DONOVAN v. COMM., Cite as 17 AFTR 2d 839 (359 F.2d 64), 04/13/1966
Daniel F. DONOVAN, Petitioner, v. COMMISSIONER of Internal Revenue, Respondent.
[pg. 839] Court Name: U.S. Court of Appeals, First Circuit,
Docket No.: No. 6678,
Date Decided: 04/13/1966
Prior History: Per Curiam affirming ¶ 65,247 P-H Memo TC (Opinion by Bruce, J.).
Tax Year(s): Year 1961.
Disposition: Decision for Govt.
Cites: 17 AFTR 2d 839, 359 F2d 64, 66-1 USTC P 9366.
1. LOSSES—Limitations on deductions—wagering losses—proof. Gambling loss deduction denied: no proof of losses. Gambler kept no records and court didn't have to find that his estimated losses exceeded his additional unreported winnings.
Reference(s): 1966 P-H Fed. ¶ 13,760-E; 56,509.
Bernard A. Kansky, 40 Court St., Boston, Mass. On brief: F. Lee Bailey, 40 Court St., Boston, Mass., Attys. for Petitioner.
John M. Brant, Atty., Dept. of Justice, Wash., D. C. On brief: Richard M. Roberts, Acting Asst. Atty. Gen., Lee A. Jackson, Joseph M. Howard, Attys., all with Dept. of Justice, Wash., D. C., for Respondent.
On Petition for Review of the Decision of the Tax Court of the United States
[¶ 65,247 P-H Memo TC]
[24 CCH Tax. Ct. Mem. 1325 (1965)] [pg. 840]
Before ALDRICH, Chief Judge, McENTEE and COFFIN, Circuit Judges.
Opinion of the Court
Judge: PER CURIAM:
 Taxpayer, in his income tax return, reported gambling winnings, and, at the trial, admitted to further winnings in an unstated amount. The court held that the Commissioner was entitled to tax the taxpayer's entire reported gambling winnings. The burden of proving deductions is on the taxpayer. The court was not obliged to find that taxpayer's estimated gambling losses, of which he kept no records, exceeded his additional unreported winnings.
F. Payson Todd, TC Memo 1966-212
F. PAYSON and MARY K. TODD
Case Information: Code Sec(s):
Docket: Docket No. 646-64.
Date Issued: 09/28/1966
Judge: Opinion by BRUCEJ.
Tax Year(s): Years 1955, 1956, 1957, 1958.
Disposition: Deficiencies redetermined.
Cites: TC Memo 1966-212, PH TCM P 66212, 25 CCH TCM 1099.
1. INCOME—Compensation for services—non-cash remuneration—various goods and services received. Excess of fair market value over price paid for stock was not income to investment adviser. Excess was not compensation for services rendered by taxpayer in publicizing and recommending purchase of corporation's stock through his investment service letters. No proof taxpayer was retained by corp. to advertise its stock.
Reference(s): 1966 P-H Fed. ¶ 7072.
2. INCOME—Compensation for services—distinguished from gift—relationship to specific services. Excess of fair market value over price paid for stock was income to investment adviser: it was not a gift to him. Excess was intended as compensation for services he had rendered in connection with an attempted sale of iron ore.
Reference(s): 1966 P-H Fed. ¶ 7051.
Official Tax Court Syllabus
 Held, on the facts presented:
((1)) That petitioner did not realize ordinary taxable income upon the receipt of 10,000 shares of Javelin stock in January 1956, or upon the receipt of 7,000 shares in July 1957;
((2)) That 2,000 shares of Javelin stock received by petitioner in June 1956 and 2,000 shares received in October 1957 were not gifts and that petitioner realized ordinary taxable income upon the receipt of such shares to the extent of the fair market value at the time they were received.
F. Lee Bailey, for the petitioners.
Frederick A. Griffen, for the respondent.
MEMORANDUM FINDINGS OF
FACT AND OPINION
Respondent determined deficiencies in the income taxes of petitioners and additions to tax for the years and in the amounts as follows:
Additions to Tax
Year Deficiency I.R.C. 1954
1955 $ 422.42 $ 211.21
1956 39,876.82 19,938.41
1957 157,831.85 78,915.93
1958 102,559.66 51,279.83
Respondent has conceded certain adjustments in the statutory notice, including the additions to tax for fraud under section 6653(b) of the 1954 Code, and a net operating loss carry-forward deduction in the amount of $6,464.18 for the year 1956. Certain other adjustments have been conceded by petitioners. The remaining issues are whether petitioner F. Payson Todd realized taxable income in 1956 and 1957 upon the receipt of certain shares of Canadian Javelin, Limited, common stock.
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulations of fact and exhibits attached thereto are incorporated herein by this reference.
Petitioners are husband and wife who at all times material hereto resided in Rowley, Massachusetts. They filed their joint Federal income tax returns for the calendar years 1955, 1956, 1957, and 1958 on the cash basis of accounting with the district director of internal revenue at Boston, Massachusetts. Mary K. Todd is a party hereto solely by reason of having filed a joint return with her husband, F. Payson Todd, hereinafter referred to as petitioner.
During the years in issue petitioner was registered with the Securities and Exchange Commission as an investment adviser and was the owner, publisher and editor of the New England Counsellor, an investment service, engaged in analyzing stock market trends and reporting its analyses through a weekly letter to its subscribers. The subscription rate for this service was $35 for three months, $60 for six months, and $100 for a full year. During the years 1955, 1956, and 1957, petitioner employed from seven to fifteen persons engaged in doing technical research or as clerical employees.
Petitioner himself wrote the New England Counsellor letter, supervised the research projects, handled advertising and answered correspondence. Whenever he found a stock which he thought was particularly attractive as an investment [pg. 66-1234] petitioner would recommend it to his subscribers. Over the years preceding those in issue petitioner had recommended investment in a number of corporations, including Mesabi Iron, the stocks of which had later increased materially in value.
Petitioner operated the New England Counsellor as an individual proprietorship from May 1, 1939, through October 1958.
Canadian Javelin, Ltd. (hereinafter referred to as Javelin), is a corporation organized and existing under the laws of the Dominion of Canada, with its principal office in Montreal, Canada. In 1955, the authorized common stock of Javelin was 5,000,000 shares. This was increased to 12,000,000 shares in 1957. In August 1955, it had approximately 2,500,000 shares outstanding and in July 1957 it had approximately 4,600,000 shares outstanding. Its stock was listed on the Edmonton Stock Exchange in Canada, and was traded over-the-counter in Canada and New York. At present its stock is listed on the American Stock Exchange. During the years in issue, John C. Doyle, a resident of Greenwich, Connecticut, was president and chairman of the board of directors of Javelin and Frank Transnik was its secretary. Robert Sherwood was Doyle's secretary. 1
Javelin was initially organized in 1951 as the Canadian Javelin Foundries & Machine Works, Ltd., to take over an iron casting and hollow-ware business, along with the assets of which it acquired certain titaniferous iron properties along the Saguenay River in the Province of Quebec. During the next two years, in addition to operating the iron casting and hollow-ware business, it engaged in activities to prove up its Saguenay River properties, estimated to contain more than 30 million tons of titaniferous iron ore. In 1953, Javelin acquired leasehold rights in the iron ore deposits near Lake Wabush in south central Labrador, hereinafter referred to.
The Newfoundland and Labrador Corporation (hereinafter referred to as NALCO) is a corporation created by the government of Newfoundland in 1951 to promote the industrial and economic development of the province. Prior to April 1958, over 80 percent of its outstanding capital stock was owned by the government of Newfoundland. NALCO's principal asset is a 25,000 square-mile concession from the government of Newfoundland containing varied mineral deposits and an estimated $100,000,000 worth of timber.
In 1953, Javelin, then known as Canadian Javelin Foundries & Machine Works, Ltd., acquired a block of NALCO stock and obtained a concession of 2,300 square miles in south central Labrador with rights to lease mineral deposits therein. The area contained an iron ore range 55 miles long by one to four miles wide described as one of the largest deposits of high grade iron ore ever discovered. By July 1955, Javelin had obtained a lease of mineral rights in a 5.6 square-mile area near Lake Wabush and had spent approximately $2,500,000 exploring and proving that ore. The ore is located near the surface, averages 38 percent iron, contains negligible impurities and, because of its friability, can be purified economically to a high grade of concentrate,—approximately 65 percent.
In July 1955, Javelin had plans to build a town site, concentrating plant and airfield at its Lake Wabush properties, a 45-mile railroad to connect its properties with the Quebec, Labrador and North Shore railroad running to Seven Islands, Quebec, at the mouth of the St. Lawrence, and docks and loading facilities at Seven Islands. In August 1955, it let a $10,500,000 contract to McNamara Construction Company of Toronto, Canada, for construction of the railroad and Lake Wabush facilities, but in November 1955 McNamara withdrew its labor and equipment and later filed suit for costs. On September 23, 1955, the government of Newfoundland guaranteed a $16,500,000 bond issue to finance the building of the railroad and two members of the Newfoundland cabinet were elected to Javelin's board of directors. The bond issue was later underwritten by a Canadian bank and was approved by Javelin's shareholders at a meeting in May 1956. Javelin originally estimated that the railroad would be operational by the spring of 1956, but construction was not approaching completion in June 1957.
