Kerbaugh v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 06 February 1934 |
| Docket Number | Docket No. 68976. |
| Citation | 29 BTA 1014 |
| Parties | HENRY S. KERBAUGH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Percy S. Crewe, Esq., for the respondent.
The Commissioner, under date of October 24, 1932, mailed to the petitioner a notice of deficiency covering the years 1922 to 1927, inclusive. An unpaid tax liability for 1922 and an overassessment for 1923 were determined to be barred by the statute of limitations. For 1924 there was a determination of a tax liability of $4,377.16, no part of which had been assessed, and a consequent determination of deficiency in the full amount, together with a determination of a penalty of $2,188.58 which was explained as "50 per cent penalty provided by section 275 (b), Revenue Act of 1924." For 1925, 1926, and 1927, there was a determination of net loss, and therefore no deficiencies.
The petition was filed December 23, 1932, the form of which was in accordance with Rule 5 of the Rules of Practice. Paragraph 3 of the petition is as follows:
3. The amount of the deficiency, which represents tax and penalty for the year 1924, is $6,565.74, all of which is in controversy.
Paragraph 4 sets forth as the only assignment of error:
(a) The Commissioner has included in the taxpayer's gross income for 1924 $74,968.78 as dividends received through the partnership of Henry S. Kerbaugh Business, whereas this amount represented a loan and not dividends.
In paragraph 5 the facts are alleged as follows:
(a) The petitioner was a member of the partnership known as the H. S. Kerbaugh Business, he and John J. McMahon having an equal interest in the profits of such partnership.
(b) During the year 1924 the New Jersey Bergen Square Realty Corporation, a corporation all the stock of which was owned by the said partnership, made a loan to the partners of $148,687.56, which amount was duly entered upon the books of the corporation and of the partnership as a loan. The Commissioner has erroneously construed a part of this loan as a dividend.
The prayer is:
Wherefore, the petitioner prays that this Board may hear the proceeding and determine that the said amount of $74,968.78 represented a loan and not taxable dividends.
The respondent's answer admits paragraphs 1, 2, 3, and 5 (a), and denies the error of 4 and the facts of 5 (b).
The case came on for trial after due notice, but no one appeared for the petitioner. The respondent moves for judgment in the full amount of both the deficiency and the penalty, contending that the petitioner has failed to prosecute as to the deficiency and that since the petitioner does not attack the penalty there is no issue as to fraud to which the respondent's statutory burden of proof can attach. He cites Hanby v. Commissioner, 67 Fed. (2d) 125.
There is no question as to the right of the respondent to prevail as to the amount of the deficiency. The burden of proving error as to this determination rested on the taxpayer and in the absence of any evidence to overcome the presumption of correctness attaching thereto judgment for the respondent will be given. As to the penalty for fraud a different situation obtains and different considerations govern. The burden of proving fraud in civil cases has always been held to be on him who asserts it. It is never presumed. The Circuit Court of Appeals, in Budd v. Commissioner, 43 Fed. (2d) 509, called attention to this rule of law and pointed out that the statutory enactment in the Revenue Act of 1928 (section 601), specifically placing the burden of proving fraud on the Commissioner, was merely declaratory of what had always been the law in fraud cases. Accordingly it reversed a decision of the Board holding, in effect, that under our rules adopted pursuant to the 1926 Revenue Act, which was in force when the case was heard before the Board, the burden of proof was on the taxpayer. As to this rule the court observed that though the Board had authority to fix rules of procedure it had no such authority as to rules of evidence, and that the burden of proof was a rule of evidence, not a rule of practice or procedure. Though the Budd case was heard prior to the enactment of the 1928 Act, these basic principles were not altered by that act. A charge of fraud has always been regarded as a serious matter in the law. Not only is it never presumed, but the ordinary preponderance of evidence is not sufficient to establish such a charge. It must be proved by clear and convincing evidence. George L. Rickard, 15 B.T.A. 316; M. Rea Gano, 19 B.T.A. 518; Budd v. Commissioner,supra.
