Glenn
v.
Comm'r of Internal Revenue

Tax Court of the United States.Feb 22, 1944
3 T.C. 328 (U.S.T.C. 1944)
3 T.C. 328T.C.

Docket No. 108437.

1944-02-22

THOMAS K. GLENN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

John E. McClure, Esq., for the petitioner. F. L. Van Haaften, Esq., for the respondent.


1. Petitioner in January 1933 transferred his home and other real property of less value to a corporation newly formed by him, in consideration of all of its stock, and hypothecated the stock to obtain listed stock which could be used as collateral with his creditors. Later he transferred life insurance and stock to the corporation. The corporation held the properties, but transacted no business. Held, on the facts, that the corporation should not be recognized as a taxable entity separate from the petitioner, and there was no error in denying loss claimed upon liquidation of the corporation in April 1935 and distribution to petitioner of the assets transferred to it by him.

2. Held, following Gus T. Dodd, 46 B.T.A. 7; affd., 121 Fed.(2d) 382, that petitioner is taxable upon all gain realized in an exchange of stock, held to constitute a distribution in partial liquidation; and is entitled to loss upon the sale of stock after receipt thereof in such partial liquidation. John E. McClure, Esq., for the petitioner. F. L. Van Haaften, Esq., for the respondent.

This proceeding involves the redetermination of deficiencies in income tax for 1935 and 1936 in the respective amounts of $19,651.97 and $23,625. The issues are whether petitioner sustained a loss upon the liquidation of a corporation, and the amount of gain realized upon the sale of certain stock. Another issue was settled by stipulation and will be reflected in the recomputation to be filed under Rule 50. The stipulation of facts filed by the parties is incorporated herein by reference as part of our findings of fact. So much thereof as is necessary for consideration of the questions at issue will be set forth with the findings of fact made from other evidence. Petitioner filed his income tax returns for the taxable years with the collector for the district of Georgia.

FINDINGS OF FACT.

For many years prior to 1929 petitioner was a substantial stockholder of several corporations. Some of the shares of stock were owned outright by the petitioner and other shares were carried in a margin account.

At the close of 1932 he owed certain debts aggregating $1,615,641.69. He had also endorsed certain notes, incurred liabilities totaling $259,950.70, and become a participant in several stock syndicates. The syndicates were formed during the period from the latter part of 1929 to the first part of 1931 for the purpose of purchasing stocks declining in value and regarded as good investments, and to help orderly liquidation. The petitioner was in an embarrassing situation, since his stocks had gone down in value. To secure his indebtedness petitioner pledged shares of some of his stock of a market value of about $1,700,000 and $218,000 face value of municipal bonds of a value of about $230,000, which bonds he had borrowed without collateral from the Piedmont Securities Co. (hereinafter referred to as Piedmont). The pledges included 12,520 shares of Coca-Cola stock and 4,148 of Coca-Cola International common stock. All of the stock of Piedmont was owned By Ernest Woodruff, a business associate of petitioner for 50 years. All of the transactions petitioner had with Piedmont were handled through Ernest Woodruff.

In addition to the stock above described, petitioner owned other local securities in real estate, none of which was considered collateral by stock exchanges or lending institutions, and other local stocks, including stock of a bank of a value of about $120,000, which stocks were not quoted on any exchange, and five parcels of real estate in and around Atlanta, Georgia, one of which was subject to a mortgage. Only listed stock could be used as collateral with lending institutions and stock exchange houses.

Petitioner did not wish to place mortgages upon the real estate. That might have been embarrassing to him.

On December 8, 1932, and in consideration of a loan made to him of 1,500 shares of common stock of Coca-Cola International Corporation (hereinafter referred to as International), the petitioner assigned to Piedmont all of his interest in the cash surrender values of insurance policies on his life, of the face amount of $211,000, and agreed to make Piedmont the beneficiary of the policies upon request. The policies of insurance had a cash surrender value of $62,769.21 in January 1933, and $71,924.38 in April 1935.