In April 1956 Javelin obtained contracts [pg. 66-1235] with German and English steel interests for the sale of three million tons of iron ore a year for 15 years beginning in 1958, with some deliveries to be made in the fall of 1957. In October 1956 Javelin subleased part of its 5.6 square-mile lease near Lake Wabush to Pickands Mather & Company (hereinafter referred to as Pickands Mather) of Cleveland, Ohio, and the Steel Company of Canada (hereinafter referred to as Stelco) on a royalty basis. In June 1957, the government of Newfoundland entered into an agreement with Javelin, Pickands Mather, Stelco and certain United States steel companies for the sale of the government's interest in NALCO to Javelin and four other parties for $1,200,000. Under this agreement, Pickands Mather and Stelco continue to have the right to mine and pay royalties on the Lake Wabush iron ore previously leased to them by Javelin, and Pickands Mather agreed to develop for Javelin the portion of its original lease not subleased to Pickands Mather and Stelco. Pickands Mather, Stelco and the United States steel companies have the right to explore and are obligated to drill ore bodies discovered in the remainder of Javelin's original concession. The agreement provided further that ownership of the Wabush Lake Railway Company, previously incorporated by Javelin to construct and operate its proposed railroad, would be divided among the participating steel companies, with Javelin retaining ten percent of its capital stock. Pickands Mather would control the railroad and build dock facilities at Seven Islands. The purchase of the government's 900,000 shares of NALCO by the Javelin group occurred on or about April 3, 1958.
Petitioner first heard of Javelin on July 14, 1955. On that date a subscriber of the New England Counsellor service, interested in transporting iron ore by ship from Canada to New England ports for trans-shipment to Pittsburgh by rail, sought petitioner's assistance in locating Doyle and delivering a message. Petitioner located Doyle at the Drake Hotel in New York and delivered the message. In the course of their conversation, Javelin and its iron ore holdings were discussed. Doyle told petitioner Javelin was well financed and in position to deliver a million tons of iron ore a year to the Jones & Laughlin Steel Corporation, which petitioner had named as a potential purchaser, and authorized petitioner to negotiate for such a contract. Thereafter petitioner contacted Carl Henning, ore purchasing agent for Jones & Laughlin, and for several days prior to July 20, 1955, relayed messages between Henning and Doyle. Henning expressed an interest in purchasing one million tons of ore a year for a period of ten years and requested delivery of ten to thirty tons of ore for testing purposes. Javelin was unable to deliver the samples requested and in February 1956, Jones & Laughlin entered into a contract to purchase iron ore from another company located approximately five miles from Javelin's property. The standard broker's commission which petitioner had expected to receive upon the sale of iron ore by Javelin to Jones & Laughlin was twenty-five cents per ton.
Petitioner was very disturbed over the failure of Javelin to obtain the Jones & Laughlin contract which he attributed to misrepresentation by Doyle as to the financial strength of Javelin and its inability to deliver the sample ores to Jones & Laughlin for testing. In a meeting with Doyle in the Javelin offices in April or May 1956, petitioner expressed his disappointment in not receiving a commission on the proposed sale to Jones & Laughlin. Thereafter, in June 1956, petitioner received by mail from Frank Trasnik, then treasurer of Javelin, two 1,000-share certificates of Javelin stock, the fair market value of which was $30,750.00. Petitioner made no payment for these shares of stock.
In another meeting with Doyle in New York in September 1957, petitioner again expressed his disappointment over the failure of Javelin to obtain the Jones & Laughlin contract. In this and another meeting with Doyle in New York in October 1957, petitioner was made aware of dissension which was taking place among the management of Javelin. Still later in October petitioner received a call from the Montreal office of Javelin requesting that he make a reservation for Eves Vincent at the Statler Hotel in Boston and meet him there. Petitioner did as requested and at the meeting with Vincent, the latter gave him twenty 100-share certificates of Javelin stock. Petitioner had never met Vincent before but understood he was connected in some way with Javelin. Vincent offered no explanation as to why the stock was[pg. 66-1236] being given to petitioner and petitioner did not ask for any. The 2,000 shares had a fair market value at that time of $38,500.00. Petitioner made no payment for these shares of stock.
During one of his conversations with Doyle in July 1955, concerning the proposed purchase of iron ore by Jones & Laughlin, Doyle requested petitioner to "assess" Javelin's stock by his investment formula and project its probable price ranges. When he later delivered the results of his analysis to Doyle, petitioner asked if he might make the information known to his subscribers. Petitioner had originally intended to charge $5,000 for his analysis of the Javelin stock, but upon being given permission to use the information in his investment advisory service, he decided to charge only $500, which amount was paid to him by Javelin.
On or about July 19, 1955, petitioner had received from Javelin a copy of a letter sent to investment advisers and brokers enclosing an economic report prepared by Professor David W. Slater of Queen's University, Kingston, Ontario, Canada, relating to the Lake Wabush iron ore deposit of Javelin. Petitioner secured several hundred copies of this report. In his New England Counsellor letter of July 22, 1955, he informed his subscribers he was considering a low-priced "special situation" which seemed to have potentialities equivalent to those of Mesabi Iron, and that he would mail pertinent data and price projections if it passed his final screening tests. In a letter dated July 23, 1955, petitioner enclosed copies of the Slater report and recommended the purchase of Javelin common stock for a "long-pull speculative holding." In the light of Javelin's prospective production of three million tons of ore per year beginning in 1957, he suggested a buying range of between 13 and 22 for the first year of production, 17 to 28 for the second year, and 22 to 33 for the third year, with liquidation ranges of 30 to 38, 40 to 53, and 49 to 65, respectively. Thereafter, through October 1958, petitioner continued to recommend the purchase of Javelin stock as a long-term speculative investment. Twelve issues in 1955, thirteen in 1956, eighteen in 1957, and twenty-two in 1958 related to Javelin. Numerous issues of the New England Counsellor letters contained reproductions or summaries of articles appearing in both Canadian and United States newspapers and trade journals relating to the potentialities of Javelin's iron ore properties, the construction and financing of railroad and other facilities contracts with German and English steel interests as well as with Pickands Mather, Stelco and certain United States steel companies. The potentialities of Javelin were frequently referred to as "fantastic." In April 1956, based upon reports that Javelin's production potential might be increased from three million to six million tons annually, petitioner suggested to his subscribers that the previously recommended "over-priced" range at which purchasers should liquidate or reduce their Javelin stock holdings, should be increased from $49 to $75 per share, to $98 to $130 per share. In October 1956 he recommended a further increase in the "over-priced" range to $125 to $163 per share.
Beginning in 1956 and continuing in 1957, there was extensive criticism of Javelin's prospects by opposing interests and Canadian brokers. Petitioner received numerous inquiries from subscribers and spent time and money in obtaining facts to refute unfavorable claims. In December 1956 he "retained the services of an independent eminent economist to check carefully into the records of CANADIAN JAVELIN," who reported to him "I am completely satisfied with the statement of ore reserves and with the working out of the mining, milling, and pelletizing problems. *** I have a very deep respect for the way in which this work has been handled." On January 24, 1957, petitioner circulated a reprint of an article which had appeared in Barron's National Business and Financial Weekly, questioning Javelin's management and ability to meet its contracts, together with his comments on various portions of the article.
Petitioner continued to recommend purchase of Javelin stock "at-the-market," in 1957 and 1958. In May 1957, he offered explanations of past price fluctuations in the stock. On July 25, 1958, the Securities and Exchange Commission placed Javelin on its Canadian Restricted List barring trading in its stock by broker-dealers in the United States. In answer to inquiries made by subscribers of the New England Counsellor service, petitioner advised them he had not [pg. 66-1237] changed his mind as to the profit potential of Javelin's common stock and reaffirmed his previously recommended over-price areas. Javelin was removed from the Canadian Restricted list by the SEC on October 7, 1958. Petitioner reported this action and on October 22, 1958, announced his answering of inquiries would be curtailed due to impending relocation of his offices.
The SEC revoked petitioner's registration as an investment adviser on October 29, 1958, and on or about November 1, 1958, petitioner's investment advisory service business was incorporated as the New England Counsellor, Inc.
On November 28, 1960, petitioner pleaded nolo contendere to an indictment charging use of the mails and engaging in transactions, practices and a course of business, which operated as a fraud and deceit upon clients and prospective clients, and was sentenced to six months in jail and fined $10,000. The jail sentence was suspended and petitioner was placed on probation for three years. The charges arose out of petitioner's activities in connection with Javelin stock, in violation of sections 77q(b), 80-b-6(1) and (2) of Title 15 of the United States Code.
