*37 Decision will be entered under Rule 50.
Held, the gain realized by petitioners in 1948 was ordinary income derived from the sale of real estate held for sale to customers in the ordinary course of petitioners' real estate business. Held, further, petitioners are not entitled to report such gain on the installment basis, having made the election in their 1948 tax return to report the gain upon a basis other than the installment basis and there being no evidence that such method does not clearly reflect income.
*165 Respondent determined a deficiency in income tax of the petitioners for the year 1948 in the amount of $ 42,109.63. *38 Several of the adjustments made by respondent have been conceded by petitioners. One issue raised by the pleadings, respecting respondent's disallowance of a claimed deduction for attorney's fees in the amount of $ 1,000, has been resolved by agreement of the parties.
The questions remaining for our consideration are:
1. Whether the gain on a certain sale made by petitioners in 1948 was ordinary income from the sale of property held for sale to customers in the ordinary course of petitioners' real estate business or was a capital gain on a sale of corporate stock.
2. Whether, if the gain was ordinary income, the petitioners are entitled to report it on the installment basis.
FINDINGS OF FACT.
Those facts which have been stipulated are so found, and, by this reference, made a part hereof.
The petitioners are S. Nicholas Jacobs and Dolores I. Jacobs, husband and wife, who reside in San Francisco, California. They filed their joint income tax return for 1948 with the collector of internal revenue for the first district of California.
Prior to the taxable year involved, S. Nicholas Jacobs (hereinafter referred to as petitioner), acquired certain real property in Sacramento County, California. *39 A portion of such property had been subdivided and sold prior to August 1946. Part of the property was included in the map of Hollywood Park Unit No. 2, hereinafter sometimes called Subdivision No. 2, which map was filed for record in the Office of the Recorder of Sacramento County on July 29, 1946. Another part of the property was included in the map of Hollywood Park Unit No. 3, hereinafter sometimes called Subdivision No. 3, which *166 map was filed for record in the Office of the Recorder on November 25, 1947.
In 1948, and for several years prior thereto, petitioner had individually engaged in the subdivision and sale of his Sacramento property. During the summer of 1946, petitioner had been advised by his counsel that, because of the undesirability of his having complete personal liability in connection with street contracts and sales of land, he should not engage in any further activity in his individual capacity with relation to subdividing and selling his Sacramento real estate.
On August 28, 1946, Hollywood Subdivision, Inc. (hereinafter referred to as Subdivision), was incorporated under the laws of the State of California. Petitioner's attorney and two of the *40 attorney's employees were the incorporators. No capital stock was issued at that time. A permit to issue such stock in exchange for Subdivision No. 2 was filed with the Commissioner of Corporations of the State of California. This plan was subsequently abandoned when petitioner became ill, was operated on, and went to Nevada to recuperate.
Prior to the incorporation of Subdivision, petitioner and his attorney did not discuss or consider the problem of whether or not petitioner would ultimately sell the stock thereof. In addition to the undesirability of petitioner's having complete personal liability in connection with street contracts or sales of land, petitioner and his attorney looked into the question of income taxes, the effect thereof on petitioner or the corporation or both jointly if instead of petitioner engaging in the business personally, he had his corporation engage in the business of selling lots.
Early in 1948, one Frank MacBride, Jr., who was in the real estate business in Sacramento and who was the agent who had successfully sold the lots in Subdivision No. 2 that had been sold, approached petitioner with regard to Subdivision No. 3. MacBride wished the right *41 to sell the lots therein. He also offered to buy the lots. He was told by petitioner's attorney, in the presence of petitioner, that he could not buy the land; that the land was not for sale; and that he would not be permitted to be a real estate broker in the sale thereof. MacBride was informed by petitioner's attorney, in the presence of petitioner, that he might obtain control of the land by purchasing the stock of a corporation owning the land. The attorney further told MacBride that the stock of the corporation was not for sale at that time; that, if, after the stock was issued in exchange for the land he was still interested in purchasing the stock, negotiations to that end could be instituted; but that, in the meantime, petitioner could abandon his plan to transfer the land to the corporation in exchange for the stock or MacBride could change his plan to submit an offer for the stock; and that the entire matter would have to be held in abeyance *167 until the attorney's return from Washington. At this time, there was no effective permit from the California Commissioner of Corporations to issue the stock. Action to that end was instituted while the attorney was away*42 but the application was not filed until after his return early in March 1948.
On March 8, 1948, Hollywood Terrace, Inc. (hereinafter referred to as Terrace), was incorporated under the laws of the State of California at the instance of Frank MacBride, Jr. Frank MacBride, Jr., Thomas J. MacBride, and Dorthy M. Baker were the incorporators. At all times material to this proceeding, Frank MacBride, Jr., owned 98 per cent of all of its issued and outstanding common capital stock. Thomas J. MacBride owned 1 per cent thereof and Dorothy M. Baker owned 1 per cent thereof. At no time did petitioner or his wife have any interest, direct or indirect, in the stock of Terrace. That corporation was at all times dominated and controlled by Frank MacBride, Jr.
The permit to issue stock was granted to Subdivision by the Commissioner of Corporations of the State of California on March 29, 1948. On or about April 1, 1948, petitioner exchanged Subdivision No. 3 for 1,750 shares of $ 100 par value stock of Subdivision. Prior to the issuance of any of the stock of Subdivision, MacBride made an appraisal of the real estate in controversy. He valued it at $ 175,000.