On December 24, 1932, the petitioner caused the Walhalla Investment Corporation (hereinafter referred to as the Investment Corporation), to be incorporated under the laws of Delaware. Petitioner and his two sons were elected directors of the corporation. The first meeting of directors was held January 3, 1933. At that meeting the bylaws of the corporation were amended to provide that no officer of the corporation could sell, mortgage, encumber, convey, or otherwise dispose of any of the assets of the corporation without an affirmative vote of a majority of the outstanding common stock of the corporation. At the same meeting and on January 3, 1933, the Investment Corporation, by resolution, accepted an offer of petitioner to sell to it the five tracts of land in exchange for 100 shares of the corporation's stock, 98 shares of which were to be issued to petitioner and one share to each of his two sons. Four of the parcels were free of debt and one was subject to a mortgage for $56,000. The resolution of the Investment Corporation accepting the offer recited that the ‘actual sound market value‘ of the property received for its stock was $150,000. The stock was thereafter issued to petitioner and his two sons in accordance with the agreement. The deed from petitioner to Investment Corporation, dated January 3, 1933, recites that the grantee as a part of the consideration agrees to pay all existing liens, encumbrances, and assessments of every kind and character. The corporation's income tax return for 1933 showed $5,600 notes payable on January 3, 1933, while at the end of the year and in the return for 1934, $56,000 was shown as accounts payable. The petitioner On january 7, 1933, paid the $56,000 mortgage.

On January 3, 1933, the petitioner and the Investment Corporation entered into an agreement in which, after reciting the conveyancing to it of the parcels of real estate for stock, the parties agreed that petitioner should pay all taxes and assessments against the property and expenses incurred in organizing the corporation, and that payment of the taxes should be in lieu of rent for the occupancy of Dunwoody. During the existence of the Investment Corporation petitioner paid out a total of $7,756.55 under the contract of January 3, 1933, for taxes, recordation fees, and other items of expense, including $56.75 for dissolution costs and $207 for documentary stamps for deeds. During that period he paid $17,862.08 in premiums on the life insurance policies.

Sometime in 1933 after the organization of the Investment Corporation, petitioner made the corporation beneficiary of the life insurance policies on his life. The insurance companies acknowledged the changes on policies for $10,000 on January 26, 1933, on $1,000 on April 5, 1933, and on the remainder in March 1933. Sometime after the transfer of the real property to Investment Corporation, petitioner also transferred to it 1,000 shares of the stock of the Atlantic Steel Co.

All of the real estate conveyed by petitioner to the Investment Corporation for stock was vacant with the exception of a tract known as ‘Dunwoody.‘ This property consisted of about 371 acres of land situated about 15 miles from Atlanta, Georgia, 50 to 60 acres of which were open to cultivation and the remainder was not practical for farming. In 1928 petitioner had commenced and in 1930 completed the construction of a residence on the tract, at a cost of about $328,000, and developed an area of about 15 acres surrounding the improvement at a cost of about $46,000. The Dunwoody property had a fair market value on January 6, 1933, of $200,000. Petitioner has occupied the residence as a home since its completion.

On January 6, 1933, petitioner entered into a contract with Piedmont, under which he assigned all of the 100 shares of outstanding stock of the Investment Corporation to Piedmont with directions to reissue the certificates in the name of Piedmont upon demand, and agreed to return to Piedmont upon demand 4,600 shares of common stock of International (which it was recited he had borrowed from Piedmont) and the $218,000 face amount of municipal bonds, failing in which Piedmont was authorized to see any or all of the Investment Corporation stock and apply the proceeds of sale to any loss sustained by it on account of petitioner's failure to return the stock and the bonds. The transfer of the stock to Piedmont, though in form a conveyance, was by way of security for a loan. The 4,600 shares of stock of International included the 1,500 shares loaned to petitioner on December 8, 1932, upon the security of the $211,000 in life insurance. The borrowed stock and the municipal bonds had a value of about $900,000 at the time of the organization of the Investment Corporation.

