*67 Decisions will be entered under Rule 50.
1. Held, a sole shareholder of two corporations did not receive a constructive dividend when one corporation advanced funds to the other.
2. Held, further, petitioners did not realize additional gain when they sold certain notes evidencing loans to corporations whose stock petitioners sold in the same transactions.
3. Held, further, certain disputed amounts are not includable by petitioners in their computations of "gross profit" and "total contract price" under sec. 453, I.R.C. 1954.
4. Held, further, petitioners failed in their burden of proof to show that they did not receive certain amounts as dividend income in 1962 from two corporations.
5. Held, further, petitioners are not taxable on liquidating dividends resulting from their installment sales of stock in two corporations after the corporations had adopted plans of complete liquidation under sec. 337, I.R.C. 1954, but prior to the date of distribution.
*888 Respondent determined deficiencies in petitioners' Federal income taxes for the calendar years 1962 and 1963 in the following amounts:
| Petitioners | Year | Deficiency |
| W. B. Rushing and Mozelle Rushing | 1962 | $ 144,281.13 |
| 1963 | 128,237.59 | |
| Max Tidmore and Catherine Tidmore | 1962 | 536.15 |
| 1963 | 116,190.96 |
After numerous issues were settled by the parties, the issues which remain for decision are: (1) Whether W. B. and Mozelle Rushing received constructive dividends of $ 62,892.40 in 1962 and $ 2,900 in 1963 as a result of advances from one wholly*69 owned corporation to another wholly owned corporation; (2) whether petitioners in each docket should have reported in 1963 as additional gain upon their sales of stock in two corporations the amounts of $ 71,000 and $ 8,969.09; (3) whether petitioners in each docket must include in their computations under the installment method an additional $ 50,000 upon their sale of K & K and P & R stock; (4) whether petitioners in each docket received dividends of $ 2,130 in 1962; and (5) whether petitioners in each docket were taxable on a liquidating dividend of $ 304,750 in 1963 resulting from their sales of stock in two corporations after the corporations had adopted plans of complete liquidation but prior to the date of distribution.
*889 FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
W. B. Rushing (Rushing) and Mozelle Rushing are husband and wife. They resided in Lubbock, Tex., at the time both their Federal income tax returns and their petition were filed in the instant case. Their Federal joint income tax returns for the calendar years 1962 and 1963 were filed on the cash basis of accounting with the district director of internal revenue, Dallas, *70 Tex.
Max Tidmore (Tidmore) and Catherine Tidmore are husband and wife. They resided in Lubbock, Tex., at the time both their Federal income tax returns and their petition were filed in the instant case. Their Federal joint income tax returns for the calendar years 1962 and 1963 were filed on the cash basis of accounting with the district director of internal revenue, Dallas, Tex.
Rushing and Tidmore have been associated in various real estate and construction ventures since 1945. On January 1, 1953, they organized as equal partners a partnership known as the R-T Building Account. The partnership is a "clearing" account for the partners.
There are many corporations which Rushing and/or Tidmore have used in their real estate activities. Lubbock Commercial Building, Inc. (L.C.B.), was organized in February 1947. Rushing has been its sole shareholder since its incorporation. Briercroft & Co. (Briercroft) was organized in July 1959 with a capitalization of $ 1,000. Rushing has also been its sole shareholder since its incorporation.
Rushing organized Briercroft to purchase 87.02 acres near 50th Street and Avenue Q in Lubbock. Rushing intended to develop the acreage for residential*71 purposes. Upon its incorporation in 1959, Briercroft consequently contracted to purchase the 87.02 acres. These acres adjoined a tract which L.C.B. was developing as a shopping center. Rushing's idea was to enhance the population surrounding the shopping center with residences built by Briercroft.
The construction of homes on these 87.02 acres was Rushing's first real estate venture outside the commercial area. He therefore anticipated having to invite other developers more knowledgeable about residential properties to participate with him in this venture. However, Rushing did not want to sell any of his shares in L.C.B. to outsiders. That would make them coowners also of his commercial real estate properties. For these reasons he formed Briercroft as a separate corporation to purchase the 87.02 acres. Subsequently it became unnecessary for Rushing to seek the assistance of other developers. Briercroft proved successful in its efforts to develop the acreage.
