*142 Decision will be entered for the respondent.
Respondent's determination, in accordance with his regulations, that petitioners' corporation was "collapsible" under section 117 (m), I. R. C. 1939, and that gain realized in 1950 on sale of its stock is ordinary income, held, on the facts, to have been properly made where the intention to sell the stock was formed prior to completion of the construction by the corporation.
*809 Respondent determined a deficiency in petitioners' income tax for 1950 of $ 11,093.04. The only issue is whether gain realized on the sale of stock of Edsol Realty, Inc., should be taxed as ordinary income because that corporation was "collapsible" under section 117 (m), Internal Revenue Code of 1939.
FINDINGS*143 OF FACT.
Some facts were stipulated and are hereby found accordingly.
Edward Weil, hereafter referred to as petitioner, and Dorothy Weil, husband and wife, reside at Lake Success, New York. They filed their joint individual income tax return for 1950 with the collector of internal revenue at Brooklyn, New York.
Since 1927, Sol Atlas has engaged in real estate activities including the construction of numerous buildings and projects of varied nature and description in and around metropolitan New York City. He constructed approximately 50 million dollars worth of buildings. He still owns about 90 per cent of the buildings he has constructed since about 1946. He customarily formed a separate corporation for each venture. He sold during the same approximate period a section 608 (F. H. A. apartment) project, a "taxpayer" (store building), and an unidentified leasehold.
*810 Petitioner has engaged in the plumbing contract business for 25 years. Dorothy has engaged in no business occupation during the years in question. Atlas and petitioner first became acquainted in 1945 when Atlas engaged petitioner as a plumbing contractor.
In 1946, Atlas and petitioner formed Salta Realty, *144 Inc., with 50 per cent of the stock in Dorothy's name and 50 per cent in the name of Mrs. Atlas. Salta, in 1946, erected a group of stores and offices on the "Miracle Mile" in Manhasset, Long Island. Salta still owns property on Miracle Mile and Dorothy and Mrs. Atlas still own stock in the corporation.
Shortly before July 1949, petitioner requested that Atlas permit him to invest in a real estate venture similar to their investment on Miracle Mile. Atlas proposed and petitioner agreed to a venture on Welwyn Road. About July 11, 1949, petitioner and Atlas organized Edsol Realty, Inc., hereafter referred to as Edsol, under the corporation laws of New York. The certificate of incorporation stated the purposes for forming Edsol as follows:
To own and hold real estate; to buy, sell, lease and sublet and generally trade in lands, buildings and realty of every sort, nature and description; to build, construct and reconstruct, alter and renovate buildings and structures; to borrow money and funds on mortgage, bond or otherwise; to buy, sell, manufacture and deal in the instrumentalities needed for its business; and to conduct and carry on any and all further enterprises and to perform*145 any and all further acts and things of the same general character which may in any wise contribute to the enhancement of its business, and which may in any wise be connected with the said business and comprehended and embraced within the provisions of the Business Corporation Law of the State of New York.
About July 20, 1949, petitioner and Atlas each acquired for $ 5,000, 10 shares of the common stock of Edsol, issued at their respective requests in the name of Dorothy and Mrs. Atlas. 1 The total outstanding capital stock consisted of these 20 of 200 shares of authorized common stock.
Atlas, his wife, petitioner, and Dorothy, the elected directors of Edsol, acted as such at all pertinent times. Atlas, the elected *146 president, and petitioner, the elected secretary and treasurer, acted in those respective capacities at all pertinent times.
About June 22, 1949, Atlas, owner of certain vacant land on Welwyn Road, filed with the Building Department of the Village of Great Neck Plaza, Nassau County, New York, plans and specifications for a 1-story commercial building to be constructed on the land. About July 6, 1949, the village issued a permit for the construction of the building.
*811 About July 12, 1949, Atlas conveyed to Edsol 31,786 square feet of vacant land located on Welwyn Road in Great Neck Plaza. Between July 6 and August 1, 1949, Atlas transferred to Edsol the plans and specifications for the building and the construction permit issued by the village.
Edsol commenced construction of the building about August 1, 1949. About December 9, 1949, the village issued a temporary certificate of occupancy for retail stores certifying that the building had been substantially completed according to the approved plans and specifications and the requirements of the Building Code. Work still to be done included installation of asphalt topping on the driveway and parking area and construction *147 of a retaining wall. The uncompleted work was a principal reason for the buyer's initial disappointment in his purchase. Edsol completed construction about January 1950.
