*205 Decision will be entered under Rule 50 in Docket No. 55934.
Decisions will be entered for the respondent in Docket Nos. 60820 and 60821.
All of the stock of a corporation, 50 shares, was owned by L. and his 2 sons in 1947 when L. transferred 23 shares into the names of each son. In 1950, the corporation paid L. $ 93,782.50 pursuant to an agreement by which he retired from all participation in the corporation's affairs and, thereafter, its business was managed by the sons. When the above payment was made the corporation had an accumulated earned surplus in excess of the sum paid to L. Upon the facts, it is held: (1) L. did not make a gift of 46 shares of stock in 1947 to his sons; they were only his nominees. (2) L. sold 48 shares of stock in 1950, and the profit realized is taxable as capital gain. (3) In effect, the corporation's funds were used for the benefit of the sons to purchase 48 shares from L. for the sons, and they received constructive dividends of $ 93,782.50, one-half of which is taxable to each as a dividend.
*314 The Commissioner determined deficiencies in income tax for the taxable year 1950 as follows:
| Docket No. | Petitioner | Deficiency |
| 55934 | Louis and Pearl Zipp | $ 35,837.61 |
| 60820 | Monroe and Helen Zipp | 20,926.88 |
| 60821 | Bernard and Jean Zipp | 20,926.88 |
In Docket No. 55934, Louis H. Zipp, several adjustments are accepted by petitioner. Prior to 1950, all of the stock of a corporation, 50 shares, was owned by Louis Zipp and his sons, Bernard and Monroe; Louis Zipp owned 48 shares and each son owned 1 share. In 1950, Louis was paid $ 93,782.50*207 by the corporation under an agreement pursuant to which Louis Zipp surrendered his stock and retired from all connections with the corporation whose business was operated thereafter by the sons. The questions to be decided are as follows: (1) Whether Louis Zipp made gifts in 1947 to his sons of 46 shares of his stock. (2) Whether, in 1950, a payment of $ 93,782.50 by the corporation to Louis Zipp was either consideration for his withdrawal from management of the corporation, surrender of rights to future income, and various noninterference covenants, so as to constitute ordinary income, or was payment for his stock resulting in capital gain. (3) Whether, as a result of the corporation's payment to Louis Zipp, each *315 of his sons constructively received taxable dividends. (4) In Docket Nos. 60820 and 60821, whether the provisions of section 275 (c), 1939 Code, do not apply so that the deficiencies are barred.
Respondent's determinations in Docket Nos. 60820 and 60821 are inconsistent with his determination in Docket No. 55934. He made those inconsistent determinations for protective reasons.
FINDINGS OF FACT.
Louis and Pearl Zipp, residents of Miami, Florida, filed a joint*208 return for the taxable year 1950 with the collector of internal revenue for the district of Florida. Monroe and Helen Zipp, and Bernard and Jean Zipp, were residents of Cleveland, Ohio, in 1950, and they filed joint returns, respectively, with the collector of internal revenue for the eighteenth district of Ohio. Monroe and Helen Zipp now are residents of Miami, and Bernard and Jean Zipp now live in Los Altos, California.
Louis Zipp is the father of Monroe and Bernard Zipp (hereinafter called Monroe and Bernard). The questions to be decided relate to them only; their respective wives are before us only because joint returns were filed.
Monroe was born in 1919, or close to that year, and Bernard was born in about 1921. Their father (hereinafter called Louis) was born in 1898. The mother of Louis is Sara Zipp. Louis has been married more than once. In 1938 his wife was Freda. She passed away in 1946. Louis married his present wife, Pearl, in 1947, at some time after May 24.
Paramount Steel & Supply Co. (hereinafter referred to as Paramount) is an Ohio corporation which was organized on August 27, 1936, and had its principal place of business, an office, plant, and yard, in *209 Cleveland, Ohio. Its authorized stock was 100 shares of no-par-value common stock. Louis organized Paramount. When the corporation was organized, capital in the amount of $ 500 was paid into the corporation for which 50 shares of stock were issued which were declared to have a value of $ 10 per share. From 1936 to 1950, inclusive, no further capital was paid into the corporation.
Paramount's business at all times has been the purchase, processing, and resale of scrap iron. The business involved the purchase of scrap iron from various concerns and the preparation of the scrap so purchased for use in making steel. After processing the scrap, it was resold to scrap brokers. This business is highly competitive and its success was dependent upon buying skills, market fluctuations, and good relationships with those concerns with which there were dealings.
Paramount discontinued its business on October 1, 1953, and thereafter it was dissolved.