In 1934 the stock market began to improve and by January 1935 the stock which petitioner had deposited as collateral increased in value to such an extent that he had more than sufficient margin on his indebtedness. Petitioner then sold some of his stock, paid his debts, and delivered to Piedmont the 1,500 shares of International stock which he had borrowed from Piedmont. By January 1935 petitioner had acquired unrestricted possession of the stock of the Investment Corporation, and, as he had no further need for the corporation, he decided to dissolve it.

On January 16, 1935, the stockholders of record of the Investment Corporation adopted a resolution to dissolve the corporation by the conveyance of all of its property to petitioner in consideration of the surrender by him of all the corporation's outstanding stock. At meetings held on April 10, 1935, the stockholders and directors of the Investment Corporation adopted resolutions to transfer certain life insurance policies of the face amount of $111,000 to petitioner and to request the insurance companies to accept the assignments and change the beneficiaries of the policies if directed by petitioner.

Upon the liquidation of the Investment Corporation, about April 1935, petitioner surrendered all of the stock of the corporation and received therefor the corporation's assets, they being the property transferred to it by petitioner. The property so received, exclusive of 1,000 shares of stock of the Atlantic Steel Co., had a fair market value of $278,024.38 at date of dissolution. Thereafter in April 1935 petitioner gave Dunwoody to his two sons.

The Investment Corporation kept no books or records except a minute book, all entries of expenses being recorded on the books of petitioner; and it received no rent or other income.

In forming and liquidating the Investment Corporation, petitioner gave no consideration to the effect it would have on his income tax liability.

Income tax returns filed by the Investment Corporation for 1933, 1934, and 1935, showed no gross income or deductions. Balance sheets attached to the returns showed assets and liabilities as follows:

+----------------------------------------------+ ¦ ¦Jan. 3, 1933,¦ ¦ +-----------------+-------------+--------------¦ ¦ ¦and Dec. 31, ¦Apr. 15, 1935 ¦ +-----------------+-------------+--------------¦ ¦ ¦1933 and 1934¦ ¦ +-----------------+-------------+--------------¦ ¦Assets: ¦ ¦ ¦ +-----------------+-------------+--------------¦ ¦Real estate ¦$150,000 ¦$150,000 ¦ +-----------------+-------------+--------------¦ ¦Total ¦150,000 ¦150,000 ¦ +-----------------+-------------+--------------¦ ¦Liabilities: ¦ ¦ ¦ +-----------------+-------------+--------------¦ ¦Accounts payable ¦1 $56,000 ¦$63,492.80 ¦ +-----------------+-------------+--------------¦ ¦Capital stock ¦10,000 ¦10,000.00 ¦ +-----------------+-------------+--------------¦ ¦Surplus (paid in)¦84,000 ¦84,000.00 ¦ +-----------------+-------------+--------------¦ ¦Deficit ¦ ¦2 (7,492.80)¦ +-----------------+-------------+--------------¦ ¦Total ¦150,000 ¦150,000.00 ¦ +----------------------------------------------+ FN2 This amount was reported as taxes and other expenses paid by petitioner for the account of the corporation. The amount does not include dissolution costs of $56.75 and an item of $207 for documentary stamps for deeds paid by petitioner, making the total $7,756.55 paid, as above recited, by petitioner under the contract for occupation of Dunwoody.