In August 1949, Edsol, as landlord, entered into leases covering portions of the building with Ng Giu Ming, Adrian Cleaners, and Julius Watson. Edsol, as landlord, entered into leases about December 23, 1949, with Henry Segall, and about March 1, 1950, with Mila Lewis, each covering a portion of the building. In October 1949, Edsol entered into a lease with Edwin Epstein, trading as City-Wide Markets, for the major portion of the building. That lease represented approximately 40 to 45 per cent of the building area, 30 per cent of the rental income, and 50 per cent of the construction cost. On January 30, 1950, Epstein assigned his lease to City-Wide Great Neck, Inc., the latter assuming all the terms, covenants, and conditions of the lease, and indemnifying Epstein against personal liability. About February 1950, City-Wide Great Neck, Inc., sublet the store to City-Wide Food Stores, Inc., which conducted business therein.
On October 31, 1949, Epstein deposited with Edsol $ 5,000 as security under his lease. *148 In spite of the terms of the lease, Edsol returned the deposit to him on March 6, 1950. About February 5, 1952, City-Wide Food Stores, Inc., sought, in the United States Bankruptcy Court for the Eastern District of New York, an arrangement with its creditors pursuant to chapter XI of the United States Bankruptcy Act.
About December 15, 1949, Atlas, under authority from the stockholders, authorized a real estate broker to procure a purchaser for the Edsol stock. On December 22, 1949, Dorothy and Mrs. Atlas, the sole stockholders of Edsol, contracted for the sale of the Edsol stock to LoPresti, hereafter referred to as the buyer. They received a check for $ 20,000 from the buyer as downpayment on the sale price of $ 100,000, which Dorothy agreed not to deposit until January 4, 1950. On March 30, 1950, Dorothy and Mrs. Atlas delivered to the buyer all of their Edsol stock, together with all other instruments and documents to be delivered under the contract of sale and received from the buyer *812 $ 80,000, the balance of the purchase price. On the sale of her Edsol stock during 1950 Dorothy realized a net gain of $ 42,000.
Atlas handled the entire management and supervised *149 the construction, leasing, and other business affairs connected with the building. Petitioner relied on Atlas and took no active role in the business of Edsol except as the plumbing contractor. Dorothy had no connection whatsoever with the construction, supervision, or management of the Edsol property.
Atlas never had assurance as to the type and quality of tenants which Edsol could obtain. He had intended to obtain a substantial chain store to occupy the principal store in the building. During construction he anticipated no trouble securing tenants but he realized he would not get the more valuable type of tenants because they would regard the project as too localized.
Prior to entering into the lease with Epstein, Atlas considered him financially able. He later realized that Epstein was less strong financially. The success of the tenant occupying the principal store figured strongly in the success and financial soundness of the entire venture.
One tenant, the Plaza Luncheonette, took possession and conducted business prior to December 22, 1949. In December 1949, the City-Wide Markets was equipping its store in the principal portion of the building. The smallest store, calling*150 for the smallest rental, became vacant late in 1952 and remained vacant almost 2 years while the buyer tried to procure a tenant.
City-Wide Stores opened for business in the latter part of February or March 1950. When petitioner and Atlas decided to sell the Edsol stock, they could not determine with any reasonable certainty the volume of business City-Wide Stores would achieve.
Under one type of lease commonly used in renting stores, a "percentage lease," the tenant pays a minimum fixed rent plus a percentage of all sales in excess of a specified volume. Another type of commonly used lease, a "rental lease," provides for graduated rentals from year to year. The lease between Edsol and City-Wide Stores was of the percentage type, which Atlas preferred. During negotiations for the sale of Edsol stock, Atlas told the buyer that City-Wide Stores would have a 1 1/2-million-dollar volume and would pay double the amount called for as rent.
A serious water leakage condition in the basement was discovered prior to the completion of the construction. The leakage problem could have been avoided by taking certain precautions. It would have cost about $ 15,000 to correct.
Atlas and petitioner*151 learned that 8 acres of business property located about 1 1/2 blocks from the building were for sale and that John Wanamaker had agreed to take a store there. Atlas considered a plan *813 to construct the North Shore Mart to include John Wanamaker, substantial chain tenants, and provision for parking approximately 700 automobiles. Construction of that shopping center might have adversely affected the Edsol property.
During the construction, several brokers approached Atlas with a view to procuring a purchaser for the Edsol property. Atlas advised the brokers that the property was not for sale. Atlas decided before the construction was completed that the Edsol stock should be sold.
Late in November or early in December, Atlas advised petitioner that the Edsol stock should be sold quickly. Dorothy first learned of the intention to sell the stock in December 1949.
