*164 Decisions will be entered under Rule 50.
1. Held, that the formation of National Tanker Corporation by stockholders of American Overseas Tanker Corporation (AOTC), the transfer to National of AOTC's right to purchase certain tankers, and the ultimate sale of National stock to United Tanker Corporation were merely steps in a transaction designed as a sale of the tankers by AOTC to United at a profit to AOTC of $ 450,000; hence, the distribution of that amount to National stockholders, petitioners herein, was in effect a dividend to them from AOTC.
2. Held, further, that United's promissory note was intended merely as evidence of its indebtedness to petitioners and, therefore, that amounts paid pursuant to the terms of the note were includible in petitioners' income only when distributed to them.
*565 These proceedings, which have been consolidated for trial and decision, involve deficiencies in income tax determined against the petitioners as follows:
| Docket No. | Petitioner | Year | Deficiency |
| 62570 | Virginia W. Stettinius Dudley | 1948 | $ 16,455.43 |
| 1949 | 5,943.98 | ||
| 62571 | Julius C. Holmes and Henrietta A. Holmes | 1948 | 7,915.52 |
| 1949 | 2,385.66 | ||
| 63143 | William E. Dobson and Thelma S. Dobson | 1948 | 603.74 |
| 63144 | John P. Maguire | 1948 | 4,856.59 |
| 63145 | E. Stanley Klein and Elizabeth M. Klein | 1948 | 21,957.12 |
| 63146 | Arthur M. Klein and Ethelyn L. Klein | 1948 | 489.46 |
| 63147 | Tracy D. Pratt and Marilyn K. Pratt | 1948 | 645.52 |
| 63148 | Estate of Frederick H. Wandelt, Deceased, | 1948 | 3,145.86 |
| John P. Maguire, Executor, and Helen Wandelt, | |||
| surviving wife. | |||
| 63529 | F. Willard Bergen and Hazel W. Bergen | 1948 | 8,879.46 |
| 63530 | Harold J. Maass and Isabel Maass | 1948 | 513.40 |
| 63531 | John C. Ennis and Theresa M. Ennis | 1948 | 525.84 |
| 63532 | Fred Barrett and Anne Barrett | 1948 | 418.94 |
| 63533 | Frank A. Dwyer | 1948 | 902.31 |
| 63534 | William N. Westerlund and Lyn B. Westerlund | 1948 | 10,547.10 |
| 63535 | John Ellis Knowles ad Marion B. Knowles | 1948 | 5,230.01 |
| 63536 | William F. Halsey and Frances G. Halsey | 1948 | 5,548.58 |
| 63537 | Roland T. Reid and Mae V. Reid | 1948 | 487.32 |
| 63713 | Frank M. Bynum and Elbee A. Bynum | 1948 | 5,689.12 |
| 63714 | Charles Bosak and Aloyse M. Bosak | 1948 | 551.90 |
| 63715 | William J. Hawthorne and Beatrice J. Hawthorne | 1948 | 529.04 |
| 63915 | George D. Hawthorne | 1948 | 805.63 |
| 63916 | Estate of Frank J. Schmitt, M. Lorraine | 1948 | 418.94 |
| Schmitt, Administratrix, and M. Lorraine | |||
| Schmitt, individually. |
*165 In Docket No. 62571 petitioners allege there was an overpayment of $ 2,850 for the year 1949 and claim a refund therefor.
The questions for decision are: (1) Whether petitioners realized long-term capital gains in 1948 and 1949 upon the purported sale of their stock in National Tanker Corporation to United Tanker Corporation for $ 450,000, or whether such amount in fact represented dividends received from American Overseas Tanker Corporation; (2) in the alternative, if the deferred payments of $ 450,000 were dividends and therefore taxable as ordinary income, whether that portion of the payments received in 1949 is properly includible in income for 1949 or for 1948.
FINDINGS OF FACT.
Petitioner Virginia W. Stettinius Dudley (Docket No. 62570) and her husband, Edward R. Stettinius, Jr. (now deceased), filed joint *566 income tax returns for 1948 and 1949 with the collector of internal revenue at Richmond, Virginia. Petitioners William F. Halsey and Frances G. Halsey (Docket No. 63536), husband and wife, also filed a joint income tax return for 1948 with the collector of internal revenue at Richmond, Virginia.
Petitioners Julius C. Holmes and Henrietta A. Holmes (Docket No. 62571), *166 husband and wife, filed joint income tax returns for 1948 and 1949 with the collector of internal revenue at Baltimore, Maryland.
Petitioners William E. Dobson and Thelma S. Dobson (Docket No. 63143), John C. Ennis and Theresa M. Ennis (Docket No. 63531), Fred Barrett and Anne Barrett (Docket No. 63532), Roland T. Reid and Mae V. Reid (Docket No. 63537), and Charles Bosak and Aloyse M. Bosak (Docket No. 63714), husbands and wives, respectively, filed joint income tax returns for 1948 with the collector of internal revenue, first New York district, Brooklyn, New York. Petitioner Helen Wandelt and her husband, Frederick H. Wandelt (now deceased) (Docket No. 63148), and petitioner M. Lorraine Schmitt and her husband, Frank J. Schmitt (now deceased) (Docket No. 63916), also filed joint returns for 1948 with the collector of internal revenue, first New York district, Brooklyn, New York. The estates of Frederick H. Wandelt and Frank J. Schmitt are represented, respectively, by John P. Maguire as executor and M. Lorraine Schmitt as administratrix.
Petitioner John P. Maguire (Docket No. 63144) filed an individual income tax return for 1948 with the collector of internal revenue, fifth New*167 Jersey district, Newark, New Jersey. Petitioners F. Willard Bergen and Hazel W. Bergen (Docket No. 63529), and Harold J. Maas and Isabel Maass (Docket No. 63530), husbands and wives, respectively, filed joint income tax returns for 1948 with the collector of internal revenue, fifth New Jersey district, Newark, New Jersey.
Petitioners E. Stanley Klein and Elizabeth M. Klein (Docket No. 63145) and petitioners Tracy D. Pratt and Marilyn K. Pratt (Docket No. 63147), husbands and wives, respectively, filed joint income tax returns for 1948 with the collector of internal revenue, third New York district, New York, New York. Petitioner George D. Hawthorne (Docket No. 63915) filed an individual income tax return for 1948 with the collector of internal revenue, third New York district, New York, New York.
Petitioners Arthur M. Klein and Ethelyn L. Klein (Docket No. 63146), and William J. Hawthorne and Beatrice J. Hawthorne (Docket No. 63715), husbands and wives, respectively, filed joint income tax returns for 1948 with the collector of internal revenue, fourteenth New York district, Albany, New York.
*567 Petitioner Frank A. Dwyer (Docket No. 63533) filed an individual income tax return*168 for 1948 with the collector of internal revenue, second New York district, New York, New York. Petitioners William N. Westerlund and Lyn B. Westerlund (Docket No. 63534), John Ellis Knowles and Marion B. Knowles (Docket No. 63535), and Frank M. Bynum and Elbee A. Bynum (Docket No. 63713), husbands and wives, respectively, filed joint income tax returns for 1948 with the collector of internal revenue, second district of New York, New York, New York.
Virginia W. Stettinius Dudley, Henrietta A. Holmes, William E. Dobson, Ethelyn L. Klein, Tracy D. Pratt, Helen Wandelt, Hazel W. Bergen, Isabel Maass, Theresa M. Ennis, Anne Darrett, Lyn B. Westerlund, Marion B. Knowles, Frances G. Halsey, Mae V. Reid, Elbee A. Bynum, Aloyse M. Bosak, Beatrice J. Hawthorne, and H. Lorraine Schmitt are petitioners herein merely because they filed joint income tax returns with their respective spouses during the years in question. The remaining petitioners were 23 of the 26 stockholders of National Tanker Corporation, as hereinafter set forth.
Certain facts have been stipulated and are incorporated herein by reference.