The income tax returns, filed by Investment Corporation and verified by petitioner, described its business as ‘Holding Company,‘ with no other business listed. The form question as to whether the basis of return is cash or accrual is unanswered. Capital stock tax returns list the corporate business as ‘Real Estate Holding Company.‘

The parcels of real property conveyed to the Investment Corporation for stock were acquired by petitioner as follows:

+------------------------------------------------------+ ¦ ¦Cost ¦Date ¦ +---------------------------+-----------+--------------¦ ¦ ¦ ¦acquired ¦ +---------------------------+-----------+--------------¦ ¦Peachtree and Third Streets¦$122,000.00¦Oct. 12, 1932 ¦ +---------------------------+-----------+--------------¦ ¦Andrews Drive ¦26,798.50 ¦Mar. 16, 1928 ¦ +---------------------------+-----------+--------------¦ ¦Ponce de Leon Avenue ¦25,472.00 ¦Sept. 11, 1917¦ +---------------------------+-----------+--------------¦ ¦Dunwoody ¦433,236.64 ¦1914-1930 ¦ +---------------------------+-----------+--------------¦ ¦Forrest Street ¦403.56 ¦1915 ¦ +------------------------------------------------------+

The Peachtree and Third Streets property was acquired from the Real Estate Investment Corporation, a corporation in which petitioner held a one-third interest. Petitioner had endorsed notes of the corporation. One of the reasons petitioner had for acquiring the real estate was his personal liability as an endorser of notes of the corporation. Petitioner assumed payment of these notes, and paid one of them on January 7, 1933, as above recited. In addition the corporation owed petitioner $10,000.

The Peachtree and Third Streets and the Forrest Street properties were acquired for investment. The Andrews Drive and Ponce de Leon Avenue properties were acquired and held for residential purposes until petitioner decided to build a residence on Dunwoody for a home. Petitioner received no income from the Andrews Drive, Ponce de Leon Avenue, and Peachtree and Third Streets properties during the years 1933 to 1935, inclusive.

In his return for 1935, petitioner deducted a loss of $409,163.89 sustained in the liquidation of the Investment Corporation, but restricted his claim for a deduction of $188,689.49 on account of the provisions of section 117(a) of the Revenue Act of 1934. The respondent denied the deduction in his determination of the deficiency.

The Investment Corporation was not organized for the purpose of carrying on, and during its existence did not carry on, business activities. Its purpose was to serve as an agent of petitioner in holding legal title to property to certain real estate and other property which petitioner might transfer to it. The purpose of the incorporation was not the equivalent of business activity, nor was it followed by the carrying on of business by the corporation, or by activities equivalent to corporate business.

Pursuant to stipulation of the parties, the findings of fact in Gus T. Dodd, 46 B.T.A. 7, are incorporated herein by reference as part of our findings of fact, excepting, however, the following finding: ‘At the time of organization, it issued one share of its own capital stock for each share of Coca-Cola common stock transferred to it until it held 251,000 of the 500,000 shares of Coca-Cola common stock then outstanding.‘

Throughout the books ‘KO‘ indicates ‘Coca-Cola.‘
Petitioner surrendered 300 shares of stock of International, receiving therefor, in partial liquidation proceedings of International, 2,400 shares of stock of the Coca-Cola Co., and, in a separate transaction entered into subsequently in 1936, sold 2,000 shares of the Coca-Cola Co. stock.
In his determination of the deficiency for 1936 the respondent held that the exchange of 200 shares of stock of the Coca-Cola International Corporation for 2,400 shares of stock of the Coca-Cola Co. constituted a distribution in partial liquidation of International and resulted in a gain of $207,652.60, 100 percent of which was taxable. He also determined a loss of $9,891.79 on the sale of 2,000 shares of common stock of the Coca-Cola Co.
On August 8, 1940, the petitioner paid Federal income taxes for 1935 in the amount of $79,679.93 and interest thereon of $20,860.86; and on October 1, 1940, petitioner paid Federal income taxes of $90,571.78 and interest of $18,984.09 for 1936.

Shown as ‘notes payable‘ on January 3, 1933, and as ‘accounts payable‘ at December 31, 1933, and in 1934.

