Mitchell v. Commissioner of Internal Revenue

• Court: U.S. Board of Tax Appeals
• Writing for the Court: WHEREAS, this Company now holds the receipt of Mr. J. P. Ripley reading as follows
• Citation: Mitchell v. Comm'r, 32 B.T.A. 1093 (B.T.A. 1935)
• Decision Date: 06 August 1935
• Docket Number: Docket No. 74720.
• Parties: CHARLES E. MITCHELL, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

32 B.T.A. 1093 (1935)

CHARLES E. MITCHELL, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 74720.

Board of Tax Appeals.

Promulgated August 6, 1935.

William Wallace, Esq., Leonard Moore, Esq., and Robert Reed, Esq., for the petitioner.

Edward S. Greenbaum, Esq., Thomas E. Dewey, Esq., J. D. Head, Esq., and Nathan Gammon, Esq., for the respondent.

This proceeding involves income taxes and penalties for the calendar years 1929 and 1930, determined by the respondent as follows:

---------------------------------------------------------------------------------
                                Year             | Deficiency in |  50 percent |
                                                 |      tax      |   penalty   | Total deficiency
                ---------------------------------|---------------|-------------|-----------------
                1929 ___________________________ |   $728,709.84 | $364,354.92 |   $1,093,064.76
                1930 ___________________________ |    121,719.84 |   60,859.92 |      182,579.76
                                                 | _____________ | ___________ | ________________
                     Total _____________________ |    850,429.68 |  425,214.84 |    1,275,644.52
                ---------------------------------------------------------------------------------
                

The pleadings raise the following issues:

1. Are the assessment and collection of the deficiencies, or either of them, barred by the statute of limitations (sections 275 and 276 of the Revenue Act of 1928), or, otherwise stated, did petitioner file false and fraudulent returns for the tax years or either of them?

2. Did petitioner realize a deductible loss upon a sale to his wife of 18,300 shares of the capital stock of the National City Bank of New York on December 20, 1929?

3. Did the amount of $666,666.67 received by petitioner on or about July 1, 1929, as a distribution from the management fund of the National City Co. constitute taxable income to him in that year?

4. Did petitioner realize a deductible loss upon a sale of 8,500 shares of the capital stock of the Anaconda Copper Mining Co., on December 26, 1930?

5. Did petitioner realize income in 1930 in the amount of $54,900 from dividends paid to petitioner's wife on the 18,300 shares of National City bank stock included in the transaction between petitioner and his wife on December 20, 1929?

6. Is the redetermination of petitioner's tax liability for the years 1929 and 1930 barred by the acquittal of present petitioner in the case of United States v. Charles E. Mitchell, that case being a prosecution of petitioner under section 146 (b) of the Revenue Act of 1928?

In his answer to the petition, the respondent affirmatively alleged that petitioner's returns for the years 1929 and 1930 were false and fraudulent with intent to evade tax. The petitioner, after leave given, filed a reply August 6, 1934, denying the affirmative allegations of the respondent.

FINDINGS OF FACT.

1. The petitioner, an individual residing in New York City, is a business man and banker of wide experience. For many years prior to 1929 he had been president of the National City Bank of New York and the National City Co. In April 1929 he became chairman (the chief executive officer) of the National City Bank, the National City Co., and also the City Bank Farmers Trust Co., which was then absorbed by the National City Bank. He remained chairman of these institutions until March 1933. In 1929 all the stock of the National City Co. was held by trustees for the benefit of the stockholders of the National City Bank. In December 1929 there were outstanding approximately five million shares of stock of the National City Bank.

2. On March 15, 1930, the petitioner filed his Federal income tax return for the calendar year 1929. This return was filed on the basis of cash receipts and disbursements, and it showed a net loss of $48,899.65. The petitioner did not report in his return of gross income an amount of $666,666.67 received by him on or about July 1, 1929, as a distribution from the management fund of the National City Co., and in computing net income an amount of $2,872,305.50 was deducted as a loss sustained by petitioner upon a sale of 18,300 shares of National City Bank stock to his wife, Elizabeth R. Mitchell, on December 20, 1929.

In determining the deficiency here in question for the taxable year 1929, the respondent included in gross income as additional compensation the $666,666.67 received by petitioner from the management fund of the National City Co. and disallowed the deduction of $2,872,305.50, claimed as a loss on a sale of the 18,300 shares of National City Bank stock to Mrs. Mitchell. Other losses on sales were disallowed in the sum of $3,668.40. The respondent also determined that the deficiency was due to fraud with intent to evade tax and added to the deficiency the statutory penalty of 50 percent of the tax.

