylor or of any and all other sales of Governmentowned property which may be made by the Louisville Real Estate and Development Co. or by D. C. Clarke, within a period of five years from above date.

(Signed) D. C. CLARKE.

E. V. KNIGHT.

Immediately underneath the foregoing and in the handwriting of Knight is the following:

APRIL 23RD, 1921.

Should the commissions for the sale of Camp Zachary Taylor not equal the expenses of the sale as actually paid by D. C. Clarke then and in that event E. V. Knight is to share difference on the same percentage basis as the profits viz - forty per cent -

(Signed) E. V. KNIGHT.

At the time the petitioner and Knight entered into the foregoing agreement they anticipated the sale of other Government camps before this one was settled for, and they did sell other camps together.

Under date of August 20, 1921, the petitioner issued the following check on the Second National Bank, New Albany, Ind.:

No. 4922.

LOUISVILLE REAL ESTATE & DEVELOPMENT CO.,

Louisville, Ky., 8/20 1921.

Pay to the order of Second Nat. Bank. $20,000.00

Twenty thousand and no/100

Dollars

To the National Bank of Kentucky in Louisville,

Ky.

(Signed) D. C. CLARKE.

The check bears in handwriting the endorsement "D. C. Clarke" and the following stamped endorsements:

Pay to the order of

Any Bank, Banker or Trust Co.

All Prior Endorsements Guaranteed

Aug. 20, 1921

SECOND NATIONAL BANK

71-90 New Albany, Ind. 71-90

Geo. A. Newhouse, Cashier

Louisville Branch of the

Federal Reserve Bank of St. Louis,

Louisville, Kentucky.

Aug. 22, 1921

All prior Endorsements Guaranteed

FIRST NATIONAL BANK

Louisville, Kentucky

21-5

The petitioner and Knight borrowed money on several occasions from the Second National Bank, New Albany, Ind., while the Camp Taylor transaction was being handled giving joint notes signed by both of them. The petitioner gave instructions to his office that the $20,000 should not be included as a deduction for advertising expense in preparing his return for 1921 which was filed on April 10, 1922. The petitioner's stenographer who prepared the data from which the return was made finding that the check was made payable to the Second National Bank, and knowing nothing about the contract between the petitioner and Knight, assumed that the check was in payment of a note and the amount was not deducted in the petitioner's return. The revenue agent who examined the petitioner's returns and records about July, 1926, found no record of any payment to Knight of the $20,000 and the first the agent learned about the matter was in the petitioner's second protest filed in October, 1926, against the agent's report. Prior to this, the agent had conferred in regard to the petitioner's tax liability for 1921 with both the petitioner and his stenographer who kept the records. In determining the deficiency for 1921, the respondent refused to allow as a deduction the amount of $20,000 alleged to have been paid to Knight for his assistance in the procurement and financing of the contract for the sale of Camp Taylor.

When the income tax law became effective in 1913, the petitioner adopted the method of deducting the cost price of real estate purchased for resale in the year in which it was bought and crediting the sale price in the year in which sold. In an audit of his sincome tax returns made on this basis, for the years previous to 1921, the method used by him has been accepted by the Government.

In 1920 the petitioner purchased land near Burlington, Iowa, for the purpose of subdividing into lots and reselling. The total cost was $18,038. On May 14, 1920, 166 lots were sold for $16,661.50. In 1921 the remaining 12 lots were sold for $3,000. In his 1921 return the petitioner reported as income from the property the $3,000. Under his system of keeping records the petitioner deducted the cost of the property in his return for 1920, the year in which it was purchased. As the full cost of the property had been taken as a deduction in the 1920 return no deduction therefor was taken in the 1921 return.