American Overseas Tanker Corporation (hereinafter referred to as AOTC) was organized *169 under the laws of Delaware on August 26, 1947, for the purpose of applying to the United States Maritime Commission (hereinafter referred to as the Commission) for the purchase of war surplus tankers from the Government pursuant to the Merchant Ship Sales Act of March 8, 1946 (50 U.S.C. secs. 1735-1746). The organizers of AOTC were Joseph E. Casey, Julius C. Holmes, E. Stanley Klein, Edward R. Stettinius, Jr., and William F. Halsey. Associated with these persons were William N. Westerlund, F. Willard Bergen, Frank M. Bynum, John Ellis Knowles, Charles Bosak, Frank A. Dwyer, John C. Ennis, George D. Hawthorne, William J. Hawthorne, Harold J. Maass, Roland T. Reid, Fred Barrett, and Frank J. Schmitt (hereinafter sometimes referred to as the Marine Transport group), who together were owners of the stock and officers of Marine Transport Lines, Inc., an organization experienced in the shipping business and particularly in the operation of tankers. The original issue of AOTC common stock consisted of 300 shares (out of 10,000 authorized shares) issued in 100-share lots to Casey, Holmes, and Klein, respectively, for $ 4 per share. It was contemplated*170 at the time of original issue that a substantial portion of AOTC common stock would subsequently be allocated to Halsey, Stettinius, and members of the Marine Transport group. Casey was elected president and treasurer; Holmes served as vice president and secretary; Casey, Holmes, and Klein together comprised the board of directors.
Under the Merchant Ship Sales Act the Commission was given authority to dispose of surplus tankers, built by the Government during *568 World War II, at statutory sales price (essentially 87 1/2 per cent of prewar domestic cost of construction, subject to certain adjustments). Citizens were given the right to apply to the Commission to purchase tankers and, if the Commission decided that the particular applicant was possessed of the necessary ability, financial resources, etc., and that the sale would carry out the purposes of the Act, the Commission was directed to sell to the citizen applicant at the statutory sales price. Noncitizens could also apply to purchase surplus tankers, in which case the Commission was directed to make certain additional determinations, such as that the sale would not be inconsistent with the established policy regarding*171 sales to aliens, that the tanker was not needed for national defense, or for the promotion of the American Merchant Marine, and that no satisfactory offer for sale or charter had been received from a United States citizen for a prescribed period. Citizen-applicants were thus given preference over alien applicants; to qualify as a citizen, a corporation had to be a domestic corporation the controlling interest in which was owned by United States citizens free of any fiduciary or contractual obligation or relationship to aliens.
The supply of Government tankers and the net approvals for sale by the Commission, pursuant to the Merchant Ship Sales Act, were as follows:
| Net approvals for sale 1 | ||||
| Quarter ending | ||||
| U.S. flag | Foreign | Total | Supply 2 | |
| flag | ||||
| Sept. 30, 1946 | 35 | 1 | 36 | 527 |
| Dec. 31, 1946 | 13 | 52 | 65 | 456 |
| Mar. 31, 1947 | 11 | 22 | 33 | 434 |
| June 30, 1947 | 25 | 31 | 56 | 376 |
| Sept. 30, 1947 | 28 | 110 | 138 | 240 |
| Dec. 31, 1947 | 149 | -4 | 145 | 15 |
| Mar. 31, 1948 3 | 6 | 4 | 10 | 3 |
| June 30, 1948 | -5 | 0 | -5 | 9 |
| Sept. 30, 1948 | -3 | 0 | -3 | 11 |
| Dec. 31, 1948 | -3 | 0 | -3 | 14 |
| Mar. 31, 1949 | 0 | 0 | 0 | 14 |
| June 30, 1949 | -1 | 0 | -1 | 16 |
| Sept. 30, 1949 | 0 | 0 | 0 | 17 |
| Dec. 31, 1949 | 0 | 0 | 0 | 17 |
| Mar. 31, 1950 | 0 | 0 | 0 | 17 |
| June 30, 1950 | 0 | 0 | 0 | 17 |
| Sept. 30, 1950 | 0 | 0 | 0 | 13 |
| Dec. 31, 1950 | 1 | 0 | 1 | 12 |
| Jan. 15, 1951 | 10 | 0 | 10 | |
| Total | 266 | 216 | 482 |
On August 27, 1947, AOTC filed with the Commission an application to purchase 20 T2-SE-A1 tankers for cash. The application stated that although the applicant had no shipping experience, its organization would comprise experienced shipping personnel; that *569 title was to be taken in the name of a proposed wholly owned Panamanian subsidiary; that the vessels would be placed under Panama registry or flag; and that the vessels would be chartered to American oil companies on a long-term basis.
On September 18, 1947, AOTC filed with the Commission Amendment No. 1 to its application, providing in effect that instead of taking title to any tankers in a Panamanian subsidiary, title would be taken in the name of AOTC, a United States citizen. The amendment was filed in the light of a change of policy of the Commission regarding sales to aliens, which occurred about this time. All other provisions of the application, including that for Panamanian registry, *173 remained unchanged.
On September 19, 1947, the Commission approved the application of AOTC, as amended, for the cash purchase of 5 type T-2 tankers for American title and for operation under the Panamanian flag. At the same time the Commission accorded AOTC a "preference" with respect to future allocation of the balance of 15 tankers for Panamanian registry.
A meeting of the directors of AOTC was held on October 13, 1947, attended by Casey, Holmes, and Klein, at which it was agreed that the interested parties be invited to participate in AOTC common stock as follows:
| Per cent | |
| Marine Transport group | 20 |
| Casey, or his nominees | 20 |
| Klein, or his nominees | 15 |
| Halsey, or his nominees | 5 |
| Stettinius, or his nominees | 10 |
| Holmes, or his nominees | 10 |
| Total | 80 |
Participation of the Marine Transport group was based on its responsibility for certain arrangements concerning the chartering, survey, repair, and delivery of tankers purchased by AOTC from the Commission, as well as the keeping of accounts and preparation of tax returns for AOTC. It was further resolved that Klein be authorized to negotiate for financing with banks and other institutions, and that he also be authorized*174 to allot all or part of the remaining 20 per cent of common stock and pledge corporate assets to secure appropriate financial arrangements. On the same date, Casey and Holmes resigned as treasurer and secretary, certain other officers were elected, and Blackwell Smith, an attorney, was elected a director. Thereafter, the officers of AOTC were Casey, president; Holmes, vice president; George D. Hawthorne, vice president; Blackwell Smith, secretary-treasurer; and James G. Mackey, assistant secretary-treasurer. The directors were Casey, Holmes, Klein, and *570 Smith. These officers and directors continued to serve until July 25, 1950, except that Holmes tendered his resignation as vice president and director on August 30, 1948, for personal reasons.
Thereafter, and pursuant to the above authorization, Klein approached certain banking institutions in an effort to obtain financing for the proposed purchase. Preliminary negotiations revealed that a certain amount of underlying financing or "base money" in the corporation would be required before the banks would agree to lend any money. In an effort to secure this "base money," Klein discussed the matter with the treasurer of *175 the University of Chicago and, through him, obtained the university's consent to advance funds, if necessary, to AOTC. In consideration of its commitment, the university was allotted 15 per cent of AOTC stock. As events turned out, it did not become necessary for the university to make the agreed advances, since the pending banking arrangements did not "go through" and other financing, described below, was obtained. The 5 per cent still unallotted was thereafter allotted to the Marine Transport group, increasing its participation to 25 per cent. Pursuant to these arrangements, and prior to the end of 1947, the stock of AOTC was allocated as follows: Casey, or his nominees, 20 per cent; Klein, or his nominees, 15 per cent; Halsey, or his nominees, 5 per cent; Holmes, or his nominees, 10 per cent; Stettinius, or his nominees, 10 per cent; Marine Transport group, 25 per cent; University of Chicago, 15 per cent. Klein and Stettinius, who together were allocated 25 per cent, agreed between themselves that Stettinius, or his nominees, should get 14 per cent and Klein, or his nominees, should get 11 per cent.
On October 21, 1947, AOTC entered into a bareboat charter arrangement with *176 Greenwich Marine Corporation (hereinafter referred to as Greenwich Marine), a Panamanian corporation whose franchise had been purchased by AOTC. At that time Greenwich Marine had issued no stock and had no assets. Under the bareboat charter arrangement the 5 tankers, when and if acquired, would be chartered by AOTC to Greenwich Marine for 15 years at the rate of $ 0.88 per deadweight ton per month. On the same date Greenwich Marine subchartered the 5 tankers, when and if acquired, to Panama Transport Company, a Panamanian corporation and a subsidiary of Standard Oil Company of New Jersey, for 5 years at the rate of $ 2.20 per deadweight ton per month; Standard Oil Company of New Jersey was to guarantee the obligations of Panama Transport under the subcharters. The making of such charters at this early date was necessary as a basis for financing the purchase of the tankers because the revenues accruing from the charters would serve as the chief security for purchase money loans to AOTC.