In addition to publishing the New England Counsellor letters, petitioner frequently sent telegrams to his subscribers in 1956 and 1957 recommending that they buy Javelin stock. In 1956 Javelin sent petitioner a check in the amount of $3,767.76 to cover the cost of these telegrams. Petitioner did not report the receipt of this income on his income tax return for 1956.
In July 1955, Javelin stock was selling for approximately $3.75 per share. Thereafter it would rise for a period and then decline for a period. Thus, during 1956, it rose to $11 on January 10 and dropped to $6 on January 23; it rose to $17 on April 30 and dropped to $12.50 on May 28; it rose to $20.50 on July 18 and dropped to $17 on July 26; it rose to $26 on August 17 and dropped to $18.50 on September 14; it rose to $27.75 on October 15 and dropped to $20.50 on October 31. It reached its peak price of about $30 per share prior to July 1, 1957. It apparently fluctuated considerably after 1957. In 1958 it dipped to $6 a share and at the time of trial was selling for slightly more than $9 a share.
During one of his conferences with Doyle in July 1955, petitioner discussed with Doyle the purchase of 10,000 shares of Javelin stock. He later discussed the purchase of such stock with Robert Sherwood, Doyle's secretary, and in early August 1955 drew a demand note predated August 1, 1955 in favor of Jacques Gagnon in the amount of $42,500 with interest at the rate of 3 1/2 percent per annum. On the back of the note petitioner wrote the following:
This note is given in consideration
of my purchase from you of 10,000
shares of Canadian-Javelin. Payment
to be made on your demand.
Gagnon's connection with Javelin is not shown. The note was drawn in his favor on Sherwood's instructions. Before signing the note petitioner discussed the stock purchase with Ralph Loomis, an elderly friend from whom he had previously obtained financial assistance, who told him to sign the note and that he (Loomis) could obtain the money with which to pay it within two or three weeks. On January 23, 1956, Gagnon made written demand on petitioner for payment of the note and on January 25, 1956, petitioner sent Gagnon a check for $43,217.26 in payment of the principal amount of the note plus 3 1/2 percent interest. Shortly thereafter, in January 1956, petitioner received a certificate for 10,000 shares of Javelin stock, the fair market value of which at that time was $74,166.66. Petitioner borrowed the money to pay the note from Loomis.
In August 1955, petitioner purchased 200 shares of Javelin stock, at the market price, through the firm of Morgan and Company of Montreal, Canada. In January or February 1956, petitioner purchased 250 shares of Javelin stock, at the market price, through Ladlow and Company of Boston, Massachusetts.
At the time he arranged to purchase the initial 10,000 shares, petitioner also discussed with Sherwood the purchase of an additional 10,000 shares thereafter at the same price. He attempted to discuss this matter with Sherwood on a number of occasions in 1956 and 1957 but each time Sherwood refused to discuss it. Finally, in April or May 1957, it was agreed petitioner might purchase 7,000 shares of Javelin stock at the[pg. 66-1238] July 1955 market price and on or about July 10, 1957 petitioner executed a demand note pre-dated July 28, 1955, in favor of Jacques Gagnon, in the amount of $28,000 with interest thereon at the rate of 3 1/2 percent per annum. On the back of this note petitioner wrote an endorsement similar to the one on the first note except that it referred to 7,000 shares. Gagnon made demand for payment of this note by letter dated July 17, 1957, and on July 24, 1957 petitioner sent Gagnon a check for $29,933.15, representing the face amount of the note plus 3 1/2 percent interest from July 28, 1955, and, in July 1957, received six 1,000-share certificates and two 500-share certificates of Javelin stock having a then fair market value in the aggregate amount of $183,812.50. Petitioner also borrowed the money with which to discharge this note from Loomis.
The 21,000 shares of stock received by petitioner from Javelin were disposed of as follows:
Two thousand two hundred shares of the 10,000-share certificate received by petitioner in January 1956 were sold in 1964 to satisfy an indebtedness owed by petitioner to a party by the name of Streif. The remaining 7,800 shares are held by the District Director of Internal Revenue pursuant to a jeopardy assessment. Petitioner reported the difference between the amount he had paid and the amount for which the 2,200 shares were sold as capital gain on his 1964 return.
Three thousand of the 7,000 shares received by petitioner in July 1957, were sold by petitioner to Loomis shortly thereafter at the same price paid therefor by petitioner; three thousand shares pledged to secure a loan from a bank were sold by the bank in 1963; and one thousand shares were allegedly appropriated by another party. Petitioner reported as capital gain on his 1963 return the difference between the amount he had paid for the 3,000 shares sold by the bank and the amount for which they had been sold.
One thousand of the 2,000 shares delivered to petitioner by Trasnik in June 1956 were given by petitioner to Loomis and the remaining 1,000 shares were placed by petitioner in a strongbox. The ultimate disposition of these 1,000 shares is not clearly shown. Petitioner did not file a gift tax return for the 1,000 shares given to Loomis in 1956.
Petitioner also gave Loomis 1,000 of the 2,000 shares delivered to him by Vincent in October 1957, and the remaining 1,000 shares were sold by petitioner's attorney in 1957 for $14,750. The attorney retained $4,750 in payment of legal fees owed him by petitioner and gave petitioner a check for the remaining $10,000. Petitioner reported the $10,000 received from the attorney as income on his 1958 return. The $4,750 retained by the attorney was not reported as income by petitioner nor did petitioner claim a deduction for such amount. Petitioner did not file a gift tax return for the 1,000 shares given to Loomis in 1957.
Petitioner did not report any income as the result of the receipt of the 21,000 shares of Javelin stock in either of his returns for 1956 and 1957.
In his statutory notice of deficiency dated November 21, 1963, respondent determined that in 1956 petitioner "realized income from the receipt of 12,000 shares of Canadian Javelin, Ltd. stock to the extent the fair market value of the stock, when received, exceeded your basis." A similar determination was made for 1957 with respect to 9,000 shares received in that year.
There was no agreement, express or implied, between petitioner and representatives of Canadian Javelin, Ltd., whereby petitioner was to be allowed to purchase Javelin stock at July or August 1955 market prices in return for his recommending the purchase of Javelin stock by the subscribers to the New England Counsellor letter.
The excess of the fair market value over the price paid by petitioner for the 10,000 shares of Javelin stock received by him in January 1956, or the 7,000 shares received by him in July 1957, did not constitute ordinary income taxable to the petitioners.
The 2,000 shares of Javelin stock received by petition in June 1956 and the 2,000 shares of Javelin stock received by him in October 1957, were not gifts.
The fair market value of the 2,000 shares received by petitioner in June 1956, and the fair market value of the 2,000 shares received in October 1957, represented compensation paid to petitioner [pg. 66-1239] in return for his efforts to procure a contract from the Jones & Laughlin Steel Corporation for the purchase of iron ore from Javelin, and as such constitutes ordinary income taxable to the petitioners in the years received.
The only issues presented herein are whether petitioner realized ordinary taxable income upon the receipt of 10,000 shares of Javelin stock in January 1956 and the receipt of 7,000 shares in July 1957, to the extent that the fair market value of such shares of stock at the time received by him exceeded the price paid for them by petitioner, and whether petitioner realized ordinary taxable income upon the receipt of 2,000 shares of Javelin stock in June 1956 and 2,000 shares in October 1957, to the extent of the fair market value of such shares at the time they were received by him. These issues are strictly factual and are to be determined from all the facts and circumstances presented.
Respondent contends that the excess value of the 10,000 shares received by petitioner in January 1956, and the 7,000 shares received by him in July 1957, over the respective purchase price paid by petitioner for such stock was compensation for services rendered by petitioner in publicizing and recommending the purchase of Javelin stock through his investment service letters. On brief, respondent states that "in July, 1955 the petitioner was retained by Canadian [herein referred to as Javelin] to advertise its stock in an attempt to increase its current selling price on the market." Respondent further contends that the fair market value of the 2,000 shares received by petitioner in June 1956, and the 2,000 shares received by him in October 1957, was compensation for such services or for his services in connection with the attempted sale of iron ore to the Jones & Laughlin Steel Corporation. Petitioner contends that both the 10,000-share and 7,000-share purchase resulted from an agreement which Sherwood and Doyle made with him in July 1955, to permit him to purchase an initial 10,000 shares, and an additional 10,000 shares at July-August 1955 market prices, and that each of the 2,000-share blocs received by him in June 1956 and October 1957, were gifts.
We find no merit in respondent's contentions respecting the 10,000 shares and the 7,000 shares received by petitioner in January 1956, and October 1957, respectively. On the other hand, we find no merit in petitioner's contention that each of the 2,000 shares received by petitioner in June 1956, and October 1957, respectively, represented gifts. On the contrary, we agree with respondent that each of these two 2,000-share blocs were delivered to petitioner as compensation for his efforts to negotiate a sale of iron ore to Jones & Laughlin.
