Decision will be entered for the respondent.
Held, petitioner was availed of during the taxable years for the purpose of preventing imposition of surtax upon its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed. Sec. 102, I.R.C. 1939.
*162 The Commissioner determined deficiencies in petitioner's income tax for the years indicated, as follows:
| Fiscal year ended -- | Amount |
| Feb. 28, 1951 | $ 31,231.08 |
| Feb. 29, 1952 | 13,807.27 |
| Feb. 28, 1953 | 11,729.39 |
The principal issue is whether petitioner is subject to tax under section 102, I.R.C. 1939, as having been availed of during the years in question for the purpose of preventing the imposition of surtax upon its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed.
FINDINGS OF FACT.
Certain facts have been stipulated and are incorporated herein by reference.
Petitioner, a Delaware corporation with principal offices in New York City, filed corporation income tax returns for the fiscal years ending February 28, 1951, and February 29, 1952, with the collector *48 of internal revenue for the second district of New York; its return for the fiscal year ended February 28, 1953, was filed with the director of internal revenue for the district of Lower Manhattan, New York.
Petitioner was incorporated on February 27, 1942, under the name Automatic Brake Control, Inc. Its name was changed to Aircraft Production Corporation on November 4, 1942.
In 1943, Floyd W. Jefferson, Sr. (hereinafter sometimes referred to as Jefferson), learned that petitioner was available to be "taken over." He had no previous connection with petitioner, but was looking for a corporate shell to engage in real estate activities and in the business of rendering textile engineering and advisory services. Jefferson, then 64 years of age, had been engaged in business since 1902. Since 1927, he had been a partner in the firm of Iselin-Jefferson Company, a widely known textile commission house acting as selling agent and factor for textile mills; Iselin-Jefferson also lent money to textile mills, invested in and controlled textile mills, and, *163 at least as late as 1943, rendered engineering services to the mills which it controlled.
Jefferson "took over" petitioner on or about June *49 29, 1943, when petitioner's name was changed from Aircraft Production Corporation to Wellman Operating Corporation, and the following officers and directors were elected: James W. Cox, president and director; Jefferson, treasurer and director; Marjorie B. Jefferson (Jefferson's wife), vice president and director; Courtland Palmer, secretary and director; Floyd W. Jefferson, Jr., director; Eugenia Bialek, assistant secretary; Edith Clemente, assistant treasurer.
Cox was known to Jefferson as an engineer specializing in textile machinery and having technical and practical knowledge as an operator of textile mills. Since 1933, he had been employed by Iselin-Jefferson, doing agency management and engineering work in the mills which it owned or controlled. When Cox left the employ of Iselin-Jefferson to assume the presidency of petitioner, he also went in business for himself as a textile engineer, and opened an office at 40 Worth Street, New York City; he worked for petitioner only part time until November 1956 when his employment became full time.
Edith Clemente was Jefferson's personal secretary at Iselin-Jefferson, and Courtland Palmer was a person active in the organization and incorporation *50 of petitioner in 1942.
At a meeting of petitioner's board of directors on June 29, 1943, resolutions were adopted that petitioner purchase from Jefferson, for shares of its no-par common stock at the stated value of $ 100 per share, (a) a 14-story apartment building located at No. 1 E. 88th Street, New York City; and (b) certain scheduled securities theretofore held by Jefferson in his portfolio.
Jefferson had purchased the aforementioned apartment building from Bankers Trust Company shortly prior to June 29, 1943; he had been a tenant in the building since 1941, occupying an apartment comprised of the three top floors and penthouse. Prior to transfer of the building to petitioner, Jefferson paid an $ 80,000 purchase money mortgage then outstanding as a first lien on the property. As of May 4, 1943, the apartment building was operating at an annual deficit of approximately $ 3,000.
By February 20, 1944, Jefferson had completed the transfer of the scheduled securities and apartment building, at the cost basis thereof to him, for shares of petitioner's common stock, as follows:
| Petitioner's | ||
| Item | Basis to Jefferson | shares issued |
| Securities | 1*51 $ 211,328.50 | 2,102 |
| Building | 102,498.87 | 1,024 |
| Total | 313,827.37 | 3,126 |
*164 After the transfer of the apartment building, until March 1, 1950, when it was sold, petitioner "occupied" the penthouse and Jefferson continued to rent the top three floors, as he had done prior to purchase from the Bankers Trust Company. At times Jefferson used the penthouse for his personal convenience. Petitioner held some board of directors meetings in the penthouse, but most of its meetings were held in Jefferson's private office at 90 Worth Street, New York City, the building occupied by Iselin-Jefferson. Some of petitioner's activities were conducted from Cox's private office to which petitioner's records were moved after the sale of the apartment building. Petitioner had no full-time employees before or during the years in question, and, as described below, the nature of its activities was such that petitioner did not need an office of its own.
Except for 3 shares temporarily allocated to Courtland Palmer, Jefferson was petitioner's sole stockholder at all times prior to May 9, 1950; as of *52 that date, his holdings of petitioner's stock had increased to 3,187 shares in part as the result of (a) the assignment to him on or about December 13, 1943, of 3 shares theretofore allocated to Palmer and (b) the issuance to him in February 1945 of 48 shares in exchange for his transfer to petitioner of 242 shares of Fitzgerald Cotton Mills preferred stock. On May 9, 1950, Jefferson sold 1,000 shares of petitioner's stock to Fitzgerald Cotton Mills. Jefferson and/or his family owned 100 per cent of the common stock of Fitzgerald Cotton Mills. Thereafter, and during the taxable years in question, Jefferson owned 2,187 shares of petitioner's stock and Fitzgerald Cotton Mills owned the remaining 1,000 shares.
As of June 25, 1943, the fair market value of the securities subsequently transferred to petitioner by Jefferson was approximately $ 205,000. Of these securities, all were sold in 1943 and 1944 except (a) a block of shares in Exposition Cotton Mills, valued at $ 64,600 on June 25, 1943, which was sold on January 2, 1946, and (b) certain shares of Package Machinery Co. and Alabama Mills, Inc., valued respectively at $ 4,000 and $ 1,000 on June 25, 1943, which petitioner continued *53 to hold through the taxable years in question. Most of the securities sold by petitioner in 1943 and 1944 were unrelated to the textile business.
Petitioner's activities before and during the years in question may, for convenience, be grouped in four principal categories: (a) Investments, loans, and related engineering and managerial services; (b) activities relating to purchase of a textile mill; (c) real estate activities; and (d) merchandising. Responsibility for the conduct of petitioner's affairs was divided among the officers of petitioner roughly according to these categories. Jefferson took charge of investments, loans, and securing related engineering contracts; Cox *165 concentrated on providing the engineering services pursuant to the aforementioned contracts; both Jefferson and Cox investigated the possible purchase of a textile mill; Jefferson and his wife handled most of petitioner's real estate activities; and Jefferson's son, Floyd, Jr., supervised merchandising.
Investments, loans, and related engineering contracts. -- Shortly after June 29, 1943, petitioner began rendering engineering, supervisory, and industrial services to textile manufacturers. The mills serviced *54 by petitioner were primarily "small and medium" in size, since most large mills have engineering staffs of their own. Cox visited the respective mills serviced by petitioner at intervals of from 6 weeks to 2 1/2 months. On each visit, Cox inspected the several departments of the mill and, shortly thereafter, submitted a written report on the operation and condition thereof, together with his comments and recommendations, copies of which reports were furnished by petitioner to the mill serviced. Beginning in 1950, Cox occasionally hired an outside assistant to help in such work.
Since June 29, 1943, petitioner has received fees in the following amounts for its engineering and advisory services:
| Fiscal year ended -- | Fees |
| Feb. 29, 1944 | $ 14,500.02 |
| Feb. 28, 1945 | 76,666.70 |
| Feb. 28, 1946 | 61,749.97 |
| Feb. 28, 1947 | 107,000.00 |
| Feb. 29, 1948 | 29,666.94 |
| Feb. 28, 1949 | 32,402.51 |
| Feb. 28, 1950 | 31,495.05 |
| Feb. 28, 1951 | 38,990.74 |
| Feb. 29, 1952 | 39,012.77 |
| Feb. 28, 1953 | 40,695.63 |
| Feb. 28, 1954 | 34,691.59 |
| Feb. 28, 1955 | 35,963.29 |
| Feb. 29, 1956 | 43,578.11 |
| Feb. 28, 1957 | 48,006.49 |
At the meeting of petitioner's board of directors on June 29, 1943, Jefferson stated that Conestogo Cotton Mills of Lancaster, Pennsylvania, and Fitzgerald Cotton *55 Mills, referred to above, would be receptive to an offer by petitioner of its engineering services. Accordingly, it was resolved that petitioner offer its services to Conestogo Cotton Mills for a minimum fee of $ 5,000 per year, plus a further sum, to be agreed upon, which would represent "a percentage of the amount of business furnished the Conestogo Cotton Mills, Inc. and/or amount of monies saved them in their operations." It was also resolved that petitioner offer its services to Fitzgerald Cotton Mills for a fee of $ 24,000 per year payable monthly. Payments from both mills were to commence October 1, 1943.