*571 On November 17, 1947, AOTC filed Amendment No. 2 to its application to purchase tankers, whereby it requested that only 3 of the 15 tankers applied for but as yet unallocated remain on *177 a preferential basis for Panamanian registry; the remaining 12 tankers would, if allocated, be operated under American registry.
On December 12, 1947, during the course of the transactions involving the purchase of the 5 Panamanian flag tankers, the Commission allocated 3 additional type T-2 tankers to AOTC for American title and registry; the names of these tankers (sometimes hereinafter referred to as the American flag tankers) were the SS Meacham, SS Kettleman Hills, and SS Antelope Hills.
On December 19, 1947, a contract embodying the terms of sale for the 5 Panamanian flag tankers was concluded between the Commission and AOTC; it provided for sale of the tankers at the statutory sales price with a downpayment on the execution of the contract of $ 202,650 per tanker and payment of the balance by certified check on date of delivery of each tanker. Article 9 of the contract stated that the Commission approved transfer of the tankers to Panamanian registry. As of this date permanent financing had not yet been obtained by AOTC. However, negotiations for a loan from the Metropolitan Life Insurance Company were in progress. To provide temporary financing in order to meet*178 the downpayment specified in the contract, Marine Operating Company, Inc., an affiliate of Marine Transport Lines, Inc., being owned by the same stockholders, made a loan of $ 1,013,250 to Greenwich Marine, which in turn lent the same amount to AOTC. In connection with this financing, AOTC issued 9,700 shares of its common stock (out of 10,000 authorized shares) to Marine Operating Company, Inc., which paid in $ 38,800 (or $ 4 per share); the certificates for 300 shares originally issued to Casey, Holmes, and Klein were likewise delivered to Marine Operating Company, Inc. On the same date, Greenwich Marine issued 20,000 shares of common stock, its entire stock issue, to Marine Operating Company, Inc., for $ 60,000 paid in by that company. These arrangements were purely temporary, pending consummation of permanent financing; it was never intended that Marine Operating Company, Inc., become a permanent stockholder in AOTC or Greenwich Marine.
On December 30, 1947, AOTC entered into a loan agreement with Metropolitan Life Insurance Company (hereinafter referred to as Metropolitan) under which Metropolitan agreed to lend to AOTC from time to time on or before March 31, 1948, an aggregate*179 principal amount not exceeding $ 10,000,000 at 3 per cent interest to mature in 60 monthly installments, beginning 45 days after the date of such advance. The loan was to be secured by preferred ship mortgages on each of the 5 tankers and by assignments by AOTC and Greenwich *572 Marine to Metropolitan of the charter hire under the charters and subcharters of the 5 tankers. AOTC agreed in the promissory note which it executed that neither it nor Greenwich Marine would create any new mortgages or pledges on assets, enter into any merger or consolidation, or sell all or substantially all assets, incur any new indebtedness, except certain subordinated indebtedness, assume any guarantees or endorser's liabilities, make any loans or advances to anyone, or purchase or acquire the obligations or the stock of any person, firm, or corporation, other than direct obligations of the United States, and that it would not declare or pay any dividends, or make any distribution of assets to stockholders. AOTC borrowed $ 9,705,000 from Metropolitan under the foregoing agreement.
The permanent financing thus secured from Metropolitan relieved the University of Chicago of its commitment to advance*180 "base money" required by other lending institutions previously approached by Klein; the university, however, retained its 15 per cent stock interest in AOTC since that was the consideration for the giving of the commitment.
On December 31, 1947, AOTC filed Amendment No. 3 to its application with the Commission wherein it was recited that the Commission had approved the sale of 5 tankers to AOTC for Panamanian registry and had allocated 3 tankers to AOTC for American registry, and it was further stated that the purpose of this amendment was to restate the desire of AOTC to purchase 12 additional tankers, the unallocated portion of the 20 tankers covered by the original application and amendments thereto. In support of this renewed request, the application stated:
The corporation intends to operate their tankers and to remain in the tanker operating business. The Marine Transport Lines, Inc., stockholders in this corporation, give it technical facilities, shipping experience and skill at least the equivalent of any other applicant. The corporation has a firm commitment to charter 20 tankers to one of the largest oil companies in the world. If this oil company has demonstrated faith*181 in this corporation's ability to finance and operate these tankers, then certainly the Commission ought to have no hesitation in selling them for cash.
The 5 Panamanian flag tankers were delivered to AOTC in January 1948, and full payment therefor was made on delivery with funds advanced by Metropolitan. Thereafter these tankers were operated under the charters to Greenwich Marine and the subcharters by Greenwich Marine to Panama Transport. By January 16, 1948, Greenwich Marine had repaid with interest the amount of $ 1,013,250 which it had borrowed from Marine Operating Company, Inc. Under date of January 27, 1948, the stock certificates for 10,000 shares of AOTC and for 20,000 shares of Greenwich Marine were returned to those companies for cancellation and Marine Operating Company, Inc., was repaid the amount it had paid in for such shares.
*573 Under date of January 28, 1948, new stock certificates for 10,000 shares of AOTC were issued, as follows:
| Certificate No. | Name | Percentage | Number of |
| shares | |||
| 1 | Joseph E. Casey | 20 | 2,000 |
| 2 | E. Stanley Klein | 15 | 1,500 |
| 3 | Edward R. Stettinius, Jr | 10 | 1,000 |
| 4 | Julius C. Holmes | 10 | 1,000 |
| 5 | William F. Halsey | 5 | 500 |
| 6 | University of Chicago | 15 | 1,500 |
| 7 | F. Willard Bergen | 6.25 | 625 |
| 8 | William N. Westerlund | 6.25 | 625 |
| 9 | John Ellis Knowles | 6.25 | 625 |
| 10 | Frank M. Bynum | 6.25 | 625 |
*182 The amount of $ 4 per share, a total of $ 40,000, was or had been paid in for such stock.
Each of the 10 stockholders was free to dispose of his interest as he pleased except that Klein was obligated by the agreement mentioned above to transfer 400 shares to Stettinius or his nominees and Bergen, Westerlund, Knowles, and Bynum had agreed to allocate their shares further among the other members of the Marine Transport group.
As of January 30, 1948, pursuant to endorsements dated January 28, 1948, each of the 10 shareholders, with the exception of the University of Chicago, transferred all or a portion of his stock to relatives, friends, business associates (including members of the Marine Transport group), trusts for the benefit of such persons, and charities, as follows:
Casey transferred 970 shares, retaining 1,030. Of the transferred shares, 580 were transferred to relatives, and 370 to 11 other persons, and 20 to a charity. The record does not reveal whether these transfers were by gift or sale, nor the relationship of the 11 other persons to Casey.
Klein transferred 1,300 shares, retaining 200. Of the transferred shares, 100 were transferred to Elizabeth M. Klein (his wife), *183 100 to E. Stanley Klein, Jr. (his son), 100 to Arthur M. Klein (his son), 100 to Marilyn K. Pratt (his daughter), 200 to Frederick H. Wandelt (friend and business associate), 200 to John P. Maguire (friend and business associate), 100 to Luther Hodges (friend and business associate), and 100 shares each to Virginia W. Stettinius, Joseph Stettinius, Wallace Stettinius, and Edward R. Stettinius III (nominees of Edward R. Stettinius, Jr.). Each transferee paid $ 4 per share to Klein, except that Stettinius paid in $ 4 per share for the 400 shares transferred to his nominees.
Stettinius transferred 716 shares, retaining 284. Of the transferred shares, 200 were transferred to Virginia W. Stettinius (his wife), 20 shares each were allocated to 5 other relatives or trustees for relatives, 100 to the Stettinius Fund, Inc., 8 to 2 other charities, and *574 the remaining 308 to 13 friends and business associates. All of such transfers were made by gift.
Holmes gave 500 shares to Henrietta A. Holmes (his wife), retaining 500.
Halsey transferred 400 shares, retaining 100. Of the transferred shares, 100 were transferred to Frances G. Halsey (his wife), 200 to William F. Halsey III (his*184 son), and 100 to Mrs. Preston Lee Spruance (his daughter). The record does not reveal whether the transfers were by gift or sale.
Bergen transferred 500 shares, retaining 125. Of the transferred shares, 80 were sold to George D. Hawthorne, 60 to John C. Ennis, and 40 to William J. Hawthorne (members of the Marine Transport group), all of whom paid $ 4 per share to Bergen; 120 shares were given to Hazel W. Bergen (his wife), 35 to Mary Bergen Wheeler (his sister), 35 to John Van Wicklen Bergen (his brother), 35 to Tallmadge Bergen (his brother), 35 each to J. Lincoln Webb and E. Theodore Webb (his brothers-in-law), and 25 to Beverly Stafford Osenga (his niece).
