39 T.C. 988">*988 The respondent determined the following deficiencies in income tax and additions to tax:

Respondent concedes that petitioner is not liable for the addition to tax under section 6653(b), Internal Revenue Code of 1954, determined 39 T.C. 988">*989 for the year 1955, and petitioner concedes that the statute of limitations is not a bar1963 U.S. Tax Ct. LEXIS 174">*177 to the assessment of the deficiency determined for that year. If petitioner's returns for the years 1946 through 1954 were not false or fraudulent with intent to evade tax, assessment of deficiencies for those years is barred by the statute of limitations.

The principal question for decision is whether petitioner's returns for the years 1946 through 1954 were false or fraudulent with intent to evade tax. Another issue is whether petitioner is entitled to an embezzlement or theft loss deduction for 1955.

FINDINGS OF FACT.

Some of the facts have been stipulated, and, as stipulated, they are incorporated herein by reference.

Petitioner, a Massachusetts corporation, was incorporated in 1942. Its principal office is in Worcester, Mass. Its income tax returns for the years 1946 through 1955 were filed with the district director of internal revenue for the district of Massachusetts. During those years it engaged in the business of buying, selling, renting, brokering, and rebuilding new and used machinery. Prior to its incorporation its business had been carried on as a division of Botwinik Brothers, Inc., Hamden, Conn. (hereinafter referred to as the Connecticut corporation), which1963 U.S. Tax Ct. LEXIS 174">*178 was engaged in the same business in Connecticut. The Connecticut corporation in turn had been a partnership prior to 1925; the business was founded by two members of the Botwinik family (Hyman and Harris Botwinik) in Connecticut and was carried on continuously by them since before World War I. They have now been deceased for a number of years, and the members of the family interested in the enterprise are their descendants. At all times material the Connecticut corporation owned 498 of the 750 shares of outstanding stock of petitioner, and two individual members of the Botwinik family owned one share each. The remaining 250 shares were owned by Albert Green and his wife, Vera Green. During most of the taxable years Albert owned 210 shares and Vera 40 shares of stock in petitioner. During the taxable years the Connecticut corporation had outstanding 2,000 shares of class A voting stock and 2,445 shares of class B nonvoting stock; Albert Green owned 70 shares of the class B nonvoting stock, and Vera Green owned no stock of any kind in the Connecticut corporation. The Greens do not appear to be members of the Botwinik family, but Albert Green has been continuously employed since1963 U.S. Tax Ct. LEXIS 174">*179 1918 either by petitioner or otherwise in the Botwinik enterprise. He was and is an extremely valuable employee. The Greens resided near Worcester, Mass., during the taxable years and were active in petitioner's affairs in the capacities shown below.

39 T.C. 988">*990 The officers and directors of petitioner were as follows:

During the period December 13, 1955, to January 1, 1958, Norman I. Botwinik replaced Vera Green as treasurer, secretary, and clerk. He had not previously been connected with petitioner nor was he familiar with its affairs.

Samuel Botwinik died on April 17, 1954. From 1946 to the time of his death he resided in Connecticut and was president of the 1963 U.S. Tax Ct. LEXIS 174">*180 Connecticut corporation; he was the person designated by that corporation to represent it in the conduct of the petitioner's business. After his death, his brother, Louis Botwinik, was the designated representative. During the entire year 1955 Louis Botwinik was under the care of a psychiatrist and for 3 months beginning March 1955 he was a patient in a psychiatric hospital. Norman I. Botwinik was the principal officer of petitioner in 1955 and thereafter, giving particular attention to the investigation of petitioner by the Internal Revenue Service and to the problems arising from Vera Green's misappropriations, hereinafter described.

During the years 1946 through 1955 Vera Green was a member and an officer of the National Office Management Association and was president of its Worcester, Mass., Chapter. She was regarded as an authority on office management and traveled throughout the country giving lectures on this subject. She owned or controlled a business having no connection whatever with petitioner.