3. On March 14, 1931, the petitioner filed his Federal income tax return for the calendar year 1930. This return was filed on the basis of cash receipts and disbursements and showed net income in the amount of $8,552.40. He paid no income tax for that year. Petitioner did not report in his return of gross income an amount of $54,900, representing dividends upon the 18,300 shares of National City Bank stock which was the subject of the transaction on December 20, 1929, between petitioner and his wife. In computing net income an amount of $758,918.25 was deducted as a loss sustained upon a sale of 8,500 shares of the capital stock of the Anaconda Copper Mining Co. to W. D. Thornton on December 26, 1930. In determining the deficiency here in question for the taxable year 1930, the respondent included in petitioner's gross income the $54,900, representing dividends upon said 18,300 shares of National City Bank stock and disallowed the deduction of $758,918.25 claimed as a loss upon a sale of 8,500 shares of Anaconda Copper Mining stock to Thornton. These, with other adjustments not in controversy, resulted in the proposed deficiency. Respondent further determined that the deficiency was due to fraud with intent to evade tax and added the statutory penalty of 50 percent of the tax.

4. From 1913 through 1930 petitioner's income tax returns were prepared by Frank W. Black, a former partner of petitioner. He obtained the information for making out the returns either from petitioner or the latter's secretary. Black, with petitioner's knowledge and consent, computed petitioner's profits and losses on the sale of securities during the taxable years. Petitioner signed and verified the returns prepared by Black and filed them with the collector of internal revenue for the third collection district of New York.

5. Under date of October 1, 1929, the National City Bank and the Corn Exchange Bank Trust Co., pursuant to the action of the directors of both banks, entered into an agreement of consolidation, subject, however, to ratification by the shareholders of both banks at meetings to be held on November 7, 1929. The agreement of consolidation provided for the exchange of four shares of National City Bank stock for five shares of Corn Exchange Bank stock. As part of the agreement, the National City Co. agreed to purchase, at $360 per share in cash, any shares of Corn Exchange Bank stock which might be tendered it for purchase within 20 days after the date of consolidation. The effect of the agreement to purchase Corn Exchange Bank stock at $360 per share was to place an equivalent price on National City Bank stock of $450 per share.

On October 28, 1929, the National City Co., in an apparent effort to support the price of the National City Bank stock, purchased 71,469 shares of that stock at a cost of approximately $32,000,000. These purchases increased the National City Co.'s holdings in that stock to 83,671 shares. Late in the afternoon of the same day petitioner learned of these purchases and, being of the opinion that the National City Co. should not purchase more of this stock, decided to use his personal credit to support the stock.

6. On the morning of October 29, 1929, petitioner arranged with J. P. Morgan & Co. for a personal credit up to $12,000,000, against which he could buy stock, to be secured by National City Bank stock as collateral, at a value for the purpose of not more than $200 per share. A special account was opened on the books of the National City Co. for shares of the National City Bank purchased for petitioner's account. Petitioner advised the president of the National City Co. of his arrangement with Morgan & Co. and authorized him to buy for his account.

7. On October 29, 1929, the National City Co. bought in the market for petitioner's account an aggregate of 28,300 shares at an average cost of $367.0028 per share, totaling $10,386,179.50. These shares were registered in the name of Taff & Co., as nominee of the National City Co. The shares so purchased were delivered to Morgan & Co., who charged the cost thereof against petitioner's credit of $12,000,000.

8. About November 4, 1929, the National City Co. sold for petitioner's account 4,000 of the 28,300 shares of National City Bank stock at $435 a share, and 1,000 shares at $425 a share. About November 6, 1929, it sold 5,000 additional shares thereof at $425 a share. The aggregate price of the 10,000 shares sold was $4,290,000. This sum was credited by Morgan & Co. against petitioner's loan account, leaving a balance due from petitioner on the 18,300 shares remaining of $6,096,179.50, for which sum Morgan & Co. held as collateral 30,000 shares of National City Bank stock registered in petitioner's name and the remaining 18,300 shares registered in the name of Taff & Co. Morgan & Co. continued to hold this collateral for petitioner's loan at all times hereinafter referred to. The National City Co. made no further sales from the stock it had purchased for petitioner's account on October 29, 1929. The petitioner realized a profit of $655,726 from the 10,000 shares sold, which...