Westerlund sold all his shares for $ 4 per share, as follows: 80 to Charles Bosak, 80 to Frank A. Dwyer, 20 to John C. Ennis (members of the Marine Transport group), 112 to Marion Westerlund Young (his daughter), and 111 each to John Thompson Westerlund, William N. Westerlund, Jr., and Dorothy Lyn Westerlund (his two sons and daughter).
Knowles sold all his shares for $ 4 per share, as follows: 80 to Fred Barrett, 80 to Frank J. Schmitt, 20 to Roland Reid (members of the Marine Transport group), 149 to Mary Knowles Wisner *185 (his daughter), and 148 each to James B. Knowles and John Ellis Knowles, Jr. (his sons).
Bynum sold 180 shares for $ 4 per share (retaining 445), as follows: 80 to Harold J. Maass, 60 to Roland T. Reid, 40 to William J. Hawthorne (members of the Marine Transport group).
After these transfers there were 84 shareholders of record owning stock in AOTC. Of the 10,000 shares outstanding at least 7,194 were owned by Casey, Klein, Stettinius, Holmes, Halsey, the Marine Transport group, and/or their relatives (or trustees for relatives). The University of Chicago continued to own 1,500 shares; charities owned 128 shares; and the remaining 1,178 shares were owned by friends, business associates, and persons whose relationship the record does not reveal.
Also as of January 30, 1948, each stockholder of AOTC acquired 2 shares of stock of Greenwich Marine for each AOTC share held by him and the shares of these 2 corporations were thereafter held in exactly the same proportions. The amount of $ 3 per share, a total of $ 60,000, was or had been paid in for the 20,000 shares of *575 Greenwich Marine. Two transfers of minority interests after January 30, 1948, and up to June 14, 1949, brought*186 the total number of AOTC shareholders to 86. On June 26, 1950, all AOTC stock was sold to Delaware Tanker Corporation for $ 40,000 and all Greenwich Marine stock was sold to World Tanker Corporation for $ 2,760,000.
On January 15, 1948, Olga Konow, a ship broker who represented United Tanker Corporation (hereinafter referred to as United), approached Casey and expressed interest in the 3 American flag tankers that the Commission had allocated to AOTC on December 12, 1947.
United had been organized under the laws of Delaware on December 10, 1947. It had two classes of voting stock, class A and class B. Class B stock could be held only by citizens of the United States; no shares of class A stock could be issued unless, including such issue, there would be outstanding a greater number of shares of class B stock than of class A stock. These provisions were an attempt to qualify United as a United States citizen for purposes of purchasing tankers pursuant to the provisions of the Merchant Ship Sales Act. Class A stock was entitled to 90 per cent of the earnings and class B stock to 10 per cent. On dissolution the corporate assets would be applied first to repay the amounts originally*187 paid for the Class A stock, and then divided 90 per cent to the holders of class A stock, and 10 per cent to the holders of class B.
In December 1947 and January 1948, United issued 10 shares of class A stock to China Trading & Industrial Development Corporation (hereinafter referred to as China Trading) for $ 2,000 and 30 shares of class B stock to 3 United States citizens for $ 6. China Trading was a Chinese corporation interested in chartering tankers for a branch of the Chinese Government.
On or about December 11, 1947, United filed with the Commission an application to purchase 2 T2-SE-A1 tankers for American registry to be used "to carry oil from Persian Gulf ports to Chinese ports for the Chinese Government." Substantially all funds necessary for the purchase of tankers were to be advanced by China Trading. No action was taken on this application by the Commission, because it was filed too late, after practically all the available tankers had been allocated.
In response to a request from Casey, Klein checked Olga Konow's credit standing and reputation. A favorable report was received; it was also learned that her husband was experienced in the shipping business and well *188 known in shipping circles.
United's expression of interest in the American flag tankers was a fortunate event from AOTC's point of view. The prospects for chartering the tankers were poor since the expense of operating them under American registry, as required by the Commission, would be *576 much greater than the expense of operating under foreign registry, thus placing AOTC at a competitive disadvantage vis-a-vis charterers of foreign tankers. In addition, the ships were badly in need of repairs.
A meeting was held on January 19, 1948, at the office of Houston A. Wasson, counsel for United, attended by Casey and Klein on behalf of AOTC and certain individuals, namely, Chung Ching Wei, Darfoon Du, P. T. Chin, C. Y. Chen, and Wasson representing United Tanker.
AOTC's representatives explained that title to the 3 American flag tankers would have to be taken in another corporation because the loan agreement with Metropolitan prevented AOTC from engaging in any business except that of operating the 5 Panamanian flag tankers. An unsigned memorandum was prepared at the meeting which stated the following:
Mr. Casey and Mr. Klein, on behalf of American Overseas Tanker Corporation, *189 have had discussions with the interests identified as United Tanker Corporation, a Delaware corporation, relative to the sale of three tankers, the names of which are as follows: The Meacham, Kettleman Hills and Antelope Hills which have been assigned to American Overseas Tanker by the Maritime Commission and contract for the purchase is due to be signed on Saturday, the 24th. American Overseas Tanker is willing to consider the sale to United Tanker under the following conditions, subject to the approval of the Maritime Commission:
American Overseas will form a new Delaware corporation for the specific purpose of taking title to these three ships. Interests connected with United Tanker will supply the down payment funds and either put up money for the breaking out expenses, including drydock, insurance and so forth, or indemnify the new company against this expense. The United group will then complete forthwith the terms of payment necessary to complete the purchase from the Maritime Commission by supplying the funds necessary and complying with the terms imposed by the Maritime Commission. When payments have been completed and title has been transferred to the new company, owners*190 of the stock of the new corporation will agree to sell to United all of the stock in the new corporation for the sum of $ 450,000, plus $ 25,000 expenses, and will deposit such stock in escrow against the $ 450,000 with you or with some agreed upon escrow agent. Any departure from this program must be agreeable to counsel for both parties.
On January 21, 1948, Klein requested Holmes and Casey to ascertain from the members of the Commission whether it would be satisfactory to form a separate or affiliate Delaware corporation with the same proportionate stockholders as AOTC to take title to the 3 American flag tankers; the proposed corporation would then charter the tankers on a bareboat basis to United, with an option to purchase, it being understood that United would make the same representations to AOTC stockholders as it had previously made to the Commission in its own application to purchase tankers.
*577 On January 22, 1948, AOTC filed with the Commission Amendment No. 4 to its application requesting permission to take title to the 3 American flag tankers in the name of National Tanker Corporation, a Delaware corporation with "the identical officers, directors, and stockholders*191 of the American Overseas Tanker Corporation." The application, as amended, was approved by the Commission on the same date.
National Tanker Corporation (hereinafter referred to as National) was organized under the laws of Delaware on January 23, 1948. Of 1,000 shares of authorized stock, it issued 300 to Casey, 300 to Holmes, and 400 to Klein, each of whom paid in $ 1 per share, or a total amount of $ 1,000. It was not intended that Casey, Klein, and Holmes become the beneficial owners of all the National stock issued to them. On the contrary, it was contemplated that a substantial portion of the stock would be allocated to Stettinius, Halsey, and the Marine Transport group. Its original officers were Casey, president; Holmes, vice president; Klein, vice president; and Mackey, secretary-treasurer. Its original directors were Casey, Holmes, Klein, and Mackey.