Of the $ 107,000 in engineering fees received by petitioner in the fiscal year ended February 28, 1947, $ 80,000 represented a payment received from Conestogo in that year; the abnormal size of the payment is explained by a restrictive clause in the contract with *166 Conestogo which obligated petitioner to render certain services over a period of time before the fees attributable to those services would be paid out by Conestogo.
Prior to June 29, 1943, Jefferson owned an interest in an offer which had been made to the bondholders and noteholders of Conestogo to purchase their *56 bonds and notes. On June 29, 1943, petitioner offered to purchase Jefferson's interest in this offer, but neither petitioner nor Jefferson ever in fact acquired an interest in Conestogo.
Commencing September 1, 1943, and ending January 31, 1945, petitioner received payments of $ 2,000 per month from Fitzgerald Cotton Mills, the stock of which was wholly owned by the Jefferson family. Commencing February 1, 1945, and during the years under review, the payments of $ 2,000 per month were received from Fitzgerald Mills Corporation, a corporation created in December 1944 to take over the physical assets of Fitzgerald Cotton Mills and carry on its manufacturing activities. Floyd Jefferson, Jr., was president of Fitzgerald Mills Corporation. Petitioner did not own any stock in Fitzgerald Cotton Mills prior to February 1945 when it acquired 242 shares of that corporation's preferred stock from Jefferson in exchange for 48 shares of its own stock. When Fitzgerald Mills Corporation was formed, however, petitioner subscribed and paid for 2,750 shares (55 per cent) of its stock at a cost of $ 27,500. On December 3, 1946, petitioner purchased 1,500 shares of the preferred stock of Fitzgerald *57 Mills Corporation for $ 75,000. At the time, Jefferson knew that Fitzgerald Mills Corporation was considering retiring a portion of its outstanding preferred stock at a premium and thought that acquisition of such stock prior to redemption would result in a "good deal" for petitioner. Fitzgerald Mills Corporation subsequently redeemed the 1,500 shares of preferred stock held by petitioner, as follows:
| Petitioner's | ||
| Number of shares | capital gain | |
| Date | redeemed | on redemption |
| Dec. 11, 1946 | 750 | 1 |
| July 28, 1947 | 250 | $ 13,750 |
| Mar. 4, 1949 | 160 | 8,800 |
| Mar. 7, 1950 | 23 | 1,265 |
| Feb. 27, 1951 | 125 | 6,875 |
| Feb. 25, 1952 | 111 | 6,105 |
| Feb. 2, 1953 | 81 | 4,455 |
| Total | 1,500 |
Prior to February 1945, petitioner had received the amount of $ 16,000 in fees for engineering services rendered to the Barret Textile Corporation, operator of mills in Massachusetts. On January *167 19, 1945, petitioner entered into a new 1-year contract with Barret pursuant to which Barret paid fees to petitioner in the amount of $ 500 per month. Neither Jefferson nor petitioner ever owned an interest in Barret.
As of February 28, 1951, petitioner held shares of stock in the following corporations:
| Basis to | ||
| Corporation | Shares held | petitioner |
| Alabama Mills, Inc | 450 common | $ 1,134.00 |
| Woodside Mills | 6,000 common | 45,002.23 |
| Package Machinery Co | 230 common | 5,750.00 |
| Iselin-Jefferson Co., Inc | 12,500 common | 125,000.00 |
| Exposition Cotton Mills | 90 common | 2,115.00 |
| Fitzgerald Mills Corporation | 2,750 common | 27,500.00 |
| Fitzgerald Mills Corporation | 192 preferred | 9,600.00 |
| Fitzgerald Cotton Mills | 242 preferred | 4,840.00 |
| 220,941.23 |
With *58 the exception of Package Machinery Co., all of the above-listed corporations were engaged in some aspect of the textile business. Package Machinery had no relation to the textile business, nor to any business activity in which petitioner engaged; Jefferson served on the board of directors of Package Machinery Co., his brother was president and chairman of the board, and the Jefferson family held a "good deal" of stock in the corporation.
The 12,500 shares of Iselin-Jefferson stock were purchased by petitioner from Jefferson for $ 125,000 on or about July 8, 1946, following the incorporation of the partnership on July 1, 1946. It had been decided to incorporate Iselin-Jefferson in late 1945 or early 1946; at that time Jefferson had a 40 per cent interest in the partnership and Floyd Jefferson, Jr., was also a partner. Jefferson wanted his family to have "an equal amount of stock with the Iselin family." Under the terms of the incorporation, Iselin-Jefferson voting stock could be issued only to partners. On January 8, 1946, petitioner advanced $ 150,000 to Jefferson in return for Jefferson's 6-month note for $ 150,000, bearing interest at 3 per cent. On July 1, 1946, Jefferson received *59 an undisclosed number of shares (but more than 12,500) of the voting stock of Iselin-Jefferson. On July 8, 1946, he transferred 12,500 of his Iselin-Jefferson shares to petitioner for $ 10 per share, or a total purchase price of $ 125,000 which was offset against the face amount of Jefferson's note ($ 150,000). The record does not reveal the manner in which Jefferson paid the remaining $ 25,000 due on his note.
Except for the aforementioned loan to Jefferson in connection with the purchase of Iselin-Jefferson stock, petitioner has never lent any money to Jefferson, his wife, or son.
*168 Subsequent to the incorporation of Iselin-Jefferson, Jefferson served as its president and later as cochairman of its board of directors. Floyd, Jr., assumed the presidency of Iselin-Jefferson when his father became cochairman of the board. A voting trust was created on or about November 15, 1947, for a period of 10 years whereby Jefferson, Floyd, Jr., and an attorney named John M. P. Thatcher were empowered to vote the Iselin-Jefferson stock then owned by petitioner, Fitzgerald Cotton Mills, Jefferson, his wife, and Floyd, Jr. The record does not reveal when or in what manner Fitzgerald Cotton Mills *60 and Jefferson's wife became stockholders of Iselin-Jefferson.
Petitioner purchased 1,500 shares of Woodside Mills from certain minority shareholders on November 4, 1948. These shares increased to 6,000 by February 28, 1951, as the result of an intervening 2-for-1 stock split and a 100 per cent stock dividend declared by Woodside Mills. Woodside Mills was a South Carolina corporation operating five textile mills. Iselin-Jefferson owned the majority of Woodside Mills' outstanding common stock and served as its selling agent.
The 90 shares of stock in Exposition Cotton Mills were acquired by petitioner subsequent to January 2, 1946, the date that petitioner disposed of the stock in that company previously transferred to it by Jefferson.
Although *61 petitioner held stock in Alabama Mills, Woodside Mills, and Exposition Cotton Mills, it neither rendered engineering services to, nor received engineering fees from, any of these corporations. As explained below, although petitioner did receive certain fees from Iselin-Jefferson, such fees were for services rendered to other corporations employing Iselin-Jefferson as sales agent and were paid by Iselin-Jefferson purely as a matter of business convenience.
In addition to its investments in the stocks of companies engaged in the textile business, petitioner also made loans to textile mills or to corporations controlling textile mills. It was petitioner's "established policy" to make no loan to any company unless such company agreed to execute a contract for engineering and managerial services to be supplied by petitioner at a fee. The fee to be paid by the borrowing company was in addition to the interest charged by petitioner on its loan.
In January 1950 petitioner made a loan of $ 95,000 to the Ferro Co Corporation of Brooklyn, New York, to aid that company in financing acquisition of a controlling stock interest in the Rhodes-Rhyne Manufacturing Company of Lincolnton, North Carolina. *62 The loan *169 bore interest at 3 per cent per year, was amortizable at the rate of $ 15,000 per year starting December 1950, and was secured by the stock of Rhodes-Rhyne. The stock of Ferro Co was owned by Kenneth Carroad, a New York attorney, and his wife. Originally, Carroad approached Iselin-Jefferson for a loan but, for reasons undisclosed by the record, the executive committee of Iselin-Jefferson was "unwilling" to make the requested advances. Iselin-Jefferson, however, was interested in reacquiring the selling agency for the Rhodes-Rhyne Mill which it had lost in 1946 following a change in ownership of the mill. The problem was worked out as follows: Petitioner agreed to advance the necessary funds to Ferro Co; Iselin-Jefferson was appointed exclusive selling agent for the Rhodes-Rhyne Mill; petitioner was "selected to take over the management of the mill"; and Iselin-Jefferson agreed to pay petitioner, as compensation for managerial and engineering services to be rendered to Rhodes-Rhyne, 1 per cent of the net billings on sales made by Iselin-Jefferson for the Rhodes-Rhyne account. The selling commissions charged to Rhodes-Rhyne by Iselin-Jefferson were "a little higher than *63 average" in view of Iselin-Jefferson's obligation to pay a percentage thereof to petitioner.