Respondent bases his contentions concerning the 10,000 and 7,000 shares primarily upon the glowing reports and favorable recommendations regarding the purchase of Javelin stock which were made by petitioner in 65 issues of the New England Counsellor letter sent to its subscribers during the period July 22, 1955 to October 22, 1958, inclusive, upon the fact that petitioner sent numerous telegrams to subscribers recommending the purchase of Javelin stock for which telegrams he was in part reimbursed by Javelin, and upon the time and money spent by petitioner in obtaining material with which to refute criticisms being made of Javelin and its management.
There is no written agreement evidencing petitioner's retention by Javelin or its representatives to publicize Javelin or to recommend the purchase of its stock. Respondent would have us imply such a contract solely on the basis of the New England Counsellor letters which the petitioner sent his subscribers, the fact that he sent numerous telegrams recommending the purchase of Javelin stock at then market prices, and that he spent considerable time and effort in obtaining information with which to refute unfavorable criticism. We have carefully read and considered each of the 65 issues of the New England Counsellor letters placed in evidence by respondent. There is no question but that they painted a favorable picture of Javelin and its future growth as a major producer of iron ore, and that petitioner consistently recommended the purchase of its stock as a long-term investment. We do not think, however, that these letters or the other factors mentioned are sufficient in and of themselves to justify the conclusion that there was an agreement between petitioner and representatives of Javelin that petitioner would be given favorable treatment in the purchase of Javelin[pg. 66-1240] stock in return for his publicizing and recommending the purchase of Javelin stock to his subscribers.
Petitioner had been in the investment advisory service business since May 1939. He was constantly on the alert for investment opportunities which he might recommend to his subscribers. Many of the persons employed by him were engaged in analyzing stock market trends and studying the growth potentials of numerous corporations. Over the years he had recommended the purchase of stock in a number of corporations, including Mesabi Iron, whose stock had later substantially risen in market price.
Petitioner first learned of Javelin in July 1955, through a subscriber, interested in obtaining contracts to transport iron ore from Canadian to New England ports, who sought his assistance in locating Doyle, the president of Javelin. He located Doyle in New York and, after delivering the subscriber's message, entered into a discussion of Javelin and its iron ore holdings. He also inquired if Javelin was in position to deliver a million tons of iron ore a year to an American steel company which he would name. Doyle assured petitioner Javelin was not in need of financing and was in position to deliver such ore. Upon being told Jones & McLaughin was the steel company petitioner had in mind, Doyle authorized petitioner to enter into negotiations for such a contract. Thereafter, petitioner contacted Henning, ore purchaser for Jones & Laughlin, and acted as an intermediary between Henning and Doyle. The contract did not materialize because Javelin failed to deliver 10 to 30 tons of ore which Henning had requested for testing purposes, and in February 1956 Jones & Laughlin entered into a contract to purchase iron ore from another company located near Javelin's property.
During one of his early conversations with Doyle concerning the Jones & Laughlin purchase, Doyle requested petitioner to make an analysis of Javelin's stock and project its probable price range. Petitioner did so and, upon delivering the results of his analysis, requested permission to use the information in the letters to his subscribers. On July 19, 1955, petitioner had also received an economic report prepared by Professor Slater of Queen's University relating to the commercial feasibility for immediate development of the Lake Wabush iron ore deposits of Javelin, wherein the professor had concluded that the Lake Wabush deposit met all tests for immediate development, including the demand and revenue situation, cost of mining, concentration and delivery of the product, the profitability of the mining operations, the self-sufficiency of the new railroad construction and future possibilities. Thereafter, on July 23, 1955, petitioner began to recommend to his subscribers that they purchase Javelin stock "for an intelligent long-pull speculative holding." He continued to recommend the purchase of Javelin stock through October 1958.
Numerous issues of the New England Counsellor letters contained reproductions or summaries of articles appearing in both Canadian and United States newspapers, financial magazines and trade journals relating to the potentialities of Javelin's iron ore properties, the construction and refinancing of railroad and other facilities, the support both financial and otherwise given by the government of Newfoundland, and contracts with German and English steel interests as well as with Pickands Mather, Stelco and certain United States steel companies. There does not appear to have been any doubt as to the high quality and the extent of Javelin's holdings. Most of the reports appear to have been favorable and those that were critical appear to have been directed mainly at management. It is not surprising that petitioner thought he had uncovered another "Mesabi Iron" situation. Perhaps he was unduly optimistic. We are unable to imply, however, either from his letters or his other activities, that "petitioner was retained" by Javelin "to advertise its stock in an attempt to increase its current selling price on the market," or that the excess of market value over the amount paid for either the 10,000 shares or the 7,000 shares represented compensation for services rendered.
It is immaterial whether there was an actual binding contract of purchase of such shares in July or August 1955 as contended by petitioner. Also, in view of our finding that the excess of market value over amount paid did not represent compensation for services rendered, it is unnecessary to discuss the legal effect of the demand notes. Even if no completed contract of sale took place until the notes were paid and the stock delivered, each of the above transactions in question represented no more than a bargain purchase. As was held by the [pg. 66-1241] Supreme Court in Palmer v. Commissioner, 302 U.S. 63 [19 AFTR 1201], "one does not subject himself to income tax by the mere purchase of property, even if at less than its true value, and *** taxable gain does not accrue to him before he sells or otherwise disposes of it." See also Helvering v. Salvage, 297 U.S. 106 [16 AFTR 1322]; Manomet Cranberry Co., 1 B.T.A. 706; William J. Haag, 40 T.C. 488, 492, affd. 334 F.2d 351 [14 AFTR 2d 5211] (C.A. 8, 1964).
We hold for petitioner with respect to the 10,000 shares received by him in January 1956, and the 7,000 shares received in July 1957.
We think a different conclusion is required, however, with respect to the 2,000 shares received by petitioner in June 1956, and the 2,000 shares received by him in October 1957. In July 1955, Doyle, then president of Javelin, authorized petitioner to negotiate with the Jones & Laughlin Steel Corporation for the sale of iron ore. Petitioner thereafter contacted the ore purchaser for Jones & Laughlin, who expressed an interest in the purchase and delivery of one million tons of iron ore a year over a period of ten years and requested that ten to thirty tons of iron ore be delivered for testing purposes. Doyle had assured petitioner Javelin could deliver as much as one million tons a year to Jones & Laughlin. It failed to deliver the ten to thirty tons requested for testing purposes, however, and the deal fell through. Jones & Laughlin subsequently contracted to procure ore from another company.
The standard broker's commission which petitioner had expected to receive upon the sale of iron ore by Javelin to Jones & Laughlin was twenty-five cents per ton. Understandably, petitioner was considerably disturbed over the failure of Javelin to secure such a contract, which he attributed to misrepresentation by Doyle as to Javelin's financial condition and its inability or failure to deliver the ore samples to Jones & Laughlin for testing. He expressed his disappointment to Doyle on several occasions. The 2,000 shares of Javelin stock delivered to him in June 1956 and the 2,000 shares delivered to him in October 1957, were clearly not gifts, Commissioner v. Duberstein, 363 U.S. 278 [5 AFTR 2d 1626], but were intended as compensation for the services he had rendered in connection with the attempted sale of iron ore to Jones & Laughlin. Accordingly, the fair market value of the 2,000 shares received in June 1956, and the 2,000 shares received in October 1957, constituted taxable income received by petitioner in the respective years. We sustain respondent's determination with respect to these shares.
Decision will be entered under Rule 50.
The following information is abstracted from various economic, financial and engineering reports, including articles appearing in Canadian and United States newspapers and magazines, which were incorporated in the New England Counsellor letters introduced in evidence by the respondent.
U.S. v. BAILEY, ET AL., Cite as 52 AFTR 2d 83-5127 (707 F.2d 19), 05/23/1983 , Code Sec(s) 7403
U.S. PLAINTIFF, APPELLANT v. F. Lee BAILEY, ET AL., DEFENDANTS, APPELLEES.
Code Sec(s): 7403
[pg. 83-5127] Court Name: U.S. Court of Appeals, First Circuit,
Docket No.: No. 82-1400,
Date Decided: 05/23/1983
Prior History: District Court affirmed.
Disposition: Decision against Govt.
Cites: 52 AFTR 2d 83-5127, 707 F2d 19, 83-1 USTC P 9372.
1. JUDICIAL PROCEEDINGS—Civil actions by U.S.—suits for collection and enforcement of lien—collection suits in general. District Court's assignment of nominal value of stock held in trust account for taxpayer's legal fees upheld. Stock market prices didn't meet govt.'s burden of proving value where evidence showed that indicator wasn't reliable under circumstances. Trading in stock was minimal and stock registered in name other than taxpayer's was transferred to trust under trading restrictions.
Reference(s): 1983 P-H Fed. 38,741(10). Code Sec. 7403.
Kenneth L. Greene, Michael L. Paup, Daniel F. Ross, Richard W. Perkins, Attys., Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., Dept. of Justice, William F. Weld, U.S. Atty., for Appellant.
Kenneth J. Fishman, Atty. for Appellee.
