International Tax Cases

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U.S. Supreme CourtNorth American Oil Consolidated v. Burnet, 286 U.S. 417 (1932)North American Oil Consolidated v. Burnet No. 575

Argued April 20, 21, 1932

Decided May 23, 1932 286 U.S. 417 CERTIORARI TO THE CIRCUIT COURT OF APPEALS

FOR THE NINTH CIRCUIT

Syllabus

1. Section 13(c) of the Revenue Act of 1916, obliging receivers"operating the property and business of corporations" to make returnsof net income "as and for such corporations," applied only where areceiver was in complete control of the entire properties and business

of the corporation; otherwise, the return must be made by thecorporation. P. 286 U. S. 422.

Page 286 U. S. 418

2. Part of an operating property was taken over by a receiver in a suitchallenging the owner's title. Held, that the owner need not reportincome as of the year when it was collected by the receiver, while theright to it was in doubt, but must report it as income of the year whenthe amount collected was paid over to him and the bill dismissed. P.286 U. S. 423.

3. The fact that appeals from the decree were not determined in hisfavor until a later year did not defer the time for returning the income.P. 286 U. S. 424.

50 F.2d 52 affirmed.

Certiorari, 284 U.S. 614, to review a judgment reversing a decision of the Board of Tax Appeals, 12 B.T.A. 68.

Page 286 U. S. 420

MR. JUSTICE BRANDEIS delivered the opinion of the Court.

The question for decision is whether the sum of $171,979.22, receivedby the North American Oil Consolidated in 1917, was taxable to it asincome of that year.

The money was paid to the company under the followingcircumstances: among many properties operated by it in 1916 was asection of oil land the legal title to which stood in the name of theUnited States. Prior to that year, the government, claiming also thebeneficial

Page 286 U. S. 421

ownership, had instituted a suit to oust the company from possession,and on February 2, 1916, it secured the appointment of a receiver tooperate the property, or supervise its operations, and to hold the netincome thereof. The money paid to the company in 1917 representedthe net profits which had been earned from that property in 1916during the receivership. The money was paid to the receiver as earned. After entry by the district court in 1917 of the final decree dismissingthe bill, the money was paid, in that year, by the receiver to thecompany. United States v. North American Oil Consolidated, 242 F.723. The government took an appeal (without supersedeas) to theCircuit Court of Appeals. In 1920, that court affirmed the decree. 264

F. 336. In 1922, a further appeal to this Court was dismissed by stipulation. 258 U.S. 633.

The income earned from the property in 1916 had been entered on thebooks of the company as its income. It had not been included in itsoriginal return of income for 1916; but it was included in an amendedreturn for that year which was filed in 1918. Upon auditing thecompany's income and profits tax returns for 1917, the Commissionerof Internal Revenue determined a deficiency based on other items.The company appealed to the Board of Tax Appeals. There, in 1927,

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the Commissioner prayed that the deficiency already claimed shouldbe increased so as to include a tax on the amount paid by the receiverto the company in 1917. The Board held that the profits were taxable tothe receiver as income of 1916, and hence made no finding whetherthe company's accounts were kept on the cash receipts and

disbursements basis or on the accrual basis. 12 B.T.A. 68. The CircuitCourt of Appeals held that the profits were taxable to the company asincome of 1917, regardless of whether the company's returns weremade on the cash or on the

86 U. S. 422

accrual basis. 50 F.2d 752. This Court granted a writ of certiorari. 284U.S. 614.

It is conceded that the net profits earned by the property during the

receivership constituted income. The company contends that they should have been reported by the receiver for taxation in 1916; that, if not returnable by him, they should have been returned by thecompany for 1916, because they constitute income of the company accrued in that year, and that, if not taxable as income of the company for 1916, they were taxable to it as income for 1922, since the litigation was not finally terminated in its favor until 1922.

First. The income earned in 1916 and impounded by the receiver inthat year was not taxable to him, because he was the receiver of only apart of the properties operated by the company. Under § 13(c) of the

Revenue Act of 1916, * receivers who "are operating the property orbusiness of corporations" were obliged to make returns "of net incomeas and for such corporations," and "any income tax due" was to be"assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they havecustody and control." The phraseology of this section was adopted without change in the Revenue Act of 1918, 40 Stat. 1057, 1081, c. 18, §239. The regulations of the Treasury Department have consistently construed

Page 286 U. S. 423

these statutes as applying only to receivers in charge of the entireproperty or business of a corporation, and in all other cases haverequired the corporations themselves to report their income.

Treas.Regs. 33, arts. 26, 209; Treas.Regs. 45, Arts. 424, 622. Thatconstruction is clearly correct. The language of the sectioncontemplates a substitution of the receiver for the corporation, andthere can be such substitution only when the receiver is in completecontrol of the properties and business of the corporation. Moreover,there is no provision for the consolidation of the return of a receiver of part of a corporation's property or business with the return of thecorporation itself. It may not be assumed that Congress intended torequire the filing of two separate returns for the same year, eachcovering only a part of the corporate income without makingprovision for consolidation so that the tax could be based upon the

income as a whole.