As of July 2, 1951, the cotton textile industry was in a depressed condition and mills were either running short time or shut down completely. Consequently, Cox became "convinced that there was no use interviewing mills, at the present time, in regard to making loans to mills." Petitioner's minutes show that the depressed state of the industry continued during 1951, 1952, and as late as 1954.
In October 1954, John Clark, president of Locke Cotton Mills, Concord, North Carolina, approached Jefferson concerning a loan. Jefferson advised Clark that petitioner would lend $ 25,000 to Locke "with the understanding" that petitioner would receive a service contract from Locke for $ 5,000 per year, payable quarterly. The ensuing negotiations between petitioner and Locke Cotton Mills culminated on February 25, 1955, when petitioner lent $ 73,875 to Locke, secured by mortgages on Locke's assets. Iselin-Jefferson made identical loans to Locke on the same date and in the same amounts as the loans made by petitioner. In connection with these loans, Iselin-Jefferson was appointed exclusive selling agent *64 for Locke and agreed to pay petitioner, as compensation for managerial and engineering services to be rendered to Locke, one-half of 1 per cent of the net billings on all sales made by Iselin-Jefferson for the Locke account.
For a period of approximately a week in December 1955, petitioner considered an investment of approximately $ 260,000 in Spray Cotton Mills, Spray, North Carolina. At the time, petitioner was informed *170 that the Alien Property Custodian was in possession of about 2,600 shares of Spray Mill stock, that bids for the stock were to be taken on January 6, 1956, and that a bid of $ 100 per share might be accepted. Jefferson contacted the majority stockholder of Spray Mills to see if a purchase by petitioner of the aforementioned shares, or a loan to the majority stockholder to enable him to acquire such shares, might result in petitioner being granted a service contract by Spray Mills. Petitioner was primarily interested in the service contract. The deal fell through because petitioner could get no assurance of employment, and not because petitioner lacked the necessary funds or resources.
Petitioner also made some smaller short-term loans to persons other than textile *65 mills for which it charged amounts in addition to interest; these additional amounts, termed "advisory fees," were in effect additional interest since petitioner did not render any services in connection therewith. Petitioner made one such loan in the amount of $ 5,000 to Eleanor A. N. McWilliams in February 1949 in order to help her launch a career as a lecturer on style. Another such loan was made on September 16, 1949, in the amount of $ 3,000 to John C. Milne, head of a drapery sales agency doing substantial business with Iselin-Jefferson. An "advisory fee" of $ 20 per month was charged to Allen Snyder, Inc., in connection with a $ 10,000 loan at 2 1/2 per cent interest made in late 1951. On September 14, 1953, petitioner's board of directors authorized Jefferson to conclude negotiations with Page, Page & Page, converters of cotton goods, for a 1-year loan of $ 10,000 at 3 1/2 per cent plus a "fee" of $ 10 per month.
Activities relating to purchase of a textile mill. -- In March 1944, Cox was designated to make surveys of any textile mill properties he thought might be an "advantageous purchase" for petitioner. Petitioner was primarily interested in mills that were in distressed *66 circumstances and could be purchased at "bargain" prices. To date, petitioner has never purchased a textile mill.
On or about July 2, 1947, Cox had discussions with Fred R. Thomas, president of Superba Mills of Hawkinsville, Georgia, concerning the possible purchase of that mill by petitioner, but Cox considered the price asked by Superba's stockholders to be "unreasonable." On October 9, 1947, Cox reported that in view of the high asking price for the Superba mill, he "did not recommend the purchase of this mill at this time"; however, Cox stated his intention to keep in touch with the situation and report to petitioner's board of directors if "it seemed wise to renew negotiations." As of January 8, 1948, Cox "had not found any good textile property, which he could recommend to the company for investment." On or about July 30, 1948, Cox arranged with the president of Russellville Cotton *171 Mills, of Russellville, Georgia, for that company to pay petitioner a commission if petitioner could negotiate a sale of the Russellville mill. On the same date the minutes of the meeting of petitioner's board of directors recite that "it was decided" to enter the business of "buying and selling *67 cotton mills" and Cox was instructed to "work on the matter." On or about September 30, 1948, Cox and Thomas reached an agreement to the effect that, if petitioner itself did not buy Superba Mills, Superba would pay petitioner a commission for arranging a sale of the mill to another company. On July 10, 1951, Cox reported that the majority stockholders of Superba were asking $ 235,000 for the mill, with arrangements to be made for purchasing inventory; that the mill was a "good buy," if it could be purchased for $ 225,000. However, before Cox had an opportunity to present these figures to petitioner's board of directors, the mill had been sold to B. Snower & Co. of Chicago for $ 250,000, with arrangements for purchase of inventory. Jefferson estimated that the Superba mill would have required additional funds for stocking the mill and for working capital. Petitioner never submitted a purchase offer to Superba, nor did it locate another purchaser. The failure of petitioner to obtain Superba Mills was attributable to factors extraneous to the availability of funds or resources.
On or about October 9, 1947, Cox talked with M. S. Dayan, president of the Jennings Cotton Mill, Lumberton, *68 North Carolina, concerning the possible purchase of this mill. Dayan advised Cox that 10,000 spindles of the 15,000 spindles in the mill were for sale at $ 35 per spindle, or a total price of $ 350,000, but that he (Dayan) was then engaged in other negotiations and would not give petitioner an option. Petitioner took the proposition "under advisement" and asked Cox to hold further discussions with Dayan; however, the record is silent as to any further discussions and petitioner never made an offer to purchase the Jennings Mill.
On February 14, 1952, petitioner learned that the goodwill, patents, copyrights, and certain other assets of the Palmer Brothers Company, Fitchville, Connecticut, were to be sold at public auction. Jefferson thought petitioner should consider buying these assets with the possibility in mind of manufacturing comfortables, tailored bedspreads, and sheets under the Palmer Brothers label; he thought relevant information might be obtained from J. Reid Johnson, former president of Palmer Brothers, that Cox could be helpful in locating personnel for the operation, that a good labor situation existed in Fitchville, that space could be obtained in the Fitchville plant *69 formerly operated by Palmer Brothers, and that Iselin-Jefferson might be employed as selling agent. Although it was originally *172 estimated that $ 100,000 would be sufficient to purchase the assets offered for sale, it was later determined that substantial additional amounts would be required to rehabilitate the plant. Petitioner did not make an offer for the purchase of Palmer Brothers and did not attend the auction sale.
On October 8, 1953, Floyd, Jr., reported that the principal stockholders of the Royston Mill, Royston, Georgia, were interested in selling their stock or the physical assets of the mill, and that "it might be a favorable purchase for Wellman"; he estimated that purchase of the stock and assumption of Royston's obligations would cost "more than $ 500,000," but that a large part of this investment could be quickly recovered through the sale of the mill's inventory. He noted that Royston was then suffering substantial losses because of low prices charged by a competitor for tobacco cloth and that he did not know how the immediate losses could be stopped. Floyd, Jr., was simultaneously engaged in negotiations with David Carmel regarding a long-term management contract *70 for petitioner; Carmel, it was hoped, would purchase a large percentage of the production of Royston Mill. Petitioner never offered to purchase this mill, and it was purchased by the Carmel interests prior to December 4, 1953.
At an unspecified time during the period 1950-1952, petitioner learned that the fixed assets of Atco Mills, Atco, Georgia, manufacturer of tobacco cloth, were up for sale. The asking price for the mill was $ 500,000, but Jefferson hoped that the price might come down because the owner was in ill health and anxious to sell. Petitioner never made an offer to purchase the mill; interest in the purchase terminated when its owner died.
In September of 1951, Cox was "in touch" with the Crescent Corporation and Samarkand Mills, Inc., Rock Hill, South Carolina, and on September 21, 1951, Cox reported that he had been in "further negotiation" with these companies with regard to purchasing a mill. Some conversations were held on October 26, 1951, but on November 13, 1951, Cox reported "no further progress" in these negotiations; he attempted to contact R. A. Postlethwaite of Samarkand Mills several times prior to November 27, 1951, but Postlethwaite was out of town on *71 each occasion. In January 1952 petitioner was invited to have a representative visit the New York office of Samarkand Mills to see the products of the mill; it was decided that Floyd, Jr., should visit Postlethwaite in this connection. On February 14, 1952, Floyd, Jr., stated that he "expected to make an inspection" of Samarkand's products as soon as he returned from a 2 weeks' vacation, but petitioner's minutes contain no mention of any further dealings with Samarkand. Cox reported on May 26, 1952, that although conditions in the textile industry were depressed, the only *173 mills he found for sale were "very old ones in poor condition and not worth considering irrespective of the price." Petitioner never offered to purchase the Samarkand mill.