The cost to Briercroft for the 87.02 acres was $ 409,788. As payment, Briercroft gave a purchase-money note for that amount. Although L.C.B. cosigned the note at the request of the sellers, only Briercroft acquired *72 title to the land.
*890 Between September 1, 1959, and December 31, 1962, L.C.B. loaned funds to Briercroft. The parties treated these transactions as accounts receivable since the advances were not evidenced by notes. Briercroft never paid interest on these loans. One such transaction occurred in July 1962 when L.C.B. advanced to Briercroft $ 64,052.40. Briercroft, in the meantime, was repaying earlier advances as it succeeded in selling improved lots out of the original 87.02 acres. Briercroft applied $ 62,252.40 as its final payment on the above-mentioned purchase-money note. Another transaction occurred in 1963 when L.C.B. advanced $ 2,900 to Briercroft.
Neither Briercroft nor L.C.B. has ever declared or paid a dividend.
In January 1965 Briercroft merged into L.C.B. A principal purpose of the reorganization was to eliminate Briercroft's oustanding debts to L.C.B.
K & K, Inc. (K & K), was organized in June 1952. Its total capitalization was $ 800 and consisted of 80 shares of common stock with a par value of $ 10 per share. Rushing and Tidmore each owned 20 shares.
K & K was organized to buy 45 acres of land in the city of Wichita Falls, Tex., for $ 285,000 and to *73 build and operate a shopping center on this land. The money to pay for this land was obtained by loans from banks and also from stockholders in proportion to their stock ownership:
| Number | ||
| of shares | Amount | |
| Stockholder | owned | of loan |
| C. H. Parker | 20 | $ 35,000 |
| Garnett Parker | 10 | 17,500 |
| Jack G. Parker | 10 | 17,500 |
| Rushing | 20 | 35,000 |
| Tidmore | 20 | 35,000 |
| 140,000 | ||
| Banks | 145,000 | |
| Total | 285,000 |
K & K issued demand notes to evidence the foregoing loans from shareholders. The notes provided for an interest rate of 4 1/2 percent. K & K has never declared or paid a dividend.
On May 28, 1959, the shareholders of K & K organized P & R, Inc. (P & R). They paid a total of $ 1,200 for their stock. On that same date the shareholders transferred 8 1/2 acres of land to P & R in exchange for notes totaling $ 35,876.36. Rushing and Tidmore together held 50 percent of P & R's outstanding stock. They each received a demand note for $ 8,969.09 as consideration for tranfer of their interest in the land to P & R.
The notes to Rushing and Tidmore remained unpaid in January 1963. On January 29, 1963, Rushing and Tidmore created trusts for their children. They named*74 the Republic National Bank of Dallas, *891 Tex. (Republic), as trustee. On January 30, 1963, the settlors funded each of their respective trusts with $ 5,000. Republic, as trustee, purchased all of the stock which the settlors held in K & K and P & R. The bank issued to each of them trust notes dated January 31, 1963, in the amount of $ 325,000. The trustee also acknowledged an additional liability to Rushing and Tidmore for a total of $ 200,000. The trustee further acknowledged liability to the R-T Building Account for the outstanding notes evidencing the shareholders' loans to K & K and P & R. As a result of such acknowledgment, Rushing and Tidmore were each entitled to receive $ 71,000 from the trustee.
After the trustee purchased the stock of K & K and P & R, it liquidated both corporations in March 1963. The trustee received the assets and assumed the liabilities of both corporations.
On June 1, 1963, Republic, as trustee, issued to R-T Building Account the following new notes to replace ones previously issued:
| Note No. -- | Amount of note |
| 1 | $ 266,600.00 |
| 2 | 100,000.00 |
| 3 | 100,000.00 |
| 4 | 53,276.36 |
| 519,876.36 | |
| 5 (for interest) | 10,397.53 |
| Total | 530,273.89 |
*75 In December 1963 Republic paid all of the above notes except note No. 2.
