MORRIS
District Judge.
On the
12th day of October, 1922, plaintiff (appellee here) filed
his bill of complaint against defendant (appellant here), the
duly qualified and acting collector of internal revenue in
and for the district of New Mexico, alleging:
'That
heretofore, and on, to wit, the 26th day of November, 1921
an action was instituted in the District Court of the
United States in and for the District of New Mexico by the
United States of America, plaintiff, against your
petitioner, as defendant, the same being numbered 846 Law
on the docket of said court. That in and by said action the
United States of America,
by and through the Honorable George R. Craig, its district
attorney, sought and now seeks to recover of and from
petitioner the sum of $5,140.50 as income tax, including
penalty, under the provisions of the Revenue Act of 1913,
being the Act of October 3, 1913, alleged to be due from
your petitioner and growing out of the sale by petitioner
on or about the 21st day of August, 1913, of his interest
in certain oil leases on various tracts of land lying and
being in the state of Oklahoma. It being averred that the
interests of your petitioner and others were, on said 21st
day of August, 1913, transferred to the Crystal Oil
Company, a corporation of Ardmore, Oklahoma, and that the
owners of the leasehold interest so sold to said Crystal
Oil Company were the sole stockholders in said oil company,
and that said sale was made in exchange for the entire
capital stock of said Oil Company of the value of $500,000;
that your petitioner's interest therein was 26 per
cent. of the whole; that the leasehold interest in the
leases so sold was valued as of March 1, 1913, at $46,000,
and the interest of your petitioner therein was of the
value of $11,960, and that his interest in the holdings of
the Crystal Oil Company, purchaser of said leasehold
interest, was on the 21st day of August, 1913, $130,000. It
being averred that the profit accruing to your petitioner
by said exchange was the sum of $118,040; that the normal
tax due thereon was $1,155.40 and surtax $2,271.60; that
petitioner had made no return as required by law; that by
reason whereof, and on, to wit, the 28th day of May, 1921,
the collector of internal revenue at Albuquerque, New
Mexico, made a return for your petitioner and demanded
payment thereof; that because petitioner had failed to make
the return he had become subject to a penalty of 50 per
cent. upon the sum of $3,427, or the additional sum of
$1,713.50, or a total sum of $5,140.50. Judgment was asked
therefor.
'That
your petitioner duly answered in the cause hereinabove
described, denying liability for the tax assessed, denying
that the profit had been made as averred, and pleaded
limitation as to the cause of action asserted. Reference is
here made to the complaint and amended answer in said cause,
which said cause is now at issue, and wherein your petitioner
is ready for trial, but that no trial has been had therein.
'That
notwithstanding the pendency of the cause hereinabove
described, the defendant, as collector of internal revenue in
and for the district of New Mexico, and under date of
September 23, 1922, gave to your petitioner the notice and
demand for tax on the form 7658, provided by the Internal
Revenue Department, wherein the said sum of $5,140.50 was
demanded, covering the income tax and penalty alleged to be
due by petitioner for and covering the year 1913. Again, the
defendant, as such collector, gave to your petitioner the
notice, form 7659 of the Internal Revenue Department, wherein
petitioner is notified that if said sum of $5,140.50,
together with an additional penalty of $257.02, is not
received within ten days, that collection, with costs, shall
be made by seizure and sale of property, the due date
thereunder being October 13, 1922; that said tax and penalty
so sought, under and by virtue of said notices, is a tax and
penalty alleged to be due by your petitioner as income tax as
and for the year 1913, and to recover which the suit is now
pending in this honorable court, as hereinabove described.
The said notices hereinabove referred to are hereto attached
and marked Exhibits A and B, respectively.
'Petitioner
represents: That the tax hereinabove described is not due by
him. That he does not owe the same, and is not liable for the
amount thereof, nor for any of same. That acting under advice
received by him from the office of the defendant, Hernandez,
he made no return for income tax for the year 1913. That no
such return by him was made within the time required by law.
