*246 Decision will be entered under Rule 50.
Held, the corporate entity of the corporation here involved may not be disregarded for tax purposes.
*479 The respondent determined a deficiency of $ 7,617.51 in petitioners' income tax *247 for the year 1944, due, in part, to his disallowance of a net operating loss carry-over of $ 110,070.98 under section 122 of the Internal Revenue Code. The petitioners plead, in the alternative, that, if the deduction is not allowable as a net loss carry-over from 1943, it should be allowed as a long term capital loss, due to the worthlessness of the stock of a certain corporation, under section 23 (g) (2) and section 117 (e) (1) and (d) (2). Petitioners on brief rely exclusively on the latter contention. Respondent on brief relies entirely on the contention that, under the facts, the corporate entity should be disregarded for tax purposes.
Most of the facts were stipulated, the stipulation being hereby adopted in full. Other facts were developed by testimony and exhibits.
FINDINGS OF FACT.
During the years 1943 and 1944, Allan Bond (sometimes referred to herein as petitioner), was a cotton broker who resided with his wife, Evelyn Bond, in New York, New York.
Allan Bond and Evelyn Bond duly filed their joint return of income taxes for the calendar year 1943.
Allan Bond duly filed an individual return of income tax for the calendar year 1944.
On or about January 2, 1919, petitioner*248 purchased for the sum of $ 58,000, subject to a mortgage upon which was due the principal sum of $ 7,500, premises known as 31 West 47th Street, New York, New York.
On or about the 9th day of September, 1924, petitioner purchased for the sum of $ 115,000, premises known as 29 West 47th Street, New York, New York.
On or about August 16, 1926, petitioner caused to be organized a real estate corporation, to be known as 29 West 47th Street Corporation, pursuant to the laws of the State of New York, the authorized capital stock of which consisted of 100 shares without par value.
On September 2, 1926, petitioner transferred and conveyed to 29 West 47th Street Corporation all his right, title, and interest in and to the real property known as 29 and 31 West 47th Street, New York, New York, in consideration of the issuance to petitioner of all of the shares of authorized capital stock of the corporation, to wit, 100 shares without par value.
At all times from 1926 to 1943, real property constituted the only asset of the corporation. This property included a new 16-story building erected by the corporation, in connection with which the corporation, with the endorsement of petitioner, borrowed*249 money in large *480 sums and executed a mortgage on the property. The balance sheet showed a value of over $ 600,000 of assets. The corporation employed a commercial rental agent and leased office space to others. It maintained its own bank account.
The 29 West 47th Street Corporation duly filed its Federal corporation income tax returns for the years 1928 through 1930 and reported thereon all rents received from the operation of the real property and claimed deductions of all expenses in connection with the operation of the property and certain other deductions allowed by law. The net income of the corporation for those years, as shown on the returns, was as follows:
| 1928 | $ 2,569.52 |
| 1929 | 1,443.62 |
| 1930 | (loss) -- (2,162.26) |
The corporation paid no Federal corporation income tax for the years 1928, 1929, or 1930, due to the allowance of the $ 3,000 credit provided by section 26 of the Revenue Act of 1928, in effect at that time.
On or about the 16th day of June, 1931, an agreement was entered into between Allan Bond and 29 West 47th Street Corporation, by the terms of which it was provided that:
I. The party of the first part [the Corporation] hereby sells, assigns, *250 transfers and sets over to the party of the second part [Allan Bond] all its business, income, profits and transactions of, from and after the 16th day of June, 1931, giving and granting to the party of the second part every right to receive, collect and reduce to his own possession all or any part thereof, either directly and in his own name, or in the name and through the party of the first part, subject nevertheless to the debts and liabilities of the party of the first part.
II. The party of the second part convenants and agrees that he shall and will duly provide for the management and operation of the business, affairs and properties of the party of the first part, and out of and from the income and receipts of the party of the first part, he shall and will pay and discharge the debts, liabilities and charges of and against the party of the first part, and further, that as between the party of the first part and himself, he shall and will bear, pay and discharge or duly provide for the debts and liabilities of the party of the first part.III. This agreement shall be in full force and effect on, from and after the 16th day of June, 1931, for the full period of five years thereafter.