Republic denied liability on note No. 2. It alleged that petitioners misrepresented at the time of sale some of the circumstances of the shopping center owned by one of the corporations. The bank denied having been aware of such circumstances. In 1965 or 1966, the parties settled their dispute. The bank paid $ 45,000 on note No. 2 in full settlement.
The books and records of K & K reflect that in June 1962 K & K paid to four corporations interest in the amount of $ 4,260. The interest was due on advances which Rushing and Tidmore had made to K & K. All four corporations recorded in their general ledgers the amounts received as interest income. Also, these corporations reported the amounts received as interest income on their respective Federal income tax returns.
Dub-Max Corp. (Dub-Max) was organized in August 1950 to engage in various real estate activities such as construction and rental of buildings and sales of properties. Tidmore Construction Co. (T.C.C.) was organized in September 1947 to engage in the commercial construction *892 business. Rushing and Tidmore each owned 50 percent of the *76 stock of these corporations during their existence.
At a special meeting on November 15, 1962, the shareholders and directors of Dub-Max agreed to dispose of all of the corporation's assets by liquidating the corporation pursuant to section 337 of the Internal Revenue Code of 1954. 1 Similarly, at a meeting on or about December 14, 1962, the shareholders and directors of T.C.C. agreed to liquidate the corporation pursuant to section 337. Both Dub-Max and T.C.C. sold substantially all of their assets within the 12-month period following adoption of their plans of liquidation and prior to November 12, 1963. They sold their assets for cash and notes.
Rushing and his wife created two irrevocable trusts for their two children at Citizens National Bank, Lubbock, Tex., on November 7, 1963. They funded these two trusts with a total of 25 shares of stock of Ray Lee Corp. Tidmore and his wife created four irrevocable trusts *77 for their four children on that same date and at the same bank. Likewise they funded these four trusts with a total of 25 shares of stock of Ray Lee Corp. The total value of these 50 shares was $ 46,784.08.
On November 12, 1963, Rushing and Tidmore sold their stock in Dub-Max for a total of $ 360,000 to the aforementioned trustee. The consideration consisted of a $ 5,000 cash downpayment and six notes totaling $ 355,000 payable on or before 20 years from date with interest of 5 percent per annum payable quarterly. On that same date Rushing and Tidmore sold their stock in T.C.C. to the aforementioned trustee for a total of $ 265,000. The consideration consisted of a $ 2,000 cash downpayment and six notes totaling $ 263,000 payable on or before 20 years from date with interest of 5 percent per annum payable quarterly.
On November 12, 1963, the aforementioned trustee, as the sole shareholder of Dub-Max, and together with Rushing and Tidmore, who were the officers and directors of the corporation, authorized the distribution on November 14, 1963, of the assets of the corporation. On November 13, 1963, the aforementioned trustee, as the sole shareholder of T.C.C., together with Tidmore*78 and Rushing, who were the officers and directors, authorized distribution on that same date of the assets of the corporation.
On November 14, 1963, Dub-Max transferred in liquidation all assets and liabilities to the trustee as its sole shareholder. The main assets of the corporation were stated to be a Key Western Investment Co. note in the principal amount of $ 325,456.50 and an account receivable from K & K of $ 75,931.12.
On November 13, 1963, T.C.C. transferred all assets and liabilities to the trustee as its sole shareholder. The main asset of the corporation *893 was stated to be a note due from Monterey Center, Inc., in excess of $ 322,875.
Respondent in his statutory notice in docket No. 389-66 determined that petitioners had additional dividend income in 1962 and 1963. The amounts of these alleged dividends were $ 62,892.40 in 1962 and $ 2,900 in 1963. The respondent claims that these dividends resulted from advances by L.C.B. to Briercroft during those years.
Respondent determined in his statutory notice in both dockets that petitioners had additional income in 1963 from long-term gains resulting from their sales of stock in K & K and P & R. Respondent claims *79 that the gains were attributable to the trustee's repayment of petitioners' earlier advances to K & K and P & R. The amounts repaid to Rushing and Tidmore were $ 71,000 as to K & K and $ 8,969.09 as to P & R.
