*141 Decisions will be entered for the respondent.
1. Corporation owning property with respect to which its stockholders (petitioners) agreed to cause conveyance, to procure F. H. A. commitments, and to have streets and other improvements installed, approved, dedicated, and paid for by corporation, held, to be "collapsible" under section 117 (m), I. R. C. 1939, so that gain realized by petitioners is ordinary income, notwithstanding that property was actually conveyed by stockholders after its distribution to them on dissolution, and that construction work was largely performed by independent contractors.
2. Failure to file a declaration of estimated tax, held, not due to reasonable cause, and additions to tax under section 294 (d) (1) (A) and (d) (2), I. R. C. 1939, properly imposed.
*796 In these consolidated proceedings respondent determined deficiencies in income tax and additions to tax for 1950 as follows:
| Additions to tax | |||
| Petitioners | Deficiency | ||
| Sec. 294 (d) | Sec. 294 (d) | ||
| (1) (A) | (2) | ||
| J. D. and Kathryn Abbott | $ 57,031.00 | ||
| Carl M. and Mary E. Wolfe | 12,175.26 | $ 1,923.19 | $ 1,153.91 |
The principal issue is whether gain realized on the liquidation of their corporation is properly taxable to petitioners as ordinary income from a distribution by a "collapsible corporation." Also in issue are additions to tax for the Wolfes due to failure to file a declaration of estimated tax and substantial underestimation of tax.
FINDINGS OF FACT.
Some facts have been stipulated and are found accordingly.
Petitioners J. D. and Kathryn Abbott, husband and wife, and petitioners Carl M. and Mary E. Wolfe, husband and wife, all residing at Pittsburgh, Pennsylvania, filed their respective joint individual income tax returns for 1950 with the collector of internal revenue for the twenty-third district of Pennsylvania. The wives are involved solely because*143 of the joint returns.
On August 30, 1948, Wolfe, Henry F. Busse, Henry C. Busse, and Leland Weed received stock in Leland Corporation, hereafter referred to as Leland, organized under the laws of Pennsylvania. Wolfe then owned 20 per cent of the outstanding stock. The named incorporators included Abbott, but he did not become an original stockholder. Leland had its principal office and place of business at Pittsburgh, Pennsylvania.
The certificate of incorporation stated the object of the corporation to be to "buy, sell, hold, own, lease, manage and mortgage improved *797 and unimproved real estate, and to construct, erect, improve and remodel buildings, and generally to carry on and transact a building and construction business" and for other purposes stated in its charter.
The Busses, engaged with Weed in the general contracting business, employed Wolfe, previously a builder of single houses. In 1948, Wolfe on his own account took an option on land in Baldwin Township, Pennsylvania. The Busses asked to buy into the land. The purchase was closed in the name of Leland.
Abbott, in the mortgage business since 1938, operated through one corporation which derived profits from*144 premiums on mortgages and fire insurance, and another, an F. H. A.-approved mortgagee, which earned income from servicing mortgages. Abbott's corporations did not look to profit on real estate sales for their income and did not make a practice of selling for a commission.
Leland became the owner of the following tracts of land in Baldwin and Jefferson townships, Allegheny County, Pennsylvania:
| Description | Date acquired | Acreage |
| Hagan land | Sept. 27, 1948 | 89.537 |
| C. M. Wolfe land | Aug. 30, 1949 | 3.355 |
| Baldwin School District land | Feb. 21, 1950 | 3.356 |
| Schwotzer land | Mar. 6, 1950 | 4.010 |
| 100.258 |
The cost of the land totaled $ 75,409.55, or about $ 752 per acre.
Leland's original stockholders, for some months, did nothing to accomplish their plan to develop the land for single homes. On January 5, 1949, Busse contacted the Pittsburgh Chamber of Commerce to secure an industrial purchaser.
Abbott attempted unsuccessfully to secure the exclusive mortgage business from Leland through agreements by which he would sell the sites for a commission to be allowed wholly to salesmen.
