Baird v. CIR, 18087.

• Citation: 438 F.2d 490
• Decision Date: 17 November 1970
• Docket Number: No. 18087.,18087.
• Parties: David G. BAIRD and Mildred B. Baird, Appellants, v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

438 F.2d 490 (1970)

David G. BAIRD and Mildred B. Baird, Appellants, v. COMMISSIONER OF INTERNAL REVENUE.

No. 18087.

United States Court of Appeals, Third Circuit.

Argued September 18, 1970.

Decided November 17, 1970.

As Amended January 27, 1971.

Rehearing Denied February 12, 1971.

Murray Gartner, Poletti, Freidin, Prashker, Feldman & Gartner, New York City, for appellants, Justin N. Feldman, Louis B. Livingston, New York City, of counsel.

Paul M. Ginsburg, Dept. of Justice, Tax Division, Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Bennet N. Hollander, Attys., Dept. of Justice, Washington, D.C., for appellee.

Before BIGGS, SEITZ and GIBBONS, Circuit Judges.

OPINION OF THE COURT

SEITZ, Circuit Judge.

Taxpayers appeal a decision of the Tax Court sustaining a deficiency in income tax asserted against them for the year 1955 in the amount of $459,542.01. The Tax Court found that the taxpayers failed to sustain their burden of showing the incorrectness of the Commissioner's determination that the transfer of 27,000 shares of Bellanca Aircraft Corporation stock from the partnership of L. Albert & Son to the Winfield Baird Foundation in 1955 constituted income to the taxpayers.

Petitioner¹ (taxpayer) is a well-known philanthropist who served as senior trustee of the Winfield Baird Foundation (Foundation). In 1955, he was a senior partner in the stock exchange firm of Baird & Company and served as a director of several business institutions and public charities. At times, including 1955, he functioned as a business broker or finder in connection with the merger and acquisition of corporations.

In 1951, taxpayer met Sidney L. Albert (Albert), who, with his wife, owned the partnership of L. Albert & Son, which engaged in the purchasing and rebuilding of used rubber machinery in Akron, Ohio. Thereafter, the Foundation, represented by taxpayer as trustee, engaged in several transactions with Albert or L. Albert & Son, including the making of secured loans and the sale of the Lake City Malleable Iron Company owned by the Foundation. Albert frequently visited taxpayer in his office to discuss business conditions and trends. There was no evidence of any social relationship between Albert and taxpayer.

Albert became interested in selling the partnership business and discussed this situation with taxpayer, who introduced Albert to Fred O. Schoeffer (Schoeffer), as a representative of a possible interested party. In 1955, on petitioner's business premises, Albert and Schoeffer discussed the possibility of merging L. Albert & Son into Sentry Safety Control, a corporation in which Schoeffer and the Foundation had substantial interests, but they quickly determined that the merger was not feasible. During the course of this meeting, Schoeffer telephoned Howard Hansell (Hansell), who had formed a group which had purchased a substantial interest in Bellanca Aircraft Corporation (Bellanca) and desired an acquisition for Bellanca. This conversation was the inception of a transaction between Bellanca and L. Albert & Son, whose details were arranged through negotiations by Albert, Hansell, Schoeffer, and one Joseph Patrick (Patrick).

Taxpayer had known all of the principals for several years and had contact with them in the course of his various business activities. During the Bellanca-L. Albert & Son negotiations, he telephoned Albert to introduce Hansell and to facilitate arranging an appointment for Hansell to inspect the L. Albert & Son plant. Taxpayer also discussed with Schoeffer the question of Schoeffer's proper finder's fee for the Bellanca-L. Albert & Son transaction.

On March 15, 1955, L. Albert & Son exchanged substantially all its assets for 1,071,250 shares of Bellanca then worth approximately $12,000,000. Out of these shares, Hansell received 15,000 shares, Schoeffer 7,000, and Patrick an indeterminate number, as finder's fees or commissions. Both Hansell and Schoeffer experienced difficulty in obtaining from Albert what they considered an adequate finder's fee.

On August 15, 1955, L. Albert & Son transferred 27,000 shares of Bellanca stock, which then had a value of $671,625, to the Foundation. L. Albert & Son reported this transfer as a charitable contribution on its 1955 partnership income tax return. Albert's other charitable contributions for 1955 amounted to $2,400. The Commissioner made the deficiency determination in issue and taxpayer's action followed.