Appeal From The United States District Court For The District Of Massachusetts. [Hon. Walter Jay Skinner, U.S. District Judge].
Before Coffin and BOWNES, Circuit Judges, and TAURO, * District Judge.
Judge: COFFIN, Circuit Judge: [pg. 83-5128]
The United States government (government) appeals from a judgment by the district court holding defendants liable, under 26 U.S.C. §6332, for the value of certain stock certificates upon which the government imposed a tax levy and which defendants refused to release. The issue before us is whether the district court erred in determining that, despite the fact that on September 28, 1970, stock in Transogram Company, Inc. traded for $8 per share on the American Stock Exchange, the value of 10,000 shares of the stock on that date was only $1, because of circumstances set forth below. Since the court's finding was not clearly erroneous and since the court committed no error of law, we affirm.
Thomas and Evelyn Shaheen retained defendants F. Lee Bailey and Colin W. Gillis to represent them in certain civil and criminal proceedings arising out of the Shaheens' unpaid federal income tax liabilities for the 1966, 1967 and 1968 taxable years. To secure payment of their legal fees, the Shaheens created a trust for the benefit of the defendants and transferred certain items of real and personal property to the defendants as trustees. Included in the property transferred were 10,000 shares of Transogram stock. The certificates were in the name of Columbia Financial Corporation (Columbia) and on the certificates was the notation "Subject To Investment Letter". Also transferred to defendants were documents executed by three directors of Columbia ratifying the transfer of the stock to the trust.
On September 14, 1970, the government made jeopardy assessments against the Shaheens for the taxable years 1966, 1967 and 1968. On September 28, 1970, the government issued Notices of Levy to defendants informing them that the assessments had been made and that they were immediately to surrender to the government all property in their possession belonging to the Shaheens. Defendants did not comply. On July 16, 1971, the government filed a complaint in the United States District Court for the District of Massachusetts alleging that, pursuant to Section 6332 of the Internal Revenue Act of 1954, 26 U.S.C. §6332, defendants were jointly and severally liable for a sum equal to the value as of the date of the levy of the assets of the Shaheens in their possession.
A trial was held on April 29, 1980. The court determined that the government had perfected its levy and that it was entitled to all the right title and interest of the Shaheens in the assets held by defendants as trustees. The court held, further, that in lieu of the property itself, which had become worthless since the date of the levy, the government was entitled to recover from defendants the value of that property as of September 28, 1970.
The only property concerning which the government introduced evidence of value was the Transogram stock, which, by the time of the trial, had become worthless. Based on the government's evidence that 900 shares of Transogram stock were traded on the American Stock Exchange on September 28, 1970, and that the closing price was $8 per share, the court concluded that the stock had some value. The court recognized, however, that several other factors bore on the value of the stock. First, the sale of 900 shares of the stock on September 28, 1970, brought about a price change of 3/8 of a point, thus suggesting that the market in Transogram shares was "thin" and would not absorb the 10,000 shares. Second, the certificates bore the legend "Subject To Investment Letter", and it appeared that defendants lacked sufficient information regarding the restriction to enable them to transfer the shares freely on the open market. Finally, it was unclear whether the Shaheens were authorized to transfer the stock to defendants in the first place, given that the shares were in the name of Columbia and that there was no evidence that the directors who authorized the transfer constituted a majority of the board of directors. Noting those factors and the opinion testimony of defendant Gillis that the stock was worthless at the time of the levy, the court assigned the value of $1 for the 10,000 shares. From that determination, the government appeals.
The government admits that the fair market value of shares of stock is generally considered a question of fact that may not be disturbed unless it is clearly erroneous. See Arc Realty Co. v. Commissioner, 295 F.2d 98, 103 [8 AFTR 2d 5607] (8th Cir. 1961); United States v. United States Gypsum Co., 333 U.S. 364 (1948). It argues, however, that because the court placed on the government too heavy a burden of proof as to value, it did not require sufficient evidence of defendants that the stock was valueless.
In support of its argument that the district court should have placed a greater burden on defendants to rebut its evidence of value, the government points to several factors. First, it urges that section 6332 is a coercive statute that seeks to foster the swift tender of property upon which a levy has been made. See Flores v. United States, 551 F.2d 1169, 1174 [39 AFTR 2d 77-1344] (9th Cir. 1977); United States v. [pg. 83-5129] Montchanin Mills, Inc., 512 F.Supp. 1192, 1195 [48 AFTR 2d 81-5739] (D.Del. 1981). The purpose of the statute requires that the risk of loss due to property becoming worthless be on the defendants who refused to give up the property when the Notice of Levy was issued. That purpose would be undermined by a rule that places too heavy a burden of proof as to value on the government. Second, the government insists that evidence of the stock's actual value is more readily available to the holders of the stock than to the government. Thus, it is fair to place the burden on them to come forward with the evidence. Finally, the government points out that a number of courts have adopted a rule that absent evidence to the contrary, the value of stock is presumed to be equivalent to the value indicated by stock exchange quotations. See 10 J. Mertens, Law of Federal Income Taxation (Rev.), Sec. 59.14 and cases cited therein.
We acknowledge the reasonableness of a presumption that the value of stock is equal to the value indicated by the stock exchange quotations. Absent such a presumption, the government would rarely be able to establish the value of stock that a party wrongfully withheld from it. Even assuming that the government is entitled to such a presumption, however, we do not interpret the presumption as shifting to the defendants the burden of proving that the stock had no value. The presumption satisfies the government's initial burden of going forward with evidence of value. Absent rebuttal evidence, the government is entitled to prevail based on the value established by the stock exchange quotations. The burden imposed on the defendants by the presumption, however, is not to prove that the stock was valueless or that it had a particular value lower than that urged by the government, but only to come forward with enough evidence to support a finding that the stock exchange quotations are not a reliable indicator of the actual value of the stock on the day in question. As one court explained a similar presumption, in favor of the validity of the deficiency determinations of the Commissioner of Internal Revenue, the presumption is "a procedural device which requires the taxpayer to come forward with enough evidence to support a finding contrary to the Commissioner's determination." Rockwell v. Commissioner, 512 F.2d 882, 885 [35 AFTR 2d 75-1055] (9th Cir. 1975). The job of assessing the sufficiency of the evidence produced by defendants to rebut the presumption remains committed to the sound discretion of the trial court and the ultimate burden of persuasion on the issue of value remains on the government.
Admittedly, a different rule—one that would shift to defendants the burden of persuasion on the issue of value—would further enhance the coercive effect of the statute. Such a rule, however, might also result in injustice to defendants who do not, in fact, have any greater access to proof of the actual value of the property in question than does the government. 1 In the absence of specific Congressional directive, we are reluctant to abandon the general rule that in tax, as in other litigation, plaintiffs have the burden of persuasion. See Rockwell v. Commissioner, supra, 512 F.2d at 887. See also United States v. Massachusetts Mutual Life Ins. Co., 38 F.Supp. 333 [26 AFTR 1061] (D.Mass. 1941), aff'd, 127 F.2d 880 [29 AFTR 433] (1st Cir. 1942) (under predecessor statute to section 6332, the government has the burden of proving the value of property it alleged was not surrendered). 2
Viewing the evidence in light of these principles, we cannot say that the court's determination was clearly erroneous. In addition to the stock certificates themselves, which raised questions about the stock's transferability, the district court had before it the testimony of defendant Gillis, a professor of law and an attorney admitted to practice in the Commonwealth of Massachusetts, and the deposition testimony of defendant Bailey. Both defendants testified that they had abandoned efforts to dispose of the stock because defendant Gillis had determined it to be worthless.
It would be helpful to know exactly what defendant Gillis testified led him to the conclusion that the stock was worthless. We are handicapped, however, by the fact that a significant portion of the transcription of defendant Gillis' testimony has been lost. Pursuant to Fed. R. App. P. [pg. 83-5130] 10(c), the government has filed and the district court has approved a supplemental statement of the evidence, briefly summarizing the lost testimony. The summary recites that "The substance of Mr. Gillis' testimony concerning the value of the Transogram shares was that he and Mr. Bailey (the other defendant) had believed the entire bundle of assets in the trust to be worthless, and that they had neither ascribed any particular value to the Transogram shares, nor made any effort to determine the value of those shares as of the date of the levies." In their brief, defendants' description of the testimony is that because the stock was subject to an investment letter, defendant Gillis believed that the stock could not be traded and had no market value.
Whatever the specifics of the testimony, the district court relied on it in support of its conclusion that the combined factors of evidence of a "thin" market in Transogram shares, an investment restriction on the certificates and the fact that the stock was in Columbia's name rendered the stock exchange quotations insufficient evidence of value to entitle the government to prevail. Particularly in light of the gaps in the evidence before us, we are unwilling to say that the court was not entitled to credit the testimony of defendant Gillis that in his opinion the stock was worthless on the date of the levy. We are also unwilling to say that the combined factors of the restrictions noted by the district court and the testimony of defendants was insufficient evidence for the court to conclude that the stock exchange quotations were not probative evidence of actual value of the stock on the date of the levy.
