*181 Decision will be entered for the petitioner.
During the taxable year the petitioner transferred a citrus grove with the growing crop of fruit on the trees and all of its other assets, except cash, to its stockholders, receiving therefor a cash down payment and a purchase money note and mortgage payable in annual installments over a period of 15 years. Since the transfer, the petitioner has not engaged in any business and has made distribution to its stockholders of the installment payments as they have been received. After acquiring the grove and other properties, the stockholders transferred them to a partnership which they formed. The partnership gathered and sold the crop of fruit as it matured and reported in its return of income the full amount of the proceeds therefrom without deduction of any portion of the stockholders' purchase price of the grove and properties. In its return, the petitioner reported the transaction between it and the stockholders as an installment sale and reported as long term capital gain the amount realized from the payment made in that year. In determining the deficiencies for the taxable year, the respondent determined that the transaction *182 was a sale and made no change in the amount of capital gain reported. However, he determined that the fair market value of the crop of fruit on the trees at the time of the sale was $ 87,918.75 and increased the ordinary income reported by the petitioner by that amount. Held, that neither the issues raised, nor the record as made, affords any basis for the application of section 45 of the Internal Revenue Code. Held, further, that any properties of the petitioner acquired by the stockholders in excess of the selling price could only have been acquired either as dividends in kind or as distributions in liquidation, and since such distributions could not result in the realization of any gain by the petitioner, the respondent erred in increasing petitioner's income by any amount because of the crop of fruit.
*1164 The respondent has determined deficiencies in the petitioner's income and excess profits taxes and penalty for the fiscal year ended May 31, 1944, as follows:
| Income tax | $ 6,007.35 |
| Declared value excess-profits tax | 11,605.28 |
| Excess profits tax | 49,172.13 |
| Penalty | 12,293.03 |
Matters in controversy are the correctness of the respondent's action (1) in determining that the ordinary income reported by the petitioner was understated by $ 87,918.75, by reason of a transaction in which the petitioner transferred to its stockholders during the taxable year its orange grove and the operating properties thereon, and (2) in determining that the petitioner was liable for a penalty because of its failure to file an excess profits tax return within the time prescribed by law.
FINDINGS OF FACT.
The petitioner is a Florida corporation, organized in 1923, and during the taxable year had its place of business at Eustis, Florida. Its corporation income and declared value excess-profits tax return for the fiscal year in controversy was filed with the collector*184 for the district of Florida.
About the time of its formation, the petitioner acquired citrus grove property situated in Lake County, Florida, approximately five miles *1165 east of Eustis, which it thereafter operated. In 1943, the grove consisted of about 320 acres. Approximately 172 acres were devoted to orange trees, 35 acres to tangerines and four acres to grapefruit. Of the balance, about 20 acres were cleared, about 60 acres were not cleared and the remainder consisted of lakes and lowland. There were on the property houses, barn, garage, tanks, irrigation system and equipment, spraying equipment, tractors, truck, trailer, automobile, and other property, including plows and other equipment used in the operation of the grove.
For about 10 or 12 years prior to 1943, the outstanding stock of the petitioner was owned in equal amounts by Eugene J. Burrell, his wife, Alice W. Burrell, and Burrell's younger brother, who resided outside of Florida. Burrell's brother wished to sell his stock in the petitioner. For several years prior to 1943, Burrell and his wife had considered buying the stock owned by the brother, dissolving the petitioner and acquiring ownership of the *185 grove themselves. They were unable to purchase the stock because of the insufficiency of their funds and those of the petitioner. During the first part of 1943, the petitioner's funds became sufficient to, and it did, acquire the stock owned by the brother. Thereupon the stock was cancelled or retired. That left Burrell and his wife each owning 50 per cent of the remaining outstanding stock.
Burrell had been president of petitioner from the date of its organization in 1923, and had found that corporate ownership and operation of the grove presented certain difficulties. Although he had attempted to establish independent credit for petitioner in the community where the grove was situated, he had been unable to do so. Banks making loans to it and those who made sales of supplies and equipment to it on deferred payment terms all required him to make personal endorsement of its notes.