As of January 24, 1948, National entered into an agreement with United. United agreed to advance to National the entire cost of purchase (including drydock and insurance expenses) of the 3 American flag tankers, estimated to be approximately $ 2,000,000 per tanker; all advances were to be evidenced by interest-bearing notes*192 or bonds of National payable to United or its assigns and secured by a preferred ship mortgage or mortgages on each tanker with respect to which the advances were made and by assignment of all moneys due under a bareboat charter from National to United. National agreed to charter each tanker to United for a term of 10 years under a bareboat charter at the rate of $ 1.20 per deadweight ton per month. To secure the performance of United's commitments under the contract, United agreed to deposit, simultaneously with the delivery of the tankers to National, an amount equivalent to $ 150,000 multiplied by the number of tankers acquired by National pursuant to the provisions of the agreement; the deposit was to be made with an escrow agent satisfactory to United and was to be maintained for 1 year, or until such earlier time as National should consent to its termination. United reserved the right to inspect each tanker and to "accept or reject" it at the time of such inspection; if any tanker were rejected, National agreed to refund to United any advances made with respect to such tanker. Upon delivery of each tanker to National and its bareboat charter to United, United agreed to pay*193 $ 8,333.33 per tanker to a payee to be designated by National as reimbursement for additional expenses incurred with respect to each tanker. Until expiration of the bareboat charter and repayment to United of its advances, National would not engage in any business other than the chartering of tankers to United, *578 nor incur any debt liability, except to United, nor enter into any merger or consolidation, nor issue additional shares of stock, declare any dividends, or make any payments of any kind. The assistant treasurer of National was to be a person satisfactory to United and all checks drawn by National were to be countersigned by him. Chung Ching Wei, secretary-treasurer of United and vice president of China Trading, was elected assistant treasurer of National in accordance with this provision. A letter from Klein, on behalf of AOTC, to United was attached to the agreement and stated that AOTC would "use its best judgment to take all necessary action to place United Tanker Corporation in the same position under the attached contract with National Tanker Corporation as though the contracts for the purchase of the tankers had been signed directly by National Tanker Corporation."
*194 As of the same date, January 24, 1948, and in consideration of United's execution of the foregoing agreement, Casey, Holmes, and Klein, as record holders of all the stock of National, granted to United an irrevocable option to purchase all of the stock of National at any time after September 15, 1948, but not later than October 15, 1948, for a price equal to $ 150,000 multiplied by the number of tankers acquired by National pursuant to the foregoing agreement. It was agreed that the National stock should be deposited with James G. Mackey, as escrow agent, and that Mackey was to deliver the stock to United any time after September 15, 1948, but not later than October 15, 1948, upon payment to him of the option price. Accordingly, the outstanding certificates for 1,000 shares of National stock were deposited with Mackey.
A meeting of the principal promotors of National was held shortly after January 24, 1948, attended by Casey, Klein, Holmes, Stettinius, and Mackey, at which it was agreed that the beneficial ownership of National stock (then held in the names of Casey, Holmes, and Klein) should be divided as follows:
| Shares | |
| E. Stanley Klein | 225 |
| Edward R. Stettinius, Jr | 225 |
| Joseph E. Casey | 150 |
| Julius C. Holmes | 100 |
| William F. Halsey | 50 |
| Marine Transport group | 250 |
*195 The University of Chicago, which was entitled to 15 per cent of the stock of AOTC and Greenwich Marine, declined to participate in the National venture. In addition Casey was requested to and agreed to reduce his participation from 20 per cent which he had in AOTC and Greenwich Marine to 15 per cent in National. This left 20 per cent of the stock of National which was not to be disposed of in the same proportions as the original distribution of the stock of AOTC*579 and Greenwich Marine. There was no question at any time that Holmes would have a 10 per cent participation in the stock of National, Halsey 5 per cent, and the Marine Transport group 25 per cent.
On or about January 26, 1948, for $ 1 per share, Klein "sold" 10 of his 225 National shares to his wife, 30 to his children, 50 to business associates, and 10 to his secretary, Thelma S. Dobson; the 250 shares previously allocated to the Marine Transport group were divided among the 13 individuals comprising that group, also at $ 1 per share. Throughout these transactions Casey, Holmes, and Klein remained the record owners of the entire issue of National stock and Mackey, as escrow agent under the National-United agreement, *196 retained possession of the certificates originally issued. The table below reveals the numerical and percentage distribution of the beneficial ownership of National stock, as of the end of January 1948, and the corresponding interest of each National stockholder in AOTC:
| National Tanker | AOTC | |||
| Name | ||||
| Number of | Percentage | Number of | Percentage | |
| shares | shares | |||
| E. Stanley Klein | 125 | 12.5 | 200 | 2 |
| John P. Maguire | 20 | 2 | 200 | 2 |
| Frederick H. Wandelt | 20 | 2 | 200 | 2 |
| E. Stanley Klein, Jr | 10 | 1 | 100 | 1 |
| Arthur M. Klein | 10 | 1 | 100 | 1 |
| Marilyn K. Pratt | 10 | 1 | 100 | 1 |
| Elizabeth M. Klein | ||||
| (Mrs. E. Stanley Klein) | 10 | 1 | 100 | 1 |
| Luther Hodges | 10 | 1 | 100 | 1 |
| Thelma S. Dobson | 10 | 1 | ||
| Joseph E. Casey | 150 | 15 | 1,030 | 10.3 |
| Julius C. Holmes | 100 | 10 | 500 | 5 |
| William F. Halsey | 50 | 5 | 100 | 1 |
| William N. Westerlund | 45 | 4.5 | ||
| F. Willard Bergen | 44 | 4.4 | 125 | 1.25 |
| Frank M. Bynum | 44 | 4.4 | 445 | 4.45 |
| John Ellis Knowles | 45 | 4.5 | ||
| Edward R. Stettinius, Jr | 225 | 22.5 | 284 | 2.84 |
| Charles Bosak | 8 | .8 | 80 | .8 |
| John C. Ennis | 8 | .8 | 80 | .8 |
| George D. Hawthorne | 8 | .8 | 80 | .8 |
| William J. Hawthorne | 8 | .8 | 80 | .8 |
| Harold J. Maass | 8 | .8 | 80 | .8 |
| Roland T. Reid | 8 | .8 | 80 | .8 |
| Fred Barrett | 8 | .8 | 80 | .8 |
| Frank J. Schmitt | 8 | .8 | 80 | .8 |
| Frank A. Dwyer | 8 | .8 | 80 | .8 |
| 1,000 | 100 | 4,304 | 1 43.04 |
On January 29, 1948, AOTC and the Commission entered into a contract dated December 31, 1947, for the sale to National of 3 American flag tankers, the SS Meacham, the SS Kettleman Hills, and the SS Antelope Hills, at the statutory sales prices. Paragraph IV of the contract permitted title to the 3 vessels to be taken in the name of National Tanker Corporation, "said corporation to have substantially identical officers, directors, and stockholders with American Overseas Tanker Corporation." On the same date, National *580 paid to the Commission the amount of $ 607,950 as a downpayment of $ 202,650 on each of the 3 American flag tankers. These funds had theretofore been advanced to National by United pursuant to the United-National agreement of January 24, 1948. United's funds had, in turn, been advanced to it by China Trading.
On January 31, 1948, G. H. Helmbold, Chief, Bureau of Operations, United States Maritime Commission, addressed a letter to National stating that:
reports have reached the undersigned that these*198 vessels [the American flag tankers] have been offered by you for resale to other interests. We should very much appreciate a prompt statement from you as to whether or not you have in mind the resale of these vessels now or at a later date.
Casey, on behalf of National, replied in a letter dated February 2, 1948, that National intended to bareboat charter these vessels to another American company. "It is the present intention of this corporation to retain title to these vessels indefinitely. Obviously, no statement can be made at this time as to what its position may be with respect to resale at some time in the future."
By April 1948, the balance sheet of United showed gross assets of $ 1,427,796; against this was an open account of $ 1,425,790 due to China Trading for moneys advanced, leaving net assets of $ 2,006 equal to the capital paid in for the class A and class B stock.
The SS Kettleman Hills was delivered to National on April 29, 1948, upon payment by National of the balance of the gross purchase price of $ 1,430,097.77, less an allowance for putting the vessel in class, and upon delivery the vessel was registered with the United States Customs authorities as owned*199 by National Tanker, a United States citizen. To finance the payment and to provide funds for reconditioning the vessel, National borrowed $ 1,350,000 from Bankers Commercial Company, secured by a preferred first ship mortgage on the SS Kettleman Hills and certain other security, and guaranteed by United Tanker and China Trading. National also borrowed $ 365,000 from United (in addition to the $ 202,650 downpayment advanced by United in January 1948), secured by a second mortgage on the vessel. On June 10, 1948, National, with the approval of the Commission, transferred title to the SS Kettleman Hills to Oceanic Maritime Corporation, a wholly owned subsidiary, which assumed the first and second mortgages and which retained title to the vessel until February 21, 1951.
The SS Meacham was delivered to National on May 14, 1948, upon payment by National of the balance of the gross purchase price of $ 1,489,883.38, less an allowance for putting the vessel in class, and upon delivery the vessel was registered with the United States Customs authorities as owned by National, a United States citizen. To finance the balance of the purchase price (over and *581 above the $ *200 202,650 downpayment advanced by United in January 1948), the Chemical Bank and Trust Company made a loan of $ 1,900,000 to National, United, and China Trading as joint obligors, secured by a preferred ship mortgage on the SS Meacham. The Bank of China had a 49 per cent participation in this loan. National retained title until November 7, 1949.