In his 1921 return the petitioner claimed a deduction of $16,933 as a loss on the sale of stocks purchased in 1919. In determining the deficiency for 1921 the respondent disallowed the deduction which was computed by the petitioner in his return as follows:

	Cost	Amount received	Net loss
Flesher Petroleum Co. stock	$4,150.00	$207.50	$3,942.50
Lee-Allen Oil Co. stock	5,000.00	250.00	4,750.00
Archer Tire & Rubber Co. stock	1,000.00	50.00	950.00
Wyoming-Kentucky Petroleum Co. stock	500.00	25.00	475.00
Co-Operative Land & Development Co. stock	340.00	17.00	323.00
Paragon Oil Co. stock	400.00	20.00	380.00
Burk-Brown Investment Co. stock	2,750.00	137.50	2,612.50
Favorite Oil Co. stock	2,000.00		2,000.00
Southern States Oil Co. stock	1,000.00		1,000.00
Kytex Oil Co. stock	500.00		500.00

The petitioner had thought of taking a loss on the stocks in his 1920 return, but was advised by the examining officer that this could not be done unless the stocks were sold and the loss actually established in that manner. As the petitioner could not sell the stocks, he transferred them to H. B. Cassin, who under date of December 31, 1921, executed to the petitioner a note for $707 due two years from date with interest at 6 per cent. The amount of $707 represented 5 per cent of the cost of the stocks as shown above excepting however the last three stocks in the list. The selling price of 5 per cent was used with the idea that if anything should ever be recovered from the stocks, the petitioner would determine his profits on them on the basis of a purchase price of 5 per cent instead of 100 per cent. The note given by Cassin has never been paid and in taking it the petitioner never expected it to be paid, nor did he expect Cassin otherwise to pay for the stocks, as they were transferred to Cassin only for the purpose of the petitioner's claiming a deduction on them in his income tax return. The petitioner attempted to have all of the stocks transferred to Cassin on the books of the various corporations, but in some instances was unable to do so because he could not locate the corporations.

The petitioner paid $2,051.68 for the Flesher Petroleum Company stock, which he admitted at the hearing was not worthless in 1921. For the other stocks he paid the amounts indicated:

Lee-Allen Oil Co. stock	$2,500.00
Archer Tire & Rubber Co. stock
Wyoming-Kentucky Petroleum Co. stock
Co-Operative Land & Development Co. stock	102.00
Paragon Oil Co. stock	200.00
Burk-Brown Investment Co. stock
Favorite Oil Co. stock	500.00
Southern States Oil Co. stock	1,000.00
Kytex Oil Co. stock	1,150.00

The Lee-Allen Oil Company was organized in April, 1919, with a capitalization of $300,000 with shares of a par value of $1 each. In May, 1919, the directors authorized the sale of 150,000 shares of the stock at 50 cents per share. The agents who sold the stock received a commission of 15 per cent for selling it. The proceeds from the sale of the stock were used for purchasing certain leases the chief of which was on what was known as the Eureka tract and for development purposes. In drilling wells on the Eureka tract the funds of the company were practically exhausted. The wells began as good producers but rapidly settled down to small production. Thereafter the sale of 43,200 additional shares of the company's stock was authorized at 50 cents per share and the stock was sold. The money realized from the sale of this stock was used in developing other of the leases and in acquiring a lease in Oklahoma which never was developed or sold and which was a total loss to the company. By a written instrument dated December 4, 1919, E. A. Flanagan proposed to purchase the Eureka tract for $38,000, $15,000 to be paid in cash and the remainder to be paid in four equal installments due in 6, 10, 14, and 18 months after date. The proposal was accepted, but Flanagan sought to withdraw. A suit instituted against him resulted in his compliance with the contract of purchase. Part of the proceeds derived from the sale were used to pay the debts of the company resulting from development and operating expenses and the remainder, approximately $20,000, was used to purchase a one-half working interest in the D. N. Witt lease. At the time of this purchase in the spring of 1920 there were nine producing wells fully equipped. Additional drilling was done on this lease, and for a while it gave promise of being a steady producer, but gradually it dwindled to point where it did not pay sufficient to carry itself and the company gradually drifted into debt. The lease was operated until about March, 1924, when it was sold in consideration of the purchaser assuming the company's existing indebtedness not exceeding $1,000 and paying an amount in addition to net and pay each stockholder 1 cent per share for each share issued and outstanding out exceeding 234,000 shares. This sale was approved by a majority of the outstanding stockholders and wound up the affairs of the company. The company never paid any dividends. During 1919 and 1920 Hudson and Collins, large oil operators, purchased from various sources approximately 100,000 shares of the company's stock at prices ranging from 15 to 20 cents a share. There was no sale of the company's stock during 1921 and its book value did not exceed 5 cents a share. The stock never had a market.