*251 * * * *
On or about the 15th day of June, 1936, and June 15, 1941, further agreements of similar effect and tenure were entered into.
Such agreements provided in substance that Allan Bond would provide for the management and operation of the business, affairs, and properties of 29 West 47th Street Corporation; would pay all the debts and obligations of the corporation; and would be entitled to receive all of its income.
*481 Petitioner applied for and obtained the approval of the Treasury Department to the inclusion in his individual return of the net gain or loss resulting from the operation of the corporation's business under the terms of the aforesaid agreement dated June 16, 1931. A letter of J. C. Wilmer, Deputy Commissioner, dated December 14, 1931, provided in part, as follows:
You are advised that only the net gain or loss resulting from the operation of the corporation's business under the terms of the contract should be shown in the taxpayer's individual return. The corporation is required to file a return in which the items of its income and expenditures should be properly reported and from which the net result, which may be reported in the individual taxpayer's *252 return, would be ascertained.
During each of the years 1931 to 1943, inclusive, the operations of the real property of 29 West 47th Street Corporation resulted in a net loss. In each of the years Allan Bond paid the amount of the net loss to the corporation and claimed, and was allowed upon his individual income tax returns, deductions in the amounts of the sums so paid to the corporation.
29 West 47th Street Corporation duly filed its Federal corporation income tax returns for the years 1931 to 1943, inclusive, and reported as income thereon the amounts of rents received from the building and the amounts paid to it by Allan Bond in payment of the debts of the corporation, pursuant to the aforementioned agreements dated June 16, 1931, June 15, 1936, and June 15, 1941. The returns likewise designated the kind of business in which the corporation was engaged as "holding real estate" for each of such years. The corporation had no net taxable income for any of such years.
On or about the 20th day of September, 1943, 29 West 47th Street Corporation entered into a contract to convey the aforesaid premises known as 29 and 31 West 47th Street, New York, New York, to 57 East 55th Street *253 Corporation, for the price of $ 325,000, subject to a first mortgage in the reduced amount of $ 275,000. At the time of the making of such contract, the principal of the first mortgage was the amount of $ 325,000, and the terms of the contract required that the $ 50,000 in cash received by 29 West 47th Street Corporation over and above the amount of the mortgage subject to which the purchaser would take title would be paid to the mortgagee for the purpose of reducing the mortgage to the sum of $ 275,000. The contract further provided that the mortgagee would release Allan Bond, guarantor of the mortgage, from any and all obligations of his guarantee thereon.
On or about the 20th day of October, 1943, 29 West 47th Street Corporation sold and conveyed the premises 29 and 31 West 47th Street, New York, New York, to 57 East 55th Street Corporation for the price of $ 325,000, pursuant to the contract and subject to a first mortgage *482 in the amount of $ 275,000. The total amount of cash received upon such sale was applied in reduction of the principal of the first mortgage upon the premises pursuant to the aforesaid contract and neither 29 West 47th Street Corporation nor Allan*254 Bond received any net proceeds from such sale.
In the Federal corporation income tax return of 29 West 47th Street Corporation, duly filed for the year 1943, the balance sheet of the corporation as of the end of the calendar year 1943 showed no assets and the following liabilities:
| Debt owed to Allan Bond | $ 16,385.62 |
| Capital stock | 100,000.00 |
| Total | 116,385.62 |
Petitioners reported in their 1943 joint income tax return a loss from the operation of 29 West 47th Street in the amount of $ 5,387.01 and the corporation, in its return for such year, reported the sum of $ 5,387.01 as income.
Petitioners also reported in 1943 as a net loss from the sale or exchange of property, other than capital assets, a loss of $ 116,385.62. Such tax return showed a net loss of income tax net income in the amount of $ 110,070.98 and of victory tax net income in the amount of $ 114,047.06.