From 1946 through December 12, 1955, Vera Green had supervision over many administrative functions of petitioner, including advertising, personnel, management and supervision1963 U.S. Tax Ct. LEXIS 174">*181 of its financial books and records and petty cash. She also had authority to issue checks of petitioner for corporate purposes against its several checking accounts and to make and direct payments of cash out of its petty cash fund or otherwise. She had custody and physical possession of its petty cash book and did the posting to that book. Beginning in 1946 and continuing until she resigned on December 12, 1955, she misappropriated funds of petitioner. Methods used by her included 39 T.C. 988">*991 making out false petty cash vouchers and using the money for her own use and benefit; making out and approving vouchers, presumably for funds paid to various employees and other persons for corporate expenses, which they never received; drawing checks against bank accounts of petitioner for nonexisting corporate expenditures; having invoices for purchases of items for her personal use or that of her immediate family paid by petitioner; using its funds to pay for advertising services rendered for her benefit; charging salaries of household domestics employed by her to the payroll of petitioner; charging to petitioner the cost of constructing a swimming pool at her residence; and at the end 1963 U.S. Tax Ct. LEXIS 174">*182 of a calendar month issuing or causing to be issued checks of petitioner made out to Albert Green for unsubstantiated traveling expenses, which checks were endorsed in her handwriting and deposited in bank accounts maintained by her and her husband. The funds of petitioner misappropriated by Vera Green amounted to at least $ 42,318.99 in 1946, $ 61,603.86 in 1947, $ 70,246.82 in 1948, $ 63,764.16 in 1949, $ 79,174.98 in 1950, $ 94,000 in 1951, $ 99,000 in 1952, $ 117,000 in 1953, and $ 76,000 in 1954. She well knew that these amounts had been used for her personal benefit or that of her immediate family, that they did not represent business expenses of petitioner, and that she had caused them to be improperly reflected as business expenses on its books and records.

Petitioner's books and records were examined monthly by members of a New Haven accounting firm. They, and their assistants, checked the purchase invoices and petty cash vouchers to see if they were approved for payment by a responsible officer and had been posted to the ledger in the proper categories. They never went beyond the face of an invoice or voucher for independent verification or substantiation of the expenditure1963 U.S. Tax Ct. LEXIS 174">*183 represented by the invoice or voucher. They considered Vera Green to be a responsible officer, and vouchers and invoices bearing her initials were accepted by them as being "okay for payment." A report on each monthly examination was sent to Samuel Botwinik. A member of the accounting firm prepared petitioner's income tax returns for the years 1946 through 1955. The data contained in these returns were taken from the books and records of petitioner maintained under the supervision of Vera Green. Its returns for the years 1946 through 1953 were signed by Samuel Botwinik as president and treasurer. Its 1954 return was signed by Vera Green as treasurer. Norman I. Botwinik succeeded Vera Green as treasurer on December 13, 1955, and he signed petitioner's 1955 return.

In 1953 or 1954, Samuel Weinberg, a member of the New Haven accounting firm, advised Samuel Botwinik that petitioner's petty cash expenditures were running unusually high. In 1954, Samuel 39 T.C. 988">*992 Botwinik discussed the matter with Vera Green, and petitioner's petty cash expenditures, which amounted to approximately $ 60,000 in 1953, were reduced to approximately $ 30,000 in 1954.

In 1950, an internal revenue agent1963 U.S. Tax Ct. LEXIS 174">*184 examined petitioner's books and records in connection with its Federal income tax returns for the years 1947 and 1948. In 1951 another internal revenue agent examined petitioner's books and records in connection with its Federal income tax return for the year 1949. In 1952 another internal revenue agent examined petitioner's books and records in connection with its return for the year 1950. Reports filed by these agents do not indicate that they ascertained in the course of their examinations that Vera Green had employed large amounts of corporate funds for personal purposes and had caused those amounts to be improperly reflected on petitioner's books and business expenses.

