Budd v. Commissioner of Internal Revenue, 4069.

• Decision Date: 13 August 1930
• Docket Number: No. 4069.,4069.
• Parties: BUDD v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

43 F.2d 509 (1930)

BUDD v. COMMISSIONER OF INTERNAL REVENUE.

No. 4069.

Circuit Court of Appeals, Third Circuit.

August 13, 1930.

H. S. Drinker, Jr., and Leslie M. Swope, both of Philadelphia, Pa. (Dickson, Beitler & McCouch, of Philadelphia, Pa., of counsel), for petitioner.

Sewall Key and John V. Groner, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Elden McFarland, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

DAVIS, Circuit Judge.

This is an appeal from an order of redetermination of taxes for the year 1921 of $55,980.87 on the sale of 7,500 shares of the preferred stock of the Budd Wheel Company on the ground that the sale was not bona fide.

On February 2, 1920, Mr. Edward G. Budd purchased 7,500 shares of the stock of the Budd Wheel Company of which he was president, at $100 a share for the total price of $750,000. The stock declined in value to $70 a share, and on November 15, 1921, he sold 3,000 shares of the stock to Mr. William B. Read, treasurer of the Budd Wheel Company. Mr. Budd indorsed and signed over to Mr. Read the certificates for the stock. The proper transfer stamps were attached to the certificates and canceled and the certificates were delivered to the Commercial Trust Company, the transfer agent of the company. On the same day the company issued new certificates to Mr. Read, which were countersigned by the transfer agent and registered by the Commonwealth Title & Insurance Company, the registrar.

Mr. Read gave to Mr. Budd in payment of the stock his promissory note dated November 15, 1921, payable February 1, 1922, for $210,000, bearing interest at the rate of 6 per cent. per annum. On the back of the note United States Revenue Stamps in the amount of $42 were affixed and canceled on the same date, November 15, 1921.

Mr. Read was worth over $600,000 at the time of these transactions, and the sale was admittedly made at that time for the purpose of taking a loss, but the testimony shows that there was no agreement, written or oral, or any understanding of any kind that Mr. Budd should subsequently repurchase the stock or that there should be an accounting of profits and losses between them.

Subsequently Mr. Read sold 660 of these shares of stock to a Mr. Campbell, leaving 2,340. The proceeds of this sale were deposited in the bank account of Mr. Read, who then drew his personal check for the amount and sent it to Mr. Budd and noted on the check that it was in curtailment or reduction of the note for the stock, but Mr. Budd appears not to have made any indorsement of the payment on Mr. Read's note.

On February 17, 1923, about fifteen months after the sale to Mr. Read, he sold to Mr. Budd the 2,340 shares, which he had left, in consideration of the cancellation and return of his note, which, as before mentioned, had been reduced, by the proceeds of the 660 shares to Mr. Campbell. The value of the stock had remained the same during the time it was held by Mr. Read, who had not paid any interest on the note, but the interest was offset by the cumulative 8 per cent. dividends which Mr. Read had not collected and which had accrued during the time Mr. Read had held the stock.

These are the undisputed outstanding facts in the transaction, and the question is whether they constituted sufficient evidence on which the United States Board of Tax Appeals could find that the sale was not bona fide. If the sale was not, it was fraudulent, made with the intention of taking a loss when he was not entitled to it under the statute and of defrauding the government to that extent.

The determination of the commissioner is presumptively correct. United States v. Anderson, 269 U. S. 422, 46 S. Ct. 131, 70 L. Ed. 347, Wickwire v. Reinecke, 275 U. S. 101, 48 S. Ct. 43, 72 L. Ed. 184. The Commissioner says the petitioner has not sustained the burden of proof which rests upon him in all cases before the Board of Tax Appeals to establish the contrary. On this theory of the case, did the petitioner bear the burden?

While the findings of fact by the Board are not conclusive, yet they will not be disturbed if there is any competent and substantial evidence to sustain them. De Ford v. Commissioner (C. C. A.) 29 F.(2d) 532, 533; Royal Packing Co. v. Commissioner (C. C. A.) 22 F.(2d) 536, 538; Ox Fibre Brush Co. v. Blair (C. C. A.) 32 F.(2d) 42, 45.

Two questions arise: (1) Was there any competent and substantial evidence to sustain the finding that the sale was not bona fide but fraudulent? (2) Was there any evidence sufficient to overcome the presumption that the Commissioner's determination was correct?

As to the first question the Commissioner did not offer any evidence, but relied upon the evidence of the petitioner. He says that the testimony of the petitioner and Mr. Read was vague, their memory was bad in that Mr. Budd was unable to recall whether the stock of his company went up or down after the sale to Mr. Read; that Mr. Read was unable to remember the month or year when he sold the stock to Mr. Campbell and was unable to produce the check with which he paid the petitioner. The Commissioner further submitted the following testimony of Mr. Read as justifying the implication that the sale was not bona fide:

"Q. Do you remember telling the revenue agent while there was no legal liability on your part to return any of this stock that you did feel morally responsible and liable to do so?

"Mr. Drinker: I object to any question of moral responsibility.

"The Member: The objection is overruled.

"Q. Do you remember such conferences? A. Yes; I recall such conferences.

"Q. Yes; and you expected to turn the stock back to Mr. Budd? A. I expected that the stock would be sold or disposed of.

"Q. And the proceeds turned back to Mr. Budd? A. I expected to satisfy my note; yes sir.

"Q. There would be a whole lot more from the proceeds than would be required to satisfy the note? A. Yes.

"Q. What did you expect to sell it at? A. What did I expect to sell it at?

"Q. Yes. What did you hope to sell it at? A. Why, I hoped to sell it at 100.

"Q. And there would be more proceeds than the amount of the $210,000 note? A. Yes.

"Q. And that would all go back to Budd? A. There was no agreement to that effect.

"Q. I am not asking what you did, but what you expected to do. A. I do not know what I expected to do."

It must be remembered that the sale was in 1921 and the testimony was taken in 1928. It would be very easy for men of large affairs not to remember the month or year of a particular sale or to be unable to produce a check used six or seven years before when there was nothing to call their particular attention to them. It is perfectly natural that Mr. Read did not know just what he expected to do with the profit that he hoped to make from the sale of the stock. It seems to us that the answer is characteristic of an honest mind. If he had taken part in manufacturing a case and had been perpetrating a fraud on the government, he would have...