*316 The 50 shares of stock of Paramount were issued originally in the names of Sara and Louis Zipp and two qualifying stockholders, J. Surany and Irving Glicken, as follows:
| Stockholders | No. of shares |
| Sara Zipp | 47 |
| Louis Zipp | 1 |
| J. Surany | 1 |
| Irving Glicken | 1 |
| Total | 50 |
*210 At all times, Paramount's stock has been owned and controlled by a member or by members of the Louis Zipp family, and it was, therefore, a family owned and controlled corporation; and, also, its shares of stock were at all times closely held. During the years 1936-1950, inclusive, there were a few changes in the individuals who were the qualifying shareholders, Glicken assigning his 1 share to Sara in September 1936, and Surany assigning his 1 share to Freda in January 1938. One share of stock stood in the name of Freda for 8 years, until January 15, 1946, when that share was assigned to Monroe. One qualifying share was assigned by Sara to Saul Zipp, who later assigned the share to Irene Konfal, who assigned that share to Bernard on January 15, 1946. Sara held a certificate for 47 shares of stock continuously from August 29, 1936, to January 15, 1946; and Louis held a certificate for 1 share from August 29, 1936, until January 15, 1940, when he assigned that share to Sara, so that, then, 48 shares stood in Sara's name. No shares of stock stood in Louis's name during a period of 6 years, from January 15, 1940, until January 15, 1946. At some time in 1936, 47 shares of stock were*211 held in Sara's name because Louis owed her money.
On January 15, 1946, Sara assigned her 2 certificates for the aggregate amount of 48 shares to Louis and 1 certificate for 48 shares was issued in his name. On the same date (as set forth above) 1 share was assigned to Monroe by Freda, and 1 share was assigned to Bernard by Irene. Accordingly, on January 15, 1946, and therafter, all of the 50 shares of outstanding stock stood in the names of Louis, Monroe, and Bernard. In January 1946, Monroe and Bernard were about 27 and 25 years of age, respectively.
During the years 1936-1946, inclusive, the directors of Paramount, 3, and later 4, included various members of the Louis Zipp family, including his mother, or his wife, or Saul Zipp, or Monroe, or Bernard; and the officers included such members of the family, the personnel of the board of directors and officers changing from time to time.
At all times, from the organization of Paramount until May 29, 1950, Louis was the general manager and dominating personality in the affairs of Paramount.
*317 Louis was the first president of Paramount, holding that office from August 29, 1936, until January 15, 1940, when he was succeeded *212 by Sara, and he then became secretary, which office he held continuously until January 15, 1949, when he became vice president, which office he held continuously until May 29, 1950, when he resigned.
The original officers of Paramount, on August 29, 1936, were as follows: Louis, president; Sara, vice president and treasurer; and J. Surany, secretary.
From January 15, 1946, until May 29, 1950, Paramount's officers were: Monroe, president; Louis, vice president; and Bernard, secretary and treasurer. During this period, Monroe was employed by Paramount as office manager, and Bernard was employed as sales manager and solicitor of business.
Since its organization, Paramount has never declared and paid dividends.
Paramount paid a weekly salary to Louis, Monroe, and Bernard. In addition, beginning in 1941, Louis was paid extra compensation in a sum equal to 50 per cent of net profits, not to exceed $ 5,000 a year (which was in addition to his weekly salary of $ 100, or $ 150 a week). His weekly salary and extra compensation, or bonus, were increased periodically after 1941, until on January 16, 1950, his weekly salary as general manager was $ 200, and his bonus was 50 per cent of net profits, *213 not to exceed $ 7,500. His weekly salary and extra compensation were fixed in January of each year for the ensuing year by the directors of Paramount.
Monroe and Bernard were voted extra compensation on December 2, 1946. Monroe and Bernard were to receive extra compensation of $ 1,500 for 1946, in addition to their salaries during 1946 of $ 90 per week. Extra compensation was authorized for Monroe and Bernard at the end of each year, thereafter. From time to time their compensation was increased until in 1949, their extra compensation amounted to $ 5,000 each, in addition to weekly salaries of $ 150 each.
Harry Elder, an attorney, represented Paramount from the time of its organization through 1947, at least. He also represented Louis.
In 1946, after Freda Zipp died, the daughter of Freda by a previous marriage involved Louis in litigation over Freda's estate.
After Freda's death, Louis became less active in the day-to-day affairs of Paramount, but he remained general manager, and he dominated and controlled its business operations. He took trips to Florida and New York, and he spent the winter in Florida in 1946 or 1947.