With regard to the sale of K & K stock, respondent has determined that petitioners in each docket must take into consideration an additional $ 50,000 in computing their gain under the installment method.
In both dockets respondent further determined that in 1962 petitioners in each docket had additional dividend income of $ 2,130.
Respondent also determined that petitioners in each docket had additional long-term gain in 1963 of $ 301,310.07. His determination was based on the following reasoning: Rushing and Tidmore sold to the aforementioned trusts their stock in Dub-Max and T.C.C. The corporations had already elected to liquidate under section 337. Although Rushing and Tidmore did not own stock in such corporations on the date of the liquidation, they should be treated as constructively having received in liquidation the assets and then as having sold the assets to the trusts.
OPINION
The first issue is whether W. B. and Mozelle Rushing received constructive dividends of*80 $ 62,892.40 in 1962 and $ 2,900 in 1963. Respondent's position is that petitioners constructively received these amounts when L.C.B. advanced such amounts to Briercroft. Respondent premises his argument on the theory that the advances should be treated as contributions to capital rather than bona fide debt.
For purposes of this decision, it is unnecessary for us to decide whether the advances were bona fide debt. The test is whether the advances from L.C.B. to Briercroft were primarily to benefit Rushing. It is well established that a corporate distribution can be attributed to a particular individual if it is expended for his personal benefit or in discharge of his personal obligation. It is not necessary that the funds be distributed directly to him. Edgar S. Idol, 38 T.C. 444 (1962), affd. 319 F. 2d 647 (C.A. 8, 1963); Challenge Manufacturing Co., 37 T.C. 650">37 T.C. 650 (1962), acq. 1962-2 C.B.4.
*894 The fact that Rushing was the sole shareholder of both L.C.B. and Briercroft is not a sufficient basis for concluding that Rushing constructively received the advances of L.C.B. Although Rushing*81 dominated Briercroft as its single shareholder, we must recognize that Briercroft was a taxable entity separate from Rushing. Best Lock Corporation, 31 T.C. 1217">31 T.C. 1217, 1237 (1959). We have decided that whatever personal benefit, if any, Rushing received was derivative in nature. Since no direct benefit was received, we cannot properly hold he received a constructive dividend.
The record further indicates that L.C.B. as a corporation had a significant interest in Briercroft's successful development of its acreage. Briercroft's success in the development of homesites on land adjacent to L.C.B.'s shopping center would inevitably lead to increased patronage for the shopping center.
There are two lines of cases relevant to the issue under consideration. One line concerns a corporation's purchase of life insurance on the lives of its shareholders, the proceeds of which are to be used in payment for stock of a deceased shareholder. In view of a series of adverse appellate decisions, the Internal Revenue Service has conceded that the premiums paid on such insurance do not constitute constructive dividends to an insured shareholder. See Rev. Rul. 59-184, 1 C.B. 65">1959-1 C.B. 65.*82
The second line of cases concerns whether a petitioner can be charged with a constructive dividend when another shareholder's stock is redeemed. In such cases a remaining shareholder does receive a benefit. Nonetheless, we have adopted the position that the benefit is indirect and so the redemption does not give rise to a constructive dividend. Milton F. Priester, 38 T.C. 316">38 T.C. 316, 329 (1962).
The only other theory which could support respondent's position on this issue would be that Briercroft was a sham. There is nothing in this record to indicate that Briercroft was a sham, so we must hold for petitioners on this issue.
The next issue is whether petitioners in each docket received additional consideration of $ 71,000 and $ 8,969.09 in 1963 as a result of the sale of their K & K and P & R stock. Respondent's position is not too clear. Respondent apparently is contending that when petitioners sold their stock in K & K and P & R in 1963 they also sold certain notes evidencing loans which they had previously made to these corporations. Respondent appears to be contending that the notes were a class of equity or preferred stock. Thus, the above amounts*83 which petitioners purportedly received as repayments of the notes were, in fact, additional consideration which petitioners received on the sale of their stock in K & K and P & R. Respondent urges that petitioners must report in full such amounts as additional gain on the sales of their shares.