There was no market for the stock of the Wyoming-Kentucky Petroleum Company in 1921. The Co-Operative Land & Development Company was a stock-selling scheme and while the stock had a market for about a month or so it died out prior to 1921. The stock was never worth anything. The Paragon Oil Company stock had a good market about 1918 or 1919, but that died out in a month or so and the stock could not be sold. A number of times in 1921 the petitioner called G. T. Dick, a brother-in-law of William H. Brown, who was the principal stockholder of the Burk-Brown Investment Company, and Dick did not give him a very good report on the stock of the company. At the time the petitioner transferred the stock of this company to Cassin he had a report that the stock was of a very doubtful value, if worth anything at all. There was no market for the stock of the Favorite Oil Company in 1921. In 1921 the stock of the Southern States Oil Company became greatly reduced in value and on October 25, 1921, the trustee of the company bought 10 shares of the stock of a par value of $100 each for $150. There was no ready market for the stock. In 1921 the stock of the Kytex Oil Company had little or no ready market value. The company was liquidated in that year and a distribution of one-half of 1 per cent of the par value per share was made to the stockholders.

There was no more market in 1920 for the stock of the Lee-Allen Oil Company, Wyoming-Kentucky Petroleum Company, Co-Operative Land & Development Company, Paragon Oil Company and the Favorite Oil Company than there was in 1921 and these stocks were as worthless in 1920 as in 1921.

In his return for 1922 the petitioner reported as "unidentified income" an amount of $10,117.56. This amount represented bank deposits which the petitioner's stenographer was unable to classify because of insufficient information at the time the return was prepared. Of the $10,117.56, $4,500 represented cash transferred under date of January 23, 1922, from the Second National Bank of the New Albany, Ind., to another bank, and $1,000 represented a transfer on the same date from the Citizens Union National Bank to some other bank. In determining the deficiency for 1922 the respondent made no change in this item of income as reported by the petitioner.

In 1922 the petitioner sold a farm for his father-in-law, E. R. Rowlett. Expenses incurred in making the sale amounted to "about $1,500," which the petitioner took as a deduction in his return and which the respondent disallowed. The agreement between the petitioner and Rowlett was that the petitioner would charge no commission for making the sale but that Rowlett would pay the expense. Of the land sold about one-fifth was paid for. The checks amounting to about $6,000 given in payment therefore were made to the petitioner and endorsed by him to Rowlett.

When Holmes started a set of books for the petitioner on June 1, 1922, he thought commissions paid and commissions received could be kept in the same account, but after making a few entries he found it did not work out in some ways and separate accounts were opened for commissions received and commissions paid. Holmes thereupon drew a red line across and about one-third of the way down the page on which the first account was opened and when the petitioner's stenographer was preparing the data from which the 1922 return was made she omitted the amounts above the red line, thereby failing to include in income commissions from June 10, 1922, to July 8, 1922, amounting to $20,362.71. There were also omitted from the petitioner's 1922 return commissions on the sale of the Massey farm amounting to $3,810 and commissions on the sale of the Morrison farm amounting to $3,005.76. Instead of crediting these amounts to the commissions received account, they were erroneously posted to the credit of the accounts for the owners of the farms.

The petitioner's income tax return for 1921 was made by T. M. Knight, who had formerly been employed for about three years as a Deputy Collector engaged on income tax work. He left the Government service on January 1, 1921, and started making returns for taxpayers, having about 150 clients a year. Knight knew nothing about the petitioner's business. He made the return from the data prepared by the petitioner's stenographer and did not check it against the original sources of information to determine the correctness of it. The petitioner never gave him directly any instructions about making the return nor did the stenographer suggest that he leave out anything.

The 1922 return was made by Holmes with the assistance of the petitioner's stenographer, the only person who prepared the data for the petitioner's returns for 1921 and 1922.

The net income reported by the petitioner for 1921 was $23,197.71, and for 1922 was $8,017.40.

The petitioner's returns for 1921 and 1922, which were signed and sworn to by him, are false and fraudulent, and were made with the intent of evading tax.

OPINION.