In mid-1947, Louis contemplated marriage to Pearl Gordon, *214 whom he married later in 1947, after May 24. She is his present wife. While he contemplated remarriage he discussed the possible effects thereof upon his financial interest in Paramount with Elder, and consideration was given to the possibility that future marital difficulties, *318 should they arise, might jeopardize Louis's interest in Paramount as well as the operations of its business. On the advice of Elder, a plan was discussed whereby all shares except 2 shares of Paramount stock owned by Louis would be put in the names of Monroe and Bernard so that they could not be reached by Louis's wife, if marital difficulties arose, or in the event of Louis's death, or in the event Louis became involved in any financial deals. Pursuant to Elder's advice, Louis caused 3 new certificates to be issued on May 24, 1947, so that 2 certificates for 23 shares, each, were issued, 1 in the name of Monroe, and 1 in the name of Bernard, and 1 certificate for 2 shares was issued in the name of Louis. These 3 certificates took the place of 1 certificate for 48 shares in Louis's name, which he surrendered. Monroe and Bernard endorsed the new certificates in blank on May 24, 1947, and gave*215 them to Elder who kept them continuously thereafter, and Monroe and Bernard did not see them again until May 29, 1950. At the time the above transpired, on May 24, 1947, Louis told his sons that the stock was being held in trust, that he was the owner of the 46 shares of stock, that during his lifetime he was to remain in control of Paramount, and that upon his death, the 46 shares of stock would go to them. Louis took the view that he was in no position in 1947 to give away a business which he had developed during the years.
At some time after May 24, 1947, Louis and Pearl Gordon were married and Louis established their residence in Florida.
Louis did not execute any written instrument to evidence a gift, either in trust or outright, for the 46 shares of stock to his sons. However, his attorney, Elder, advised him to file a Federal gift tax return to make the transfer "look legal," and, accordingly, on or about April 17, 1948, Louis filed a Federal gift tax return reporting gifts of 23 shares of stock of Paramount to each of his sons, and he paid the gift tax reported thereon. Subsequently, the Commissioner determined a deficiency in gift tax. Louis asked Monroe and Bernard *216 to pay the deficiency because the stock was to become theirs upon his death. Monroe and Bernard complied with his request.
In 1948, Louis suffered a stroke, the result of which was impairment of his health, and he was obliged to reduce substantially his business activities. (In 1954, Louis had another stroke.) Although he made short visits to Cleveland in 1948, 1949, and 1950, he spent the major portion of each year in Miami, Florida. Throughout this period, Bernard and Monroe managed the affairs of the corporation.
During short visits of Louis to Cleveland in the period 1947-1950, there were arguments about the operations of Paramount between Louis and his sons. Bernard and Monroe usually acceded to Louis's demands, but in one instance, at least, they resorted to a subterfuge because they considered Louis's judgment about selling scrap iron to be unwise at the time.
*319 In May 1950, Louis was in Cleveland, and on May 28, during a visit to Paramount's office, he and his sons become involved in a serious dispute. Louis criticized Bernard severely for some work which had been done in the processing yard. He objected, also, to actions of both sons involving their borrowing*217 funds from the corporation for the purpose of financing the construction of new homes, in which both were engaged. Louis became enraged and threatened to take steps which, if carried out, would be harmful to Paramount's business. Bernard told his father that if he wanted to run the business he would have to return from Florida and take over the entire management. Louis stated that he would do so.
Bernard and Monroe immediately went to see Lou Miller, the president of a corporation with which Paramount dealt, with whom they discussed the possibility of borrowing money. Monroe then telephoned Louis and asked him what he wanted for the business of Paramount. Louis quoted a price of $ 75,000, which was his estimate of the total value of the buildings, land, machinery, and equipment of Paramount. No agreement was reached with Miller because he insisted upon having a 51 per cent interest in Paramount if he advanced any money.
Bernard and Monroe then contacted the district manager of Luria Brothers & Company, Inc. (hereinafter called Luria Bros.), a steel scrap broker to whom Paramount sold scrap. Luria Bros. agreed to advance $ 75,000, and arrangements were made for a meeting in *218 the office of Louis's attorney, Elder, on May 29, 1950. Monroe telephoned Louis and told him, "We'll take the place. We'll give you a check for it in the morning."
At the meeting on May 29, 1950, there were present Louis, Elder, Monroe, Bernard, H. A. Springer, Jr., an attorney representing Luria Bros., and M. I. Goldsmith, an attorney who represented Paramount. Louis then said that he wanted $ 75,000, plus cancellation of his debt to Paramount in the amount of $ 16,682.50, and a Cadillac automobile which was valued at $ 2,100 on Paramount's books. Louis's demands were accepted, and Elder than drafted an agreement between Louis and Paramount which is referred to hereinafter.
Under a written agreement dated May 29, 1950, between Luria Bros. and Paramount, Luria loaned $ 75,000, for which Paramount gave its note in the amount of $ 75,000. The note was dated May 29, 1950; it provided for payments of $ 1,500 per month commencing July 1, 1950, and continuing thereafter until paid. The note was secured by a mortgage on real estate owned by Paramount, where its plant was located, and by chattel mortgages on all motor vehicles and all personal property owned by the corporation.