On June 1, 1955, another internal revenue agent began an investigation of petitioner's returns for the years 1952, 1953, and 1954. During the course of his examination he noted that petitioner's petty cash was large in amount as compared with that of the Connecticut corporation, whose returns he was also investigating, and that there was no substantiation of petty cash slips. In July 1955 he decided to expand his examination to include the years 1946 to 1952. On August 3, 1955, a letter was sent to petitioner1963 U.S. Tax Ct. LEXIS 174">*185 advising it that the years 1947 through 1950 were to be reinvestigated by the respondent. The agent experienced some difficulty in getting petitioner's books and records for examination and the expanded examination was not begun until the latter part of 1955 when the books and records were received.

As indicated above, Louis Botwinik, petitioner's president, was under psychiatric care during the entire year 1955. When Norman Botwinik, who directed petitioner's activities in 1955, learned that it was being investigated by the Internal Revenue Service, his suspicions were aroused. In the fall of 1955, he asked Vera Green to submit to him a list of expenditures charged to petitioner's accounts in 1955 which might not qualify as deductible corporate business expenses. The request was made of her because he felt she was the person responsible for petitioner's books and records, and it was limited to 1955 because the books and records for prior years were not available. Vera Green prepared a list and forwarded it, under cover of a letter dated November 9, 1955, to Norman Botwinik. On December 2, 1955, a meeting was held in New Haven which was attended by Norman Botwinik, Albert Green, 1963 U.S. Tax Ct. LEXIS 174">*186 Vera Green, and Samuel Weinberg, a member of the accounting firm. After examining the expenditures on the list which totaled $ 35,541.23 and some invoices brought to the meeting by Vera Green, and hearing oral statements pertaining to 39 T.C. 988">*993 the expenditures made by the Greens, Norman Botwinik, with the advice of Samuel Weinberg, decided that $ 11,035.16 represented expenses properly chargeable to business expenses of petitioner, and that the remaining $ 24,506.07 represented funds misappropriated by Vera Green during 1955.

As of November 30, 1955, adjusting entries were made on petitioner's books reflecting the fact that the amount of $ 24,506.07 did not represent corporate expenditures and charging that amount to Albert Green's loan account which was then in excess of $ 100,000. This loan account had been built up throughout the 1950's and covered amounts he had borrowed from petitioner and amounts it had paid on his behalf. Because of the adjusting entries the revenue agent's report for the year 1955 does not reflect any disallowance of petitioner's petty cash expenditures.

The list of expenditures totaling $ 35,541.23 submitted by Vera Green and considered at the December1963 U.S. Tax Ct. LEXIS 174">*187 2, 1955, meeting did not include the amount of $ 22,932.92 claimed by petitioner as a deduction for travel expense in its 1955 return. During his examination the revenue agent found checks totaling $ 22,932.92 made out to Albert Green purportedly for travel expense which were endorsed by Vera Green. He was unable to determine where this money went or that it represented expenditures made by Albert Green for travel on behalf of petitioner, and he concluded it was money of petitioner misappropriated by Vera Green. In determining the deficiency for 1955, respondent disallowed the claimed deduction.

As a result of the December 2, 1955, meeting, a letter signed by Louis Botwinik and Norman Botwinik was sent by petitioner to Vera Green on December 9, 1955, requesting her to resign from all of her positions and duties with petitioner. A similar letter was not sent to Albert Green because they were not convinced he was a coconspirator with his wife in misappropriating funds of petitioner. Norman Botwinik "felt" that Albert Green was not "involved." He was a very valuable employee and a "tremendous producer of sales" and they felt it necessary to retain his services. On December 12, 1963 U.S. Tax Ct. LEXIS 174">*188 1955, Vera Green tendered her resignation.

On December 9, 1955, the petitioner issued a check for $ 8,000 to Albert Green. This payment was made in accordance with a request by letter dated December 5, 1955, from Vera Green to Norman Botwinik which stated that the Greens estimated that their expenses for entertaining customers at their home in 1955 were approximately $ 8,000.

On December 14, 1955, Albert Green paid petitioner $ 8,000 which was credited to Albert Green's loan-receivable account. On December 28, 1955, the petitioner voted and paid Albert Green a $ 20,000 bonus.

39 T.C. 988">*994 No State criminal action was ever instituted against either Albert or Vera Green as the result of any misappropriation of petitioner's funds nor was a complaint ever made by petitioner to State authorities.