On May 1, 1949, Leland contracted with Macri and Heyer, independent road and sewer contractors, for*145 the installation of streets, curbs, storm sewers, manholes, and catch basins in Plan No. 1, which contemplated single-family residences.
On June 3, 1949, Leland gave one of Abbott's corporations an option to purchase 11.7 acres. Leland agreed that if it should erect apartment buildings, it would pay the Abbott corporation an architect's fee and the usual F. H. A. commitment fees. Abbott then acted to obtain F. H. A. site approval for building apartments. He engineered the layout, architectural plans, and topographical maps, all at expense to his own corporation before becoming a Leland stockholder. On August 17, 1949, Leland and Abbott modified the latter's option by offering to sell apartment sites at $ 450 a dwelling unit or $ 16,200 per apartment site, the seller to complete the roads, sewers, and utilities in compliance with F. H. A. requirements.
*798 Abbott contemplated placing $ 10,000,000 of F. H. A.-insured mortgages, the total amount ultimately placed on the land, including the portion sold in 1949. His corporation received $ 229,993.95 in premium income. It expects to receive service charges of $ 300,000 to $ 400,000 over the entire 34-year life of the F. H. *146 A. mortgages.
On August 25, 1949, Vernon Neal deposited $ 10,000 with an Abbott corporation in negotiating to purchase optioned land, and to obtain F. H. A. commitments on proposed apartment buildings. On October 5, 1949, the Abbott corporation agreed to sell the land to a Neal corporation, and Vernon C. Neal Construction Company agreed to pay the Abbott corporation for improvements under Plan No. 2. As Neal paid Abbott the option price that Abbott had to pay Leland, Abbott derived no profit from the sale. Abbott's corporation applied for F. H. A. commitments to complete the 1949 Neal transaction. Wolfe and Abbott, the latter still not a Leland stockholder, signed the applications as sponsors. Leland, ineligible to act as sponsor, was not a party to the applications.
The 1949 Neal transaction is not here in controversy.
Shortly before August 31, 1949, the original Leland stockholders decided to sell their stock, and on August 31, 1949, they agreed to sell to Kramer, Abbott, Wolfe, and Kovach, each to have an equal 25 per cent interest. The parties closed this transaction on October 18, 1949.
Abbott had solicited Kramer and Kovach, customers of his mortgage business, to enter *147 the transaction. He intended to acquire the stock to make apartment sites available to builders. Kramer acquired stock because his efforts to buy the land had proved unsuccessful.
On October 28, 1949, Leland recorded Plan No. 2, providing for apartment sites subsequently sold to Neal. Leland purchased an additional small parcel in 1949 to complete the 15.82 acres sold to Neal about October 27, 1949, for $ 113,400, or about $ 7,200 per acre. Leland computed the basis of the land sold as follows:
| Allocated to | Allocated to | ||
| land sold | remaining | Total | |
| in 1949 | land | ||
| Purchase price of land | $ 15,426.47 | $ 59,983.08 | $ 75,409.55 |
| Cost of improvements | 74,500.78 | 23,186.16 | 97,686.94 |
| Total | 89,927.25 | 83,169.24 | 173,096.49 |
Shortly after they had each acquired 25 per cent of the stock, Kovach and Abbott had a disagreement. Kovach agreed to sell his stock to Abbott. Kramer, not desiring to remain as a stockholder without Kovach, joined him in selling their stock on November 19, 1949, for the price they had paid for it. Abbott then owned 75 per cent of the stock.
*799 After acquiring his 75 per cent interest in Leland, Abbott managed it and determined its activities*148 and policy.
Leland had no employees except a laborer who mowed the grass once. Leland provided for all street and sewer work under Plan Nos. 1 and 2 under contracts with Macri and Heyer. Leland, by recording the plans, committed itself to dedicate the streets and sewers to the township.