Atlas first told a broker that the Edsol stock was for sale about December 15, 1949. That broker had asked if the property was for sale on each of many earlier occasions, and Atlas always told him it was not for sale. The buyer first learned of the availability of the stock in mid-December 1949.
Petitioner engaged*152 in only two real estate ventures, with Atlas, in his entire experience. He made one other unidentified sale during 1950.
The minimum annual gross rent potential of the property as of March 30, 1950, was as follows:
| Minimum | Minimum | |
| Tenant | monthly rent | annual rent |
| Adrian Cleaners | $ 250.00 | $ 3,000 |
| Julius Watson | 262.50 | 3,150 |
| Mila Lewis | 185.00 | 2,220 |
| City-Wide Food Stores (Edwin E. Epstein) | 875.00 | 10,500 |
| Ng Giu Ming | 608.33 | 7,300 |
| Henry Segall | 225.00 | 2,700 |
| 2,405.83 | 28,870 |
Respondent's notice of deficiency contained the following:
Taxable Year Ended December 31, 1950
Explanation of Adjustments
(a) It is determined that Edsol Realty, Incorporated is a collapsible corporation as defined in Section 117 (m) (2) (A) of the Internal Revenue Code of 1939. Accordingly, the gain of $ 42,000.00 realized on the sale of the stock of Edsol Realty, Incorporated, reported in your return as a long term capital gain is considered as a gain from the sale or exchange of property which is not a capital asset and, therefore, taxable as ordinary income. The foregoing is computed as follows:
| Proceeds from the sale of Edsol Realty, Inc. stock | $ 47,000.00 |
| Less: Basis of stock | 5,000.00 |
| Gain | $ 42,000.00 |
*153 As of March 30, 1950, when petitioners consummated the sale of their stock, Edsol had collected total rents of $ 2,998.75. It had not *814 realized a substantial part of the net income to be derived from the property.
Edsol was formed or availed of for the construction of property with a view to the sale of its stock prior to realization by it of a substantial part of the net income to be derived from the property constructed by it.
OPINION.
Two principal controversies must be disposed of in determining here whether respondent was correct in applying to the gain realized by petitioners the provisions of section 117 (m), 1939 Code, because the corporation of which they sold the stock was "collapsible." 2
*154 Petitioners first contend that respondent's regulations, which require that the intention to collapse the corporation must occur during "construction," 3 are an invalid and unenforcible interpretation of the statute. The main thrust of petitioners' position appears to be that the intention must exist at the time of the formation of the corporation, or, at the latest, at the time when it is determined to use the corporation for any of the specified purposes. As we understand the effect of this position, it is that where respondent relies upon the formation of the corporation, the "view to" taking the designated action must exist; and that similarly, if respondent relies upon the "availed of" language, the described purpose must exist at the time the corporation is first availed of.
*155 It seems to us that this is an unnecessarily restrictive approach to the interpretation of the section. While the precise question did not have to be and was not disposed of in the case of Raymond G. Burge, *815 28 T. C. 246, respondent's regulations, to the extent that they were there involved, were uniformly approved. We think, in the present instance, the latitude necessary to permit administrative officers to construe legislation in such a manner that its fundamental purpose will be achieved requires that in this respect also the regulation must be given effect and that it must be viewed as a reasonable interpretation of the section and in no way contrary to its language.
For similar reasons we regard it as necessary to give the words "at the time of * * * construction" when used in the regulation their fullest effect -- that is, to treat them as including all periods until completion of construction and not something less. 4 This seems to us required if the legislative purpose is not to be thwarted. The statute is concerned with the realization of "net income from the property." It aims at a situation where, before a substantial part of*156 that net income has been realized, the individual stockholders take action designed to result only in capital gain. But net income would ordinarily not be susceptible to realization until completion of whatever activity of the corporation was designed to create that income. The word "construction" when used in the regulation must be treated in the light of this concept so that the project should not be considered constructed until it is in shape to begin to realize net income. Partial completion, near completion, or even substantial completion are thus not effective substitutes for full completion of the "construction." 5
*157 The second controversy is basically factual and has, in effect, been disposed of in our findings. Petitioners insist that even construing the regulation as we have, the facts show that "the view to" taking the critical action, that is, in this case the sale of the stock, did not originate until after construction had been completed. This requires a determination first, of when the intention to sell the stock was formed, and second, of when the project was actually completed. As to the former, petitioners frankly and fairly concede that "[respondent] and petitioners agree that one's intent, as stated in self-serving testimony, must be tested against the background of outside factual circumstances." They urge, however, that their intention to sell the stock resulted from a combination of three circumstances, as to which they could not have had knowledge prior to the time fixed by them. Even giving effect to these circumstances, and particularly to the admitted fact that the determinate decisions were made by petitioners' costockholder, *816 Atlas, we have found as a fact that the decision to sell the stock was fixed not later than late November or early December.