The SS Kettleman Hills and the SS Meacham were thereafter chartered by National to United under a standard bareboat charter form for a period of 10 years at $ 1.40 per deadweight ton per month. In addition, United paid to National $ 8,333.33 per tanker as reimbursement of expenses incurred.
United subchartered these 2 vessels on a time charter basis to China Trading which in turn subchartered the tankers on a consecutive voyage basis to China Petroleum Corporation, a wholly owned subsidiary of the National Resources Commission of China which was a branch of the Nationalist Government of China. Both subcharters were approved by the Maritime Commission.
On June 18, 1948, the corporate charter of United was amended to increase the total authorization of class B stock to 75,000 shares, with a par value of 10 cents per share. Each*201 share of old class B stock was then exchanged for 2 shares of new class B. The remainder of the class B stock, 74,940 shares, was paid for by China Trading at 10 cents per share, but was issued to a new corporation, the China International Foundation, Inc., a nonstock, nonprofit corporation organized to further educational, medical, and scientific enterprises in the United States, China, and throughout the world for the benefit of the peoples of the Republic of China; its control was vested in a board of trustees whose members were required to be citizens of the United States. In addition, the China International Foundation, Inc., acquired all 10 shares of class A stock of United by donation from China Trading, and also acquired, partly by gift and partly by purchase, the 60 shares of class B stock owned by the 3 United States citizen stockholders of United. At the same time, a preferred stock issue of $ 2,500,000 was created in shares of $ 100 each; $ 2,030,000 of the preferred was issued to China Trading in satisfaction of its advances to United which by June 1948 totaled that amount. Later, the remaining $ 470,000 of preferred stock was issued to China Trading for additional*202 advances.
When the period arrived, September 15 to October 15, 1948, during which United had the right to exercise the aforementioned option, the third American flag tanker, the SS Antelope Hills, had not yet been delivered by the Commission to National. Although United was still interested in acquiring all 3 American flag tankers, it was not then in a position to advance the funds required for the purchase of the SS Antelope Hills, or to pay the $ 450,000 option *582 price. In view of the uncertainties United requested an extension of time for the exercise of its option and proposed an alternative plan whereby payment of the option price might be made in installments. Because of a sharp decline in charter rates since January 1948, and the continued absence of any other market for the tankers, National accepted United's proposal rather than let the option lapse. In a letter agreement dated October 11, 1948, signed by United and by Casey, Holmes, and Klein (as record owners of all National stock), United elected:
to exercise said option, effective as of the date when title to the S.S. Antelope Hills is taken by Trans-World Maritime Corporation (a subsidiary of National*203 Tanker Corporation), but in no event later than the date of the final payment provided for below. * * *
The option price for the stock of National Tanker Corporation is hereby fixed at $ 450,000, and shall be paid by United Tanker Corporation * * * in the installments and on the dates specified below:
| October 11, 1948 | $ 100,000 |
| November 6, 1948 | 125,000 |
| November 30, 1948 | 75,000 |
| December 31, 1948 | 75,000 |
| January 31, 1949 | 75,000 |
George D. Hawthorne was appointed co-escrow agent with Mackey, who was in possession of the National stock pursuant to the agreement of January 24, 1948. On October 11, 1948, United delivered to Hawthorne its certified check for $ 100,000 payable to Hawthorne; United also executed its unconditional promissory note for the deferred payments totaling $ 350,000, naming Hawthorne and Mackey as payees and bearing interest at 6 per cent. The note was secured by an assignment of all payments under a charter of the SS New London from United to Standard Oil Company of New Jersey dated May 4, 1948, by a pledge of all the outstanding capital stock of Arctic Tankers, Inc., the corporation holding title to the SS New London, and by an agreement to pledge*204 all National stock upon its acquisition. The record does not reveal how United acquired the stock of Arctic Tankers, Inc., nor how the latter corporation acquired the SS New London.
The co-escrow agents were instructed as follows:
The co-escrow agents, or either of them, are hereby authorized to transfer all of the capital stock of National Tanker Corporation into the name of United Tanker Corporation on the date at which title to the Antelope Hills is taken by Trans-World Maritime Corporation as above provided. If title to the Antelope Hills has not been taken by Trans-World Maritime Corporation on or before October 31, 1948, said escrow agents, or either of them, are authorized at any time on the direction of United Tanker Corporation to cause said stock to be transferred into the name of United Tanker Corporation. The new certificates for the capital stock of National Tanker Corporation, registered in the name of United Tanker Corporation, shall be held by said escrow agents, or either of *583 them, as security for the performance by United Tanker Corporation of its obligations hereunder.
At such time as United Tanker Corporation has made full payment of the amounts*205 above set forth, with interest as above provided, the escrow agents, or either of them, are hereby irrevocably instructed to deliver to United Tanker Corporation the stocks of National Tanker Corporation and Arctic Tankers, Inc. and any other security then held under this agreement.
The payments totaling $ 450,000 plus interest were made to Hawthorne, as co-escrow agent, on the dates and in the amounts stipulated in the promissory note, except that the final payment of $ 75,000 (one-sixth of $ 450,000) was made on January 17, 1949.
The SS Antelope Hills had been delivered to Trans-World Maritime Corporation, a newly organized wholly owned subsidiary of National, January 12, 1949, at a gross purchase price of $ 1,475,375.13, less an allowance for putting the vessel in class, and upon delivery was registered with the United States customs authorities as owned by Trans-World, a United States citizen. Trans-World gave to the Commission a preferred ship mortgage for $ 1,220,800; the balance of the purchase price not provided for by the mortgage and the downpayment of $ 202,650 was paid by Trans-World on January 12, 1949, out of $ 815,000 which it had received from National in payment*206 for Trans-World's common and preferred stock; National had, in turn, borrowed the $ 815,000 from United. In addition United paid the amount of $ 8,333.33 to National as reimbursement of expenses incurred. When delivered, the SS Antelope Hills was in need of extensive repairs, but the expenditures for repairs were deferred since no immediate prospect developed for active use of the vessel. As in the case of the 2 other American flag tankers, the SS Antelope Hills was chartered to United under a standard bareboat charter form at $ 1.40 per deadweight ton per month.
Hawthorne, as co-escrow agent, opened a special bank account in which he deposited all payments received by him from United. Upon receipt and deposit, Hawthorne promptly distributed such payments by check to the 26 persons who were the beneficial owners of the stock of National in proportion to their ownership. On December 20, 1949, Hawthorne drew checks on the special bank account totaling $ 3,370.83, the amount of interest payments received from United, to the same 26 individuals.
On February 11, 1949, Mackey, as co-escrow agent, delivered all the stock of National, the stocks of its wholly owned subsidiaries, *207 and the resignations of its officers to Wasson, as attorney for United. National was liquidated in December 1949, and all of its assets were transferred to United.
Petitioners in each of the consolidated cases reported long-term capital gain of $ 449 per share on disposition of their National stock, computed by subtracting a cost of $ 1 per share from an amount realized *584 of $ 450 per share. In all but one of the consolidated cases respondent determined that the amount of $ 450 per share, unreduced by the alleged cost of $ 1 per share, constituted ordinary income to petitioners. In Docket No. 62570, however, the deficiency notice did not challenge petitioner's subtraction of $ 1 per share from the amount received in computing "gain," but merely determined that the "gain," as computed by petitioner, constituted ordinary income; respondent has not challenged petitioner's computation by affirmative allegation in his answer.
In all but one of the consolidated cases petitioners reported the entire amount of the "gain" as income for 1948. In Docket No. 62571 petitioners reported two-thirds of the "gain" in 1948 and one-third in 1949; they now seek a refund for 1949 on the ground*208 that five-sixths of the "gain" should have been reported in 1948 and only one-sixth in 1949. The deficiency notice in Docket No. 62570 allocated one-sixth of petitioner's "gain" to 1949. In every case petitioners now contend that if they realized ordinary income, one-sixth of such amount should have been included in income for 1949 rather than 1948. Respondent urges that the entire amount in controversy was includible in income for 1948, whether regarded as ordinary income or capital gain.
OPINION.