The agreement*219 with Luria Bros. provided, inter alia, that Paramount would sell, in reasonable quantities, all of its scrap metal to *320 Luria, at the prevailing market price at the time of each shipment, until such time as $ 75,000 had been repaid to Luria, or until September 30, 1954, whichever "event" occurred later; that Luria would pay Paramount cash for all scrap which it received and accepted, provided, however, that Luria would deduct from each invoice of Paramount the sum of $ 1 for each ton of scrap purchased by Luria, to be applied in reduction of Paramount's note; that, in any event, Luria would receive at least $ 1,500 per month from Paramount, either through the above arrangement or by direct payment by Paramount; and that in the event either party should be adjudged a bankrupt or make an assignment for creditors, or if a receiver should be appointed, or if either party should attempt to assign its interest in the agreement, then, in any such event, the other party could, at its option, terminate the agreement. Paramount agreed, further, that during the term of the agreement, it would not sell any scrap, then held or thereafter acquired, to any person, firm, or corporation*220 other than Luria unless the scrap had been rejected by Luria.
A written agreement between Louis Zipp and Paramount was executed on May 29, 1950, by Louis, by Monroe as president of Paramount, and by Bernard as its secretary. The agreement in substance provided, inter alia, that Louis agreed (1) to sell to Paramount 2 shares of stock of Paramount, and to transfer the certificate representing those shares to the corporation; (2) to resign, as of the date of the agreement, as director and general manager of Paramount; (3) not to engage in the business of buying, selling, or dealing in scrap metals, or in any other similar business, directly or indirectly, in Ohio, for a period of 10 years, and not to interfere in any manner with the business of Paramount in Ohio; (4) to relinquish all claims to and right in any further salaries and extra compensation from Paramount during 1950, and thereafter. The agreement provided, further, that in consideration for the shares of stock and all the covenants of Louis, as set forth, Paramount agreed to pay Louis cash in the amount of $ 75,000, to forgive all of the sum owing to Paramount by Louis, including salary paid to Louis for 1950, and to*221 convey to him by proper transfer of title, a Cadillac automobile. The entire agreement between Louis and Paramount (Exhibit 6-F) is incorporated herein by this reference.
The agreement between Louis and Paramount was dictated by Elder, Louis's attorney. Goldsmith, Paramount's attorney, having heard of the dispute between Louis and his sons on the previous day, insisted that a clause should be inserted in the agreement which would prevent Louis from interfering in any way in the future with the operations of Paramount's business, and, therefore, the noninterference clause (par. 3 of the covenants of Louis) was inserted.
*321 At the time of the closing of the transaction, Springer, who represented Luria Bros., noticed that the 2 certificates, issued on May 24, 1947, for 23 shares of stock each, in the names of Monroe and Bernard, respectively, had been endorsed in blank, and he insisted upon a written acknowledgment that those shares of stock belonged to Bernard and Monroe. Elder dictated the following memorandum which was executed by Louis:
Cleveland, Ohio
May 29, 1950The undersigned, L. H. Zipp, hereby acknowledges that he has no interest, right, title or claim whatever, *222 in the following shares of stock, issued by The Paramount Steel & Supply Co.
Certificate No. 13 for Twenty-three shares (23), issued to Bernard Zipp;
Certificate No. 14 for Twenty-three shares (23), issued to Monroe Zipp.
(signed) L. H. Zipp
L. H. ZippIn accordance with the terms of the agreement, Louis received from Paramount a total consideration of $ 93,782.50, as follows: Cash, $ 75,000; cancellation of indebtedness, $ 16,682.50; and an automobile, $ 2,100.
The parties have stipulated that the earned surplus of Paramount on May 29, 1950, amounted to $ 93,790.90, and that such surplus represented earnings of the corporation since its organization in 1936.
Special meetings of Paramount's stockholders were held on May 29, 1950. Minutes of this meeting recite, inter alia, that the purpose of one meeting was to consider the purchase of shares of stock held by Louis Zipp and to do all things incidental thereto; that Louis Zipp had offered to sell his stock and to resign as vice president, director, and general manager of the corporation; and that it was necessary for the corporation to borrow money for the purpose of buying Louis's stock. A resolution was adopted authorizing *223 the president and secretary of Paramount to obtain a loan, to negotiate with Louis for the purchase of his stock, to enter into an agreement for obtaining a loan, to enter into an agreement with Louis, and to do all necessary things to accomplish the stated purposes.
Paramount's stockholders, on May 29, 1950, at a subsequent meeting, ratified the agreements with Luria Bros. and with Louis Zipp, and the execution of Paramount's note and mortgages to Luria Bros.; and they accepted the resignation of Louis as vice president, general manager, and director of Paramount.
After completion of the transaction on May 29, 1950, Louis returned to Florida, and thereafter, from that date, he had no contacts with or interest in the business of Paramount. At the time he entered into the agreement, he did not intend or plan to engage in any business which would compete with Paramount's business; he was not in *322 such physical condition as would permit his engaging in new business activities; and he did not, on or before May 29, threaten to or discuss the possibility of his going into any competing business arrangements. Paragraph 3 of the agreement, the covenant not to engage in any scrap *224 metal business in Ohio for 10 years, was not included to curtail any then intended activities of Louis; he did not expect to resume any business connections of any sort; he did not subsequently enter into any business venture. The insertion of paragraph 3 was a matter of form which the attorney representing Paramount suggested. There was no discussion when the agreement was drafted about the value of the covenants in paragraphs 2, 3, and 4, to which Louis agreed, and no part of the consideration which Louis received was bargained for, or allocated to any of those covenants. It was not intended that any part of the consideration paid was for any or all of such covenants.