On February 15, 1950, petitioners contracted with Catarinella to sell 3 plots of land to erect apartment buildings. Petitioners agreed to "cause" the land to be conveyed to Catarinella. Petitioners further agreed to "cause" installation of streets, sewers, and utilities, as shown on the plan, within 1 year after an F. H. A. insurance commitment was obtained. The buyer agreed to furnish to Abbott's corporation all required information and material for F. H. A. mortgage insurance applications. The parties agreed that the purchase price should be immediately paid into escrow pending F. H. A. approval, after which the fund would be so held to pay for street and sewer improvements. Petitioners agreed to contract for the construction of these improvements within 60 days after F. H. A. approval was obtained. The parties conditioned the agreement on F. H. A. approval of these sites and the agreement*149 recited that petitioners contemplated that all land in the plan would be similarly developed for apartments through F. H. A. financing.
On February 15, 1950, petitioners contracted with a group headed by Young to sell 2 plots. The terms and provisions of this agreement conformed to those of the agreement with Catarinella.
Young and Catarinella deposited $ 64,350 and $ 80,300, respectively, with Potter Title and Trust Company, hereafter referred to as the trust company, to be held in escrow as provided in the agreements of February 15, 1950.
On February 21, 1950, Leland purchased 3.356 acres of land from the Baldwin School District needed to complete the plot which petitioners had agreed to sell to Catarinella 6 days previously. Leland had previously owned the remainder of the land.
On March 6, 1950, Leland purchased 4.010 acres of land from Schwotzer. Petitioners ultimately deeded this land on July 10, 1950.
On May 8, 1950, Leland and the township entered an agreement whereby Leland, in consideration of the approval of "Leland Heights Plan No. 3" for recording purposes, agreed to construct the streets, sewers, and improvements shown on the entire plan according to the rules and*150 regulations of the township. Leland further agreed to deposit $ 120,000 in escrow with the trust company for the completion of these improvements. Simultaneously, Leland executed a bond guaranteeing performance of its contract with the township. Petitioners signed these agreements as officers of Leland. On May 10, *800 1950, the trust company notified the township and the F. H. A. that it held in escrow more than $ 120,000 to be used for street and sewer improvements in Plan No. 3 under the contract between Leland and the township. That fund consisted of the moneys previously deposited by Young and Catarinella under the agreements with petitioners.
On May 13, 1950, the Leland shareholders voted to dissolve, to distribute the assets to the shareholders subject to liabilities, and to deliver a certificate of dissolution to the State. Petitioners, as cograntees, received the land owned by Leland by deeds dated May 20, 1950, June 9, 1950, and August 25, 1950. Petitioners received 84.438 acres, of which 14.368 acres were later dedicated to public use. The complete dissolution of Leland occurred in 1950.
Prior to its distribution, improvements to the land totaled $ 97,686.94, *151 of which petitioners allocated $ 74,500.78 to the portion sold to Neal in 1949 and $ 23,186.16 to the land distributed to them.
The expenditures prior to liquidation included payments under construction contracts entered into on May 1, 1949, and October 5, 1949, relating to Plan Nos. 1 and 2. Those contracts contemplated total expenditures of $ 63,400.
On May 29, 1950, petitioners contracted with Macri and Heyer for the construction of streets, storm sewers, and sanitary sewers in Plan No. 3. This agreement provided, in part, as follows:
The Township Engineer and the Engineer for * * * [petitioners] shall monthly prepare * * * an estimate and certificate as to the amount of work completed * * * during the preceding thirty (30) days, which * * * certificate, less ten (10%) percent retained until final completion, shall be presented * * * for payment out of funds * * * deposited with * * * [the trust company] under various agreements between purchasers of land in * * * Plan No. 3 and * * * [petitioners].
[Macri and Heyer] agree to look to said funds * * * for payment under this contract, it being distinctly understood and agreed that sufficient funds to pay for all work performed*152 by * * * [Macri and Heyer] under this agreement have been deposited with * * * [the trust company].