In about 1951, Jefferson was approached by a person named Swergold who, in association with other individuals, was interested in acquiring control of the Victoria Cotton Mills, Rock Hill, South Carolina, a manufacturer of ginghams; Swergold, representing the Cotra Company, had use for the product of the mill. Jefferson had a long acquaintance with the Victoria mill and its owners, having acted as selling agent therefor. Jefferson caused petitioner *72 to form a syndicate with the Swergold group, but a purchase offer submitted by the syndicate for the fixed assets of the mill was rejected and subsequent negotiations broke down. At the time of trial, Jefferson estimated that about $ 500,000 would have been required to purchase the property, but he did not specify the amount of the purchase offer nor the extent of petitioner's interest therein.
During an unidentified period, petitioner considered the possibility of purchasing the Sanders Mill in Mobile, Alabama, which the owner, J. W. Sanders, was very anxious to sell. Sanders was asking as much as $ 500,000 for the mill, but petitioner thought all the assets of the mill, including inventory, might be purchased for $ 300,000. Although an offer at the latter figure was "under consideration" by petitioner, it was not "definitely planned" and the Sanders Mill burned down before petitioner's intentions crystallized further.
During the period 1951-1952, Jefferson had discussions with Thomas Tifft, owner of the Tifton Mills, Tifton, Georgia, about 20 miles from Fitzgerald, Georgia. Tifft was asking about $ 500,000 for the fixed assets of Tifton Mills, which price Jefferson considered "out *73 of our range." As a result of Jefferson's contact with Tifft, however, Iselin-Jefferson succeeded in obtaining the selling agency for one of Tifft's other mills, the Piedmont Mill in Atlanta, Georgia. Petitioner never submitted an offer to purchase Tifton Mills.
Real estate activities. -- The building at 1 East 88th Street, New York City, was sold to William Zeckendorf of Webb & Knapp on March 1, 1950, for $ 156,350; petitioner's adjusted basis in the building at that time was $ 106,795.80, so that its gain on sale was approximately $ 50,000. During the period of its ownership, 1943-1950, petitioner, through a managing agent, managed and leased the building to a number of tenants, and made structural changes in the first floor at a cost of approximately $ 5,000. Petitioner also considered (a) turning the building into a cooperative apartment building; (b) adding three stories to the height thereof; and (c) converting the duplex apartments into simplex apartments. These possibilities were abandoned prior to November 1949. A *174 switch to operation on a cooperative basis would not have required any financial outlay; the addition of stories and conversion to simplex apartments would *74 have involved substantial expenditures.
On December 30, 1943, petitioner purchased a commercial building numbered 325-327 Broadway, New York City, for $ 77,875.16. It continued to own and rent this property to various tenants until February 21, 1946, when the building was sold to Iselin-Jefferson for $ 102,078.81, representing a gain to petitioner in the amount of $ 27,556.55; both purchase and sale were cash transactions. The building at 325-327 Broadway adjoined a building owned by Iselin-Jefferson and, after the aforementioned sale, the combination of buildings was known as 90 Worth Street and was occupied by Iselin-Jefferson and its affiliated companies.
In the fall of 1946, Durand Taylor, a promoter and manager of real estate, approached Jefferson with a proposal to raze the buildings at 90 Worth Street and construct, in lieu thereof, a multiple-story building to be named the Iselin-Jefferson building; the project was Taylor's conception. Oliver Iselin, Jefferson's former partner and a major stockholder in Iselin-Jefferson, and Jarvis Cromwell, a person associated with Iselin-Jefferson, participated in the ensuing discussions.
As a result of the interest generated by his proposal, *75 Taylor, had an architect draw tentative plans for the building; the ground floor was to be leased to a commercial bank; the center segment, about 50,000 square feet, was to be occupied by the "Iselin-Jefferson group" and the top segment was to be general office space for specific renting. Letters of intent were obtained from certain potential lessees.
At the time Taylor estimated that the cost of the building, excluding land, would be about $ 3,000,000; he thought a mortgage loan of $ 2,500,000 might be obtained, and that Jefferson, or interests represented by him, would supply the remaining $ 500,000. Taylor knew that Jefferson was connected with petitioner, and during the conversations, Jefferson indicated that petitioner might participate in the project, but the extent of such participation was never defined in terms of a specific amount or commitment. No specific portion of the aforementioned 50,000 square feet designed for occupancy by the "Iselin-Jefferson group" was ever earmarked for petitioner's use.
In early 1947, Taylor and Jefferson held discussions with Frazier Wilde, president of the Connecticut General Life Insurance Company, with respect to financing the project. *76 These discussions were general and exploratory in nature and Wilde was never asked whether his company would advance any specific amount as a mortgage loan; however, Wilde evidenced interest in the project on the basis of the preliminary plans.
*175 Most of the conversations concerning the project, including those with Wilde, were held in Jefferson's private office at 90 Worth Street, the building occupied by Iselin-Jefferson; some of the conferences with Wilde were held in a hotel.
Consideration of the project was dropped as an increasing number of textile firms moved from Worth Street to uptown locations; the movement uptown began in 1945 or 1946 and accelerated in the early 1950's.
Taylor also approached Jefferson with offers to sell other commercial buildings in the textile area of downtown New York City, including those listed below, but in each case Jefferson rejected the offer.
| Building | Offering | Year of offer |
| price | ||
| J. P. Stevens Bldg | $ 600,000 | 1949 or 1950 |
| Smith-Hogg Bldg | 300,000 | 1947 |
| John Wolf Bldg | 325,000 | 1947 |
| Sinclair Oil Bldg | 550,000 | 1946 |
On November 7, 1944, petitioner purchased the "Main Street" property located on South Main Street, Southampton, Long Island, New York, and renovated the buildings *77 thereon at a total cost, including improvements, of $ 85,299.64. The renovations, which included the conversion of a garage and child's playhouse into dwellings, were supervised by Jefferson's wife. The dwellings on the property were all rented by petitioner as furnished houses or apartments. Some summer months Jefferson and his wife rented the main house, and other summer months they rented "Whitegates," another house on the property; Floyd, Jr., rented the garage apartment during some summer months. At other times, the dwellings were rented to other tenants. Petitioner realized net rental losses from the Main Street property during the taxable years in question, as follows:
| Fiscal year ending | Net rental losses |
| Feb. 28 -- | (round figures) |
| 1951 | ($ 8,837) |
| 1952 | (15,596) |
| 1953 | (8,812) |
Petitioner sold the Main Street property on February 6, 1953, at a net gain of $ 13,136.30, which gain was attributable solely to basis adjustments resulting from depreciation deductions taken by petitioner in the amount of $ 27,185.94.
On December 29, 1949, petitioner purchased a second Southampton property, the "LaMontaigne Property," from Fitzgerald Cotton Mills and improved it at a total cost of $ 60,239.70. The *78 improvements *176 included conversion of a garage into a dwelling under the supervision of Jefferson's wife. Except for the garage apartment which was rented to Floyd, Jr., for one summer, the dwellings were rented to tenants other than the Jefferson family. Petitioner incurred rental losses on this property during the taxable years in question, as follows:
| Fiscal year ending | Net rental losses |
| Feb. 28 -- | (round figures) |
| 1951 | ($ 1,244) |
| 1952 | (4,172) |
| 1953 | (2,130) |
The property was sold in two parcels on July 1, 1953, and September 30, 1954, respectively, at a net gain to petitioner of $ 440; the gain was attributable solely to basis adjustments resulting from depreciation deductions taken by petitioner in the amount of $ 10,889.63.
On February 9, 1953, petitioner purchased "Fair Winds," also in Southampton, and added improvements, including furniture and furnishings costing $ 17,826.07, at a total cost of $ 87,502.28; Jefferson's wife supervised the conversion of a garage into living quarters. The Jeffersons lived in the main house during some summer months. At other times the living quarters were rented to various tenants. "Fair Winds" was sold on October 14, 1955, at a net gain to petitioner of *79 $ 3,505.50, which gain was attributable solely to basis adjustments resulting from depreciation deductions taken by petitioner in the amount of $ 13,146.18.
The purchase and sale by petitioner of the three Southampton properties were cash transactions, no mortgages being given. Jefferson and his wife personally selected all three properties for purchase by petitioner.
On September 28, 1950, petitioner purchased the property located at 17 Sutton Place, New York City, for $ 55,000 and added improvements thereto at a cost of $ 22,085.12. The purchase was for cash, no mortgage being given. Petitioner rented the property to Floyd, Jr., for 6 months when it was purchased by him for $ 80,000 -- $ 10,000 in cash and a mortgage of $ 70,000 maturing in 1962 and payable $ 3,500 per year with annual interest at 4 1/2 per cent. During petitioner's 6 months' ownership of the property, it incurred net rental losses of $ 1,041.81.