Petitioner's officers felt that certain agreements dated June 25, 1956, hereinafter described, between the Greens and the petitioner provided sufficient security to petitioner to reimburse petitioner for such misappropriations.

On June 25, 1956, petitioner, through its vice president and treasurer, Norman Botwinik, and Albert and Vera Green entered into two agreements (sometimes referred to as the1963 U.S. Tax Ct. LEXIS 174">*189 trust agreements) which provided that Vera Green was "indebted" to petitioner, and she agreed therein to repay "the full amount due the corporation" for such indebtedness. Such agreements estimated the amount of indebtedness at $ 200,000, set forth in some detail the manner in which such indebtedness would be determined, that is, by arbitration by a trustee, the terms of repayment, and provided for the execution of a note by Vera Green and the initial payment by her of $ 10,000. They further provided for the pledging by Vera and Albert Green of securities (including the Greens' stock in petitioner) and the transfer into trust of certain realty to secure such repayment. Such agreements placed a value of approximately $ 380,000 on the Greens' interest in such securities and realty. The Greens' home was not included in the property covered by the trust agreements. The agreements provided that the petitioner was to cause an independent audit of its books and records within a reasonable time after they were obtained from the respondent, and upon completion of such audit the petitioner was to present the trustee in writing a statement of its claim as to the amount of the indebtedness1963 U.S. Tax Ct. LEXIS 174">*190 of Vera Green.

In 1956 petitioner retained the accounting firm of Baker & Baker, Worcester, Mass., to conduct an audit of its books for the years 1946 to 1954, inclusive.

In a letter dated November 1, 1957, to Norman Botwinik, treasurer of petitioner, Baker & Baker set forth the results of their audit. The auditors indicated therein that the audit was discontinued prior to completion as the total indebtedness already disclosed was in excess of the security set forth in the trust agreements. The auditors determined the funds diverted by Vera Green for her personal use totaled approximately $ 385,000 and the balance due from Albert Green for loans and advances totaled approximately $ 165,000 as of December 31, 1956, whereas, the assets securing the indebtedness were valued at approximately $ 380,000. They recommended that petitioner proceed 39 T.C. 988">*995 immediately in accordance with the terms of the trust agreements and realize on the assets securing the indebtedness pursuant to such agreements, that a deficiency judgment be obtained in the amount of approximately $ 171,000, and that the audit be resumed if there appeared to be a likelihood of recovery in addition thereto.

No court1963 U.S. Tax Ct. LEXIS 174">*191 action has ever been instituted by petitioner to obtain repayment of Vera Green's "indebtedness" nor has any action ever been taken by petitioner pursuant to the terms of the trust agreements to obtain repayment. However, it has had several meetings with the Greens or their attorneys between 1957 and 1961 with respect to obtaining repayment of the misappropriated funds. Petitioner's failure to take effective steps to implement the trust agreements has been due at least in part to the judgment of counsel that the collateral tax effects of the implementation of the trust agreements were unpredictable and that full enforcement had to await the final outcome of the instant case. The balance due to petitioner from Albert Green for loans and advances, in the amount of approximately $ 165,000 as of December 31, 1956, and not related to Vera Green's misappropriations, was satisfied in full in 1961.

Albert Green has continued as an employee of petitioner during all of the years involved and to the date of the hearing of this case, but he resigned as an officer and director in 1958. His salary has varied from year to year, covering a range from $ 62,400 to $ 82,415 during the years 1956-1961.

1963 U.S. Tax Ct. LEXIS 174">*192 Petitioner's reported "net income" ("taxable income" in 1954 and 1955) and corrected "net income" ("taxable income" in 1954 and 1955), as modified by respondent's concessions, for each of the years 1946 to 1955, inclusive, are as follows:

Petitioner's income tax returns for the years 1946 through 1954 were not false or fraudulent with intent to evade tax, and no part of the deficiency determined by the respondent for any of those years was due to fraud with intent to evade tax.