It is further understood and agreed that * * * [petitioners] shall not be personally liable under this agreement for payment, except as provided herein. * * * [Petitioners] agree that they will monthly direct * * * [the trust company] to pay the monthly estimates certified * * * less the retained percentages * * *
After the transfer of the land to petitioners, further improvements to the land were made between May 29, 1950, and December 31, 1950, totaling $ 145,967.02. The moneys in escrow were used in paying for these improvements.
Petitioners sold, in a number of separate transactions, the portion of the land covered by F. H. A. commitments, about 35 acres, for $ 435,350. The total price received averaged $ 8,800 for each of the acres either covered by F. H. A. commitments or dedicated to public *801 use. The price paid by the purchasers anticipated and reflected the value of the land after the improvements were made.
Purchaser corporations, including those controlled by Catarinella and Young, subsequently constructed apartment buildings on this land. Catarinella and Young, *153 as sponsors, in January and February 1950 filed applications for F. H. A. mortgage insurance on land ultimately conveyed to their corporations. Abbott and Wolfe sponsored applications for other lots. The individual sponsors later assigned them to the purchasing corporations. Petitioners never served as incorporators, shareowners, or directors of any of these purchaser corporations.
The 34.99 acres upon which no section 608 commitments were obtained and no part of which was dedicated were valued by petitioners at $ 20,817. Respondent increased this to $ 25,817, less than $ 740 per acre.
Petitioners subsequently transferred part of the land received by them from Leland to 4 corporations in which they owned interests. Those corporations erected no buildings on this land and filed no applications for F. H. A. mortgage insurance with reference to this land. In 1952, petitioners sold the portion of the land which they still held for $ 15,000.
When petitioners received the land in liquidation of Leland, it had a fair market value of $ 500 for each unit permitted under section 608 commitments thereon. The number of units allowed by the F. H. A. varied from 10 to 20 per acre depending*154 upon the location and the type of building. F. H. A. limited the commitments to 1,000 units.
The $ 23,186.16 of improvements to the land made before liquidation of Leland represented 8 to 9 per cent of the enhanced land value.
Abbott and Wolfe reported gains of $ 140,157.34 and $ 46,719.11, respectively, on liquidation of Leland. They computed this gain as follows:
| Total | Abbott | Wolfe | |
| Fair market value at date of | |||
| liquidation | $ 297,500.00 | $ 223,125.00 | $ 74,375.00 |
| Less: Net liabilities assumed | 30,623.55 | 22,967.66 | 7,655.89 |
| Net liquidating distributions | 266,876.45 | 200,157.34 | 66,719.11 |
| Deduct: Basis of stock | 80,000.00 | 60,000.00 | 20,000.00 |
| Gain | 186,876.45 | 140,157.34 | 46,719.11 |
Petitioners realized gain on liquidation, as computed in the deficiency notices, of $ 143,907.34 and $ 47,969.11, respectively. The fair market value of the assets received in liquidation was $ 448,467.02.
Petitioners reported their gain on liquidation of Leland as long-term capital gain. Respondent, in the deficiency notices, treated the *802 gain as from the sale of property other than capital assets on the theory that Leland had been a collapsible corporation under section*155 117 (m).
Respondent, in the deficiency notices, increased the amount of gain reported by $ 5,000.
Petitioners computed the gain on the sale of land received in liquidation as follows:
| Selling price | $ 435,350.00 | |
| Basis: | ||
| Fair market value at date of liquidation | $ 297,500.00 | |
| Improvements after May 13, 1950 | 145,967.02 | |
| 443,467.02 | ||
| Deduct: Allocated to unsold acreage, | ||
| Dec. 31, 1950 | 20,817.00 | |
| 422,650.02 | ||
| Add: Expense of sale | 9,073.60 | |
| 431,723.62 | ||
| Gain | 3,626.38 | |
| 75 per cent -- Abbott | 2,719.79 | |
| 25 per cent -- Wolfe | 906.59 | |
| Total gain | 3,626.38 |
They reported this gain as short-term capital gain. Respondent, in the deficiency notices, allowed the basis of $ 422,650.02 claimed by petitioners as allocable to the land sold in 1950.