1. This case presents a variation of the familiar problem of substance versus form. Petitioners contend that the transaction under review was simply a sale of 1,000 shares of National stock at $ 450 a share which had been acquired at $ 1 a share, and that the difference represents long-term capital gain. Respondent's determination, on the other hand, proceeds upon the assumption that the substance underlying this apparently simple sale of stock was entirely different, namely, that the purported sale of the National stock was merely the final step in a transaction designed essentially as a sale of the 3 American flag tankers or the right to acquire them by AOTC to United at a profit*209 of $ 450,000 to AOTC, accompanied by a simultaneous distribution of that profit to stockholders of AOTC (or their nominees), and that such distributions are taxable as ordinary income. Respondent's position treats National merely as a convenient device employed to accomplish the result which was thus planned from the beginning.
We think the evidence supports the latter view. National was created only after United expressed its interest in purchasing the 3 American flag tankers and AOTC realized that its loan agreement with Metropolitan would prevent taking title to the tankers in its own name. Prior to that time the need for a second corporation had not even been suggested. AOTC had earned the right to purchase the tankers in question by applying to the Commission in *585 its own name and filing amendments to its application in order to conform to the Commission's changing policies. As of December 12, 1947, AOTC, through the efforts of its officers and promoters, held allocations for 8 tankers, 3 for American registry and 5 for Panamanian registry; title to all 8 tankers was to be taken in the name of AOTC. United, unsuccessful in its own efforts to obtain a tanker *210 allocation from the Commission, turned to AOTC in the hope of accomplishing indirectly what it had failed to accomplish directly. AOTC, unable to charter the American flag tankers or to finance their acquisition, responded favorably.
The memorandum of January 19, 1948, although not itself a contract, is a clear indication of United's desire to purchase the 3 tankers and of AOTC's desire to sell. The first paragraph of the memorandum establishes AOTC's willingness to consider the "sale" of the tankers to United under certain conditions. The second paragraph outlines the means by which the sale was to be accomplished. AOTC was to form a new corporation "for the specific purpose of taking title to these three ships." United was to bear the entire financial burden of the purchase by supplying funds sufficient to pay not only the statutory sales prices but drydock and insurance expenses as well. After title had been transferred to the new corporation, the shareholders thereof would agree to sell all their stock to United for $ 450,000, plus $ 25,000 as reimbursement for certain other expenses. The memorandum leaves little doubt that AOTC contemplated eventual sale of the tankers to*211 United. Formation of a new corporation by AOTC, transfer of the tankers to it, and sale of its stock to United were merely means to that end and part of a single planned transaction. In these circumstances, the $ 450,000 payment represents in substance a profit to AOTC from the proposed tanker sale. Cf. Nicholas Jacobs, 21 T.C. 165">21 T.C. 165, affirmed 224 F. 2d 412 (C.A. 9); J. Roger DeWitt, 30 T.C. 1">30 T.C. 1.
We are not persuaded by petitioners' argument that AOTC could not have "sold" the tankers or distributed dividends because its agreement with Metropolitan prevented it from so doing. The agreement may have foreclosed a direct sale and dividend distribution by AOTC but it did not preclude realization of the same result by indirect means. Tax consequences are determined by the substance of a transaction rather than by the means employed to transfer legal title. Cf. Griffiths v. Helvering, 308 U.S. 355">308 U.S. 355; Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331; United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451.*212 As was stated in the Jacobs case, supra at 169:
Although petitioner went through all of the formal steps of activating a dormant corporation, transferring the property in question thereto in exchange solely for its stock and then "selling" such stock to a corporation dominated and controlled by one, who, it is admitted, was anxious to acquire the land by whatever *586 means, it seems clear to us that it was of no avail taxwise. All of the separate transfers were but component steps of a single transaction, namely, the sale and transfer of petitioner's Sacramento property to MacBride or to a corporation controlled by him. * * *
Moreover, even if there was no enforceable agreement or binding commitment on the part of petitioner to sell his stock in Subdivision prior to its issuance to him, it is properly to be inferred from the evidence at hand that there did exist an understanding to such effect, albeit implied. * * *
Consequently, we are constrained to disregard the corporate entity of Subdivision, and hold that it served only as a conduit through which petitioner was enabled to effect a sale of property in the ordinary course of his real estate business * * *
In*213 Kimbell-Diamond Milling Co., 14 T.C. 74">14 T.C. 74, affirmed per curiam 187 F. 2d 718 (C.A. 5), certiorari denied 342 U.S. 827">342 U.S. 827, it was found that taxpayer corporation had, in substance, purchased the assets of another corporation even though the transaction took the form of a stock purchase followed by a preconceived liquidation. Similarly in the case at bar, it is our view that AOTC sold the tankers in question even though the sale took the form of the creation of National, transfer of the tanker allocation to it, and sale of National stock to United pursuant to a prearranged plan.
This interpretation of the tanker deal is verified by events occurring subsequent to the memorandum of January 19, 1948, and prior to January 17, 1949, when the last installment on the option price was paid. In informal discussions with the Commission and pursuant to Amendment No. 4 filed on January 22, 1948, AOTC obtained the Commission's consent to take title to the 3 tankers in the name of National, a corporation with "the identical officers, directors, and stockholders" as AOTC. The Commission's consent to the amendment was*214 thus clearly predicated upon the assumption that National would be the alter ego of AOTC, at least in terms of ownership.
The agreement of January 24, 1948, made more obvious what was already apparent, namely, that National was to serve no purpose other than to hold title to the tankers until such time as United was in a position to pay for them. The express terms of the agreement effectively prevented National from engaging in any business activities except those incidental to the contemplated transfer of ownership to United. The appointment of Chung Ching Wei as assistant treasurer of National with power to countersign all checks imposed a virtual hammerlock on National's operations and guaranteed that its affairs would not be conducted to the prejudice of United. That the contract was in the form of a "loan" agreement accompanied by grant of an option is not controlling. The primary function of the agreement was to provide a convenient means for consummating the understanding of the parties as expressed in the previous memorandum, namely, ultimate sale of the tankers in question. We are *587 not aware of any intervening negotiations between the parties which might lead*215 us to a different conclusion. Nor are we aware of any change in circumstances which might have caused the parties to depart from their intention as originally expressed. As shown by the evidence, United continued to be AOTC's only hope for profitable disposition of the tankers and, as far as we know, there was no abatement of United's desire to acquire tankers to transport oil for the Nationalist Government of China. Until such time as United should exercise or fail to exercise the option, the terms of the "loan" agreement limited National's functions to those of a corporate shell holding title to the tankers and conduit for payments to the Commission. Such being the case, the disregard of the several steps intervening between the original negotiations between AOTC and United for sale of the tankers and consummation of that sale is in accord with established principles. The applicable rule of law was thus stated in Jackson v. Commissioner, 233 F. 2d 289, 290 (C.A. 2), affirming 24 T.C. 1">24 T.C. 1, as follows:
A corporation may not be disregarded in respect of taxation if, inter alia, a bona fide intention in creating *216 it was that the corporation itself should have some real substantial business function, or if it actually engages in business; on the other hand, the corporation may be disregarded, in the absence of such an intention or activity.
In the Jackson case the owners of the stock of Empire Corporation, in order to avoid further disputes among themselves with respect to the management of Empire, agreed to transfer one-third of Empire's assets to a new corporation to be controlled and managed by petitioners, owners of one-third of Empire's outstanding stock. To accomplish this goal, Empire transferred one-third of its assets to corporation A in return for all the stock of corporation A. Petitioners transferred their Empire stock to corporation B; corporation B in turn sold the Empire stock to corporation C for $ 1,000 cash and $ 469,000 in notes; and corporation C transferred the Empire stock to Empire for the stock of corporation A. The purpose of these intricate maneuvers was to assure that Mrs. Jackson, owner of all the stock of corporation C, would have, as her sole property free from the claims of her husband's creditors, any future increment in the value of the stock of corporation*217 A. The Court of Appeals held that corporation B and corporation C should be disregarded despite the fact that they were employed for reasons other than tax avoidance, namely, to escape Mr. Jackson's creditors. We think the reasons for the creation of National, namely, avoidance of restrictions imposed by AOTC's creditors, are not sufficiently different to warrant a different result. Cf. National Investors Corp. v. Hoey, 144 F. 2d 466 (C.A. 2), reversing 52 F. Supp. 556">52 F. Supp. 556 (S.D.N.Y.). Certainly, the fact that corporations *588 A and B were formed to avoid personal creditors whereas National served to bypass the restrictions of business creditors is not a sound basis for distinction. The significant fact is that in both cases the corporations in question were formed solely to hold title to assets and engaged in no substantial business activities.