*895 Respondent's position is without merit. Even if the notes were a class of equity, their bases in the hands of petitioners would be equal to their face amount. Petitioners therefore could not have realized a gain on sale of the notes. See sec. 1.118-1, Income Tax Regs.
The third issue is whether petitioners in each docket must include in their computations under section 4532 of "gross profit" as well as the "total contract price" an additional $ 50,000 resulting from their sale of K & K and P & R stock. Respondent has not discussed this issue on brief, and we would be justified in considering it as having been conceded by him. Nonetheless, we have considered the issue.
*84 The $ 50,000 was petitioners' prorata shares of a $ 100,000 note (note No. 2). The trustee which purchased the foregoing stock issued note No. 2 in 1963 as part of the purchase price. Before making any payments on note No. 2, however, the trustee disputed in 1963 its liability on the note. 3 The trustee claimed that petitioners misrepresented at the time of sale some of the circumstances of a shopping center owned by one of the corporations. Not until 1965 or thereafter was the dispute settled and any payment made.
Petitioners cite North American Oil v. Burnet, 286 U.S. 417 (1932), for the proposition that the computations under section 453 of "gross profit" and the "total contract price" should not include the disputed amount. We agree that the doctrine announced in the case above controls this issue. The Supreme Court held in that case that a taxpayer need not report as income*85 an amount which was not actually received in the taxable year and might never be received. That Court added that it was immaterial whether the taxpayer filed on an accrual or cash method. In the case at bar, if petitioners' position were not adopted, the percentage of gain recognized on collections in 1963 would be increased. That result would be inconsistent with the holding of the Supreme Court in North American Oil.
*896 The fourth issue is whether petitioners in each docket received from K & K dividends of $ 2,130 in 1962. Previously, petitioners had advanced money to K & K. The amounts in issue were allegedly paid by K & K as interest on these advances. Although Rushing and Tidmore had made the advances, four corporations in which they held stock recorded in their general lergers that they had received as interest income the amount in issue.
It is obvious that this issue raises two questions. The first is whether petitioners received the amounts in issue either directly or constructively. As to this question, petitioners have failed to satisfy the Court that they did not actually receive such amounts. Alternatively, if K & K did pay such amounts to the four *86 corporations, petitioners have failed to prove that these payments were not made to satisfy an obligation owing by petitioners. Accordingly, we must hold that the petitioners in each docket received the $ 2,130 as income in 1962.
The second question is whether such amounts in the hands of petitioners were dividends or interest. The evidence supports the conclusion that petitioners' advances, pursuant to which the "interest" was paid, were in the nature of contributions of equity. Although the debt-to-equity ratio is not conclusive, we do take notice that such ratio was high in the case of K & K. The capitalization of K & K at the time of its organization was only $ 800. At that same time shareholders loaned the corporation $ 140,000. The shareholders made the loans in proportion to their respective number of shares. Obviously, unless the real estate venture of K & K succeeded, petitioners would not be repaid their loans to the corporations.
In view of the foregoing, we conclude that petitioners in each docket must characterize as dividends the amount of $ 2,130 which they received in 1962. Petitioners have not denied that K & K had sufficient earnings and profits to cover the*87 dividends.
The final issue is whether petitioners in each docket are taxable on a liquidating dividend of $ 304,750 in 1963 resulting from their sales of stock of two corporations after the corporations had adopted plans of complete liquidation but prior to the dates of distribution.
Respondent's position is that petitioners constructively received the corporate assets in liquidating distributions and sold such assets, rather than their stock, to the trusts. The tax consequence of respondent's position would be denial to petitioners of the benefits of the installment method of reporting gain. There would be no effect on the character or total amount recognized.