Leland engaged in no activities other than the development of the land and had no income other than rents of $ 187.50 and a gain of $ 23,472.75 realized on the 1949 sale of land to Neal.
The sites sold would not have been salable for apartments at as high a price without section 608 F. H. A. financing. On November 6, 1950, Wolfe (for Knoedler Corporation) purchased 42 adjacent acres similarly zoned but without *156 F. H. A. commitments for $ 30,000, or about $ 715 per acre.
A prospective purchaser could acquire land and apply for an F. H. A. commitment on his own behalf through a bank or other approved mortgagee. To obtain an F. H. A. commitment, the Federal Housing Commissioner required assurance that improvements such as streets, sewers, and grading had been or would be made, and F. H. A. withheld final approval until completion of such improvements. On occasion F. H. A. requirements were stricter than those of the municipality involved. F. H. A. commitments had no assignable value apart from a concurrent transfer of the land. Obtaining F. H. A. commitments for the Leland property, aside from the cost of the physical improvements, cost $ 9,776.
*803 Leland could not have originated the mortgages without a special agreement from F. H. A. or amending its charter and increasing its capitalization. An approved mortgagee had to have capital of at least $ 100,000. Leland qualified neither as an approved mortgagee nor as a mortgagor. Approved mortgagors had to issue two classes of stock, have the Housing Commissioner own preferred stock, and have as an officer or director of the corporation*157 a representative of the Commissioner.
When Leland distributed the land to petitioners, it had not realized a substantial part of the net income to be derived from the property.
Leland was formed or availed of principally for the manufacture, construction, or production of property, with a view to (1) a distribution to petitioners, prior to the realization by Leland of a substantial part of the net income to be derived from the property; and (2) the realization by petitioners of the gain attributable to the property.
Petitioners Wolfe filed no declaration of estimated tax (Form 1040 ES) and paid no estimated tax for 1950. Their final return (Form 1040) for 1950 reported interest of $ 350 and salary of $ 6,217.20. Their failure to file a declaration of estimated tax was not due to reasonable cause.
OPINION.
If this controversy dealt with the liability of the seller of real property to pay tax on ordinary income rather than capital gain, the problem would be comparatively simple. The resulting profit would be ordinary "net income." See Spanish Trail Land Co., 10 T. C. 430; Brown v. Commissioner, (C. A. 5) 143 F.2d 468">143 F. 2d 468,*158 affirming a Memorandum Opinion of this Court; Gamble v. Commissioner, (C. A. 5) 242 F. 2d 586, affirming T. C. Memo. 1955-289.
Petitioners themselves concede, indeed they insist, that "the record is clear that Leland Corporation was formed for the purchase, subdivision and sale of land to customers in the regular course of business." It is even possible that if the only question concerned the gain to the corporation from the sale of property previously owned by it but distributed in liquidation to its stockholders, the result might, under different circumstances, be to attribute the gain to the corporation which owned the property during the negotiations. See Rose Kaufmann, 11 T. C. 483, affd. (C. A. 3) 175 F.2d 28">175 F. 2d 28.
But the effect of what was done here is said to be that only the petitioners were in receipt of any gain and that their profit is taxable only as capital gain. This is for the reason that the corporation was not the seller of the property and had no income on which to pay any tax; and that since it had no earnings and profits, and since the distribution*159 *804 to petitioners was in liquidation, their income was only capital gain. And when they, as individuals, came to sell the property and thus realize the "net income" to the creation of which all of the activities of the corporation had been devoted, the increase over their own new basis was so small that only a token profit accrued. It would seem at first glance that this is precisely the kind of situation to which section 117 (m) was directed. 1*160 And it is the applicability of that section which is the present issue; that is whether petitioners, the individuals who owned the stock of the corporation, received taxable ordinary income by virtue of the characterization of the corporation as "collapsible." 2 See Raymond G. Burge, 28 T.C. 246">28 T. C. 246.
