Court Opinion

ID: 4497706
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:34.094457+00
Date Added: 2024-06-11T14:54:15.304308
License: Public Domain

Leech,
dissenting: Fraud must be established by clear and convincing evidence. Charles E. Mitchell, 32 B. T. A. 1093. I agree with, the majority that no such evidence exists here in petitioner’s returns for 1925,1926,1928, and 1929. I also find none in the return for 1930.
There may have been negligence in the filing of the returns for each of the years in question. Certainly that was so in the return for 1930. But negligence, alone, does not sustain a finding of fraud. Griffiths v. Commissioner, 50 Fed. (2d) 782; L. A. Meraux, 38 B. T. A. 200; Harold B. Franklin, 34 B. T. A. 927; Oscar G. Joseph, 32 B. T. A. 1192.
Petitioner was a church leader, prominent in the Boy Scout movement, relief work, and similar community activities. He was a very busy executive and engineer. His returns for 1930 and several prior years were prepared by a trusted employee, Nabors, in whose honesty and ability petitioner had absolute confidence, which clearly was not unjustified, though Nabors was not an accountant. Petitioner did not examine the computations on any of the returns. Respondent’s agents investigated those for 1930 and for other years, and constructively approved them. Nothing was concealed from these agents then or in their later investigation. All of petitioner’s data, supporting the returns, was made available to them. See Harold B. Franklin, supra; John Thomas Smith, 40 B. T. A. 387. Though there were omissions of three sales of securities for 1925 and 1926, every sale petitioner made in 1930 — and there were 35 — was reported in his return for that year. His receipts therefrom were all correctly reported except for a small overstatement. The error which resulted in the understatement of income upon which the deficiency for that year mainly arose and upon which the finding of, fraud in this proceeding was made, was the use of the wrong basis for computing the gain petitioner realized on these sales.
It is now conceded that the proper basis was not used in that computation. After seven months’ investigation by respondent, the computation of gain on these sales and those for the earlier years involved, was completed. But this computation exceeded the amount later stipulated as correct, by the amount of approximately $70,000. A tax specialist in the employ of petitioner then spent several months on another computation of petitioner’s income, for the several years here in review!, which computation respondent accepted as correct, with only minor changes, after investigation, and determined the present deficiencies thereon. The income thus computed is here stipulated as correct. Those facts indicate the complexity of the necessary computation. But that extreme complexity is even more graphically and startlingly evidenced.
*457Petitioner’s income for each of the years here, as thus stipulated, is shown, upon the face of the record, to be incorrect and overstated in a large amount because of the use of an erroneous basis for the stock then sold. The majority opinion admits the existence of this error and directs that it be corrected. In the face of this condition, can it be doubted that the computation of the correct basis of the stock sold in each of these years, is a matter so technical and involved that an error, resulting in a large understatement or overstatement of income could be made honestly and without fraudulent intent? Certainly the respondent had no intent to overstate petitioner’s income for 1930, and yet, the basis used by his accountants after months of detailed work, with all the records before them, resulted in a computation of income in an amount of $70,000 in excess of the income finally stipulated. And that figure, thus agreed upon, as I calculate it, is about $44,000 in excess of the correct income.
But the majority says that even this error by respondent “does not in the slightest degree affect the issue of fraud.” This may be theoretically true when the finding of fraud is limited to the narrow one of petitioner’s use, for the second time, of a cost basis for the so-called 5,000-share lot. But is it true, in fact — in view of the peculiar complexity of the calculation of basis for this stock? I think not.
This record convinces me that when the return for 1930 was filed, neither petitioner nor Nabors knew they were using a cost basis that had already been exhausted. The basis thus used was, indeed, wrong. But, error in such a complicated computation — not even yet correctly made — is surely no basis here for a finding of fraud. And the fact that this error actually resulted in the use of a cost basis already exhausted — in the picture presented — is, at least, far removed from “clear and convincing evidence” of fraud.
Petitioner and Nabors now admit that the use of such basis was a mistake, but they both categorically deny they knew they were making this mistake when the return was prepared and filed. Nevertheless, the majority regards petitioner’s explanation that this error was an unintentional mistake, as unsatisfactory. They dismiss it with that brief comment.
In view of everything revealed in this record, I think, it was amply sufficient to answer the imputation of fraud. It is significant that the District Court of the Middle District of Georgia, in determining a similar issue for 1931, thought so too. The petitioner had acquired these stocks in an effort to build an estate. All of his 1930 sales were made to pay obligations. In 1929, he was worth $3,000,000. By 1930, the value of his net estate had shrunk to $100,000. He was not a tax expert. Under such circumstances, is it reasonable that he should have known he was in receipt of income during that year, *458in an amount much larger than his total net estate? Although the information from which the calculation was made, was always available to respondent, the same exhausted basis was used for the third and fourth times in his returns for 1931,1932, and 1933. In computing the gain on the sales of Commonwealth stock during those years, Nabors testified he had lost sight of the 5,000-share block and used such mistaken basis because, when he prepared the returns for those years, he had that figure firmly fixed in his mind as the cost, per share, of all the remaining Commonwealth stock. A deficiency and fraud penalty thereon were determined for 1931. Petitioner paid both of them and sued in the District Court of the United States for the Middle District of Georgia, to recover part of the deficiency and all of the 50 percent penalty for alleged fraud. Because of this consistent and continuous error of basis the understatement of income for that year was much greater even than that for 1930. It is true more detailed evidence was presented in this proceeding. Only the year 1931 was there involved, but the issue was the same as that upon which fraud has been found here — petitioner’s use of a cost basis in computing gain on sales, which basis had been exhausted by prior sales. The case was tried before the court, without a jury, and the court there had before it the fact that, in petitioner’s return for 1931, in computing his gain on sales of Commonwealth stock during that year, the petitioner had used as a basis therefor a cost of stock which had already been used in computing gains on sales made before 1930. It was not there noted, however, that the basis used even by the respondent in computing the contested income was wrong. Yet the court, at the conclusion of the trial, said in part, and included the same in its findings of fact:
Thh Court. I want to say, and I feel that it is only fair to Mr. Mitchell that I say it now; that is, any charge of fraud in the sense that is generally understood as being dishonest and for the purpose of evading the payment of taxes, as I understand it, is certainly not sustained in this ease and I do not hesitate to actually and promptly find against that contention now. If it means negligence there is room for argument probably that Mr. Mitchell, with his occupation and the many other duties in which he toot part, might not have found time to go more thoroughly into the matter. That need not be determined now; nor am I going into the question of the alleged Huntington Aircraft loss. But I am announcing now that I am so thoroughly in sympathy with his feeling of outrage at being charged with fraud and dishonesty that I take pleasure in making this statement at this time and I will incorporate it in my findings.
I do not think the record here warrants any different conclusion as to the year 1930.