As the district court noted, the government offered no other evidence of value. Since the probative value of the stock exchange quotations was cast into serious doubt by the other evidence before the district court, the government failed to meet its burden of establishing that the value of the stock was more than $1. The judgment of the district court, granting the government recovery against the defendants of $1, plus interest from September 28, 1970 and costs, must be and is therefore Affirmed.
Of the District of Massachusetts, sitting by designation.
In this case, the court found that defendants did not have information available to them that would have permitted them to transfer the shares freely on the open market. The court thus apparently credited the testimony of defendants that they had been unable to obtain information that would enable them to dispose of the stock.
The defense of no value is distinguishable from the defense that the defendant did not hold any property of the taxpayer at the time of the levy. The latter is one of two specifically recognized affirmative defenses to a claim under section 6332. See United States v. Montchanin Mills, Inc., supra, 512 F.Supp. at 1194. Defendants can be presumed to have access to the necessary information to establish this defense and courts have imposed on defendants the burden of doing so. Id. at 1195.
STICKER, JR. v. COMM., Cite as 30 AFTR 2d 72-5215, 07/14/1972
Charles W. STICKLER, JR. and Nellie M. L. Stickler, APPELLANTS v. COMMISSIONER of Internal Revenue, APPELLEE.
[pg. 72-5215] Court Name: U.S. Court of Appeals, Third Circuit,
Docket No.: No. 71-1765,
Date Decided: 07/14/1972
Prior History: Per Curiam affirming Tax Court order.
Tax Year(s): Years 1955, 1956, 1957, 1958, 1959, 1960, 1961, 1962, 1963, 1964, 1965, 1966.
Disposition: Decision for Govt.
Cites: 30 AFTR 2d 72-5215, 464 F2d 368, 72-2 USTC P 9562.
1. 1. TAX COURT—Practice and procedure in general—rehearings and related matters—scope of court's authority. Tax Court lacked authority to permit withdrawal of stipulation submitted nearly 6 years before. Fraud on court exception to finality rule didn't apply: puffing by IRS on completeness of evidence to taxpayers during negotiations wasn't fraud.
Reference(s): 1972 P-H Fed. ¶39,202(5); 39,266(30).
Bernard J. O'Brien, F. Lee Bailey, 1 Center Plaza, Boston, Mass., Attys. for Appellants.
Fred B. Ugast, Acting Asst. Atty. Gen., Meyer Rothwacks, Atty., Tax Div., Dept. of Justice, Wash., D.C., for Appellee.
Appeal From An Order Of The United States Tax Court.
Before ALDISERT, ROSEN and HUNTER, III, Circuit Judges.
Opinion Of The Court
Judge: PER CURIAM: [pg. 72-5216]
Income tax deficiencies were determined against the appellants for the years 1955 and 1956, including fraud penalties amounting to 50% of each of the principal deficiency determinations. The parties entered into a stipulation agreeing to a reduced amount, and the tax court entered a decision thereon. The Sticklers then brought a motion "for leave to file motion to withdraw and reform stipulation, further hearing and reconsideration, and to revise decision." An evidentiary hearing was held, and the motion was denied.
The Commissioner of Internal Revenue had initially determined deficiencies in the Sticklers'income taxes of $148,388.73 and $18,629.22 for each of the two years, respectively. After a series of conferences with the Commissioner's representatives, they filed a written settlement stipulation with the tax court. 1 On September 28, 1965 the court entered a decision pursuant to the stipulation.
On February 19, 1971, the motion to withdraw and reform stipulation and to revise decision was filed. 2 A hearing was held on April 14, 1971, and testimony was offered by the appellant Charles Stickler and Frederick McGavin, appellants' attorney of record at the time of stipulation.
 The thrust of the motion is that the decision rendered almost six years earlier pursuant to a stipulation of the parties, was procured by fraud on the court. In support of the motion, appellants rely on the testimony of Mr. McGavin and a decision rendered by the tax court in Manu-Mine Research and Development Co. v. Commissioner, 26 T.C.M. 1259 [P-H Memo TC ¶67,244] (1967). Charles Stickler was president and majority stockholder of Manu-Mine and the funds involved in the 1965 deficiency determination against the Sticklers as individual taxpayers were the assets of Manu-Mine. McGavin indicated at the hearing that he advised appellants to sign the stipulation on the basis of representations by the agents of the Internal Revenue Service that they had irrefutable proof of fraud. The inducement for signing was allegedly supplied by the Government's promise that it would not proceed against Manu-Mine if the appellants signed the stipulation.
Appellants highlight their allegation of fraud on the court with the Manu-Mine decision, insofar as the tax court found that the Government had failed to prove by clear and convincing evidence that the corporate deductions claimed therein were the result of an intent to defraud.
This Court's review is limited to the narrow issue of determining whether the tax court's denial of special leave was an abuse of the discretion vested in the tax court. See Toscano v. C.I.R., 441 F.2d 930 [ 27 AFTR 2d 71-1308] (9th Cir. 1971), Byrne dissenting, and cases cited. As the tax court noted in its memorandum and order of April 21, 1971, ordinarily "a decision of this Court becomes final 3 months after it is rendered, if no appeal has been taken within that period; and we are then powerless to set aside such a decision. Sections 7481, 7843 3 (sic), Internal Revenue Code of 1954; Lasky v. Commissioner, 235 F.2d 97 [ 49 AFTR 1696], aff'd per curiam 352 U.S. 1027 [ 52 AFTR 337]." See also Schaffner v. Bingler, 268 F.2d 76 [ 3 AFTR 2d 1384] (3d Cir. 1959); White's Will v. Commissioner of Internal Revenue, 142 F.2d 746, 748 [ 32 AFTR 732] (3d Cir. 1944); United States v. Howard, 296 F. Supp. 264 [ 23 AFTR 2d 69-579] (D. Ore. 1968).
Although the authorities are not in agreement, an exception has been constructed to this jurisdictional bar allowing the tax court to reexamine an otherwise final decision in the event it is shown that such decision was produced by fraud upon the court. Kenner v. Commissioner, 387 F.2d 689 [ 21 AFTR 2d 391] (7th Cir. 1968) cert. denied 393 U.S. 841 (1968); Toscano v. C.I.R., supra. Contra: Jefferson Loan Co. v. Commissioner, 249 F.2d 364, 367 [ 52 AFTR 870] (8th Cir. 1957).
In Kenner, the court defined fraud upon the court as that "species of fraud which does, or attempts to, defile the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery can not perform in the usual manner its impartial task of adjudging cases that are presented for adjudication." The petitioner alleged that the agents of the I.R.S. acted improperly or showed animus toward him. The court concluded that "[E]ven assuming, however, that the agents were hostile or had an attitude of unfairness toward Dr. Kenner, the petition leaves us completely in the dark as to how the agents fraudulently induced the court to decide against Dr. Kenner. We suspect that Dr. Kenner may have proceeded upon the unfounded assumption that the acts of the agents of the internal revenue service are chargeable to the tax court." 387 F.2d at 692. In Toscano, the phrase was said to apply to those "acts of the adverse party as prevented the losing party from fully and fairly presenting his case or defense."
The record in this case, as in Kenner, sheds no light on the allegation of fraud. The [pg. 72-5217] stipulations were entered into voluntarily. The "fraud," if any, practiced by the attorneys was nothing more than "some puffing of the supposed strength of the Government's position in the settlement negotiations." 4 Appellants cannot escape the intimation of their own conduct that indeed there may have been some doubt in their minds as to the absence of fraud respecting the unclaimed items of income for 1955 and 1956. They were in the best position to determine (a) whether they had in fact received those items of income on which the deficiency determinations were made and (b) whether the fraud penalties assessed by the Commissioner were subject to clear and convincing proof by the Government in the tax court suit. With this presumption of knowledge, the Sticklers' election not to proceed to trial cannot be circumvented because of some misunderstanding between the parties or some "puffing" by the commissioner's representatives during settlement negotiation.
The conclusions of the tax court in Manu-Mine shed no light on what the Commissioner may have shown at the taxpayer's earlier trial, had the taxpayers not entered into the disputed stipulation. The nexus between the facts of Manu-Mine and the record before us is attenuated at best. Furthermore, the taxpayers' contention that the Government represented that it would not proceed against Manu-Mine if taxpayers signed the stipulation is not substantiated by the record. Appellants were represented by counsel at all times during conferences with the I.R.S. Finally, appellant's claim that the Government instituted suit against Manu-Mine after the appeal period had run on the 1965 judgment is plainly incorrect. Manu-Mine instituted that action and the Commissioner was the respondent, as in all suits filed in the tax court alleging overpayments.
Appellants have had the benefit of an evidentiary hearing on their motion, in spite of a continued objection by the Government to the jurisdictional basis for such a hearing. The record of that hearing indicates an attempt by appellants to litigate the merits of the Commissioner's original deficiency determinations for 1955 and 1956. The tax court concluded that the appellants failed to demonstrate "fraud upon the court." We reach the same conclusion.