On October 10, 1953, Jefferson and his wife examined four properties in Greenwich, Connecticut, and were particularly impressed by the S. Vere-Smith property which comprised an area of about 37 acres. It was contemplated that if petitioner purchased the property, it would *80 be able to sell 30 acres to a development company at approximately $ 5,000 per acre; that the "gate-house" at the entrance to the property with 1 acre of land could be sold for about $ 40,000; *177 and that the big house and large garage located on the remaining 6 acres could be rehabilitated, furnished, and rented as dwellings. Negotiations for the S. Vere-Smith property proceeded along two lines. During November 1953 petitioner offered $ 179,500 for the entire property; when its offer was rejected, petitioner entered a further bid of $ 185,000, but this offer was also declined. As an alternative to purchasing the entire property, petitioner offered $ 125,000 for 10 acres which included all the houses on the property; however, surveys subsequently taken failed to show a 10-acre plot satisfactory to Jefferson and, on November 30, 1953, Jefferson called off the negotiations. The owner of the property never disclosed an asking price.
On February 9, 1954, petitioner purchased the "Doubling Road" property in Greenwich, Connecticut, for $ 57,000; since that time petitioner has expended $ 78,458 for improvements to the property, including $ 51,250.85 for furniture and furnishings. The property *81 was, and still is, rented part time to the Jeffersons and part time to other tenants. Petitioner still owns the property but has sold off two portions of it -- one portion comprising 3.1 acres for $ 13,272, and another portion to a neighboring owner at $ 4,000 per acre.
Merchandising. -- Since as early as 1948, petitioner has engaged in the purchase and sale of textiles, and has realized gross profits (or losses) therefrom, as follows:
| Fiscal year ending Feb. 28 -- | Net sales | Gross profit |
| 1948 | $ 6,019 | $ 767 |
| 1949 | (1) | (1) |
| 1950 | (2) | (2) |
| 1951 | 3,404 | 1,498 |
| 1952 | (2) | (2) |
| 1953 | 62,774 | 8,020 |
| 1954 | 47,443 | 1,781 |
| 1955 | 9,757 | 133 |
| 1956 | 18,602 | (100) |
| 1957 | 121 | 17 |
Purchases of textile merchandise at favorable prices require cash. Petitioner's merchandising activities were carried on under the supervision of Jefferson's son who was in close contact with the textile market. On February 14, 1952, in connection with petitioner's merchandising activities, Jefferson suggested that petitioner enter the business of textile converting, and that they hire John Paul Maynard to manage this business. Petitioner's board of directors accordingly voted to employ Maynard on a part-time basis at $ 5,000 *82 per year, plus a bonus if the business proved successful. Maynard was also elected a director and vice president of petitioner. It was decided *178 "that the amount of money to be invested in this enterprise should be limited to $ 100,000, unless authorization was given at a later time by the directors for putting a greater amount of money at risk." It appears from petitioner's tax returns that petitioner paid Maynard $ 5,000 in the fiscal year ended February 28, 1953, $ 4,250 in 1954, nothing in 1955 or 1956, and $ 2,800 in 1957. The gross profit of $ 8,020 from merchandising reported for the fiscal year ended February 28, 1953, resulted primarily from the sale of (a) print cloth purchased from Woodside Mills in May 1952, and (b) sheeting purchased from Bibb Manufacturing Company in June 1952.
Petitioner sold jewelry during the years indicated at the following prices and at the profit (or loss) indicated:
| Fiscal year ending Feb. 28 -- | Sales price | Net profit (or loss) |
| 1951 | $ 1,320 | $ 120 |
| 1952 | 5,750 | (3,000) |
| 1953 | (1) | (1) |
| 1954 | (2) | 300 |
| 1955-1957 | (1) | (1) |
The $ 3,000 loss in 1952 was incurred upon the sale of a marquise diamond ring acquired by petitioner in May 1944 at *83 a cost of $ 8,750.
Subsequent to the taxable years under review, petitioner also engaged in additional areas of business.
In November 1956, petitioner purchased for $ 10,000, 50 per cent of the outstanding stock of Alemany & Co., a corporation engaged in the manufacture and sale of jewelry, including museum pieces designed by Salvador Dali, the artist, with whom Alemany & Co. had an exclusive contract; petitioner agreed to lend Alemany & Co. the amount of $ 10,000 at 4 per cent interest for working capital, and a prior note for $ 10,000 lent to Alemany by petitioner was canceled. In June 1957, petitioner decided to advance additional working capital to Alemany & Co. until that company should conclude negotiations for the sale of certain jewelry and designs. On February 11, 1958, petitioner purchased three Dali designs from Alemany & Co. for $ 12,500, the latter company to manufacture jewelry pursuant to the designs and sell it "at a reasonable profit" to petitioner.
In 1956, petitioner acquired for $ 11,200 a 40 per cent interest in Andrews & Co., Ltd., a Bermuda corporation representing American textile firms and also engaged in the upholstery, drapery, and furniture business; petitioner *84 has subsequently advanced additional amounts to that company for working capital.
In April 1957, petitioner purchased the assets of Waverly Printing Co., Portland, Connecticut, for $ 71,761, including inventory and *179 work in process valued at $ 35,767.85; in addition, petitioner purchased a new press for Waverly in May 1957 at a cost of $ 7,400. Waverly has been operated as a "division" of petitioner.
In the fall of 1958 petitioner purchased control of the Gorham Press, South Norwalk, Connecticut. Its total investment in this company is approximately $ 75,000.
Petitioner paid no rent and had no full-time officers or employees prior to, or during, the years under review. Salaries paid to officers and employees in the years indicated were as follows:
| Fiscal year ended Feb. 28 -- | |||
| Officers | |||
| 1951 | 1952 | 1953 | |
| James W. Cox | $ 10,000.02 | $ 9,999.96 | $ 10,000.00 |
| William L. Walker | 2,400.00 | 2,400.00 | 2,400.00 |
| J. H. Mayes | 100.00 | 100.00 | 100.00 |
| Marjorie B. Jefferson | 100.00 | 100.00 | 100.00 |
| John Paul Maynard | (1) | 208.33 | 5,000.01 |
| Subtotals | 12,600.02 | 12,808.29 | 17,600.01 |
| Other employees | 3,420.00 | 3,420.00 | 3,763.28 |
| Totals | 16,020.02 | 16,228.29 | 21,363.29 |
Walker and Mayes were vice presidents of petitioner during the years in question. Walker *85 served as petitioner's "southern representative," investigating and keeping petitioner informed of possible opportunities in that region. Mayes was also manager of the Fitzgerald Mills Corporation. The "other employees" were mostly associated with petitioner's real estate activities, e.g., caretakers, gardeners, electricians, contractors, etc.