Second. The net profits were not taxable to the company as income of 1916. For the company was not required in 1916 to report as income anamount which it might never receive. See Burnet v. Logan, 283 U. S.404, 283 U. S. 413. Compare Lucas v. American Code Co., 280 U. S. 445, 280 U. S. 452; Burnet v. Sanford & Brooks Co., 282 U. S. 359, 282 U. S.363. There was no constructive receipt of the profits by the company in that year, because at no time during the year was there a right inthe company to demand that the receiver pay over the money.Throughout 1916, it was uncertain who would be declared entitled tothe profits. It was not until 1917, when the district court entered a finaldecree vacating the receivership and dismissing the bill, that thecompany became entitled to receive the money. Nor is it material, forthe purposes of this case, whether the company's return was filed onthe cash receipts and disbursements basis, or on the accrual basis. Inneither event was it taxable in 1916 on

Page 286 U. S. 424





















account of income which it had not yet received and which it mightnever receive.

Third. The net profits earned by the property in 1916 were not incomeof the year 1922 -- the year in which the litigation with the

government was finally terminated. They became income of thecompany in 1917, when it first became entitled to them and when itactually received them. If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has receivedincome which he is required to return, even though it may still beclaimed that he is not entitled to retain the money, and even thoughhe may still be adjudged liable to restore its equivalent. See Board v.

Commissioner, 51 F.2d 73, 75, 76. Compare United States v. S.S. WhiteDental Mang. Co., 274 U. S. 398, 274 U. S. 403. If in 1922 thegovernment had prevailed, and the company had been obliged torefund the profits received in 1917, it would have been entitled to a

deduction from the profits of 1922, not from those of any earlier year.Compare Lucas v. American Code Co., supra.

Affirmed.

* Act of September 8, 1916, 39 Stat. 756, 771, c. 463:

"In cases wherein receivers, trustees in bankruptcy, or assignees areoperating the property or business of corporations . . . subject to taximposed by this title, such receivers, trustees, or assignees shall makereturns of net income as and for such corporations . . . in the same

manner and form as such organizations are hereinbefore required tomake returns, and any income tax due on the basis of such returnsmade by receivers, trustees, or assignees shall be assessed andcollected in the same manner as if assessed directly against theorganizations of whose businesses or properties they have custody andcontrol."







G.R. No. 78953 July 31, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS,

respondents.

Elison G. Natividad for accused-appellant.

SARMIENTO, J.:p

Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in his income tax return that a sum of money that he erroneously received and already spent is the subject of a pending litigation and there did not declare it as income is liable topay the 50% penalty for filing a fraudulent return.

This question is the subject of the petition for review before the Courtof the portion of the Decision

1dated July 27, 1983 of the Court of Tax

Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of InternalRevenue," which orders the deletion of the 50% surcharge from Javier's deficiency income tax assessment on his income for 1977.

The respondent CTA in a Resolution2

dated May 25, 1987, denied the

Commissioner's Motion for Reconsideration 3 and Motion for NewTrial 4 on the deletion of the 50% surcharge assessment or imposition.

The pertinent facts as are accurately stated in the petition of privaterespondent Javier in the CTA and incorporated in the assailed decisionnow under review, read as follows:

xxx xxx xxx

2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein),received from the Prudential Bank and TrustCompany in Pasay City the amount of US$999,973.70remitted by her sister, Mrs. Dolores Ventosa, through

some banks in the United States, among which isMellon Bank, N.A.

3. That on or about June 29, 1977, Mellon Bank, N.A.filed a complaint with the Court of First Instance of Rizal (now Regional Trial Court), (docketed as CivilCase No. 26899), against the petitioner (privaterespondent herein), his wife and other defendants,claiming that its remittance of US$1,000,000.00 was aclerical error and should have been US$1,000.00 only,and praying that the excess amount of US$999,000.00

be returned on the ground that the defendants aretrustees of an implied trust for the benefit of MellonBank with the clear, immediate, and continuing duty to return the said amount from the moment it wasreceived.

4. That on or about November 5, 1977, the City Fiscalof Pasay City filed an Information with the thenCircuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private respondentherein) and his wife with the crime of estafa, allegingthat they misappropriated, misapplied, and convertedto their own personal use and benefit the amount of US$999,000.00 which they received under an impliedtrust for the benefit of Mellon Bank and as a result of the mistake in the remittance by the latter.

5. That on March 15, 1978, the petitioner (privaterespondent herein) filed his Income Tax Return forthe taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating



in the footnote of the return that "Taxpayer wasrecipient of some money received from abroad whichhe presumed to be a gift but turned out to be an errorand is now subject of litigation."