Louis did not make a completed, bona fide gift of 23 shares of Paramount stock to each of his sons on May 24, 1947; he did not give up dominion and control of the 46 shares of stock; he continued to own the 46 shares of stock until May 29, 1950, and the names of Monroe and Bernard appeared on the 2 certificates during the period of May 24, 1947, until May 29, 1950, merely as nominees of Louis.
The memorandum signed by Louis on May 29, 1950, in which he stated that he had no interest in the 46 shares of stock represented*225 by certificates 13 and 14, in the names of his sons, which has been set forth above, constituted a written release, or quitclaim, by Louis of all of his rights in the 46 shares of stock which had been transferred to his sons' names in May 1947.
The total consideration, $ 93,782.50, received on May 29, 1950, by Louis from Paramount was in exchange for all of Louis's 48 shares of stock in Paramount. The certificate for 2 shares, in Louis's name, was endorsed in blank by Louis and surrendered.
After May 29, 1950, Monroe and Bernard operated the business of Paramount, and their wives became directors. All of the loan of $ 75,000 was repaid to Luria Bros. before Paramount's business was terminated on October 1, 1953.
After May 29, 1950, Monroe and Bernard owned all of the 50 shares of outstanding stock of Paramount. Funds of Paramount were used to purchase all of the outstanding stock of Paramount in an equal number of shares for Monroe and Bernard.
In their respective returns for 1950, Monroe and Bernard did not report any income from the transaction of May 29, 1950.
In computing the deficiency of the income tax liability of Louis Zipp, the Commissioner determined that he received *226 $ 93,782.50 under the agreement of May 29, 1950, of which $ 93,762.50 was taxable as a *323 dividend under section 115(a), or section 115(g), 1939 Code. The Commissioner's explanation of this determination in the statement attached to the statutory deficiency notice is as follows:
(a) In your income tax return for the taxable year 1950, the disposition of 50 shares of stock of The Paramount Steel and Supply Co. was reported in Schedule "D" as a $ 75,000.00 sale of a capital asset. It is held that the amount received under the May 29, 1950 agreement between Mr. Zipp and the corporation was $ 93,782.50. It is held further that $ 93,762.50 of the amount received is taxable as dividends under Section 115(a) and/or Section 115(g) of the Internal Revenue Code, and that the capital gain provisions of Section 117 of the Internal Revenue Code do not apply.
Louis admits that the total consideration which he received from Paramount amounted to $ 93,782.50, and that he erred in reporting such consideration to be only $ 75,000.
In determining the deficiency in the income tax liability of each of the petitioners, Monroe Zipp and Bernard Zipp, income was increased by the Commissioner, in *227 each instance, by $ 46,891.25, one-half of $ 93,782.50. The Commissioner's explanation of each determination in the statement attached to each deficiency notice is as follows:
(a) It is determined that the following amounts were withdrawn from The Paramount Steel and Supply Company during the taxable year 1950 by Louis H. Zipp in payment for 46 shares of the corporation's capital stock, which shares were acquired by you and your brother, Monroe Zipp, from Louis H. Zipp in the year 1947:
| Cash | $ 75,000.00 |
| Accounts Receivable (cancelled) | 16,682.50 |
| Cadillac Car | 2,100.00 |
| Total | $ 93,782.50 |
Since you held 23 of these 46 shares, it is determined that 50% of the above amount, or $ 46,891.25, is taxable to you as a dividend. Accordingly, this amount of $ 46,891.25 is being included in your gross income.
Monroe and Bernard each omitted from his gross income stated in his return for 1950 an amount properly includible therein which was in excess of 25 per cent of the amount of gross income stated in the return.
OPINION.
These proceedings involve those who were at one time the three sole stockholders of Paramount. The Commissioner audited Louis's return for 1950 first. When*228 he later audited the returns of Monroe and Bernard for 1950 he made a determination which was inconsistent with the one he had made in determining Louis's income tax liability. When these cases were ready for trial, they were consolidated because the issues arise out of one transaction, that of May 29, 1950. In the case of Louis, the question is whether the transaction *324 resulted in capital gain or ordinary income. In the cases of Monroe and Bernard the issue is whether they received constructive dividends from Paramount.
Counsel for each party takes a position which differs from his opponent, and since the respondent has taken an inconsistent position, he has had to file a different brief in the cases of the sons than in the father's case. Altogether, four sets of briefs have been filed.