The order of the tax court will be affirmed.
The total deficiency determination of the Commissioner was compromised at approximately $112,000.
Rule 19(f) of the Tax Court Rules of Practice requires a motion to vacate or revise a decision to be filed within 30 days after the decision has been entered, except by special leave, 26 U.S.C.A.
26 U.S.C. §7483 was amended by Public Law 91-172, Title IX, §959(a), 83 Stat. 734. The amendment changes the time within which a notice of appeal shall be filed in the tax court from 3 months to 90 days.
Memorandum and order of tax court, appellee's brief, appendix B, p. 16.
U.S. v. SHAHEEN, Cite as 28 AFTR 2d 71-5026, 06/12/1971
U. S., PLAINTIFF-APPELLEE v. Thomas A. SHAHEEN, DEFENDANT-APPELLANT.
[pg. 71-5026] Court Name: U.S. Court of Appeals, Seventh Circuit,
Docket No.: No. 71-1273,
Date Decided: 06/12/1971
Prior History: District Court reversed.
Disposition: Decision for taxpayer.
Cites: 28 AFTR 2d 71-5026, 445 F2d 6, 71-1 USTC P 9477.
1. JUDICIAL PROCEEDINGS — Civil actions by U.S. — Authorization — decisions. District court was in error for refusing to quash writ confining taxpayer to jurisdiction: Extraordinary writ (ne exeat republica) issued without findings of fact or conclusions of law and no hearing. U.S. had burden to show departure would frustrate collection, restraint was necessary, not just convenient, and offer proof beyond jeopardy assessment alone that underlying tax claim had merit.
Reference(s): 1971 P-H Fed. ¶ 38,729(145), (150).
F. Lee Bailey, 1 Center Plaza, Boston, Mass., John Powers Crowley, 105 W. Adams St., Chicago, Ill., Attys. for Appellant.
William J. Bauer, U.S. Atty., 219 S. Dearborn St., Chicago, Ill., Johnnie M. Walters, Asst. Atty. Gen., Janet R. Spragens, Tax Div., Dept. of Justice, Wash., D.C., Attys. for Appellee.
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.
Before KILEY, PELL and STEVENS, Circuit Judges.
Judge: STEVENS, Circuit Judge:
This is an appeal from an order denying a motion to quash a writ ne exeat republica. The writ issued pursuant to 26 U.S.C. § 7402(a) 1 in an action filed by the United States to collect alleged income tax deficiencies of $452,534.89. As the principal action is still pending in the district court, the appeal is from an interlocutory order. The Government does not question our appellate jurisdiction. Since the extraordinary writ entered by the district court is in the nature of an injunction, we are satisfied that we have jurisdiction of the appeal pursuant to 28 U.S.C. § 1292(a). 2
By its terms the writ restrains appellant "from departing out of the jurisdiction of this Court until further order of this Court, and requiring him to give security in the amount of $450,000." The writ was originally construed by the Government and by the district court to require imprisonment of appellant since he was unable to post a $450,000 bond. On emergency application, we found that the record did not warrant the confinement of appellant either in prison or within the Northern District of Illinois, and ordered his release from custody without prejudice to the continuing restraint of the writ against his departure from the United States. We now conclude that the writ must be vacated.
(I.) The writ was entered on the ex parte application of the Government. The supporting affidavits established the following facts. Appellant is an American citizen who formerly resided in Chevy Chase, Maryland. For several months prior to August 1970, the Internal Revenue Service had been investigating the accuracy of his tax returns for the years 1966 and 1967; appellant had commenced litigation tending to impede that investigation, and certain negotiations between his counsel and the Service had taken place.On August 3, 1970, appellant sold his residence for a price of $190,000. [pg. 71-5027] About two weeks later his household goods were shipped, in the name of a third party, to a destination in London, England. The furnishings belonging to his daughter and her husband were also shipped to London in late August. On August 28, 1970, appellant borrowed $80,000 secured by a conveyance of his interest in real estate adjacent to his former residence.On September 4, 1970, appellant, accompanied by his wife and daughter, traveled by air from Boston to London. On September 8, 1970, appellant's counsel conferred with the District Director of Internal Revenue in Boston. Apparently the Government then learned of appellant's departure.On September 14, 1970, the Government made a jeopardy assessment against appellant in the amount of $151,104.40. On March 19, 1971, an additional jeopardy assessment of $301,430.49 was made. All administrative methods of collecting the asserted tax liability of appellant were exhausted with the result that only $4,139.28 had been collected. Credit for this amount had been allowed in making the jeopardy assessments which, therefore, aggregated $452,534.89, plus interest, when this action was commenced on April 1, 1971.Certain assets of appellant were held in trust by his attorneys, but they failed and refused to surrender such property in response to notices of levy and a final demand on behalf of the Treasury. Apart from the trust, the Government was unaware of any assets belonging to the taxpayer located in the United States. It levied on appellant's household goods while they were on the high seas, but appellant's son-in-law recovered the goods in an action brought in the English courts.On April 1, 1971, appellant was present within the Northern District of Illinois for the purpose of attending a bail hearing in connection with a criminal charge pending against him in that court. The District Director of Internal Revenue for Baltimore, Maryland, based on the facts set forth above, concluded that appellant would depart quickly from the United States if not restrained, and that if appellant were allowed to depart, the tax claims against him would be wholly lost.Neither appellant nor his counsel was present in court, or had received prior notice of the proceeding, when the writ issued.
(II.) On the day following the issuance of the writ, counsel for appellant presented an oral motion to quash the writ. 3 Judge Hoffman, to whom the case had been assigned, interrupted a trial to hear the motion as an emergency matter. Because the writ had been entered by another judge, he required appellant to go forward with the presentation of evidence showing why the writ should be quashed. We believe appellant correctly contended that the burden of proof was on the Government to establish that the writ should remain in effect. United States v. Robbins, 235 F. Supp. 353, 357 [ 14 AFTR 2d 5766] (E.D. Ark. 1964). However, we are not persuaded that the record before us demonstrates any prejudice to appellant because his evidence was heard first. The papers on file gave him fair notice of the substance of the Government's case. Appellant's evidence supplemented and explained, but did not contradict, the facts as set forth above. He frankly confirmed his intention to depart the United States as soon as he could. He had been residing in Rome for about four months and expressed a desire to rejoin his wife and minor children promptly. Moreover, according to his testimony, adverse publicity related to financial difficulties of a business associate and to his own indictment on a charge unconnected with the tax matterns has made it impossible for him to realize earnings in the United States as a financial consultant. He expressed optimism, however, with regard to his earnings potential in Europe.He denied that he would never return to the United States if permitted to leave. His three oldest children reside in this country. He has voluntarily returned for court appearances in the criminal case. He testified that except for about $3,000 that he drew from a company in Italy, all of his assets are in the United States. Furthermore, he denies liability for the claimed tax deficiencies and has a substantial interest in defeating the Government's claim.The amounts realized from the transactions [pg. 71-5028] described by the Government were used to discharge indebtednesses, reinvested, or placed in trust with his Boston counsel. He estimated that the trust assets had a value of "several hundred thousand dollars" and with proper financing could "be increased to well over a million." The trust was created on September 14, 1970, the date of the first jeopardy assessment. The documents were executed in London, England, and provide that the first $250,000 of trust assets shall be available for payment of fees of his attorneys, who apparently include the trustees of the fund as well as his son-in-law. The record does not disclose the extent to which trust assets may ultimately be subject to levy or collection by the Government.Details of various financial matters are discussed in the evidence. The sums mentioned, plus appellant's apparent financial ability to live in Rome in a style appropriate to his intended business activities, suggest that he may have more property abroad than the record indicates. There is no direct proof, however, that his foreign assets are significant.The district court made no findings of fact and expressed no conclusions of law. He simply denied the motion to quash the writ and refused an oral request to reduce the bond.
