Before GOODRICH, McLAUGHLIN and STALEY, Circuit Judges.
These appeals concern the tax liability of James L. Meldon (taxpayer) for the years 1943 and 1945. After separate proceedings, the tax court decided that taxpayer owed tax deficiencies of $22,573.05 for 1943 and $202,547.75 for 1945. In addition, 50% fraud penalties of $11,336.36 for 1943 and $101,773.88 for 1945 were imposed.
These appeals by the taxpayer from the separate decisions entered for the two years were argued together and are covered by this opinion, although each year presents separate and independent questions. We will first consider the year 1945.
On January 31, 1945, the taxpayer entered into a written agreement with members of the Pattan family for the purchase of the Erie Casket Company stock. The purchase price was $500,000 of which $115,000 was to be paid immediately and $385,000 was to be paid over a three-year period. Upon complete payment of the purchase price, the stock was to be transferred to the taxpayer. Subsequently, Pattan wanted to cancel the deal in order to take advantage of a more lucrative offer from another party. On June 25, 1945, the agreement was cancelled, and payments which had theretofore been made by the taxpayer were returned plus $226,961.54. The June 25, 1945, date and the $226,961.54 profits are not disputed facts.
The tax court treated the taxpayer's rights under the January 31, 1945, agreement as capital assets and determined that they were acquired on January 31, 1945, the date of the written agreement, and sold on June 25, 1945. Therefore, the holding period was less than six months and the profit was to be treated as a short-term capital gain.*fn1
The taxpayer's quarrel is with the determination that his holding period was less than six months. He claims that his acquisition date was prior to January 31, 1945 (we are not told specifically at what date but only that it was early enough to make the holding period, which ended on June 25, 1945, more than six months) and that the written agreement of January 31, 1945, was but a memorial of an oral agreement in effect prior to that date.
To sustain his position, the taxpayer points out that $107,000 of the $115,000 down payment required by the written agreement was paid to Pattan in government bonds before the written agreement was signed,*fn2 and that in November of 1944 the Casket Company transferred to Pattan a life insurance policy which it carried on Pattan. The written agreement provided for the transfer of this asset. The occurrence of these two events prior to the written agreement is clear evidence, according to the taxpayer, that the written agreement was but a memorial of an already completed oral agreement. Among other arguments put forth to further sustain his contention, taxpayer tells us that in the latter part of 1944 he began spending time at the Casket Company (for which services he was later paid), and this he would not have done had there been no agreement in effect.
But this evidence to which taxpayer refers does not stand alone in the record. There was sufficient evidence that, although certain things were done in contemplation of an agreement, no such agreement was in effect prior to January 31, 1945. The taxpayer testified that these events took place because an oral agreement was in effect, but the tax court obviously disbelieved his testimony and accepted that of Pattan and Pattan's attorney, whose combined testimony was that, although negotiations and discussions between Pattan and the taxpayer began in the summer of 1944, no final agreement was reached before the written agreement was signed. Several drafts of proposals were drawn, both by the taxpayer and Pattan's attorney. None of them were acceptable. The agreement that was signed was drafted in January of 1945. According to Pattan's attorney, this included various items which were not contained in other proposals. These included a prohibition against assignment; a provision that if the taxpayer died before rendering complete performance, the contract was to be cancelled and all payments refunded; and a provision that no dividends were to be paid by the Company. The only part of the original proposal that survived all negotiations was the over-all purchase price of $500,000. From Pattan's testimony and that of his attorney, the conclusion was warranted that certain events took place because an agreement was contemplated - not because one was already in effect. The tax court decided that the turning over of $107,000 worth of government bonds was done only as evidence of good faith. The taxpayer himself in an affidavit which was introduced as Exhibit 7-G, along with certain stipulations, stated:
"The purpose of paying Mr. Pattan the $107,000 just as soon as I had collected them was in order to assure him of my genuineness and that I could handle the purchase besides the fact that I was then engaged by the Erie Casket Company at the salary named which commenced November 1945 [sic]."
We are told that the parties were laymen and did not concern themselves with legal niceties, but that for all practical purposes they considered that an agreement had been made prior to January 31, 1945. But, as we have indicated, the evidence, except for taxpayer's testimony, is to the effect that although they may have assumed that sooner or later they would reach agreement, neither entered into nor considered that he had entered into a binding agreement until January 31, 1945. The record discloses sufficient evidence to sustain the tax court's conclusion that taxpayer's acquisition date was January 31, 1945, and so its determination must be sustained.
The taxpayer also objects to the tax court's determination that his failure to report the $226,961.54 profit in 1945 was fraudulent and asks that we reverse the imposition of the 50% fraud penalty. Taxpayer did not report the $226,961.54 gain in his 1945 return. In 1946, the taxpayer filed a declaration of estimated tax for 1946 and later a revised estimate. Neither mentioned the profit, but his 1946 return, filed in 1947, reported the gain as a long-term gain on a capital asset acquired on January 4, 1945, and disposed of in early 1946. Taxpayer concedes that the gain should have been reported in 1945.
We think the government met its burden of establishing fraud. Taxpayer, who had been employed by the Bureau of Internal Revenue between 1918 and 1924 (first as a deputy collector and later as assistant to the Revenue Agent in Charge at Pittsburgh, Pennsylvania), had a substantial accounting practice in Erie, Pennsylvania, during the period 1924 to 1945. He prepared monthly financial statements and tax returns for the company, and prepared Pattan's 1945 individual return, in which he did not report anything having to do with Pattan's transactions in Casket Company stock. Taxpayer's explanation was that Pattan had advised him that he had not recovered his cost. The tax court thought the explanation wanting because of evidence that on or about July 6, 1945, taxpayer prepared a calculation indicating that Pattan had realized a $410,550.39 gain on the two transactions with the taxpayer and the other purchaser. It was only after taxpayer had knowledge that Pattan had hired another accountant to file an amended return for 1945 (which return included the Casket Company stock transactions) that he reported the gain on his 1946 return. In addition, neither the taxpayer nor Pattan maintained any book records or original documents concerning the transaction.
Petitioner's explanation of his failure to report the gain in 1945 was that his wife was ill and, as a result, he was not responsible for his actions. We think that, in light of the evidence and the substantial nature of the transaction, taxpayer's explanation was properly rejected by the trial court. It is difficult to believe that the taxpayer when he filed his return ...