There would be unnecessary repetition if an attempt were made to deal with the various questions as would be done if these cases had not been consolidated. Upon careful consideration of all of the arguments and contentions of each counsel, it appears that the issues can be considered best if the cases of Monroe and Bernard are discussed first. For convenience and in the interest of *229 clarity, this is done, but such order of consideration is not prejudicial to any party; the conclusions reached would be the same if some other method of stating them were employed.
It is the Commissioner's contention that the payment of $ 93,782.50 by Paramount to Louis was made in behalf of Monroe and Bernard, and that, in effect, Louis sold his 48 shares of Paramount stock in equal amounts to his sons on May 29, 1950, and that, since funds of Paramount were used by the sons to purchase the stock, the payment by the corporation constituted dividends to them under section 115, 1939 Code.
The sons contend that prior to May 29, 1950, they became the owners of 46 shares of Paramount stock by virtue of alleged gifts of the stock to them on May 24, 1947, when 2 certificates, for 23 shares each, were issued in their respective names, and that on May 29, 1950, Paramount purchased only 2 shares of stock from Louis, which, they say, constituted a redemption of the 2 shares, and, also, paid Louis for various covenants, such as a noninterference covenant, all of which did not result in taxable dividends to them.
Upon consideration of all of the record, we have found as fact and conclude that*230 Louis did not make completed, bona fide gifts of 23 shares of stock to each of his sons in May 1947; that his sons were merely nominees whose names were used to suit the convenience of Louis for reasons best known to himself; and that Louis was the owner of the 46 shares after May 24, 1947, until immediately prior to his execution of the agreement with Paramount on May 29, 1950. There was no document of transfer of the stock, and there was no actual delivery thereof to the sons. They endorsed the certificates in blank, and Louis's attorney, Elder, kept them, so that Louis, through his attorney, retained the power to use and control the stock; it was not put beyond his reach and control. The evidence does not establish that Louis intended to make completed gifts in praesenti to his sons of the stock on May 24, 1947. Rather, the entire record establishes *325 that Louis intended to retain complete ownership and control over the 46 shares of stock, that he told his sons that he was to remain in control of Paramount, and that the 46 shares of stock would go to them upon his death. He did not part permanently with all interest in the 46 shares at that time.
On the matter *231 of the understanding among the parties on May 24, 1947, there is conflict between the testimony of Louis and that of each of his sons, who testified that they understood that Louis had made a gift of the stock to them. But the testimony of Monroe and Bernard is limited to their self-serving conclusion, and there is no independent proof that each, at any time, exercised dominion and control over the shares of stock placed in their names. They did not attempt to give any explanation of why they endorsed the certificates in blank, gave them to Elder, and allowed them to remain in his possession, if they regarded the 46 shares of stock as belonging to them. There is no evidence of any action on the part of either Monroe or Bernard to establish their acceptance of all of the incidents of ownership of the stock. On the other hand, Bernard testified that after Freda's death, her daughter, whom Louis had not adopted, instituted litigation against Louis, which serves to corroborate Louis's statement of his motive for putting the 46 shares in the names of his sons, so that neither the stock nor the business of Paramount would be jeopardized if any marital difficulties arose, or claims were*232 made after his death.
The filing of the gift tax return reporting gifts of the stock is not conclusive of the question. That was done on Elder's advice, and was consistent with the general plan of putting the stock beyond the reach of anyone making a claim against Louis.
There is testimony that during a conference with attorneys of Louis, Monroe stated that his father was the real owner of the 46 shares of stock after May 1947. Such testimony conflicts with his present contention.
There is, also, testimony of Goldsmith that at the closing on May 29, 1950, Elder stated to the other attorneys who were present that the 46 shares of stock belonged to Monroe and Bernard. Elder did not testify in these proceedings, however, and the absence of his direct testimony and of cross-examination of Elder militates against giving much weight, if any, to the testimony of Goldsmith on this point. Elder's statement to Goldsmith at the closing, as quoted by Goldsmith, constitutes a conclusion about a question which is now before us for decision, and our decision must be based upon all of the record before us. The quoted statement of Elder can be understood as a statement of his position, consistent*233 with his earlier advice to Louis to transfer the 46 shares into his sons' names, and with his drafting *326 of the agreement of May 29, 1950, to refer to only the 2 shares of stock standing of record in Louis's name.
We cannot find as a fact from the entire record that the requisites of a completed gift in praesenti existed on May 24, 1947, namely, a deed of gift, or delivery of the property to the donee, intent of the donor to make a gift, and acceptance of the gift by the donee. Brown, The Law of Personal Property, secs. 37, 38 (2d ed., 1955). Furthermore, Paramount was a family owned and controlled corporation, which was closely held. Therefore, the arrangements of May 24, 1947, relating to 46 shares of stock, must be closely scrutinized, Weiss v. Stearn, 265 U.S. 242">265 U.S. 242; Higgins v. Smith, 308 U.S. 473">308 U.S. 473; Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, and substance must be given greater weight than form. This rule applies, also, to our consideration of the agreement of May 29, 1950. Louis, after transferring the stock into his sons' names, exercised the same control*234 over Paramount's business as he had done before. He was not in such financial position in May 1947 as to give away and strip himself of the ownership of the business which he had founded and developed; he was not in poor health in May 1947, and he had no intent or reason to retire from his only, or chief, business interest.