39 T.C. 988">*996 OPINION.

1. Fraud 1946-1954. -- It is agreed between the parties that the deficiency for each of the years 1946-1954 is barred by limitations ¹ unless the returns were "false or fraudulent * * * with intent to evade tax." Sec. 276(a), I.R.C. 1939; sec. 6501(c)(1), I.R.C. 1954. And, of course, the burden is upon the respondent1963 U.S. Tax Ct. LEXIS 174">*193 to prove fraud by clear and convincing evidence. We hold that he has not carried that burden in this case.

It must be kept in mind at the outset that the fraud to be established is the fraud of petitioner corporation, not that of Vera Green. The record reeks with her fraud, but her fraud consisted of embezzling or misappropriating petitioner's funds for her own benefit and falsifying its books and records to conceal that fraud, with the incidental consequence that petitioner's returns incorrectly reflected deductions based upon such falsified books and records. Were such returns "false or fraudulent * * * with intent to evade tax"? We think not in the circumstances of this case.

The Commissioner quite correctly argues that a corporation can act only through its officers and agents and that therefore their intentions must be imputed to the corporation. 1963 U.S. Tax Ct. LEXIS 174">*194 So much is hornbook law. See, e.g., Irving S. Federbush, 34 T.C. 740">34 T.C. 740, 34 T.C. 740">749; Ace Tool & Eng., Inc., 22 T.C. 833">22 T.C. 833, 22 T.C. 833">843; George M. Still, Inc., 19 T.C. 1072">19 T.C. 1072, 19 T.C. 1072">1077, affirmed 218 F.2d 639 (C.A. 2); Saven Corp., 45 B.T.A. 343">45 B.T.A. 343, 45 B.T.A. 343">355; L. Schepp Co., 25 B.T.A. 419">25 B.T.A. 419, 25 B.T.A. 419">438-441. But the fundamental assumption in these cases is that the officer or agent was acting in behalf of, not against the interests of, the corporation. In the case of sole or dominant stockholder-officers who divert corporate funds for their own benefit, such action is not regarded as antagonistic to the corporation, since such stockholders to a large extent are merely "taking their own money" ( Ace Tool & Eng., Inc., 22 T.C. 833">22 T.C. 833, 22 T.C. 833">841-842; Kann v. Commissioner, 210 F.2d 247, 251 (C.A. 3), affirming 18 T.C. 1032">18 T.C. 1032, certiorari denied 347 U.S. 967">347 U.S. 967) and thus obtaining from the corporation what would otherwise be available to them as1963 U.S. Tax Ct. LEXIS 174">*195 dividends. In such circumstances it may be a compelling conclusion that the normal consequences of the stockholder-officer's acts (i.e., the filing of incorrect corporate returns) were intended by him in behalf of the corporation and that the necessary corporate fraud was therefore present when the incorrect income tax returns were filed. Indeed, in a number of such cases where corporate fraud was found the courts have 39 T.C. 988">*997 stressed the fact that the stockholders involved (acting alone or in concert) were either sole or dominant stockholders. Auerbach Shoe Co. v. Commissioner, 216 F.2d 693, 697-698 (C.A. 1), affirming 21 T.C. 191">21 T.C. 191; Currier v. United States, 166 F.2d 346, 348 (C.A. 1); Lash v. United States, 221 F.2d 237, 239 (C.A. 1); Irving S. Federbush, 34 T.C. 740">34 T.C. 740, 34 T.C. 740">750; United Dressed Beef Co., 23 T.C. 879">23 T.C. 879, 23 T.C. 879">886; United Mercantile Agencies, Inc., 23 T.C. 1105">23 T.C. 1105, 23 T.C. 1105">1112-1114; Ace Tool & Eng., Inc., 22 T.C. 833">22 T.C. 833, 22 T.C. 833">841-842.

The1963 U.S. Tax Ct. LEXIS 174">*196 present case is to be sharply distinguished from the foregoing decisions. Here, Vera Green owned only 40 out of a total of 750 shares of petitioner's stock. And even if her husband could be regarded as particeps criminis with her in her numerous misappropriations -- a matter which at best is doubtful on this record and which respondent has certainly not proved by clear and convincing evidence ² -- the Greens together were merely minority stockholders as against the interests of the Botwinik family.