(III.) The power of a district court to issue a writ ne exeat republica, though seldom exercised, 4 is not questioned. Its common law anetcedent, the writ ne exeat regnum, was a prerogative writ enabling the sovereign to compel a man to remain within the realm to help in the defense of his country. 5 An equally proper office of the writ is to aid the sovereign to compel a citizen to pay his taxes. As at common law, however, it is an extraordinary writ which should issue only in exceptional cases. When issued, the writ restrains the right possessed by "every man [to] go out of the realm for whatever cause he pleaseth." This right to travel is "a constitutional liberty closely related to rights of free speech and association, ..." Aptheker v. Secretary of State, 378 U.S. 500, 517. It cannot be abridged without due process of law. Kent v. Dulles, 357 U.S. 116, 125-26, United States v. Laub, 385 U.S. 475, 481.A party seeking to support the issuance of an extraordinary writ has the burden of showing exceptional circumstances warranting the relief requested. See De Beers Consolidated Mines, Ltd. v. United States, 325 U.S. 212. When the relief impinges upon a constitutionally protected personal liberty, that burden must certainly be at least as great as that required to obtain more familiar forms of injunctive relief. In our opinion, the analogy to preliminary injunction actions reveals both procedural and substantive defects in the Government's case.Rule 65(d) of the Federal Rules of Civil Procedure requires any order granting an injunction to set forth the reasons for its issuance and to be specific in its terms. Rule 52(a) requires every order granting an interlocutory injunction to set forth findings of fact and conclusions of law "which constitute the grounds of its action." Comparable requirements should govern the processing of an application for a writ ne exeat republica. As a matter of procedure, therefore, the absence of any findings of fact or conclusions of law persuades us that the writ here must be vacated. 6 [pg. 71-5029] As a matter of substance, we also find critical weaknesses in the Government's case. At the heart of the matter is the fact that the Government is seeking extra-ordinary assistance for the purpose of collecting a disputed claim. The jeopardy assessment may well be sufficient to support, for a matter of a few days, a temporary emergency order which would prevent the defendant from defeating the court's jurisdiction. But just as the entry of a temporary restraining order must be promptly followed by an evidentiary hearing to determine whether a preliminary injunction should issue, see General Electric Co. v. American Wholesale Co., 235 F.2d 606 (7th Cir. 1956), we believe that a ne exeat writ issued on the basis of an ex parte application can authorize no more than a brief period of initial restraint during which the Government has the burden of proving, in an evidentiary hearing, after due notice has been given, its right to have the restraint continue in effect. Cf., Rule 65(b) F. R. Civ. P. In our opinion, that burden includes the obligation of proving probable success on the merits of its underlying claim by evidence other than a mere jeopardy assessment. Cf., Bell v. Burson, 39 L.W. 4607; Sniadach v. Family Finance Corp., 395 U.S. 337, 343 (Harlan, J., concurring); De Beers Consolidated Mines, Ltd. v. United States, supra, at 221-22; Ginsberg & Sons v. Popkin, 285 U.S. 204, 208; see also Pizzarello v. United States, 408 F.2d 579, 583 [ 23 AFTR 2d 69-1575] (2d Cir. 1969) cert. denied 396 U.S. 986. That showing would also be necessary to determine the amount of security which the court should require as a condition to unrestricted travel.The writ must also be supported by findings of fact predicated on evidence showing that the taxpayer's departure will frustrate the collection of the amount due. In Robbins the application for the writ was based on an assertion that the taxpayer was in the course of liquidating all of his assets in the United States and transferring those assets or their proceeds to Mexico. The restraint on his departure was intended to frustrate the expatriation of assets within the country. The Government failed to prove the threatened consequence and the writ was vacated.Here there is no evidence that the taxpayer is in the process of transferring assets abroad, or that he will take any property with him if he is permitted to depart. The transfers identified in the record took place prior to the jeopardy assessments. The Government's theory is that taxpayer's presence is required to enable the court effectively to enforce an order requiring him to repatriate assets now located in Europe. The record does not contain any motion by the Government seeking such relief. 7 We assume that the district court would have the power to enter an order of that kind on the basis of an appropriate showing. See United States v. Ross, 302 F.2d 831, 834 [ 9 AFTR 2d 1516] (2d Cir. 1962). Whether such power should be exercised, however, depends on a number of facts which this record does not disclose, at least not with any clarity.The nature and extent, if any, of taxpayer's foreign assets is far from clear. Assuming that such assets may exist, the need for such an order may depend on the unavailability of the trust corpus to satisfy the deficiencies, a fact which has been assumed but not demonstrated. Even assuming the existence of foreign assets and the need for a repatriation order, other problems such as the interests of third parties or other sovereigns may be involved. 8 If restraint of a citizen's liberty may be justified as an aid to the enforcement of an order directing repatriation of assets, the Government has the burden of demonstrating probable cause that such an order will be entered. That burden has not been met in this case.We are also persuaded that the Government has the burden of demonstrating that the restraint of liberty is a necessary, and not merely coercive and convenient, method of enforcement. The writ should not be employed for any purpose akin to imprisonment for debt, cf., Tate v. Short, 39 L.W. 4301; Williams v. Illinois, 399 U.S. 235, or to exact a more favorable compromise from a taxpayer who may have valid defenses to the Government's claim, cf., [pg. 71-5030] Perez et ux v. Campbell, Superintendent, 39 L.W. 4621.Without findings of fact by the judge who heard the evidence, we do not know whether he determined that appellant would probably disobey a repatriation order if it should be entered. Other than the pendency of a criminal charge, which, of course, does not overcome the presumption of innocence, we find no evidence in the record that appellant has disobeyed the law or shown disrespect for any court order or proceeding. Even if he departs, the court's jurisdiction over his person will continue. The effectiveness of normal sanctions against a recalcitrant party will be diminished if he is out of the country, but it is not frivolous to assume that a default judgment of about a half million dollars against a would-be international business consultant is a significant sanction. In any event, a finding of necessity for the extraordinary relief requested is, we believe, another condition to the issuance of this extraordinary writ.We have considered the possible need for continued restraint to enable the Government to have effective discovery, both on issues of liability and with respect to the location, value, and legal status of appellant's property. In an appropriate case, the detention of a citizen for a limited time for that purpose might be justified. However, in this case we were advised at oral argument that taxpayer has recently testified at an oral deposition and answered without reservation all questions which were asked by Government counsel. We find no basis in the record for continuing the restraint as an aid to discovery.We have, therefore, concluded that the order denying the motion to quash the writ must be reversed. Rule 41(a) of the Federal Rules of Appellate Procedure provides for the issuance of our mandate in 21 days unless the time is expressly shortened or enlarged. We anticipate that the Government may move for a stay of mandate while a petition for certiorari is prepared and filed, and that appellant may request that the mandate issue forthwith. Since such motions may be supported by facts of which we are unaware, or by authorities we have overlooked, we, of course, cannot now rule definitively on such contingent requests. In view of the unusual nature of the proceeding, however, we believe it appropriate to express the conclusions indicated by our present appraisal of the record.We will not look with favor on a motion to stay the mandate. The allowance of such a motion might automatically extend the restraint on appellant's liberty for an unwarranted period of time. 9 On the other hand, in recognition of the possibility that an immediate departure of appellant might have the practical consequence of defeating the court's jurisdiction to grant effective relief, we are not directing that our mandate issue forthwith. We have concluded that an interval of 10 days between the receipt of this opinion and the issuance of our mandate is appropriate. As this is an appeal from an interlocutory order, the jurisdiction of the district court to entertain appropriate motions by either party is not impaired. A degree of diligence appropriate to the nature of the case will, however, be required.The order denying the motion to quash the writ ne exeat republica is reversed. This court's mandate will issue on June 25, 1971.
"(a) The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such laws."
The procedure specified in 28 U.S.C. § 1292(b) for appeals from interlocutory orders "not otherwise appealable" was not followed. We also believe our jurisdiction may be supported by the "collateral order" doctrine. See Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541,545-47 Baxter v. United Forest Products Co., 406 F.2d 1120, 1123-25 (8th Cir. 1969) cert., denied 394 U.S. 1018.
The motion slip presented to the clerk simply stated, "Motion to Quash Writ Ne Exeat."
The only reported case construing 26 U.S.C. § 7402(a) which has been called to our attention is United States v. Robbins, 235 F. Supp. 353 [ 14 AFTR 2d 5766) (E.D. Ark. 1964). It is not unlikely, of course, that applications for the writ which were either unsuccessful, or which resulted in the prompt settlement of pending litigation, are unreported. The manner in which it was originally employed in this case might well have caused many reluctant taxpayers to change their attitude about the desirability of a prompt settlement with the Internal Revenue Service.
"By the common law, (n) every man may go out of the realm for whatever cause he pleaseth, without obtaining the king's leave; provided he is under no injunction of staying home; (which liberty was expressly declared in King John's great charter, though left out in that of Henry III,) but because that every man ought of right to defend the king and his realm, therefore, the king, at his pleasure, may command him by his writ that he go not beyond the seas, or out of the realm, without license; and, if he do the contrary, he shall be punished for disobeying the king's command." Cooley's Blackstone, 3d Ed., Vol. 1, p. 264.
Moreover, the form of the writ did not satisfy the requirement of specificity as to its terms with respect either to the condition of the $450,000 bond or the time or conditions upon which the writ would terminate.
There is a prayer for such relief in the complaint, but we interpret that prayer to relate to the form of judgment to be entered after trial.
See In re Ryan, 430 F.2d 658 [ 26 AFTR 2d 70-5439] (9th Cir. 1970) reversed on other grounds United States v. Ryan, 39 L.W. 4606.
"If during the period of the stay there is filed with the clerk of the Court of Appeals a notice from the clerk of the Supreme Court that the party who has obtained the stay has filed a petition for the writ in that Court, the stay shall continue until final disposition by the Supreme Court." F.R.Ap.P. 41(b).