Respondent's argument is that, since petitioner did not allege specifically that the respondent erred in determining fraud and did not appear and contest the determination, no issue of fraud is raised by the pleadings, and judgment should be given for the fraud penalty as well as for the deficiency.
We cannot agree. We have seen that by general rule of law and by statute the burden of proof is placed on the respondent. Since fraud is never presumed and since the burden of proof is on the respondent, there is no presumption of correctness attaching to a charge of fraud. If not admitted it must be proved. Here there is no such admission. Decisions of the Board involving questions of fact fall generally into two classes — those in which petitioner fails to overcome by evidence the prima facie presumption of correctness attaching to the finding of the Commissioner, and those in which, the presumption of correctness being overcome, the case is ruled by the preponderance of the evidence. In fraud cases, there being no presumption of correctness accorded the Commissioner's finding, they are decided by the weight of the evidence, which, as above stated, must be clear and convincing.
But, respondent argues, since the petitioner does not by his petition specifically allege error in the determination of fraud, accordingly there is no issue of fraud under the statute and, therefore, respondent need submit no evidence to sustain the charge. The obvious answer to this position is that so to do would be either to presume fraud or to put the burden of proof on the taxpayer. A further answer is that the petitioner in paragraph three of his petition specifically says that both tax and penalty are in controversy. Attention may also be called to the fact that a fraud penalty is based on the finding of a deficiency and is proportionate to the same. If no deficiency is due there is no penalty. Petitioner alleged error in determining that a certain sum constituted dividends received and not a loan. Had petitioner proved his contention and been relieved of the deficiency he would automatically have been relieved of the charge of fraud. Nor is it to be overlooked that in this case the respondent has not complied with Rule 14 of the Board's Rules of Practice, requiring him to include in his answer a statement of the facts on which he relies to prove fraud. In this material respect the case differs from F. O. Statler, 27 B.T.A. 342, where the issue was whether petitioner's failure to file a reply was to be taken as an admission of fraud.
The case of Hanby v. Commissioner, supra, on which respondent relies, is clearly not authority in support of his position. The preliminary procedural question there considered was whether an issue of fraud was raised. The case arose under the Revenue Act of 1926 and at a time when the Board's rules did not require the respondent affirmatively to allege the facts on which he relied to prove fraud. The answer, accordingly, contained no such allegations. The court pointed approvingly to the holding of the Board that the question of fraud was inherent in the Commissioner's determination and held that the issue of fraud was before the Board. If the above decision lends support to either party here, it is to the taxpayer. Respondent is contending there is no issue of fraud raised by the pleadings. The Hanby case would seem to be direct authority to the contrary.
The issue of fraud being before the Board, there being no admission thereof and no evidence in support of the charge, we are of the opinion that as to this issue petitioner must prevail. The fraud penalty is not approved.
Reviewed by the Board.
Decision for the respondent for the amount of the deficiency without penalty will be entered.
McMAHON, concurring:
The provision of section 907 (a), Revenue Act of 1924, section 601, Revenue Act of 1928, is as follows:
* * * In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, where no hearing has been held before the enactment of the Revenue Act of 1928, the burden of proof in respect of such issue shall be upon the Commissioner. * * * Emphasis ours.
The word "involving" as used here has a broad meaning. It has a broader meaning than the word "pleaded." The word "issue" as used here is not qualified by the word "pleaded" or by the words "raised by the pleadings" or by the words "pleaded under the rules of the Board." There is no justification for reading such qualifications or similar qualifications, into this statute. While the Board has authority to make rules governing its procedure, and has made them, it has no authority to make rules which conflict with the statute. The statute is paramount; and the Board's rules, in any event, must be construed to harmonize with the statute. "The issue whether the petitioner has been guilty of fraud with intent to evade tax" became involved within the meaning of section 907 (a) when respondent determined a deficiency and a penalty, based on fraud and computed on the deficiency of which he gave the petitioner notice. The penalty cannot stand without a basis of fraud to sustain it, in addition to a deficiency as a basis of computation. The burden of proving this fraud, under section 907 (a), is put upon the respondent, who relies upon it....
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