At the close of 1936 International had outstanding 195,756 shares of common stock and 96,438 shares of class A stock. Such stock and like classes of stock of the Coca-Cola Co. were listed on the New York Stock Exchange.

On January 6, 1936, petitioner owned 300 shares of common stock of International represented by three certificates for 100 shares each. He delivered the shares to International for exchange into shares of stock of the Coca-Cola Co. and received in exchange therefor 2,400 shares of common stock of the Coca-Cola Co. The transaction was recorded in petitioner's books by the following journal entry:

+-----------------------------------------------------------------------------+ ¦January 6, 1936. ¦ ¦ ¦ +------------------------------------------------+-----------------+----------¦ ¦Coca-Cola Common Stock 2400 shs ¦$213,150.00 ¦ ¦ +------------------------------------------------+-----------------+----------¦ ¦Coca-Cola Int. Stock 300 shs ¦ ¦$5,497.40 ¦ +------------------------------------------------+-----------------+----------¦ ¦P & L ¦ ¦207,625.60¦ +------------------------------------------------------------------+----------¦ ¦To record exchange on 1-6-36 of 300 shs. of com. stk. of CC Int. ¦ ¦ ¦Corp. for 2400 shs of cs of CC Company. ¦ ¦ +------------------------------------------------------------------+----------¦ ¦Certf. rec. NYC 20901-20924 inc. ¦ ¦ ¦ +-----------------------------------------------------------------------------+

On January 10, 1936, petitioner paid to the Trust Co. of Georgia an amount for transfer tax on the exchange and an additional sum for the cost of making the exchange.

On January 10, 11, and 14, 1936, petitioner made the following entries, respectively, on his books:

+-----------------------------------------------------------------------------+ ¦1/10/ ¦Continental Gin Co ¦$79,000.00¦ ¦ ¦36 ¦ ¦ ¦ ¦ +------+------------------------------------------------+----------+----------¦ ¦ ¦P & L ¦9,812.50 ¦ ¦ +------+------------------------------------------------+----------+----------¦ ¦ ¦1 KO Com. Stk. 1000 shs ¦ ¦$88,812.50¦ +------+------------------------------------------------+----------+----------¦ ¦ ¦Sale to Cont'l. Gin Co. of 1000 shs. of KO Com. ¦ ¦ ¦ ¦ ¦Stk. Certf. ¦ ¦ ¦ +------+------------------------------------------------+----------+----------¦ ¦ ¦#NYC-20905 to 20914 inc. ¦ ¦ ¦ +------+------------------------------------------------+----------+----------¦ ¦1/11/ ¦KO Deferred sale ¦$88,733.21¦ ¦ ¦36 ¦ ¦ ¦ ¦ +------+------------------------------------------------+----------+----------¦ ¦ ¦P & L ¦79.29 ¦ ¦ +------+------------------------------------------------+----------+----------¦ ¦ ¦KO Com. Stk. 1000 shs ¦ ¦$88,812.50¦ +------+------------------------------------------------+----------+----------¦ ¦ ¦Sale of 1000 shs. KO Com. Stk. certifs. #20915 ¦ ¦ ¦ ¦ ¦to 20924 inc. ¦ ¦ ¦ +------+------------------------------------------------+----------+----------¦ ¦1/14/ ¦Cash ¦$88,733.21¦ ¦ ¦36 ¦ ¦ ¦ ¦ +------+------------------------------------------------+----------+----------¦ ¦ ¦Equitable Co ¦ ¦$88,733.21¦ +------+------------------------------------------------+----------+----------¦ ¦ ¦Proceeds of sale of 1000 shs. KO Com. ¦ ¦ ¦ +-----------------------------------------------------------------------------+

OPINION.

DISNEY, Judge:

The major difference between the parties on the first issue, loss on liquidation of Investment Corporation, is whether such corporation should be recognized as an entity for the purpose of computing gain or loss to petitioner, resulting from the disposition of his stock of the corporation in liquidation proceedings.