TRAMMELL: The petitioner contends that he is entitled to a deduction in 1921 of $1,000 representing the amount he paid M. Bert Thurman for accompanying him to Washington. In his petition he alleged that the amount was paid Thurman for his services rendered in connection with the procurement of the contract for the sale of Camp Taylor and the sale of the camp. With respect to Thurman's employment and services, the petitioner under questioning of his counsel, testified as follows:

Q. Mr. Clarke what connection, if any, did Mr. M. Bert Thurman have with the sale of Camp Taylor?

A. I think it would be safe to say that he did not have any. Mr. Thurman went to Washington one time. He lived in New Albany, at the time we sold an estate, for the DePauls, and was familiar with our operation, and he went to Washington to introduce me and tell what he knew about our business. We never got any further than the hotel. We never interviewed a soul, and came back home, and I gave that check to him for his services.

* * *

Q. Did you pay Mr. Thurman or employ him before or after the contract was entered into for the sale of Camp Taylor?

A. Afterwards - I do not remember the date. Q. What was he to do; what was the purpose of his employment?

A. It must have been before. As I remember he was to introduce me to the authorities there and tell them about my service.

* * *

Q. Mr. Clarke, did you ever pay * * * Mr. Thurman or anybody else any money to procure the contract for you for the sale of Camp Taylor?

A. I did not.

We think the foregoing testimony of the petitioner clearly is in direct conflict with the allegation in the petition that the amount was in payment of services rendered by Thurman in procuring the contract to sell Camp Taylor or in the sale of the camp. The testimony merely shows that Thurman was to introduce the petitioner to some one of Washington and to tell what he knew of petitioner's business, but it fails to connect Thurman with the transaction connected with Camp Taylor. If the petitioner had any other business in Washington at that time the testimony does not indicate its nature and does not connect Thurman with it. The introduction of the petitioner to some one in Washington or a statement of the petitioner's business does not necessarily constitute a business transaction. Since the record does not show that the expenditure was for any purpose connected with the petitioner's business, we do not think the respondent erred in refusing to allow the amount as a deduction.

The petitioner contends that he is entitled to a deduction for 1921 of $20,000 on account of a payment of that amount to E. V. Knight. The petition contains the following allegations:

The petitioner employed E. V. Knight of New Albany, Indiana, to assist him in the procurement and financing of the contract and sale of the property [Camp Taylor]. During the tax year 1921, the property was sold and the commissions paid to the petitioner were reported in gross income. The petitioner paid to E. V. Knight the above mentioned $20,000.

The petitioner submitted in evidence the check dated August 20, 1921, payable to the Second National Bank, New Albany, Indiana, which is as set out in our findings of fact, and testified that it was for the payment of Knight's part of the profits under the written contract of April 22, 1921, between the parties for his assistance in the sale of Camp Taylor. While the check was not drawn payable to Knight and does not bear his endorsement, the petitioner testified unqualifiedly as to what it was for.

We are convinced by the evidence that the amount in question was paid by the petitioner to Knight for services rendered in connection with the sale of Camp Taylor under the contract which was introduced in evidence, and represents an allowable deduction.

Counsel for the respective parties have referred in their briefs to our decision in , wherein in deciding whether a portion of the $20,000 was a gift to Knight. In that to Gwin, we stated that the $20,000 was a gift to Knight. In that case we had before us the question of the taxability to Gwin of a portion of the $20,000 here involved which was paid over to him by Knight. In the Gwin case Knight was a witness and testified that the $20,000 was a gift to him from Clarke. In the instant case we have the written instrument signed by Knight under which the amount was paid in addition to having Clarke's testimony as to what the payment was for, and at a rehearing of this proceeding we have heard the testimony of Knight and further testimony from the petitioner, both of whom were subjected to cross-examination. From all the evidence we are convinced that the payment was for services rendered and was not a gift by the petitioner. While there is an irreconcilable conflict between the testimony and the decision in the Gwin case and in this case, we must decide each case according to the testimony in that particular case.

The petitioner contends that the respondent erred in refusing to allow as a deduction for 1921 as additional sales expense an amount of $2,730 which he claims represents the cost of the lots near Burlington, Iowa, sold in that year. These lots, twelve in number, were a part of the land purchased in 1920, subdivided and all sold in that year except them. The total cost of the land purchased, including the 12 lots, was $18,038, which was deducted in the petitioner's return for 1920. The petitioner contends that the respondent erred in allowing the total cost of the land in 1920, a year not before us, and that he should be allowed a deduction in 1921 of $2,730 as representing the cost of the 12 lots. We recognize the rule that where land is acquired on one tract, subdivided, and sold in different tracts, the purchase price of the entire tract may be allocated to the portions or subdivided tracts which are sold and gain or loss determined. ; . In allocating the cost price to the subdivided portions there must be some reasonable fact basis on which to make an allocation. As no evidence was submitted on the basis of which an allocation of the cost could be made, the determination of the respondent is affirmed.