On or about April 5, 1948, petitioner's*43 attorney arranged for the "sale" of petitioner's stock to Terrace. At that time, petitioner received a promissory note in the sum of $ 175,000 from Terrace, which corporation had little or no assets other than the stock of Subdivision, thereby acquired. Such stock was pledged by an instrument of pledge to petitioner. It was reissued in the name of Terrace, and then was reissued in the name of petitioner as pledgee. At that point in the transaction, petitioner was the owner of a promissory note having a fair market value when received in 1948 of $ 125,000, which note was secured by 1,750 shares of the common stock of Subdivision. Subdivision continued to be the owner of the real estate, and Terrace was the owner of the 1,750 shares, subject to the pledge to secure the promissory note. Thereafter and on April 6, 1948, MacBride, in writing, requested permission to alter the plans concerning the subdivision and to dissolve Subdivision. Such permission was granted by petitioner and Subdivision was dissolved on or about April 8, 1948, by one or more or all of Frank MacBride, Jr., Thomas J. MacBride, and Dorothy M. Baker. At this point, petitioner was the holder of the promissory*44 note in the sum of $ 175,000, which note was secured by a deed of trust on Subdivision No. 3.
Prior to April 5, 1948, Subdivision never had a bank account, it never paid any salaries to any employees, it never had any books of *168 account, it never bought or sold any real estate or any personal property, and it had not entered into any business transactions of any kind.
The promissory note of Terrace, held by petitioner, was liquidated in the years 1948 through 1951, as follows:
| Year | Payment |
| 1948 | $ 28,364.57 |
| 1949 | 74,762.98 |
| 1950 | 12,225.77 |
| 1951 | 7,201.41 |
On the Federal income tax return filed by petitioner and his wife for the year 1948, they did not elect to report on the installment basis their gain on the sale of the property which they sold for $ 175,000 in such year.
In addition, we make the following ultimate findings of fact:
The conveyance of Subdivision No. 3 to Hollywood Subdivision, Inc., the issuance of the stock of Hollywood Subdivision, Inc., to petitioner, the transfer of such stock by petitioner to Hollywood Terrace, Inc., and the receipt by petitioner of a note in the sum of $ 175,000 were component parts of a single transaction, by which petitioner*45 effected a sale of land in the ordinary course of business.
The corporation known as Hollywood Subdivision, Inc., served no business purpose and performed no business function other than to act as a conduit to transfer the title to Subdivision No. 3 from petitioner to a purchaser of such real estate.
OPINION.
Respondent has determined, and here maintains, that the gain derived by petitioner from his transaction with Terrace is ordinary income from the sale of land held for sale to customers in the ordinary course of his real estate business. Petitioner contends that such gain is a capital gain derived from a sale of petitioner's stock in Subdivision. The pertinent portion of the Code is section 117 (a) (1). 1
*46 Whether the transaction in controversy was a sale of petitioner's stock in Subdivision as it purported to be or was in substance a sale by petitioner of his Sacramento real estate in the ordinary course of business is entirely a question of fact. Our ultimate finding, set out above, *169 is dispositive thereof and no useful purpose is to be served by prolonging this opinion with a detailed analysis of the evidence and the factors leading us so to conclude. Suffice it to say that, in reaching such conclusion, we have given full consideration to the entire picture, all the pertinent evidence and the inferences properly to be drawn therefrom. 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 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*47 a corporation controlled by him. "* * * A given result at the end of a straight path is not made a different result because reached by following a devious path. * * *" Minnesota Tea Co. v. Helvering, 302 U.S. 609">302 U.S. 609.
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. MacBride's letter to petitioner, written as it was on the day following the so-called sale of petitioner's stock to Terrace, and in which he requested permission to alter the plans and to dissolve the corporate titleholder of the land involved, appears to be but another step in completing the formal picture.
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; that petitioner's various transactions with and through Subdivision were all parts of a single transaction, *48 and that the gain derived therefrom constitutes and is taxable as ordinary income. Compare Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, with United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451. See also Chicago, M. & St. P. Ry. v. Minn. Civic Assn., 247 U.S. 490">247 U.S. 490; Western Maryland Ry. Co. v. Commissioner, 33 F.2d 695">33 F. 2d 695.
In view of the foregoing holding, there arises the question of whether petitioner is entitled to report such income on the installment basis as provided in section 44 (b), Internal Revenue Code. 2
*49 *170 The short answer is that the petitioner and his wife, having exercised in their 1948 income tax return the option granted them by law to report the gain derived from the transaction in controversy upon a basis other than the installment basis, may not now change to the installment basis of reporting such gain. Pacific National Co. v. Welch, 304 U.S. 191">304 U.S. 191; United States v. Kaplan, 304 U.S. 195">304 U.S. 195. Moreover, the evidence does not show that the method employed by petitioner and his wife does not, if properly applied, clearly reflect income. They received in the transaction Terrace's promissory note in the amount of $ 175,000. It has been stipulated that the fair market value of such note at the time it was received was $ 125,000. Respondent has made his determination upon the basis of such fair market value.
We answer the question posed in the negative and hold that petitioner is not entitled to report the gain in controversy on the installment basis.
The agreement of the parties with regard to the deduction by petitioner of attorney's fees in the amount of $ 1,000 as an ordinary and necessary business expense*50 will be reflected in the Rule 50 recomputation consequent hereon.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 117. CAPITAL GAINS AND LOSSES.
(a) Definitions. -- As used in this chapter --
(1) Capital assets. -- The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, * * *.↩
2. SEC. 44. INSTALLMENT BASIS.
(b) Sales of Realty and Casual Sales of Personality [sic↩]. -- In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding $ 1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 30 per centum of the selling price (or, in case the sale or other disposition was in a taxable year beginning prior to January 1, 1934, the percentage of the selling price prescribed in the law applicable to such year), the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this section. As used in this section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.