Having become the owners of all of petitioner's outstanding stock, Burrell and his wife decided to explore the idea of dissolving the corporation and of operating the grove as individual owners. In June of 1943, they took the matter up with their tax accountants. After several conferences, the accountants*186 advised that they could acquire the properties by liquidating the petitioner, but that that would result in a tax to them on the gain resulting to them from the liquidation. After having been informed as to the approximate amount of tax that would result from a liquidation, the Burrells concluded that it was greater than they were willing to incur at that time and inquired of the accountants if there were some other way of accomplishing the desired end. Thereupon the accountants advised that they could purchase the property on the installment basis from the petitioner, but that it would have to be at a fair price to be established by an appraisal made by independent real estate *1166 appraisers. The accountants further advised that this would be the most expensive procedure, tax-wise, since the petitioner would be taxable on the gain arising from the sale and that if later the petitioner should be liquidated, the Burrells would be taxable on the gain resulting to them from the liquidation. Because the latter method proposed by the accountants provided for small payments to be made by them to the petitioner over a period of years and would not, as they understood it, require*187 such a large payment of tax currently by either the petitioner or themselves, as would have been required of them if the petitioner had been currently liquidated, they elected to pursue the purchase plan proposed by the accountants.
The petitioner employed two real estate men in Eustis to make an appraisal of the grove and operating properties thereon. In an appraisal dated August 25, 1943, they valued the properties as follows:
| Land | $ 27,000 |
| Trees | 131,140 |
| Equipment | 27,250 |
| Harrows, cutters and plows | 2,200 |
| Total | $ 187,590 |
The appraisers assigned no specific value to the growing crop of fruit then on the trees.
The Burrells again conferred with their accountants. At a special meeting of the directors of the petitioner, held on August 31, 1943, a motion was adopted to accept the offer made by the Burrells to purchase the grove and the operating properties thereon for $ 187,590, payable $ 5,340 in cash and the balance to be represented by a note and mortgage for $ 182,250, payable in 15 equal annual installments of $ 12,150 each, with interest at 4 per cent per annum, the principal and interest to be due and payable on June 1 of each year beginning June 1, 1944, *188 until paid. At a special meeting of the stockholders, consisting of the Burrells, thereafter held on the same day, a motion was adopted approving the action of the directors. On the same day, the petitioner executed a deed to the Burrells for the grove and the other properties. They, in turn, made the cash payment specified in their offer, and executed a note to the petitioner for $ 182,250, payable as specified in the offer. The note was secured by a mortgage of like date on the grove and the other properties. By this transaction the Burrells acquired all of the petitioner's assets except its bank account. Prior to the time of the transfer of the grove to the Burrells, the petitioner had not entered into any negotiations to sell, and had not contracted to sell, any of the growing crop of fruit then on the trees.
At the suggestion of their accountants, the Burrells formed a partnership, to which they transferred the grove and operating properties. *1167 Each had a one-half interest in the partnership. The partnership began operations on September 1, 1943, and thereafter cared for and cultivated the grove. As the growing crop of fruit on the trees matured, the partnership*189 gathered and sold it. Sales of the fruit began on December 9, 1943, and continued to May 1, 1944. During that period, a total of 70,335 boxes of fruit were sold for $ 142,593.90.
In its return of income for the fiscal period ended August 31, 1944, the partnership reported as receipts from the sale of fruit, the entire amount of $ 142,593.90, without deduction of any portion of the $ 187,590 purchase price of the properties as cost of the fruit. In computing its income, the partnership deducted from the $ 142,593.90 the amount of $ 30,293.87 as operating expenses for the fiscal period and $ 9,675.05 as depreciation on the trees and other properties for the period, and reported an income from the crop of $ 102,624.98. Each of the Burrells reported one-half of the latter amount as ordinary income in their individual income tax returns for 1944.