That he was not due to the government of the United States,
nor to the defendant as an officer of the Internal Revenue
Department, any income tax for and covering the year 1913.
That no demand was made upon him that such return should be
made, or that any income tax should be paid by him covering
the year 1913, until after July 31, 1920. That on that date a
letter presumably from the office of the Commissioner of
Internal Revenue at Washington, D.C., signed by George
Newton, Deputy Commissioner, was addressed to him, wherein
and whereby, among others, it was represented that a total of
$5,140.50 was due by petitioner covering income tax and
penalty for the year 1913, request being made that he prepare
and file a return for that year with the collector of
internal revenue, defendant herein. That the amount of said
tax as so demanded was not paid, for the reason that same was
not due and owing, as petitioner is informed, believes, and
so alleges. A copy of said letter is hereto attached, made a
part hereof, and marked Exhibit C for indentification. That
the property acquired, and on which it was sought to make the
assessment in question, had been acquired prior to the year
1913, and there had been and was no added value thereto for
and during the year 1913. That the stock in the Crystal Oil
Company acquired and held by petitioner as of August 31,
1913, represented and had no greater value than did the
leases and interest therein held by your petitioner and
exchanged for said stock, and that said exchange represented
to your petitioner no profit. That the value of the interests
of your petitioner in the leases owned and held by him on
March 1, 1913, represented as great a value and same were
worth as much as was the stock in the Crystal Oil Company so
acquired by your petitioner in exchange for his interests in
said leases; and, in this behalf your petitioner represents
that there accrued to him no profit for and during the year
1913 by reason of the sale and exchange of his interests in
said leases for holdings in said Crystal Oil Company, and
that his holdings in said Crystal Oil Company were of no
greater value as of December 31, 1913, as were his holdings
and ownership in and to the above described leases as of
March 1, 1913. That he realized and had no profit or return
for and during the year 1913 by reason of his interests in
said leases, nor by reason of any interest owned and held by
him in the Plains Development Company, nor did he realize or
obtain or in any way secure a profit for and during the year
1913 by reason of the ownership by him of any of the capital
stock of the Crystal Oil Company. That no profit was either
earned, declared, or paid by said properties, nor did
petitioner earn or receive any profit, for and during the
year 1913, by reason of his connection with the Plains
Development Company or the Crystal Oil Company, or through or
by reason of any interests owned and held by him in various
tracts of oil lands, situate, lying and being in the state of
Oklahoma for and during the year 1913, and that the arbitrary
value of the interest of your petitioner in said leases as of
August 31, 1913, at the sum of $130,000 as placed by the
Department of Internal Revenue, was wholly inaccurate and
untrue, and petitioner had no voice in the fixing of said
value.
'It
is further averred in this behalf that the values so alleged
by the Commissioner of Internal Revenue of the stock in the
Crystal Oil Company acquired by your petitioner in August,
1913, and the difference between the amount so fixed by said
Commissioner and the amount of the value of the interest of
your petitioner in the lease above referred to in the sum of
$11,960 as of March 1, 1913, is wholly inaccurate and untrue,
but, on the contrary and as in fact, the value of the
interest of your petitioner in said lease as of March 1,
1913, was as great as was the interest of your petitioner in
the Crystal Oil Company, which took over said lease, for and
during the entire period of the year 1913.
'In
other words, the value of the interest of your petitioner in
said property was just as much on March 1, 1913, as was such
value at any time thereafter and during the year 1913; that
the difference in said value so placed and claimed by the
Commissioner of Internal Revenue, or his deputy, was wholly
fictitious and had nothing in fact to sustain the same, and
that if the defendant herein fixed such difference in value
the same is and was wholly fictitious and had nothing in fact
to sustain the same; that petitioner was never consulted by
the Treasury Department, (nor) any of its officers, relative
to the fixing of such value nor was he ever advised by any
officer of the Treasury Department or the Internal...