The date of*158 full completion, on the other hand, it seems to us, could not have been earlier than January. Petitioners again concede "that the instant case is a perfect example of a situation where the date of completion * * * is subject to argument and doubt." But we think that here the record makes the date of full completion fairly clear. The purpose of the construction was a shopping center. While the structure itself may have been substantially completed by the middle of December, the work remaining to be done, such as the construction of a retaining wall and the completion of a parking area to make the project serviceable, was an integral and necessary aspect of the construction, and was required to be finished before the whole could be placed in effective operation. Employing the approach to the word "construction" which we have applied in dealing with its meaning in the regulation, it seems to us that final completion could not be fixed earlier than the time when the project was ready to begin earning a "substantial part" of the "net income," the earliest date for which is that set out in our findings.
In addition to the foregoing, petitioners make two further arguments. They say, *159 first, that respondent's determination was arbitrary since he made no subsidiary determination but charged merely that petitioners were taxable with ordinary income under section 117 (m). The examining agent's report, upon which respondent's determination appears to have been based, is likewise lacking in specific statements as to the actions upon which the determination rests. We are not persuaded that the determination should be disregarded for that reason. Respondent's characterization of the situation as one covered by section 117 (m) incorporates such necessary supporting conclusions as would be required to bring that section into operation. Smoot Sand & Gravel Corp. v. Commissioner, (C. A. 4) 241 F. 2d 197, 208, affirming on this point T. C. Memo. 1956-82, certiorari denied 354 U.S. 922">354 U.S. 922. At least in the absence of a motion to make respondent's position more definite, and certainly on this record where the proceedings make it clear that petitioners were not misled, the contention must fail.
Finally, it is insisted that since the statute does not apply to years ending prior to December*160 31, 1949, it should not be invoked here because the contract to sell the stock was entered into prior to that date. To this the short answer is that, by its terms, section 117 (m) applies "with respect to gain realized after" December 31, 1949. Sec. 212 (b), Revenue Act of 1950. Petitioners were presumably on the cash basis, at least as far as this record shows. As such they realized no gain from the sale of the stock until March 1950 when the *817 stock was transferred and the purchase price received. They so treated it in their own income tax return.
On all the grounds stated, we see no reason why section 117 (m) should not be given its full effect here.
Decision will be entered for the respondent.
Footnotes
1. Respondent states, without contradiction from petitioner, that "[for] the purposes of this proceeding the parties have agreed that the Edsol stock of Dorothy Weil shall be deemed to have been owned also by Petitioner Edward Weil * * * and the stock of Edythe Atlas by her husband Sol G. Atlas * * *."↩
2. SEC. 117. CAPITAL GAINS AND LOSSES.
(m) Collapsible Corporations. --
* * * *
(2) Definitions. --
(A) For the purposes of this subsection, the term "collapsible corporation" means a corporation formed or availed of principally for the manufacture, construction, or production of property, or for the holding of stock in a corporation so formed or availed of, with a view to --
(i) the sale or exchange of stock by its shareholders (whether in liquidation or otherwise), or a distribution to its shareholders, prior to the realization by the corporation manufacturing, constructing, or producing the property of a substantial part of the net income to be derived from such property, and
(ii) the realization by such shareholders of gain attributable to such property.↩
3. Regulations 111:
Sec. 29.117-11 (b). Determination of collapsible corporation. -- * * * A corporation is formed or availed of with a view to the action described in section 117 (m) (2) (A)↩ if the requisite view existed at any time during the * * * construction * * * referred to in that section. Thus, if the sale * * * is attributable solely to circumstances which arose after the * * * construction * * * (other than circumstances which reasonably could be anticipated at the time of such * * * construction * * *) the corporation shall, in the absence of compelling facts to the contrary, be considered not to have been so formed or availed of. However, if the sale * * * is attributable to circumstances present at the time of the * * * construction * * * the corporation shall, in the absence of compelling facts to the contrary, be considered to have been so formed or availed of.
4. Having once concluded that the intention to sell the stock was definitely formed within the prescribed period, we need not go further and consider whether the intention to sell may also have existed at an even earlier time "as a recognized possibility."↩
5. This interpretation is borne out by section 117 (m) (3) (C): "[This] subsection shall not apply to gain realized after the expiration of three years following the completion of such * * * construction↩ * * *." Emphasis added.