In his original petition the petitioner alleged that the respondent erred in disallowing as a deduction for 1921 an amount of $17,640 representing the cost of stock acquired prior to 1921 and which became worthless in 1921. In the amended petition the amount is shown as $18,290. The costs of the various stocks involved here have been determined on the basis of the evidence in the record and are set out in our findings of fact.

At the hearing the petitioner stated his contention as being that the transaction with Cassin "was not a real sale." He admits in his brief that the so-called sale of the stocks to Cassin was for the sole purpose of reducing income tax and that it was not an actual sale. He contends, however, that all of the stocks except one became worthless in 1921, and that he is entitled to deduct the loss on all of them except the one from his gross income for that year.

The petitioner, being unable to make a bona fide sale of the stocks, entered into the arrangement with Cassin as set out in our findings of fact, and on the basis of it reported in his 1921 return a loss sustained on the sale of the stocks. At the time he transferred the stocks to Cassin, who was in the petitioner's employ at $200 per month and who had no assets, he did not expect Cassin to pay anything for them and according to the petitioner's testimony he knew that Cassin would not give 5 per cent of the par value of the stocks or even 1 per cent of such value for them. The only purpose of the arrangement was for the petitioner to take a loss on them in his income tax return and thereby reduce the amount of his tax. Although the petitioner went through the form of selling these stocks to Cassin, he actually made no sale to him. Cassin paid nothing for them and was not to pay anything for them. They were and continued to remain the property of Clarke.

In his return for 1921 the petitioner took a deduction of $3,942.50 as a loss on the stock of the Flesher Petroleum Company. He has established by evidence a cost of $2,051.68 for this stock, which he admitted at the hearing was not worthless in 1921. This stock was included in the pretended sale to Cassin.

By the use of a transaction known to him to be fictitious the petitioner took as a deduction a loss which he claimed had been sustained by a sale of stock which was in fact not worthless, and which so far as the record shows was known not to be worthless. In our opinion the return for 1921 in which such a deduction was claimed was false and fraudulent and was made for the purpose of evading tax. The respondent's action in imposing the fraud penalty for 1921 is approved. .

In order to sustain the petitioner's contention that the remainder of the stocks became worthless in 1921 and that he is entitled to deduct the losses on them from his gross income for that year, it must be shown that the stocks became worthless in fact during that year and that there was no reasonable probability that any portion of the investment in them would ever be recovered. See , and cases there cited.

The evidence with respect to the value in 1921 of the stock of the Lee-Allen Oil Company, Wyoming-Kentucky Petroleum Company, Co-Operative Land & Development Company, Paragon Oil Company, and the Favorite Oil Company is indefinite, ambiguous and uncertain. The conclusion we reach from it is that the stocks were as worthless in 1920 as in 1921 and have so found as a fact. Aside from the Lee-Allen Oil Company stock no evidence was submitted as to whether the companies were still in business in 1921, or as to the assets owned by them or their financial condition otherwise. From such evidence we are unable to find that the respondent was in error in disallowing the losses claimed in 1921 on these stocks.

Cost was not established by the evidence for the stock of the Archer Tire & Rubber Company and no evidence was offered as to the value of it. We therefore have no basis for allowing any loss on it.

No cost was established for the stock of the Burk-Brown Investment Company and from the evidence as to the value of this stock in 1921 we are unable to determine when it became worthless. Under the evidence therefore, no deductible loss is shown.

While the evidence shows that the stock of the Southern States Oil Company became greatly reduced in value in 1921 and that there was no ready market for it, we are unable to find that the stock actually became worthless in 1921. The petitioner's contention as to this stock is therefore denied.

The Kytex Oil Company was liquidated in 1921 and a distribution of one-half of 1 per cent of the par value per share was made to the stockholders. The petitioner is entitled to a deduction for a loss on this stock of the cost price of $1,150 less the amount received in liquidation.