It is argued that Louis's execution of the memorandum on May 29, 1950, in which he declared that he had no interest in the 46 shares of stock, is evidence of a prior gift thereof in 1947, but we are unable to agree. The memorandum was executed at the request of the attorney representing Luria Bros. because the agreement between Louis and Paramount referred to only 2 shares of stock, and since Luria Bros. had loaned $ 75,000 to Paramount, the attorney representing Luria Bros. required the execution of the memorandum to safeguard his client who wanted full security for its loan. Under all of the circumstances the memorandum constituted a formal release, or quitclaim, by Louis which, upon the entire record, represented a release on May 29, 1950, and it is not regarded by this Court as evidence that Louis had made gifts of the stock in May 1947, or on May 29, 1950.
*235 It is held that Louis did not make gifts of the 46 shares of stock in May 1947, and that he was the owner of the stock at the time he entered into the agreement with Paramount on May 29, 1950.
The next issue is whether Monroe and Bernard realized taxable income from Paramount's payment of $ 93,782.50 to Louis. It is necessary to consider, first, under this issue, the nature of the transaction between Louis and Paramount. Since the agreement of May 29, 1950, refers to only 2 shares of Paramount stock, and since it has been held under the first issue that immediately prior to the execution of the agreement, Louis owned 48 rather than 2 shares of Paramount stock, it is necessary to take into account all of the facts and circumstances *327 surrounding Paramount's payment to Louis, giving due weight to the fact that Paramount was a closely held, family owned and controlled corporation, and that all of the interested persons are closely related.
It is our conclusion from analysis of the entire record that Louis intended to surrender his entire legal and equitable interest in Paramount, represented by all of the stock which he owned, for a total consideration of $ 93,782.50, and that*236 this was the understanding of his sons. It is our opinion that Louis's attorney, Elder, having previously carried out the arrangements for transferring 46 shares of stock into the names of Monroe and Bernard, drafted the agreement of May 29, 1950, to reflect the record ownership of the stock of Paramount, and, therefore, that agreement stated that Louis would transfer to Paramount only the 2 shares of stock of which he then was the record owner. In view of the complete control of the corporation in the hands of Louis, and since he and his two sons were the only persons directly concerned with the transaction, arrangements having been made to give Luria Bros., as security for its loan of $ 75,000 to Paramount, its note secured by mortgages on all of the corporation's assets, it was sufficient to draft the agreement of May 29, 1950, so as to refer to only 2 shares of Louis's stock. The important part of that agreement was the consideration which Louis would receive. The sum agreed upon on May 29, $ 93,782.50, was very close to the book value of all of the stock of Paramount, $ 94,290.90 (capital $ 500, plus earned surplus, $ 93,790.90), on the basis of which the outstanding stock*237 of 50 shares had a book value of $ 1,885.81 per share. Unless the total sum paid by Paramount was paid for something besides Louis's equity in Paramount, it must have been paid for his 48 shares of stock. It cannot be concluded, from the entire record, that Paramount paid $ 93,782.50 for 2 shares of stock having a book value of only $ 3,711.62.
The evidence does not support the contention that most of the consideration, $ 90,000, for example, was paid in consideration of Louis's covenant not to enter into any competing business in Ohio, not to interfere with Paramount's business, and for giving up the present value of future salary payments, and for the elimination of such friction as Louis's management of the corporation's business may have caused. Opposed to such theory are these facts:
Louis had suffered a stroke and had been told by his physician that he must rest and avoid pressures, all of which necessitated his complete retirement from, or substantial giving up of, business activities. The record shows that on May 29, 1950, he did not contemplate or intend going into any business, in Ohio or elsewhere, and that he did not do so. We are not impressed by the explanation *238 that Louis's participation in the management of Paramount caused extreme controversy *328 and conflicts, except to the extent that such irritation as he may have exhibited, at times, could be explained by his physical condition and poor health, which provided good cause for his willingness to end his interest in the corporation. Furthermore, Louis had moved to Florida and his visits to the corporation's office in Cleveland were infrequent and of short duration each year. Also, there is no evidence whatsoever of any negotiations on or before May 29, or discussions, about the payment of any amount of consideration for the covenants in question; they were not bargained for, nor evaluated. The record indicates that they were inserted in the agreement to give assurances to Luria Bros., which had become a creditor of the corporation, in order to satisfy Luria Bros. about the future success of the business, as well as to satisfy the customary concern of the lawyers who were present that the agreement with Louis was adequate and formally correct. In addition, the record before us contains no evidence that any part of the total consideration paid by Paramount represented the present*239 value of Louis's future salary payments which he might have received if he had not retired. The minutes of the corporation show that since its organization, the rates of compensation for the services of Louis, as well as of Monroe and Bernard, were fixed at the beginning of each year by duly adopted resolutions of the directors. That is to say, there was no agreement in existence in May 1950, or before, that Louis would be paid any fixed amount of salary and extra compensation continuously or for any period of more than 1 year.