The controversy arises against the following factual background:
Petitioners, the only stockholders, *161 contracted, while their corporation still owned the property, with two builders to "cause" the conveyance of part of the corporation's land to the builders. They further agreed to cause the installation of streets, sewers, and other improvements. Petitioner Abbott was to arrange F. H. A. mortgage financing. The two builders paid their purchase price into escrow pending F. H. A. approval, the funds then to continue to be held and to be used to pay for the improvements. The corporation contracted with the municipality to have the improvements installed, to provide for payment for them, and to dedicate the land needed therefor in return for recording the development plan and obtaining the approval of the municipality. Petitioners liquidated the corporation and received the land. They thereupon deeded to buyers a number of parcels, including the land contracted for, which had in the meantime been covered by F. H. A. commitments, and provided for the improvements, for which they made payments from the funds in escrow.
*805 Petitioners, of course, contend that the activities of the corporation (or of the shareholders in dealing with the property of the corporation) which were *162 responsible for the increase in value and the consequent profit on resale, are not encompassed within any of the purposes to which section 117 (m) refers. 3 Specifically, they say that Leland was not engaged in construction in the first place and, in the second, that the increase in the value of property was the result of the securing of F. H. A. commitments and nothing else.
*163 But we think it would be idle to suggest that subdivision of the property, installation of streets and utilities, obtaining the approval of the municipality, and securing financing through F. H. A. commitments would not ordinarily be the preliminary part of construction -- that is, the early steps in transforming the raw land into completed apartments. Indeed, it may be said that construction of a road is no less "construction" than building an apartment house. And construction need not consist of the activities involved from start to completion. There is no requirement that to be collapsible a corporation must carry the construction through from the beginning to the end of the project. Quite the contrary. That the term "construction" was intended to have its broadest scope is demonstrated by the accompanying phrase "to any extent." If there were doubt of this, the contemporary committee reports would dispel it:
Subparagraph (B) of paragraph (2) of the subsection states that a corporation shall be deemed to have * * * constructed * * * property if it engaged in the * * * construction * * * of such property to any extent * * *. Under this statement the corporation need not have*164 originated the * * * construction * * *; neither need the * * * construction * * * be completed by it. It will nonetheless be deemed to have * * * constructed * * * property in that its shareholders may realize gain with respect to the additional value added to the property by the * * * construction * * * to the extent that it was carried out. [H. Rept. No. 2319, 81st Cong., 2d Sess., p. 98; 1950-2 C. B. 450. Emphasis added.]
See also S. Rept. No. 2375, 81st Cong., 2d Sess., p. 89; 1950-2 C. B. 547.
Nor does it alter the situation that the F. H. A. commitments, whether or not by themselves they would be "construction," were obtained through petitioners or their agencies. Without them, there might have been no occasion for subdivision and development of the land by the corporation. But without ownership of the land, the commitments would have been meaningless. All the activity was interconnected and *806 cannot be considered separately. Particularly the rise in value of the land while it was owned by the corporation cannot be so narrowly attributed to a single element that the corporate ownership and activity*165 are completely discounted.
Neither is it significant that the streets and other improvements installed by the corporation, by petitioners, or by agencies employed by them, occupied a part of the land that, instead of being received as a distribution, was dedicated to the municipality. It is clear that the increase in the value of the remaining land was due at least in part to these improvements, and entirely to them and the other activities, including the F. H. A. commitments with which they were indivisibly connected. The gain in the last analysis must be said to be "attributable to the property * * * constructed" for without the improvements there could have been no F. H. A. commitments, and without the latter, even on petitioners' theory, there would have been no gain. That general situation is covered by respondent's regulations which certainly cannot be considered unreasonable in the circumstances:
Gain may be attributable to the property referred to in section 117 (m) (2) (A) even though such gain is represented by an appreciation in the value of the property other than that manufactured, constructed, produced, or purchased. Where, for example, a corporation owns a tract*166 of land and the development of one-half of the tract increases the value of the other half, the gain attributable to the developed half of the tract includes the increase in the value of the other half. [Regs. 111, sec. 29.117-11 (c) (3).]