The contract to purchase the tankers from the Commission was signed by AOTC 5 days after the United-National agreement and again reiterated National's function as titleholder. On the same day United advanced $ 607,950 to National and National in turn paid that amount *218 to the Commission by way of a downpayment.
National was similarly used for the payment of the balance of the statutory sales prices. Although a substantial part of the subsequent financing was advanced directly to National by independent banks rather than by the Chinese interests backing United, it was United and China Trading, not National, that bore the true financial responsibility for repayment. United and China Trading had arranged and guaranteed all the subsequent financing. National's liability was of no financial consequence since it had never invested any of its own funds in the tankers and its stockholders had never contributed any more than the initial $ 1,000 of paid-in capital.
In seeking to establish an independent identity for National, petitioners lay much stress on United's financial inability to exercise the option when the option period arrived and the subsequent negotiation of a "new agreement" between National and United. In our view this was not a "new agreement" at all. It was rather an exercise of the option granted on January 24, 1948, with the one modification that payment of the $ 450,000 be made in installments rather than in a lump sum. The continued*219 depression of the charter market, the comparative expense of operating under American registry, the poor condition of the tankers, and the absence of any other source of financing left no alternative other than to accept United's suggestion. Similarly unfavorable conditions prevailed in January 1948, when United first approached AOTC. At that time AOTC realized that United's proposal was the only convenient and potentially profitable opportunity to dispose of the allocation; in organizing National and entering into a contract with United, the promoters of AOTC effectively resolved to take their chances on the ability of United to arrange financing and pay the $ 450,000 profit. In these circumstances, it would be ignoring substantial reality to regard National's submission to the modified option as the kind of "business activity" sufficient to establish its independent corporate identity. Cf. Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436, affirming 131 F. 2d 388 (C.A. 5), reversing 45 B.T.A. 647">45 B.T.A. 647. See the discussion of Moline Properties in Jackson v. Commissioner, supra.*220
*589 If the $ 450,000 received on disposition of the National stock was in effect income earned by AOTC from the sale of tankers, it follows that the distribution of that amount to petitioners was in the nature of a dividend. It is argued that the distribution could not have been a dividend from AOTC since it was made to the 26 shareholders of National rather than to the 86 shareholders of AOTC. Our findings indicate, however, that the allocations of both AOTC and National stock were substantially identical as of January 24, 1948, the date the option was granted. Even after subsequent stock transfers the shareholders of National and/or their relatives, or trustees therefor, owned at least 71 per cent of the stock of AOTC, and perhaps more. And, as recognized by petitioners on brief, it is not essential that distribution be strictly according to percentage of stock ownership in order to characterize such distribution as a dividend. Cf. Joseph Goodnow & Co., 5 B.T.A. 1154">5 B.T.A. 1154; Lincoln National Bank, Executor, 23 B.T.A. 1304">23 B.T.A. 1304, affirmed 63 F. 2d 131 (C.A.D.C.); Forcum-James Co., 7 T.C. 1195">7 T.C. 1195;*221 Paramount-Richards Theatres, Inc. v. Commissioner, 153 F. 2d 602 (C.A. 5); Hugh Smith, Inc., 8 T.C. 660">8 T.C. 660, affirmed per curiam 173 F. 2d 224 (C.A. 6), certiorari denied 337 U.S. 918">337 U.S. 918. However, petitioners argue that the disparity is so great "as to nullify any notion" that the amounts in question were dividends distributed by AOTC. But any disproportion in the respective stock ownership of the two corporations loses significance when it is realized that prior to the creation of National, and in contemplation thereof, it was understood by AOTC and United that all future beneficial owners of National stock would agree to sell their stock to United for $ 450,000; and it was to facilitate the anticipated transfer of stock to United that Casey, Holmes, and Klein retained record ownership, and Mackey, as escrow agent under the agreement of January 24, 1948, retained possession of all outstanding National stock. In addition, petitioners' contention is further weakened by the fact that, apart from the University of Chicago, the stock in National was allotted in substantially*222 the same proportions to the same dominant stockholders who controlled the affairs of both corporations; and the disparity exists only because they, in turn, arranged to divide the fruits of the allocation of the tankers among their nominees in a different manner. Conceivably, the Commissioner might have charged the distributions in their entirety to those stockholders on a Lucas v. Earl (281 U.S. 111">281 U.S. 111) theory -- i.e., that they in effect made an anticipatory assignment of profits which were then contemplated as a result of the allocation of the 3 American flag tankers to AOTC, and which would otherwise have been chargeable to them as dividends from AOTC when paid over to them; and that such anticipatory assignment could not relieve them of liability for tax on such payments. If the Commissioner *590 had taken that position, then consistency would require that no dividend income be attributed to the nominees. But in spite of the fact that no such issue is here presented, this circumstance does explain the so-called disparity and we agree with the Commissioner's determination that the amounts in controversy do represent in substance a distribution*223 of profits by AOTC.
Petitioners argue in their reply brief that the Commissioner, on brief, has abandoned his theory based upon a distribution of corporate earnings by AOTC. However, although it is true that the Commissioner's brief does not articulate that theory in those terms, it is replete with general arguments about substance versus form, and nowhere does it state that the theory is being abandoned. While a more precise brief would have been of greater assistance to the Court, we cannot say that the Government has abandoned the theory upon which the deficiencies were determined.
2. Petitioners are correct, however, in their contention that the final payment on the note should have been reported as income in 1949 rather than 1948. Upon this record it appears that the note was given to evidence indebtedness of $ 350,000, not in payment thereof. Throughout this transaction the promoting parties were interested in cash payment by United, not in its promise to pay. The original agreement of January 24, 1948, provided that United should deposit $ 150,000 per tanker as each tanker was delivered in order to secure its performance should it choose to exercise the option. Apparently*224 this deposit was never made. Respondent does not contest the fact that United was in tenuous financial condition at all relevant times so as to render questionable the value of any promise it might give. Although its note was secured, we do not know the value of the security; certainly the National stock was of little value in view of National's heavy indebtedness and the virtually nonexistent charter market for the tankers. Finally, the escrow arrangement itself, whereby the note was in terms payable to the escrow agents who retained possession of the note and received all payments thereon, indicates that the note was not available to the petitioners as an equivalent of cash in any practical or commercial sense, nor was it intended to be. It follows that the fair market value of the note, if any, was not includible in income but that payments on the note should have been reported as received. Schlemmer v. United States, 94 F. 2d 77 (C.A. 2); Robert J. Dial, 24 T.C. 117">24 T.C. 117; Jay A. Williams, 28 T.C. 1000">28 T.C. 1000.
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Julius C. Holmes and Henrietta A. Holmes, Docket No. 62571; William E. Dobson and Thelma S. Dobson, Docket No. 63143; John P. Maguire, Docket No. 63144; E. Stanley Klein and Elizabeth M. Klein, Docket No. 63145; Arthur M. Klein and Ethelyn L. Klein, Docket No. 63146; Tracy D. Pratt and Marilyn K. Pratt, Docket No. 63147; Estate of Frederick H. Wandelt and Helen Wandelt, Docket No. 63148; F. Willard Bergen and Hazel W. Bergen, Docket No. 63529; Harold J. Maass and Isabel Maass, Docket No. 63530; John C. Ennis and Theresa M. Ennis, Docket No. 63531; Fred Barrett and Anne Barrett, Docket No. 63532; Frank A. Dwyer, Docket No. 63533; William N. Westerlund and Lyn B. Westerlund, Docket No. 63534; John Ellis Knowles and Marion B. Knowles, Docket No. 63535; William F. Halsey and Frances G. Halsey, Docket No. 63536; Roland T. Reid and Mae V. Reid, Docket No. 63537; Frank M. Bynum and Elbee A. Bynum, Docket No. 63713; Charles Bosak and Aloyse M. Bosak, Docket No. 63714; William J. Hawthorne and Beatrice J. Hawthorne, Docket No. 63715; George D. Hawthorne, Docket No. 63915; Estate of Frank J. Schmitt and M. Lorraine Schmitt, Docket No. 63916.↩
1. Approvals for sale during quarter minus cancellation of prior approvals.↩
2. Subject to changing requirements of the Government.↩
3. Sales to noncitizens ceased Mar. 1, 1948.
Sales to citizens ceased Jan. 15, 1951.↩
1. A minimum of an additional 28 per cent of AOTC stock was owned by relatives of some of the above individuals or trustees for such relatives.↩