6. That on or before December 15, 1980, the petitioner(private respondent herein) received a letter from theacting Commissioner of Internal Revenue datedNovember 14, 1980, together with income assessmentnotices for the years 1976 and 1977, demanding thatpetitioner (private respondent herein) pay on orbefore December 15, 1980 the amount of P1,615.96 andP9,287,297.51 as deficiency assessments for the years1976 and 1977 respectively. . . .

7. That on December 15, 1980, the petitioner (private

respondent herein) wrote the Bureau of InternalRevenue that he was paying the deficiency incomeassessment for the year 1976 but denying that he hadany undeclared income for the year 1977 andrequested that the assessment for 1977 be made toawait final court decision on the case filed againsthim for filing an allegedly fraudulent return. . . .

8. That on November 11, 1981, the petitioner (privaterespondent herein) received from ActingCommissioner of Internal Revenue Romulo Villa a

letter dated October 8, 1981 stating in reply to hisDecember 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance which you wereable to dispose, is definitely taxable." . . .

5

The Commissioner also imposed a 50% fraud penalty against Javier.

Disagreeing, Javier filed an appeal6

before the respondent Court of Tax Appeals on December 10, 1981.

The respondent CTA, after the proper proceedings, rendered thechallenged decision. We quote the concluding portion:

We note that in the deficiency income tax assessmentunder consideration, respondent (petitioner here)

further requested petitioner (private respondenthere) to pay 50% surcharge as provided for in Section72 of the Tax Code, in addition to the deficiency income tax of P4,888,615.00 and interest due thereon.Since petitioner (private respondent) filed his incometax return for taxable year 1977, the 50% surcharge was imposed, in all probability, by respondent(petitioner) because he considered the return filedfalse or fraudulent. This additional requirement, toour mind, is much less called for because petitioner(private respondent), as stated earlier, reflected in as

1977 return as footnote that "Taxpayer was recipientof some money received from abroad which hepresumed to be gift but turned out to be an error andis now subject of litigation."

From this, it can hardly be said that there was actualand intentional fraud, consisting of deception willfully and deliberately done or resorted to by petitioner (private respondent) in order to induce theGovernment to give up some legal right, or the latter,due to a false return, was placed at a disadvantage soas to prevent its lawful agents from properassessment of tax liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519),because petitioner literally "laid his cards on thetable" for respondent to examine. Error or mistake of fact or law is not fraud. (Insular Lumber vs. Collector,L-7100, April 28, 1956.). Besides, Section 29 is not tooplain and simple to understand. Since the questioninvolved in this case is of first impression in this jurisdiction, under the circumstances, the 50%



surcharge imposed in the deficiency assessmentshould be deleted.

7

The Commissioner of Internal Revenue, not satisfied with therespondent CTA's ruling, elevated the matter to us, by the present

petition, raising the main issue as to:

WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE50% FRAUD PENALTY?

8

On the other hand, Javier candidly stated in his Memorandum,9

thathe "did not appeal the decision which held him liable for the basicdeficiency income tax (excluding the 50% surcharge for fraud)."However, he submitted in the same memorandum "that the issue may be raised in the case not for the purpose of correcting or setting asidethe decision which held him liable for deficiency income tax, but only

to show that there is no basis for the imposition of the surcharge."This subsequent disavowal therefore renders moot and academic theposturings articulated in as Comment 10 on the non-taxability of theamount he erroneously received and the bulk of which he had already disbursed. In any event, an appeal at that time (of the filing of theComments) would have been already too late to be seasonable. Thepetitioner, through the office of the Solicitor General, stresses that:

xxx xxx xxx

The record however is not ambivalent, as the record

clearly shows that private respondent is self-convinced, and so acted, that he is the beneficialowner, and of which reason is liable to tax. Putanother way, the studied insinuation that privaterespondent may not be the beneficial owner of themoney or income flowing to him as enhanced by thestudied claim that the amount is "subject of litigation" is belied by the record and clearly exposedas a fraudulent ploy, as witness what transpired uponreceipt of the amount.

Here, it will be noted that the excess in the amounterroneously remitted by MELLON BANK for theamount of private respondent's wife was $999,000.00after opening a dollar account with Prudential Bankin the amount of $999,993.70, private respondent and

his wife, with haste and dispatch, within a span of eleven (11) electric days, specifically from June 3 to June 14, 1977, effected a total massive withdrawalfrom the said dollar account in the sum of $975,000.00 or P7,020,000.00. . . .

11

In reply, the private respondent argues:

xxx xxx xxx

The petitioner contends that the private respondent

committed fraud by not declaring the "mistakenremittance" in his income tax return and by merely making a footnote thereon which read: "Taxpayer wasthe recipient of some money from abroad which hepresumed to be a gift but turned out to be an errorand is now subject of litigation." It is respectfully submitted that the said return was not fraudulent.The footnote was practically an invitation to thepetitioner to make an investigation, and to make theproper assessment.