Petitioners strenuously contend that the corporation was not "availed of" "with a view to" eliminating ordinary income or permitting the stockholders to realize gain with reduced tax liability. They insist that liquidation of the corporation had been decided on before the transactions giving rise to the principal profit. The difficulty is that for a number of reasons the record does not support these contentions.
There is, to be sure, some evidence that by reason of the insistence of the prior stockholders, procedures were undertaken looking toward liquidation. But after that Abbott became the majority stockholder, and we have found as a fact, at petitioners' request, that from that time on the corporation's activities resulted from his decisions. There is no evidence that he intended to liquidate the corporation or to distribute its property to the stockholders any sooner than this was actually done. Parenthetically it seems highly improbable*167 that any earlier liquidation would ever have taken place if Abbott's was the decisive vote. The gain reported by petitioners on the distribution to them in exchange for their stock was set up as long-term capital gain in view of the fact that by that time Abbott had held his stock for more than 6 months, although barely so. Such treatment would have been hazardous if the distribution had taken place sooner than it did and less than 6 months after his stock acquisition. See, e. g., Helvering v.*807 ., 305 U.S. 293">305 U.S. 293. But be that as it may, we are unable to find that the intention, if any, formulated when a totally different group was in control of the corporation, is in any way indicative of the purposes or views of the corporation or its stockholders when other minds fixed its objectives and the reason for the original decision had disappeared.
By the same token it is impossible to discern any business reason for liquidation of the corporation except the supposed saving of taxes. Arrangements for sale of part of the property were already well under way; there is no business reason why they could not have been completed while the *168 corporation remained the owner. A good proportion of the remaining property ultimately found its way into the hands of other corporations owned by petitioners. No reason appears why it could not equally well have remained the property of the original corporation. If, however, the distribution of the property to petitioners, their consummation of the previously negotiated arrangements for development and sale, and their collection of the proceeds as capital gain and without profit to the corporation, are effective tax devices, a potent reason -- and the only one apparent on this record -- easily appears for the way things were done.
There is some suggestion that because the improvements were actually installed, at least in part, after the distribution to petitioners, they are not to be considered to any extent as attributable to the intervention of the corporation. But the facts show that not only was the genesis of the improvements the agreements made while the corporation owned the property and that they were a prerequisite to the securing of the ultimate purchasers but that, in fact, the funds needed to defray the cost of installation were first derived from the purchasers, placed*169 in escrow as a result of the original agreements, and finally used to discharge an obligation of the corporation undertaken for the very improvements specified in the contract of sale; so that the entire operation was arranged for and covered by binding agreements made at a time when, as owner of the property, only the corporation itself was in a position to, and actually did, carry the transaction forward. 4
That petitioners, as the sole stockholders of the corporation, felt themselves in a position to make the agreements as individuals, knowing that their controlled corporation could be counted upon to take whatever subsequent action their commitments called for, is merely a further reason why the provisions*170 of section 117 (m) must necessarily be invoked. If it were otherwise, and if individuals could thus project the acts which would take place after distribution and dissolution *808 as though the corporation was in no sense a participant, all of the provisions in question would be meaningless. As we said in Raymond G. Burge, supra (p. 262):
It is also clear that any gain to the shareholders may be considered as gain attributable to the property constructed, even though the corporation has not realized gain from such property. Indeed the statute basically contemplates the sale or exchange of stock or a distribution by the corporation prior to the realization by the corporation of a substantial part of the net income to be derived from the property. * * *
Finally, petitioners contend on the same theory that, on the one hand, a substantial part of the total profit had already been realized by the corporation as its "net income" 5 and, on the other, that less than the requisite 70 per cent of the total amount involved was attributable to "the property * * * constructed." 6 Both contentions derive from the assumption that only the property actually*171 sold by the corporation can be regarded as giving rise to the income from the transaction; and that the F. H. A. commitments, the subdivision and street improvement work, and the sale of the property, actually carried out subsequent to dissolution but as a result of commitments made prior to it, are to be attributed only to petitioners and not in any respect to corporate activity. In this position, as we have said, we are unable to concur.