In his individual income tax return for the year 1944, Allan Bond claimed credit for a carry-over of net operating loss in the amount of $ 110,070.98, as "Loss on 1943 return incurred through business of handling 29 W. 47th St. Building."
The carry-over credit was disallowed by respondent upon examination*255 of petitioner's 1944 return.
The stock of 29 West 47th Street Corporation became worthless in 1943.
OPINION.
Originally petitioner claimed that the loss sustained by him on the sale of the corporate property was a business loss and, as such, came under the provisions of section 122 (b) (1) of the Internal Revenue Code as an operating loss. In view of the holding of this Court in Joseph Sic, 10 T.C. 1096">10 T. C. 1096; affd., 177 Fed. (2d) 469, and other similar cases, that a loss incurred in an isolated transaction of sale, such as that here involved, was not an operating loss under section 122 (b) (1), he abandoned that position and now contends that he is entitled to carry forward in 1944 a loss incurred in 1943 due to the worthlessness of the corporate stock, under favor of section 117 (e) and section 23 (g) of the code. Thus the single question posed for decision is, Are the petitioners entitled to a capital loss carry-over to 1944? The respondent's sole contention is that the provisions *483 of section 117 (e) are inapplicable because the contract between Allan Bond and the corporation resulted in denying to the corporation*256 any recognition as an entity for tax purposes. As a consequence, our consideration is limited to the inquiry, Should the corporation be recognized as a separate entity?
Says the respondent, the "Corporation was nothing more than the 'alter ego' of Allan Bond" and we "must look to actualities and must treat substance as prevailing over form," citing Griffiths v. Commissioner, 308 U.S. 355">308 U.S. 355.
Petitioner accepts this challenge and points to the facts of record to sustain his argument that the corporate entity may not here be disregarded. He calls to attention that petitioner was a bona fide owner of the stock, having a cost basis in excess of $ 191,000; that, when the corporation was stripped of all its assets, the stock became worthless and petitioner suffered a loss; that there is no basis in law or in the facts here present to disregard the corporate entity; and that only in exceptional circumstances will a corporate entity be disregarded. Dalton v. Bowers, 287 U.S. 404">287 U.S. 404; Burnet v. Clark, 287 U.S. 410">287 U.S. 410; Burnet v. Commonwealth Improvement Co., 287 U.S. 415">287 U.S. 415;*257 New Colonial Ice Co. v. Helvering, 292 U.S. 435">292 U.S. 435. Petitioner quotes Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436, in which it is said:
* * * In general, in matters relating to the revenue, the corporate form may be disregarded where it is a sham or unreal. In such situations the form is a bald and mischievous fiction.
Looking to the record, it is to us abundantly clear that the corporation should not be characterized a sham or unreal, nor should it be described as a bald and mischievous fiction. The corporation was formed in 1926 for the purpose of acquiring title to two pieces of property. It received deed to those properties and thereafter, until 1943, held the title as actual owner thereof. It filed its income tax returns for every year; borrowed money; erected a 16-story building and executed a mortgage incident thereto; hired a commercial managing agent who managed the building; leased office space in the property; and, in 1943, contracted to sell the property, later executing and delivering to the purchasers a deed to the property. The above characterizing facts do not stamp the corporation as*258 petitioner's alter ego.
In fact, the very letter of the Deputy Commissioner recognized the separate entity of the corporation and stipulated that the same should be maintained when he stated that "only the net gain or loss resulting from the operation of the corporation's business under the terms of the contract should be shown in the taxpayer's individual return. The corporation is required to file a return in which the items of its income and expenditures should be properly reported * * *."
Looking at the whole record and after carefully analyzing the facts in the several cases cited by respondent and petitioner, we have *484 come to the conclusion that the corporate entity may not here be disregarded and that petitioner was entitled to carry over to 1944 the capital loss sustained when the stock of the corporation became worthless. National Carbide Corporation v. Commissioner, 336 U.S. 422">336 U.S. 422.
Decision will be entered under Rule 50.