Petitioner operated its rental properties at a loss during each of the years in question, as follows:
| Fiscal year ending | Net operating loss |
| Feb. 28 -- | from rentals |
| 1951 | $ 10,808.58 |
| 1952 | 20,082.79 |
| 1953 | 11,909.72 |
Petitioner's net income and net income after taxes for the years in issue were as follows:
| Fiscal year ending Feb. 28 -- | Net income | Net income after taxes |
| 1951 | $ 133,552.41 | $ 113,567.56 |
| 1952 | 60,118.60 | 55,523.75 |
| 1953 | 64,420.71 | 55,055.82 |
The following schedule gives a breakdown of the principal sources of petitioner's gross income during the years in issue: *180
| Fiscal years ending Feb. 28 -- | |||
| 1951 | 1952 | 1953 | |
| Dividend Income: | |||
| Alabama Mills, Inc | $ 900.00 | $ 562.50 | $ 337.50 |
| Exposition Cotton Mills | 90.00 | 90.00 | 112.50 |
| Fitzgerald Cotton Mills | 2,178.00 | 2,178.00 | 2,178.00 |
| Iselin-Jefferson Co., Inc | 37,500.00 | 37,500.00 | 25,000.00 |
| Package Machinery Co | 322.00 | 368.00 | 368.00 |
| Woodside Mills | 18,000.00 | 10,700.00 | 8,000.00 |
| Fitzgerald Mills Corp | 3,408.34 | 1,052.50 | 438.75 |
| Total dividend income | 62,398.34 | 52,451.00 | 36,434.75 |
| Income from interest | 2,250.19 | 4,752.84 | 4,729.44 |
| Rental income | 13,123.85 | 13,759.84 | 11,624.15 |
| Total dividend, interest and rental | |||
| income | 77,772.38 | 70,963.68 | 52,788.34 |
| Income from fees: | |||
| Fitzgerald Mills | 24,000.00 | 24,000.00 | 24,000.00 |
| Iselin-Jefferson (Rhodes-Rhyne) | 14,555.23 | 14,972.77 | 16,655.62 |
| John C. Milne | 35.51 | ||
| E. N. McWilliams | 400.00 | ||
| Allen Snyder, Inc | 40.00 | 40.00 | |
| Total income from fees | 38,990.74 | 39,012.77 | 40,695.62 |
| Gross profit from sales | 1,498.20 | (1) | 8,019.73 |
| Long-term capital gain | 64,031.19 | 6,105.00 | 16,761.47 |
Since 1947, petitioner's earned surplus has increased as follows:
| Fiscal year ended Feb. 28 -- | Earned surplus | Increase |
| 1947 | $ 159,741.99 | |
| 1948 | 190,599.62 | $ 30,857.63 |
| 1949 | 212,620.45 | 22,020.83 |
| 1950 | 248,953.86 | 36,333.41 |
| 1951 | 360,023.57 | 111,069.71 |
| 1952 | 414,074.61 | 54,051.04 |
| 1953 | 471,947.10 | 57,872.49 |
| 1954 | 511,209.27 | 39,262.17 |
| 1955 | 539,794.97 | 28,585.70 |
| 1956 | 588,807.69 | 49,012.72 |
| 1957 | 696,573.47 | 107,765.78 |
| Total increase in earned surplus, | ||
| 1947-1957 | 536,831.48 |
Petitioner's current ratio (current assets at book cost to current liabilities) during this period varied as follows:
| Fiscal year ended Feb. 28 -- | Current | Current | Current |
| assets | liabilities | ratio | |
| 1947 | $ 334,702.74 | $ 35,685.41 | 9 to 1 |
| 1948 | 339,684.77 | 10,384.39 | 33 to 1 |
| 1949 | 356,051.00 | 8,293.43 | 43 to 1 |
| 1950 | 392,312.00 | 36,642.08 | 11 to 1 |
| 1951 | 521,705.61 | 28,331.67 | 18 to 1 |
| 1952 | 562,961.90 | 6,985.34 | 81 to 1 |
| 1953 | 635,491.73 | 20,185.73 | 31 to 1 |
| 1954 | 568,087.57 | 19,439.47 | 29 to 1 |
| 1955 | 515,449.06 | 9,597.43 | 54 to 1 |
| 1956 | 658,925.07 | 5,182.01 | 127 to 1 |
| 1957 | 787,996.11 | 8,100.05 | 97 to 1 |
*181 Petitioner's current assets during this period included "quick assets" (cash, notes, and accounts receivable), stock in domestic corporations, and inventory, as follows:
| Notes and | Total | ||
| Fiscal year ended Feb. 28 -- | Cash | accounts | quick |
| receivable | assets | ||
| 1947 | $ 81,945.64 | $ 3,315.87 | $ 85,261.51 |
| 1948 | 70,986.28 | 4,285.51 | 75,271.79 |
| 1949 | 101,842.62 | 14,446.40 | 116,289.02 |
| 1950 | 70,406.90 | 90,143.12 | 160,550.02 |
| 1951 | 230,154.73 | 70,609.65 | 300,764.38 |
| 1952 | 263,431.57 | 68,089.10 | 331,520.67 |
| 1953 | 364,125.39 | 43,975.11 | 408,100.50 |
| 1954 | 307,497.33 | 33,199.01 | 340,696.34 |
| 1955 | 253,488.98 | 34,568.85 | 288,057.83 |
| 1956 | 402,792.21 | 23,541.63 | 426,333.84 |
| 1957 | 443,554.24 | 47,962.52 | 491,516.76 |
| Fiscal year ended Feb. 28 -- | Stocks | Inventory |
| 1947 | $ 249,441.23 | (1) |
| 1948 | 237,856.23 | $ 26,556.75 |
| 1949 | 237,856.23 | 1,905.75 |
| 1950 | 229,856.23 | 1,905.75 |
| 1951 | 220,941.23 | (1) |
| 1952 | 231,441.23 | (1) |
| 1953 | 227,391.23 | (1) |
| 1954 | 227,391.23 | (1) |
| 1955 | 227,391.23 | (1) |
| 1956 | 232,591.23 | (1) |
| 1957 | 242,591.23 | 53,888.12 |
Jefferson *87 and his wife filed joint income tax returns for the following calendar years showing net income and tax liability as follows:
| Year | Net income | Tax liability |
| 1950 | $ 180,103.80 | $ 106,738.58 |
| 1951 | 282,728.52 | 154,320.24 |
| 1952 | 75,349.79 | 39,749.86 |
From June 29, 1943, through the fiscal year ended February 28, 1958, petitioner has not declared any dividends on its stock nor has it paid any salary to Jefferson.
On December 16, 1955, respondent notified petitioner of his intention to issue a deficiency notice based on section 102 of the 1939 Code for the taxable years now under review. On January 15, 1956, pursuant to section 534 of the 1954 Code, petitioner submitted a "statement" (incorporated herein by reference) to respondent setting forth certain "grounds" and "facts" in opposition to the section 102 deficiency proposed by respondent. Respondent then mailed to petitioner a notice of deficiency dated April 13, 1956.
During the years under review petitioner permitted its earnings and profits to accumulate beyond the reasonable needs of its business.
Petitioner was availed of during the years under review for the purpose of preventing the imposition of surtax upon its shareholders, through the medium of *88 permitting its earnings and profits to accumulate instead of being divided or distributed.
OPINION.
The challenged deficiencies were determined under section 102 of the Internal Revenue Code of 1939, which imposed a special surtax upon corporations formed or availed of for the purpose of preventing the imposition of surtax upon its shareholders by *182 permitting earnings or profits to accumulate instead of being divided or distributed. 1*89 Although a limited burden of proof in relation to accumulations beyond the reasonable needs of the business may be shifted to the Commissioner pursuant to section 534 of the Internal Revenue Code of 1954, as amended by sections 4 and 5 of Public Law 367, 84th Cong., 1st Sess., the ultimate burden of proving that the corporation was not availed of for the prohibited statutory purpose is and remains upon the petitioner. Pelton Steel Casting Co., 28 T.C. 153">28 T.C. 153, affirmed 251 F. 2d 278 (C.A. 7), certiorari denied 356 U.S. 958">356 U.S. 958.
1. A preliminary issue is raised in this case as to whether the limited burden dealt with in section 534 of the 1954 Code 2*91 has been shifted. The pleadings show that the Commissioner sent a notice pursuant to section 534(b), and that the taxpayer filed a "statement," purportedly in compliance with section 534(c). Prior to trial petitioner filed a motion for a ruling that its "statement" is in compliance with the requirements of section 534(c), and that "by reason of such compliance, the burden is upon the respondent *90 to prove that the net earnings accumulated with respect to each of the three fiscal years at issue were beyond the reasonable needs of the petitioner's business." However, at the trial, in order that it might be able to present its entire affirmative case first, petitioner stated that, without *183 waiving any rights under that motion, it did not press at that time for a ruling upon the motion.
We find it unnecessary to rule upon that motion because regardless of whether there has been any shifting of a limited burden of proof, we are satisfied on the evidence before us that the petitioner was availed of for the purpose of preventing the imposition of surtax upon its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed. However, it may be appropriate to point out certain respects in which petitioner's "statement" and *92 motion are defective.
In the first place, the motion requests a sweeping ruling that the burden is upon the respondent to prove that the net earnings accumulated were beyond the reasonable needs of the business. Even if petitioner's "statement" were a proper one, no such broad ruling could be granted, for section 534(a)(2) provides for a shift in the burden only "with respect to the grounds set forth in such statement." And in the second place it is highly doubtful whether the "statement" filed by petitioner is a proper one under the statute.
The "grounds" upon which petitioner relies to establish that earnings and profits were not accumulated beyond the reasonable needs of its business were set forth as follows in petitioner's statement:
Ground No. 1. The corporation was not created or organized for the purpose of preventing the imposition of the surtax upon its shareholders.
Ground No. 2. The corporation was not availed of for such purpose in any of said three years, no part of the earnings accumulated in any of those years being beyond the reasonable needs of its business.
In our opinion, these are not "grounds," as that term was intended to be understood in section 534; rather, they *93 are mere reformulations of section 102 itself. To shift the burden to respondent on the issue of "reasonable needs," petitioner's statement of "grounds" must allege reasons for accumulating earnings and profits which, if proved, will tend to establish that the earnings and profits were not accumulated unreasonably. Section 534 expressly requires "a statement of the grounds on which the taxpayer relies to establish that * * * earnings and profits have not been permitted to accumulate beyond the reasonable needs of the business." (Emphasis supplied.) The relevant report of the Senate Finance Committee expresses a similar view:
in order for the burden of proof to be shifted, the taxpayer * * * must submit a statement indicating why the needs of the business require the retention of earnings and profits, together with facts sufficient to show the basis thereof. [S. Rept. No. 1622, 83d Cong., 2d Sess., p. 315. Emphasis supplied.]
Petitioner's allegations that the corporation was not formed or availed of for the proscribed purpose, and that earnings were not accumulated beyond the reasonable needs of the business, are not reasons for accumulating earnings and profits, but rather conclusions *94 *184 masquerading as reasons. As such, the statement is deficient for failing to allege appropriate grounds.