Vera Green's acts were not done in behalf of petitioner. To the contrary, petitioner was a victim of her wrongful conduct. Accordingly, her knowledge cannot be attributed to petitioner on the theory that she was acting for it, when her interests were in fact antagonistic to petitioner. 1963 U.S. Tax Ct. LEXIS 174">*197 ³ The fact that she was a minority stockholder, whose interests were adverse to those of the corporation and the majority stockholders, is of crucial significance here. Cf. All Americas Trading Corporation, 29 T.C. 908">29 T.C. 908, 29 T.C. 908">913; Harry Sherin, 13 T.C. 221">13 T.C. 221, 13 T.C. 221">228-229; United Dressed Beef Co., 23 T.C. 879">23 T.C. 879, 23 T.C. 879">886.

This is not a case like George M. Still, Inc., 19 T.C. 1072">19 T.C. 1072, affirmed 218 F.2d 639 (C.A. 2), where the dominant stockholder-officer had learned of the wrongful diversion of corporate funds by two minority stockholders and had obtained undertakings by the wrongdoers prior to the filing of the return, to restore the unauthorized withdrawals. 1963 U.S. Tax Ct. LEXIS 174">*198 In those circumstances the return was plainly fraudulent. In this case there is no credible evidence that any of the Botwiniks or anyone representing them or their majority interest in the corporation were aware of Vera Green's misappropriations prior to or at the time of the filing of any of the returns for the period 1946-1954.

The Government has undertaken to establish that the majority stockholders here "condoned" the improper corporate diversions by 39 T.C. 988">*998 Vera Green. The evidence is far from convincing. When her wrongful conduct was discovered she was dismissed, and, since the Botwiniks were more interested in restitution than criminal prosecution, assets of the Greens were required to be placed in trust to secure repayment. To be sure, other evidence points in the opposite direction -- e.g., no substantial amount of reimbursement has yet been received, and Albert Green has continued as a high-salaried employee. But plausible explanations were offered for these circumstances. The matter at best is in doubtful balance, and if this were a dispositive issue the Government has not carried its burden by the requisite clear and convincing evidence. But it is far from1963 U.S. Tax Ct. LEXIS 174">*199 clear that it is a dispositive issue. Even if proved it would establish only that after the returns for 1946-1954 had been filed, the other stockholders and the corporation condoned the corporate diversions. At most, therefore, it would have only the following consequences: That the improper deductions taken during 1946-1954 would perhaps not be offset by corresponding deductions for theft losses, cf. 19 T.C. 1072">George M. Still, Inc., supra.This, however, would merely go to the correctness of the basic deficiencies for those years, but would not necessarily establish the requisite fraud at the time the returns were filed. Absent fraud, we do not reach the basic deficiencies, which are otherwise barred, and we therefore do not consider, among other things, whether petitioner would in any event be entitled to deductions for embezzlement losses during the years 1946-1954.

2. Embezzlement loss 1955. -- The Government has conceded the absence of fraud for 1955, and petitioner admits that this year is not barred by limitations. There remains nevertheless the question whether petitioner is entitled to a deduction in 1955 for theft loss in respect of the 1963 U.S. Tax Ct. LEXIS 174">*200 $ 22,932.92 reimbursement of alleged traveling expenses of Albert Green which Vera Green obtained from petitioner in 1955. Sec. 165, I.R.C. 1954. The burden in respect of this issue is upon petitioner, and we hold that it has not been met. Section 165(e) provides that a theft loss "shall be treated as sustained during the taxable year in which the taxpayer discovers such loss." Petitioner has failed to present convincing evidence that it discovered the "theft" or embezzlement relating to this item in 1955. It is therefore not entitled to the deduction. Moreover, in view of the trust agreements we cannot say that the loss was "not compensated for by insurance or otherwise" within the meaning of section 165(a). This issue must be decided against petitioner.

Decision will be entered under Rule 50.