It may be appropriate to add that although the corporation may not have been "formed" *172 for the purposes described, it was manifestly "availed of" for whatever was actually accomplished. Under the statute that is sufficient.
Our conclusion is that petitioners have not borne their burden, cf. Thomas Wilson, 25 T. C. 1058, W. H. Weaver, 25 T. C. 1067, 1084, of showing that the corporation was not availed of principally for the purpose of constructing property with a view to a distribution to its shareholders prior to the realization by the corporation of a substantial part of the net income on such property, and that, accordingly, respondent's determination must be sustained.
As to the addition to tax imposed on petitioners Wolfe for failure to file declarations under section 294 (d) (1) (A), and for substantial underestimation of tax under section 294 (d) (2), it suffices to say that the record is inadequate for a finding that any reliance on a qualified and informed accountant was "reasonable cause" for the failure to *809 file any declaration, Rene R. Bouche, 18 T. C. 144, Walter H. Kaltreider, 28 T. C. 121; and that it is now established, *173 as petitioners recognize, that the imposition of this addition to tax does not preclude the further addition for substantial underestimation of tax. G. E. Fuller, 20 T.C. 308">20 T. C. 308, affd. (C. A. 10) 213 F. 2d 102; Harry Hartley, 23 T. C. 353; Fred N. Acker, 26 T.C. 107">26 T. C. 107. See also H. R. Smith, 20 T.C. 663">20 T. C. 663.
Decisions will be entered for the respondent.
Footnotes
1. Upon completion * * * but prior to the realization by the corporation of any income therefrom, the corporation is liquidated and the assets are distributed. In such a case, the corporation pays no tax, claiming that it has realized no income. The producer pays tax upon the difference between his cost and the fair market value of the assets so distributed; but such gain is reported as long-term capital gain * * *. After liquidation * * * [if] the income * * * does not exceed such fair market value, there is no further tax. [H. Rept. No. 2319, 81st Cong., 2d Sess., p. 57; 1950-2 C. B. 380↩, 423.]
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.
(B) For the purposes of subparagraph (A), a corporation shall be deemed to have manufactured, constructed, or produced property, if --
(i) it engaged in the manufacture, construction, or production of such property to any extent,↩
3. One of petitioners' contentions is that the extension of the definition of a collapsible corporation to include corporations which purchased property normally sold to customers in the ordinary course of their business, and which was not made until 1951, indicates that they are not included in the 1950 version of the section. But section 326, Revenue Act of 1951, which made the change, expressly states:
(c) Effective Date. -- * * * The determination of the tax treatment of gains realized prior to September 1, 1951, shall be made as if this section had not been enacted and without inferences drawn from the fact that the amendments to section 117 (m) made by this section are not expressly made applicable to gains realized prior to September 1, 1951, and without inferences drawn from the limitations contained in section 117 (m)↩, as amended by this section.
4. This is what we assume petitioners mean when they say in their brief: "Leland was a party to the agreement with Baldwin [the township] only because it was the record holder of the title and obviously the only party then in a legal position to enter into the agreement with the Township↩." Emphasis added.
5. See sec. 117 (m) (2) (A) (i), footnote 2, supra↩.
6. SEC. 117. CAPITAL GAINS AND LOSSES.
(m) Collapsible Corporations. --
* * * *
(3) Limitations on application of subsection. -- In the case of gain realized by a shareholder upon his stock in a collapsible corporation --
* * * *
(B) this subsection shall not apply to the gain recognized during a taxable year unless more than 70 per centum of such gain is attributable to the property so manufactured, constructed, or produced; and↩