It is concluded, therefore, that Paramount paid Louis $ 93,782.50 for all of his shares of stock, namely, 48 shares; that the miscellaneous covenants of Louis in the agreement were merely incidental to his disposition of his stock in Paramount, George H. Payne, 22 T. C. 526; Aaron Michaels, 12 T. C. 17; and that Louis sold the 48 shares.
Having reached the conclusion that the agreement of May 29, 1950, accomplished a sale by Louis of his 48 shares of stock, we now consider whether the transaction resulted in the constructive receipt of dividends by Monroe and Bernard in 1950.
The record as a whole*240 establishes that Monroe and Bernard decided on May 28 to purchase all of Louis's interest in the corporation, but they were without sufficient funds to make the purchase themselves, and, also, the corporation did not have enough cash on hand for such use. They were able, however, to enter into an arrangement with Luria Bros. whereby Paramount gave that concern an option to purchase all of its scrap, provided it suited Luria, and agreed to make all of its scrap available to Luria, first, over a period of years. Such arrangement induced Luria to loan Paramount $ 75,000 with which the corporation proceeded to purchase all of Louis's stock. There was *329 no thought of any partial liquidation of Paramount in so doing; no such contention is made. Paramount continued the operation of its business after the transaction with Louis, just as it had done before; in fact, such continued operations were required under the arrangements made by Monroe and Bernard with Luria Bros. It is abundantly clear that the purpose of the transactions on May 29 was to enable Monroe and Bernard to purchase all of Louis's interest in Paramount. Since Paramount was a family controlled corporation, and*241 came under the complete control of Monroe and Bernard on May 29, it was possible for them to proceed as they did. In effect, they caused Paramount's cash to be distributed for their benefit, i. e., to purchase all of Louis's stock. It is clear that no loans were made by Paramount to Monroe and Bernard. The arrangements had the same effect as though the sole stockholders had withdrawn funds from Paramount for their own use and benefit. Such withdrawals would be taxable as dividends to Monroe and Bernard. Ruphane B. Iverson, 29 B. T. A. 863, 870. Since Paramount had accumulated earned surplus in the amount of $ 93,790.90, it must be concluded that the payment of $ 93,782.50 by Paramount constituted taxable dividends constructively received by Monroe and Bernard in 1950, in the amount of $ 46,891.25 each, under section 115 (b), 1939 Code. Cf. Wall v. United States, 164 F.2d 462">164 F. 2d 462.
It is well established that the disbursement of corporate earnings serving the ends of a stockholder may constitute a dividend to such stockholder even though there is not the formality of a dividend declaration. Paramount-Richards Theatres v. Commissioner, 153 F. 2d 602, 604;*242 Byers v. Commissioner, 199 F. 2d 273, 275.
Monroe and Bernard make an alternative argument that they received nontaxable stock dividends from Paramount which constituted dividends of common on common stock. This theory cannot be regarded as having any merit whatsoever in the light of all of the facts and circumstances.
There remains for decision the issue presented in the case of Louis (Docket No. 55934) which is whether $ 93,782.50 was received solely in exchange for his 48 shares of stock, so that the profit realized is properly taxable as capital gain. The respondent has taken the view in Louis's case that Louis received consideration for only 2 shares of stock, that he made a gift of 46 shares in 1947, that the 2 shares of stock had a nominal value only, that he received all of the sum of $ 93,782.50 in consideration for his resignation as vice president, director, and general manager and for his relinquishment of all rights and claims to any further salaries and extra compensation for 1950, and thereafter, and for covenants not to compete and not to interfere with Paramount's business, and that, therefore, the entire sum is taxable *330 *243 as ordinary income. In determining the deficiency, respondent took a slightly different view, treating $ 20 as a return of capital and the balance, $ 93,762.50, as ordinary income.
The conclusions set forth above dispose of the issue in Louis's case. Respondent erred in his determination. It is held that Louis, on May 29, 1950, sold 48 shares of Paramount stock, and that his profit is taxable as capital gain. Because it is agreed that minor adjustments properly were made by the respondent, a Rule 50 recomputation is required in his case.
The provisions of section 275 (c), 1939 Code, apply in Docket Nos. 60820 and 60821. The deficiencies are not barred.
Decision will be entered under Rule 50 in Docket No. 55934.
Decisions will be entered for the respondent in Docket Nos. 60820 and 60821.