Nor are the facts alleged by petitioner in its statement sufficient to show the basis of its alleged "grounds." With respect to its real estate activities, petitioner sets forth certain instances when it bought and sold parcels of real estate, but no facts are alleged which would indicate a need to accumulate earnings and profits in order to consummate those transactions. Petitioner also alleges that in certain other instances "the corporation lacked sufficient means" to make purchases, but reveals nothing more than the names of the parcels involved; the statement does not indicate the dates the properties were considered, their estimated costs, any discussions, plans, or actions taken with respect to these properties, nor any other facts indicating a need to accumulate earnings and profits during the years in question.
Regarding its loans, investments, and related engineering contracts, petitioner merely recites various loans or investments that it did in fact make, and engineering contracts received as a result thereof; not a single instance is set forth showing that petitioner *95 needed additional funds for this department of its business; the sum of petitioner's allegations on this point is a general statement that in the opinion of the directors additional "capital and surplus" was required to secure profitable engineering contracts from substantial textile manufacturing companies. Petitioner's allegations as to "the business of buying, converting and selling textile fabrics" consist of a single instance where it sold cotton goods at a profit and an allegation that "the directors have had to limit to $ 100,000 the amount to be devoted to that portion of its business." There are no facts alleged to indicate that the amount of $ 100,000 was insufficient for petitioner's merchandising activities, nor any instance set forth where petitioner was required to forego a profitable merchandising opportunity for lack of funds. The same may be said of petitioner's allegations concerning its interest in purchasing a textile mill. Six mills are listed as having been considered by petitioner and an allegation is made that petitioner offered to purchase three of them, but in no instance do the facts show that petitioner lacked the resources to purchase any one of the listed *96 mills. Instead, petitioner contents itself with the general statement that "on several occasions, the corporation could have acquired such a mill, but was prevented by its limited means."
In sum, the "specific" allegations in petitioner's statement of "facts" consist of sketchy references to certain transactions, some of which were considered and others of which were consummated; they in no sense substantiate petitioner's general allegations of fact *185 that it was handicapped in its operations by insufficient resources. Such general allegations fail to satisfy the requirements of section 534. See I. A. Dress Co., 32 T.C. 93">32 T.C. 93; Dixie, Inc., 31 T.C. 415">31 T.C. 415, on appeal (C.A. 2); Kerr-Cochran, Inc., 30 T.C. 69">30 T.C. 69, on appeal (C.A. 8).
2. Section 102(c) states that "the fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid surtax upon shareholders unless the corporation by the clear preponderance of the evidence shall prove to the contrary." Apart from any issue of burden of proof, we think the record in this case persuasively demonstrates that petitioner's financial position at the beginning *97 of and during the years in question was adequate to meet its business needs, both immediate and anticipated, that additional accumulations were unreasonable, and that the corporation was availed of for the purpose of preventing the imposition of surtax upon its principal shareholder.
As of February 28, 1950, the close of the last fiscal year prior to the period under review, petitioner had been a going corporation for more than 6 years during which time it had never paid a dividend in spite of substantial earnings. It had accumulated earnings and profits of $ 248,953.86 and current assets of $ 392,312, including cash of $ 70,406.90, notes and accounts receivable of $ 90,143.12, securities of $ 229,856.23, and a negligible closing inventory. Its current ratio (current assets at book cost to current liabilities) was 11 to 1. During the years under review, petitioner maintained its policy of not paying dividends, although substantial earnings continued. As of the close of the fiscal year ending February 28, 1953, its earned surplus had increased to $ 471,947.10, an increase of $ 222,993.24 over earned surplus at the beginning of the period. Current assets had increased to $ 635,491.73, *98 including cash of $ 364,125.39, notes and accounts receivable of $ 43,975.11, securities of $ 227,391.23, and no closing inventory. Its current ratio had risen to 31 to 1. These figures are a graphic illustration of the accelerated accumulation of earnings and profits by petitioner, accompanied by increasing liquidity, particularly in the cash account. There were no reasonable business needs sufficient to justify such substantial accumulations.
Loans, investments, and related engineering contracts. -- The record does not reveal a single loan or investment made, negotiated for, or contemplated by petitioner during the years under review in order to secure an engineering contract. Nor could Cox recall a single instance, in any year, in which petitioner was compelled to refuse a loan to a soliciting company because of lack of funds. Petitioner's net investment in stocks of other corporations actually declined during the years in question as its preferred stock in Fitzgerald *186 Mills Corporation was gradually redeemed. Similarly, the outstanding balance in "notes and accounts receivable" declined from $ 90,143.12 to $ 43,975 as Ferro Co repaid part of its loan.
Most of the stocks owned *99 by petitioner during the years in question were held for Jefferson's convenience rather than for any business need of petitioner. Cf. Kerr-Cochran, Inc. v. Commissioner, 253 F. 2d 121 (C.A. 8), affirming a Memorandum Opinion of this Court. We cannot ignore the fact that Jefferson was in a high tax bracket, whereas the substantial annual dividends received by petitioner from its investments, particularly its stock in Iselin-Jefferson and Woodside Mills, were subject to the 85 per cent dividends-received credit provided by section 26(b)(1), I.R.C. 1939. Cf. Trico Products Corporation, 46 B.T.A. 346">46 B.T.A. 346, 380, affirmed 137 F. 2d 424 (C.A. 2), certiorari denied 320 U.S. 790">320 U.S. 790. Petitioner argues that its investments were necessary to secure or retain engineering contracts, or to maintain a close relationship with corporations whose activities would benefit petitioner in other ways. While this may, to some extent, be true as to petitioner's loans to Ferro Co and Locke, it is patently inapplicable to petitioner's investments in stock of other corporations. For example, no engineering services were rendered to Iselin-Jefferson, Woodside Mills, Alabama Mills, Exposition Cotton Mills, or Package *100 Machinery Company. The facts also demonstrate that in some instances petitioner obtained profitable engineering contracts from corporations in which petitioner owned no stock and to which no advances were made, e.g., Conestogo Cotton Mills and Barret Textile Company. Moreover, whatever business benefits accrued to petitioner from its relationships with Iselin-Jefferson would undoubtedly have accrued even if Jefferson retained all his shares in that company instead of selling a portion to petitioner. Jefferson was cochairman of the board of Iselin-Jefferson and a substantial stockholder; Floyd, Jr., was president of Iselin-Jefferson and also a stockholder; both were voting trustees of all the Iselin-Jefferson stock held by the Jefferson family and corporations controlled by them. A similar statement may be made as to the business necessity of holding Woodside Mills stock inasmuch as that corporation was controlled by Iselin-Jefferson. Petitioner's investments in Iselin-Jefferson and Woodside Mills represented a total investment of $ 170,000, approximately 70 per cent of the total basis of the stocks held by petitioner as of February 28, 1951. Purchase of the Fitzgerald Mills Corporation *101 preferred stock was prompted by the prospect of its anticipated redemption at a premium rather than any purpose relating to petitioner's engineering contract with that company. Fitzgerald Cotton Mills was not even an operating company during the years under review; prior to February 1945, when that *187 company did operate a textile mill, it paid $ 24,000 per year to petitioner for engineering fees, even though petitioner owned none of its stock. Thus, it appears that of petitioner's investments only its common stock interest in Fitzgerald Mills Corporation was even arguably necessary to its engineering business. And, even as to that company, there was no apparent business necessity for purchasing a controlling interest therein, if petitioner's purpose was merely to secure or retain an engineering contract. Fitzgerald Mills Corporation was the successor to Fitzgerald Cotton Mills which was wholly owned by the Jefferson family; petitioner already had an engineering contract with Fitzgerald Cotton Mills when Fitzgerald Mills Corporation was formed; and Floyd, Jr., was the president of Fitzgerald Mills Corporation. It therefore seems probable that Fitzgerald Mills Corporation would have *102 continued to employ petitioner whether or not petitioner purchased a majority of its stock. Furthermore, the amount of petitioner's investment in Fitzgerald Mills Corporation -- $ 27,500 -- seems to bear little relation to the size of its engineering contract -- $ 24,000 per year. The loans to Ferro Co and Locke respectively were made before and after the taxable years in question. Petitioner's prospects for making similar loans during the years under review were minimal in view of the continuing state of depression in the textile industry, as documented by petitioner's minutes and Cox's statement that "there was no use interviewing mills, at the present time, in regard to making loans to mills." And, finally, it appears that the loans to Locke and Ferro Co were the only loans ever made by petitioner -- before, during, or after the years in question -- with respect to engineering contracts. In short, we think petitioner's argument that it needed additional investment funds to carry on the engineering phase of its business is largely fictitious; the fact is that petitioner had more than adequate resources for this purpose, so much so that it was able to carry many investments that *103 had no, or only a remote, connection with its engineering contracts, or other activities. See Jacob Sincoff, Inc., 20 T.C. 288">20 T.C. 288, affirmed 209 F. 2d 569 (C.A. 2).