In a suit to contest a deficiency determination, the Commissioner's determination is presumptively correct and the burden of disproving it rests upon the petitioner. Tax Court Rule 32; Hoffman v. C. I. R., 298 F.2d 784, 788 (3rd Cir. 1962). But if a taxpayer demonstrates that the Commissioner's determination was arbitrary he is not required to assume the burden of disproving it. Helvering v. Taylor, 293 U. S. 307, 515, 55 S.Ct. 287, 79 L.Ed. 623 (1935); cf. Hoffman v. C. I. R., supra. Taxpayer contends that the record establishes the arbitrary nature of the Commissioner's determination and thus the Tax Court erred in placing the burden of proof on him. We address ourselves to that issue.

In his opening statement to the Tax Court the Commissioner stated that he "initially discovered Mr. Baird's participation in the Bellanca deal from certain testimony that was given before the S. E. C. about the Bellanca transactions. The parties that gave the testimony were one Sidney L. Albert and Howard Hansell. That testimony was to the effect that a fee was paid to David Baird in the form of a 27,000 share donation to the Winfield Baird Foundation, one of David Baird's wholly owned foundations." There is nothing in this record to show that such testimony was not given before the S. E. C. The Commissioner's deficiency determination was therefore not shown to have been arbitrary ab initio. But the taxpayer urges that since Albert did not testify in the Tax Court as to this matter and since the testimony of Hansell in the Tax Court was to the effect, according to taxpayer, that the taxpayer had not received a finder's fee, the deficiency determination was thereby shown to be arbitrary because it was deprived of the only foundation that the Government claimed for it. First, since Albert did not testify in the Tax Court as to this aspect of the case, it cannot be assumed that the foundation for the Commissioner's determination was destroyed. Furthermore, Hansell testified that he did not think taxpayer received a finder's fee when he got his finder's fee.² Certainly such testimony could not justify a finding that the Commissioner's determination was arbitrary.

We conclude that the deficiency determination was not arbitrary. Therefore the presumption in favor of the determination continued and the burden of proof remained with the taxpayer.

The taxpayer argues that the Tax Court in its opinion improperly relied upon a theory of liability not tendered at the trial. Thus, he says that the finder's fee theory was the sole issue at the trial, yet the Tax Court found that the taxpayer received the shares as compensation for various past services and the expectation of future services as well as a finder's fee.

The statutory notice of deficiency ("90-day notice letter") sent to taxpayer by the Commissioner pursuant to Treasury Regulation 301.6212-1 was worded most broadly. It stated that:

"It has been determined that you realized additional taxable income in the amount of $671,625.00 representing the fair market value of 27,000 shares of Bellanca Aircraft Corporation stock transferred to the Winfield Baird Foundation in your behalf. This income was not reported on your return."

We think, that the wording of the deficiency notice was broad enough to include an issue as to income arising from past and future services as well as the finder's fee. But that is not the end of the matter. Prior to the introduction of testimonial evidence in the Tax Court, the Commissioner on a number of occasions indicated that he bottomed his position on the theory that the income in question resulted from a finder's fee arising out of the Bellanca transaction. He so indicated in his 30-day letter, in his trial memorandum, and in his counsel's opening statement³ to the Tax Court. Indeed, the Tax Court's own statement at the outset of the proceedings made it clear that it understood that the Commissioner's position was based solely on its finder's fee claim.⁴ Under these circumstances, we think the taxpayer was reasonably warranted in assuming that at the trial his burden of proof was to show that he received no finder's fee as a result of the Bellanca transaction. Furthermore, from our reading of the transcript we do not think it can fairly be said that the taxpayer was on notice that a broader theory of liability was being pursued. Consequently, the Tax Court was not warranted in evaluating taxpayer's evidence against any other theory of liability. We say this because it would be patently unfair to decide this case on a theory of which taxpayer was unaware and thus did not have an opportunity to meet at the evidentiary stage.

Did the taxpayer carry his burden of producing evidence that could justify the conclusion that the presumption arising from the Commissioner's deficiency determination was overcome as it related to the finder's fee? When the taxpayer makes an evidentiary showing of "no income" based on competent and relevant credible evidence, Foster v....