The rule in fraud cases is that the proof "must beclear and convincing" (Griffiths v. Comm., 50 F [2d]782), that is, it must be stronger than the "merepreponderance of evidence" which would besufficient to sustain a judgment on the issue of correctness of the deficiency itself apart from thefraud penalty. (Frank A. Neddas, 40 BTA 672). Thefollowing circumstances attendant to the case at barshow that in filing the questioned return, the privaterespondent was guided, not by that "willful and



deliberate intent to prevent the Government frommaking a proper assessment" which constitute fraud,but by an honest doubt as to whether or not the"mistaken remittance" was subject to tax.

First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case" was given very, very wide publicity by media; and only one whois not in his right mind would have entertained theidea that the BIR would not make an assessment if the amount in question was indeed subject to theincome tax.

Second, as the respondent Court ruled, "the questioninvolved in this case is of first impression in this jurisdiction" (See p. 15 of Annex "A" of the Petition).

Even in the United States, the authorities are notunanimous in holding that similar receipts aresubject to the income tax. It should be noted that thedecision in the Rutkin case is a five-to-four decision;and in the very case before this Honorable Court, oneout of three Judges of the respondent Court was of the opinion that the amount in question is nottaxable. Thus, even without the footnote, the failureto declare the "mistaken remittance" is notfraudulent.

Third, when the private respondent filed his incometax return on March 15, 1978 he was being sued by theMellon Bank for the return of the money, and wasbeing prosecuted by the Government for estafacommitted allegedly by his failure to return themoney and by converting it to his personal benefit.The basic tax amounted to P4,899,377.00 (See p. 6 of the Petition) and could not have been paid withoutusing part of the mistaken remittance. Thus, it wasnot unreasonable for the private respondent to

simply state in his income tax return that the amountreceived was still under litigation. If he had paid thetax, would that not constitute estafa for using thefunds for his own personal benefit? and would theGovernment refund it to him if the courts ordered

him to refund the money to the Mellon Bank?12

xxx xxx xxx

Under the then Section 72 of the Tax Code (now Section 248 of the1988 National Internal Revenue Code), a taxpayer who files a falsereturn is liable to pay the fraud penalty of 50% of the tax due fromhim or of the deficiency tax in case payment has been made on thebasis of the return filed before the discovery of the falsity or fraud.

We are persuaded considerably by the private respondent's

contention that there is no fraud in the filing of the return and agreefully with the Court of Tax Appeals' interpretation of Javier's notationon his income tax return filed on March 15, 1978 thus: "Taxpayer wasthe recipient of some money from abroad which he presumed to be agift but turned out to be an error and is now subject of litigation thatit was an "error or mistake of fact or law" not constituting fraud, thatsuch notation was practically an invitation for investigation and that Javier had literally "laid his cards on the table." 13

In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return was discussed in this manner:

. . . The fraud contemplated by law is actual and notconstructive. It must be intentional fraud, consistingof deception willfully and deliberately done orresorted to in order to induce another to give upsome legal right. Negligence, whether slight or gross,is not equivalent to the fraud with intent to evade thetax contemplated by law. It must amount tointentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere



mistake cannot be considered as fraudulent intent,and if both petitioner and respondent Commissionerof Internal Revenue committed mistakes in makingentries in the returns and in the assessment,respectively, under the inventory method of

determining tax liability, it would be unfair to treatthe mistakes of the petitioner as tainted with fraudand those of the respondent as made in good faith.

Fraud is never imputed and the courts never sustain findings of fraudupon circumstances which, at most, create only suspicion and themere understatement of a tax is not itself proof of fraud for thepurpose of tax evasion.

15

A "fraudulent return" is always an attempt to evade atax, but a merely "false return" may not be, Rick v.

U.S., App. D.C., 161 F. 2d 897, 898.16

In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the hereinpetitioner. The government was not induced to give up some legalright and place itself at a disadvantage so as to prevent its lawfulagents from proper assessment of tax liabilities because Javier did notconceal anything. Error or mistake of law is not fraud. The petitioner'szealousness to collect taxes from the unearned windfall to Javier ishighly commendable. Unfortunately, the imposition of the fraud

penalty in this case is not justified by the extant facts. Javier may beguilty of swindling charges, perhaps even for greed by spending mostof the money he received, but the records lack a clear showing of fraud committed because he did not conceal the fact that he hadreceived an amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surchargeimposed as fraud penalty by the petitioner against the privaterespondent in the deficiency assessment should be deleted.

WHEREFORE, the petition is DENIED and the decision appealed fromthe Court of Tax Appeals is AFFIRMED. No costs.

SO ORDERED.

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