The Burrells made payments on their purchase money note and mortgage as they fell due, until July 1945, when the Burrell partnership sold the grove and other properties to a Mr. Britt. A portion of the purchase price was represented by a note and mortgage given by Britt. The Burrells substituted that note and mortgage for their note and *190 mortgage then held by the petitioner and on which $ 158,000 remained unpaid. Final payment on the Britt note and mortgage was made to the petitioner about the middle of 1949.
After the above-mentioned transactions on August 31, 1943, the petitioner's assets consisted of cash and the purchase money note and mortgage given by the Burrells. After said date petitioner did not engage in any business and its only activities after that date consisted of the purchase at an undisclosed cost of some interest-bearing building loans and in making cash distributions in liquidation to its stockholders as payments were made on the Burrell and Britt notes and mortgages. It was the intention of the Burrells to complete the liquidation of the petitioner in this manner, but, on the advice of their accountants, the distributions were stopped when the deficiencies here involved were determined. About 1946, the petitioner filed a notice of liquidation with the respondent.
When the Burrell partnership sold the grove and operating properties to the Britts in July 1945, the selling price was $ 300,000, of which $ 75,225 was received in cash at the time of the sale.
In its corporation income and declared*191 value excess-profits tax return for the fiscal year ended May 31, 1944, the petitioner reported the sale of its grove and operating properties for $ 187,590. The cost, less depreciation of the properties, was shown as $ 136,311.50, and the gain as $ 51,278.50. The gain was shown as 27.3354 per cent of the *1168 selling price, and collections or payments received on the selling price during the year were shown as $ 17,490. Of the latter amount, 27.3354 per cent, or $ 4,780.96, was reported as long term capital gain realized during the taxable year on the sale of the properties.
In determining the deficiencies in controversy, the respondent made no change in the gain reported from the sale of the properties. However, he increased taxable income by $ 87,918.75, which was explained in the deficiency notice as follows:
It has been determined that the fruit on trees at date of sale of grove had a fair market value of $ 87,918.75, which should have been included as ordinary taxable income.
The petitioner did not file an excess profits tax return, Form 1121, for the fiscal year ended May 31, 1944, because the firm of accountants who prepared its corporation income and declared value*192 excess-profits tax return for that year and who were fully informed as to the facts, advised Burrell that the petitioner's taxable income was not large enough to require it to file such a return. In determining the deficiencies here involved, the respondent asserted a penalty of 25 per cent of the amount of the excess profits tax determined by him, because of petitioner's failure to file an excess profits tax return within the time prescribed by law.
The petitioner's failure to file an excess profits tax return was due to reasonable cause, and not to willful neglect.
OPINION.
The contention of the petitioner is that the transaction of August 31, 1943, between petitioner and its stockholders, was a sale by the petitioner of its properties, made in good faith and for a full consideration. It further contends that if it be determined that the transaction was not a sale, it should be determined that the transfer of the properties constituted the payment of a dividend in kind, which resulted in no taxable gain to it. The petitioner also contends that in the event the transaction be determined to be a sale, but for an inadequate consideration, then to the extent that the value of the*193 properties exceeded the selling price, there was a payment of a dividend in kind, which likewise would not result in taxable gain to it.
The respondent, on brief, concedes that as between the petitioner and the Burrells the transfer was of binding effect and passed legal title to the properties involved, including the fruit on the trees. On the other hand, he contends that the transaction was not a bona fide sale, stating that the basis for his determination and for his present position is that the transaction was not such as would have been made by persons dealing at arm's length. His next contention is that since *1169 the crop of fruit was produced in part by the efforts and expenditures of the petitioner and in part by the efforts and expenditures of the Burrells, he, acting under the provisions of section 45 of the Internal Revenue Code, 1 made an allocation of the $ 142,593.90, the price for which the crop was later sold, between the petitioner and the Burrells and of that amount he allocated $ 87,918.75 to the petitioner as being the amount which represented the fair market value of the fruit at the time of the transfer. With respect to petitioner's contentions that*194 the properties transferred or the value thereof in excess of the stated consideration should be regarded as dividends in kind, the respondent takes the position that no such issues were pleaded and any decision thereof would be outside this proceeding.