Respondent relies generally on the assignment-of-income doctrine. Lucas v. Earl, 281 U.S. 111">281 U.S. 111 (1930); Helvering v. Horst, 311 U.S. 112*897 (1940). Relating the doctrine to the instant case, respondent emphasizes that Dub-Max elected on November 15, 1962, to liquidate under section 3374 and that T.C.C. acted similarly on December 14, 1962. Section 337requires disposition within 12 months of all assets, less those retained to meet claims. On November*88 7, 1963, petitioners established trusts for their children at Citizens National Bank. Five days later the trusts purchased petitioners' stock in the two corporations. Within a day the trusts authorized the corporations to distribute their assets in liquidation. Thus, there was an affirmative act on the part of the trustee.
Respondent specifically relies on Howard Cook, 5 T.C. 908">5 T.C. 908 (1945). In that case the shareholders commenced in October 1941 to sell*89 their operating assets. They subsequently approved such a sale at a special meeting held on December 15, 1941. At that same meeting they voted to liquidate and dissolve the corporation prior to December 31, 1941. On December 23, 1941, petitioner addressed letters to his two minor sons advising them that he had made gifts of shares of the liquidating corporation. This Court held petitioner's intent was to make gifts to his sons of a proportion of the distributions in liquidation rather than gifts of stock. Thus, petitioner was taxable on the gain resulting from the liquidation.
The Cook case is clearly distinguishable from the case at bar. In Cook the vote for dissolution occurred prior to the gift. Moreover, petitioner's sons could not have voted to rescind the prior resolution to liquidate. Two of petitioner's associates owned a majority of the stock and they favored immediate dissolution. Petitioner also had a proxy to vote the shares of his two minor sons. In contrast, in the instant case there was a corporate trustee which was bound as a fiduciary to act on behalf of Tidmore's and Rushing's children. As the only shareholders, the trusts could have voted to rescind*90 the resolutions of liquidation. In actual fact, they affimatively voted to carry through on the plans of liquidation.
Petitioners cite Jacobs v. United States, 280 F. Supp. 437 (S.D. Ohio 1966), affd. 390 F. 2d 877 (C.A. 6, 1968), in support of their position. It is the only reported case that has dealt with facts closely resembling *898 those in the case at bar. In Jacobs the taxpayer gave his shares to an exempt family foundation after the corporation had elected to liquidate under section 337 and had entered into a contract of sale for its assets. The foundation received the liquidating dividends on the shares acquired from the taxpayer. The Government argued that the donation constituted an assignment of taxpayer's right to receive income and therefore he must be taxed on such income as was received by his donee pursuant to the assignment. Holding for the taxpayer, the trial court stated that notwithstanding the unlikelihood of a repudiation of the dissolution proceedings prior to their finality, such abandonment was possible.
In the instant case the facts are more favorable to petitioners than were the*91 facts in Jacobs. In Jacobs the transferors continued to exercise control of the corporation in its position as trustee of the family foundation. In the case at bar the stock was acquired by an independent corporate trustee. There is nothing to suggest that the trustee was not free to void the resolution of liquidation, and, in fact, final implementation and fruition of the plan required an affirmative act on the part of the trustee. More significantly, in Jacobs the taxpayers completely escaped taxation on the liquidation. In the instant case, the only dispute has to do with the time when petitioners must report their gain on the liquidation.
Decisions will be entered under Rule 50.
Footnotes
1. All statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩
2. SEC. 453. INSTALLMENT METHOD.
(a) Dealers in Personal Property. -- Under regulations prescribed by the Secretary or his delegate, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit, realized or to be realized when payment is completed, bears to the total contract price.
(b) Sales of Realty and Casual Sales of Personalty. --
(1) General rule. -- Income from --
* * * *
(B) a casual sale or other casual disposition of personal property * * * for a price exceeding $ 1,000.
may (under regulations prescribed by the Secretary or his delegate) be returned on the basis and in the manner prescribed in subsection (a).[Emphasis added.]↩
3. There is nothing in the record to indicate that the dispute between the parties was not bona fide.↩
4. SEC. 337. GAIN OR LOSS ON SALES OR EXCHANGES IN CONNECTION WITH CERTAIN LIQUIDATIONS.
(a) General Rule. -- If --
(1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and
(2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims, ↩
then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.