Possible purchase of a textile mill. -- Although petitioner earnestly contends that it needed to accumulate earnings and profits in order to purchase and stock an operating textile mill, there are several dramatic features to the evidence which foreclose a finding consonant with this contention. First, from March 1944 to December 1958, a period of more than 14 years, petitioner did not purchase a textile mill, although during this period petitioner allegedly desired to engage in the business of operating a textile mill. Second, with one exception, petitioner's activities with respect to acquisition of an operating mill never passed the discussion stage. KOMA, Inc. v.*188 , 189 F. 2d 390 (C.A. 10), affirming a Memorandum Opinion of this Court. Victoria Mills was the only mill 3 during the 14-year period for which a purchase offer was submitted, but that offer was made by a syndicate which was dominated by Swergold and in which petitioner had only an undisclosed interest. Third, after repeated questioning by the *104 Court in an effort to pin down the precise reason for petitioner's failure to purchase the Superba mill, Jefferson admitted that such failure was attributable to factors extraneous to the availability of funds or resources. The Superba mill was sold to another purchaser for $ 250,000 in July 1951; as of February 28, 1951, petitioner had earned surplus of $ 360,023.57, current assets of $ 521,705.61, and total "quick" assets of $ 300,764.38, including cash of $ 230,154.73. Fourth, although we are prepared to accept as generally true petitioner's contention that substantial amounts are necessary to stock a mill for operation after its fixed assets have been purchased, we are not satisfied that petitioner intended to purchase a mill for purposes of operation during the years under review. In 1948 petitioner's minutes record its decision to enter the business of "buying and selling cotton mills," and petitioner did in fact agree to sell both the Superba and Russellville mills in return for a commission. The depressed state of the industry during the years in question, which prompted Cox to report that as of May 1952 the only mills available were "very old ones in poor condition and *105 not worth considering irrespective of the prices," substantiates our doubts as to the seriousness of petitioner's intentions regarding operation of a mill at that time. Fifth, the evidence does not support petitioner's claim that lack of resources was the reason for not purchasing a mill. Jefferson admitted the contrary with respect to Superba Mills. As an additional example, petitioner's minutes document the fact that a large part of the alleged $ 500,000 required to purchase the Royston Mill could have been quickly recovered through the sale of inventory; and, the fact that sale of inventory was contemplated indicates that petitioner would not have had to expend large amounts to stock that particular mill. Petitioner's minutes, otherwise detailed with respect to mills considered for purchase, nowhere mention lack of resources as an inhibiting element. It seems clear that petitioner's resources on hand at the beginning of, and during, the years in question were more than adequate with which to purchase a mill, wholly apart from the possibility of financing a portion of the purchase price by borrowing from a third *189 party. Viewing the record as a whole, petitioner's allegation that *106 lack of resources handicapped it in its search for a mill leaves us with a sense of unreality; we think such allegation was primarily an afterthought and in no way influenced petitioner's intentions with respect to purchase of a mill during the years in question.
Real estate activities. -- We agree with respondent's statement on brief that "petitioner purchased all of the real estate properties it desired, prior to, during and after the years in issue and at no time were its operations in this department hampered or restricted by a lack of funds." The record is plain that in no case did insufficient resources force petitioner to reject or postpone any real estate opportunities otherwise desirable from a business viewpoint.
If petitioner lacked resources, why did it spend approximately $ 77,000 in cash to purchase and improve the property at 17 Sutton Place, rent it at a loss to Floyd, Jr., for 6 months, and then sell it to him for $ 10,000 down and a $ 70,000 mortgage? This *107 transaction, which occurred during the years in issue, appears to be completely inconsistent with a present need for liquid resources; it indicates instead that petitioner's real estate activities were not always motivated by business considerations so much as the personal convenience of the Jefferson family. A similar conclusion suggests itself with respect to at least two of the Southampton properties which the Jeffersons rented for their own occupancy in "some summer months" and the Doubling Road property which they similarly continue to rent. In this connection, petitioner's expenses in operating its properties exceeded the rental income therefrom during the years in question.
The possibility of erecting a multiple-story office building at 90 Worth Street, which petitioner alleges was still being considered during the years in issue, never went beyond the discussion stage, and the record indicates that most of the discussions took place in 1946 and 1947. Petitioner's minutes do not even mention this project, and Taylor admitted that he approached Jefferson as an individual with substantial assets under his control, rather than as a representative of petitioner. Cf. Dixie, Inc., supra, at 428-429. *108 The only indication that petitioner was at all concerned with the project was Jefferson's statement during the discussions that petitioner might participate therein, but the extent of such participation was never defined. If anything definite can be said about this venture, it is that Iselin-Jefferson would be its primary beneficiary; the benefit to petitioner, if any, would be incidental. In any event, consideration of the project was dropped as a result of the increasing movement of textile firms from downtown New York City to uptown locations, *190 and not for lack of resources. And it seems probable that similar reasons played a part in Jefferson's rejection of the other buildings in the downtown textile area offered to him by Taylor.
As far as the S. Vere-Smith property is concerned, there is no proof that petitioner contemplated its purchase during the years in issue. It is first mentioned in the minutes of October 10, 1953, and petitioner's first offer was made in November 1953. Furthermore, petitioner failed to obtain this property for reasons other than a lack of resources and, even if petitioner had succeeded in purchasing the property, it was contemplated that a substantial *109 part of its investment would be recovered through resale of most of the acreage.
In short, petitioner has failed completely to substantiate its allegation that insufficient resources limited its real estate activities.
Merchandising. -- Petitioner's merchandising ventures during the years in question, in cotton goods and jewelry, were at best sporadic. Although the minutes document petitioner's decision in February 1952 to enter the converting business and hire Maynard at $ 5,000 per year, the record is clear that petitioner's plans in this regard were not restricted by insufficient resources. Petitioner never refused an opportunity to purchase merchandise which it thought it could resell at a profit, it had no closing inventory in any of the fiscal years with which we are concerned, and, from all that appears in the record, the amount of $ 100,000 allocated to this phase of its business was more than adequate.
Throughout its business history petitioner has accumulated its earnings and profits for no apparent business need. The most substantial source of these accumulations has been income from dividends and interest which, during each of the years under review, exceeded its income *110 from engineering fees. Petitioner's rental income during this period was more than offset by expenses of operating its real estate holdings, and the only significant gain from sale of a property was that realized on disposition of the apartment building transferred to petitioner by Jefferson in 1943 or 1944. The corporation was utilized in substantial measure for Jefferson's personal convenience, the substantial accumulations of earnings enabled him to avoid imposition of surtax, and we conclude on all the evidence that petitioner was availed of during the years in question for the purpose of preventing the imposition of the surtax upon its shareholders.
Decision will be entered for the respondent.
Footnotes
1. This is a stipulated figure. According to a schedule dated June 25, 1943, and incorporated in petitioner's minutes of Feb. 20, 1944, the securities had a basis to Jefferson of $ 210,207.16.
1. Not available.↩
1. Not available.↩
2. None.↩
1. None.↩
2. Not available.↩
1. None.↩
1. None.↩
1. None.↩
1. SEC. 102. SURTAX ON CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS.
(a) Imposition of Tax. -- There shall be levied, collected, and paid for each taxable year (in addition to other taxes imposed by this chapter) upon the net income of every corporation * * * if such corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders or the shareholders of any other corporation, through the medium of permitting earnings or profits to accumulate instead of being divided or distributed, a surtax * * *
* * * *
(c) Evidence Determinative of Purpose. -- The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid surtax upon shareholders unless the corporation by the clear preponderance of the evidence shall prove to the contrary.↩
2. SEC. 534. BURDEN OF PROOF.
(a) General Rule. -- In any proceeding before the Tax Court involving a notice of deficiency based in whole or in part on the allegation that all or any part of the earnings and profits have been permitted to accumulate beyond the reasonable needs of the business, the burden of proof with respect to such allegation shall --
(1) if notification has not been sent in accordance with subsection (b), be on the Secretary or his delegate, or
(2) if the taxpayer has submitted the statement described in subsection (c), be on the Secretary or his delegate with respect to the grounds set forth in such statement in accordance with the provisions of such subsection.
(b) Notification by Secretary. -- Before mailing the notice of deficiency referred to in subsection (a), the Secretary or his delegate may send by registered mail a notification informing the taxpayer that the proposed notice of deficiency includes an amount with respect to the accumulated earnings tax imposed by section 531. * * *
(c) Statement by Taxpayer. -- Within such time (but not less than 30 days) after the mailing of the notification described in subsection (b) as the Secretary or his delegate may prescribe by regulations, the taxpayer may submit a statement of the grounds (together with facts sufficient to show the basis thereof) on which the taxpayer relies to establish that all or any part of the earnings and profits have not been permitted to accumulate beyond the reasonable needs of the business.↩
3. Although Jefferson testified that an offer was also made for the Superba mill, we have concluded on the basis of Cox's testimony and the minutes of petitioner's board of directors that no such offer was ever made.↩