In its income tax return, the petitioner reported the transaction in question as an installment sale by it*195 of its properties to its stockholders. Using $ 136,311.50 as its basis for determining gain or loss, it arrived at the total gain of $ 51,278.50. It then computed the portion of the 1943 payment which would represent the gain realized by reason of the said payment and reported the gain so computed on its return for the fiscal year ended May 31, 1944, as long term capital gain. In determining the deficiencies, the respondent made no adjustment or change whatever in the petitioner's treatment of the transaction, in so far as the gain thus reported was concerned. With only the explanation that it had been determined that the fruit on the trees at the date of the sale of the grove had a fair market value of $ 87,918.75, which should have been included as ordinary taxable income, he increased the income of the petitioner for the taxable year in question by $ 87,918.75 of "ordinary taxable income." There was no further explanation or indication as to how or in what manner this added amount of income was realized, and there was no showing that section 45, supra, or the bona fides of the transaction between the petitioner and its stockholders, was in any way involved in the determination. *196 Neither was there anything in the respondent's answer setting up or allocating any part of the subsequent selling price of the crop between petitioner and its stockholders. Similarly, the respondent has at no time by any pleading raised any issue declaring that section 45 was applicable or had been applied. It is accordingly our conclusion that the record before us supplies no basis, either in issues raised or on the record made, for any application of section 45, supra.
*1170 There is some suggestion of argument on the part of respondent's counsel that under some interpretation of the transaction not made apparent the petitioner retained an interest in the crop after the date of the transaction and that to the extent determined, the sale of the crop was made for and on behalf of the petitioner corporation. Whatever may be said as to the character and effect of the transaction of August 31, 1943, the record, we think, makes it amply clear that there was complete and final disposition by the petitioner of its properties to its stockholders. The properties, including the growing crops, were theirs at all times thereafter, whether it be said that they acquired the properties*197 through and pursuant to a bona fide purchase, or whether it be said that they received the properties as a distribution in liquidation of the petitioner, or in part by purchase and in part as a distribution in liquidation. There is, accordingly, no basis in fact for any holding or conclusion that the petitioner had any interest in or realized any gain from the subsequent sale by the Burrells of the crops from the grove. To the extent that a sale was made, as claimed, the petitioner has fully reported its gain therefrom according to its interpretation of the sale, and the respondent, in his determination, has not questioned or disturbed the reporting of the transaction which has been made. Any and all properties acquired by the Burrells from the petitioner over and above the sales or alleged sales contract could only have been acquired by them from petitioner either as dividends in kind or distributions in liquidation, and such distributions by a corporation to its stockholders do not result in a realization of gain by the corporation. United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451. See also General Utilities Operating Co. v. Helvering, 296 U.S. 200">296 U.S. 200.*198 As to the tax-wise effect of the transaction to the stockholders, we express no opinion, since we do not have their cases before us.
In passing, it should be noted that we do not have here a question such as was before us in Ernest A. Watson, 15 T.C. 800">15 T. C. 800. There, the question was whether a portion of the selling price received for orange grove properties was allocable to the growing crop, and therefore ordinary income and not long term capital gains. Here the amount the respondent seeks to tax to the petitioner as ordinary income was over and above and outside of the selling price of the grove, assuming the transaction was a sale.
In view of the fact that the petitioner's excess profits net income exclusive of the $ 87,918.75 was not such as to require petitioner to file an excess profits tax return, the failure to file such a return was due to reasonable cause and not to willful neglect, and we have so found. Accordingly, the respondent's determination of penalty is without merit.
Decision will be entered for the petitioner.
Footnotes
1. SEC. 45. ALLOCATION OF INCOME AND DEDUCTIONS.
In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income, deductions, credits, or allowances, between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.↩