In a schedule attached to his return for 1922 the petitioner listed 13 items, totaling $10,117.56, which he reported as "unidentified income" and explained as follows: "Unable to classify the following income due to insufficient information regarding deposits." He now contends that these amounts can be identified and that they do not represent income. The evidence shows that two items included in the above amount, one of $4,500 and another of $1,000, represented cash merely transferred from two banks. It was money already received and the transfer from one bank to another did not affect income. The amounts should, therefore, be omitted in determining the petitioner's taxable income.

The petitioner contends that he is entitled to deduct in 1922 the amount of $1,545.35 as expenses incurred by him in the sale in that year of the farm of E. R. Rowlett, his father-in-law. With respect to the repayment by Rowlett of the expenses the petitioner testified as follows:

Q. Do you know whether or not he ever paid these expenses?

A. I do not recall. I know he paid for the car. We gave a car away, and he paid for that, and I do not recall any other settlement.

* * *

Q. Did you ever ask him for that money?

A. I do not recall. That has been five or six years ago, and I do not recall how that was paid. I do recall that he paid for a car given there, but I married Mr. Rowlett's only daughter, and he has been paying me for twenty years in different ways.

Q. You felt very friendly towards him? A. Exceedingly so.

We are not convinced by the evidence that the petitioner has not received payment for the expenses incurred in the transaction. The burden is upon the petitioner to show that he has not been reimbursed. If he was reimbursed he is not entitled to the deduction claimed. The determination of the respondent on this issue is affirmed.

For 1922 the petitioner failed to report commissions amounting to $27,178.47 as set out in our findings of fact. He concedes that these items are taxable income, but does not accept the blame for these omissions from his return. He seeks to lay it all on his stenographer or others in his office.

The petitioner testified that he left the making of his returns and the keeping of his accounts entirely and wholly to the office force. In contrast to this we have his testimony as to how he had thought of taking in his 1920 return the losses taken on stock in his 1921 return and how he devised and carried out the fictitious scheme resorted to in order to take losses in his 1921 return. With respect to the $20,000 paid to Knight, he testified that he told his office force not to put the amount in his return as advertising the which direction, according to his explanation, resulted in the amount being omitted from the return. His stenographer also testified as to instructions received from the petitioner as to including certain unidentified bank deposits in the return.

The petitioner also testified that he employed men of experience in tax matters to make out his returns and that he left their preparation to them with such assistance as might be gotten from the office force. Holmes, who was employed as a full-time bookkeeper, made out the 1922 return with the assistance of the petitioner's stenographer.

From a consideration of the evidence we do not accept the petitioner's claim that he had but little if anything to do with the preparation of the return or furnishing the data from which it was made Neither do we think it likely that the petitioner could have filed an income tax return such as was filed for 1922, showing a net income of $8,017.40 when commissions of more than three times that amount had been omitted, without realizing that it was not a true return. The great discrepancy in the amount of income with respect to which it appears the petitioner had never entertained a doubt as to its taxability is one circumstance which, taken in connection with other evidence, prevents our attributing the errors to mistakes of judgment or oversight.

Aside from the above considerations there is a personal responsibility of a taxpayer in reporting his taxable gains and profits which he can not lightly avoid by leaving the preparation of his return to others. We think that the language of the Court in the case of Duffin v. Lucas, decided by the United States District Court for the Western District of Kentucky, September 12, 1929, unreported to date, in which the Court found that the return was fraudulent upon facts similar to those here presented, is applicable here. There the Court said:

But it does not help plaintiff to have it accepted that he had little, if anything to do with the preparation of the returns. If such was the case in signing and swearing to them he must have done so either with or without carefully advising himself as to their contents. It is not reasonable to suppose that he did so without advising himself and if he was fully advised as to their contents he must have known that they were wrong and that egregiously so. If as a matter of fact he thus did and allowed them to be given in there was such indifference on his part in regard to the matter as to indicate that he desired to keep in the dark as to their contents. I am led to these conclusions by the fact that the returns were so far out of the way from what they should have been. * * *

From the facts before us we are of the opinion that the petitioner's return for 1922 was false and fraudulent and made with the intent of evading tax and that the respondent did not err in imposing the fraud penalty for that year.

Reviewed by the Board.

Judgment will be entered under Rule 50.