It is the contention of the petitioner that Walhalla Investment Corporation had, and accomplished, a distinct business purpose, that is, to enable him to use its stock to obtain further collateral which petitioner could put up on his existing indebtedness and thus save his investment securities. The petitioner stresses that he could not directly use as collateral the properties which were put into the corporation, also the fact that he had no tax-saving motive and did not know that he could save taxes, until after the liquidation had actually occurred. The respondent argues, in effect, that the whole transaction was unreal, that the corporation was, in effect, the alter ego of petitioner, and that no loss upon liquidation should be allowed.

It is the burden of the petitioner to show his right to the deduction claimed for loss, and therefore to demonstrate that the corporate entity here being analyzed should be recognized. We have found that there was no consideration of tax-saving motive in the formation or dissolution of the corporation.

We consider, then, the further facts presented. In brief, and in effect, the petitioner possessed several pieces of real estate, including his home, some life insurance, and Atlantic Steel Co. stock. The life insurance was already pledged to Piedmont. He was in financial difficulties. He placed the real property in a corporation and hypothecated the stock, with Piedmont, wholly owned by Woodruff, his long time business associate. (The transfer of the life insurance and the Atlantic Steel Co. stock to the corporation was apparently after the hypothecation of its stock to Piedmont, since it was after incorporation and original transfer, and the insurance changes were not acknowledged by the companies until much later.) By this means he secured the loan of 3,100 shares of Coca-Cola common stock. He already had 1,500 shares, borrowed from Piedmont on the collateral of life insurance of a cash surrender value of $62,769.21 and $218,000 face value of bonds, borrowed from Piedmont without security. As to whether he then actually put up the borrowed collateral with his other creditors the record is vague, and we can make no finding, the evidence merely being that he put ‘those up to supplement the collateral I had,‘ which may refer, and seems to refer, to the hypothecation of the Investment Corporation shares to supplement the collateral which Piedmont had, i.e., the life insurance policies.

Upon reacquiring possession of the stock in January 1935, through payment of his loans, petitioner, having no further need for the corporation, took the necessary steps to dissolve it. In the liquidation proceedings that followed he received for his stock the same assets he had transferred to the corporation. The purpose for which the corporation was organized did not contemplate that he should receive anything else. The purpose was that the corporation should hold title to the real estate and such other property as petitioner might transfer to it.

The income tax return and capital stock tax return of the corporation, verified by the petitioner, give its business as that of ‘Holding Company,‘ and ‘Real Estate Holding Company.‘ It was obviously not a holding company in the usual sense, for it held no other companies or property. It appears plain, then, that the company was considered as merely holding the real estate, stock, and insurance. This is almost tantamount to an admission of mere agency of corporation for petitioner. The corporation never transacted any business and the petitioner does not so contend, except to say that its purpose was not just ‘the equivalent of business activity,‘ but it was a business activity. The purpose, of course, could not itself be business activity.

Nothing of record indicates that petitioner ever intended the Investment Corporation to engage in business activities. At the time of the formation of the corporation, petitioner agreed to pay the taxes on, and assessments against, the real property and the organization expense, these payments to be in lieu of rent for the parcel occupied by petitioner as a residence. Petitioner paid such charges. The corporation had no income or expenses and functioned only as a record holder of real estate and stock and beneficiary of insurance on the life of its sole stockholder.

Though the corporation, in fact, transacted no business, the petitioner contends, nevertheless, that it served a business purpose. To sustain such thesis that such corporation served a business purpose, so that he may deduct a loss on its dissolution, it is logically incumbent upon the petitioner to demonstrate, at least, that the fact of incorporation (upon which, with dissolution, petitioner relies for a deduction) itself had and served a business purpose, that is, that the same result would not have come about without such incorporation. In analyzing this situation, we note first that far the larger portion of the property originally turned over to the Investment Corporation and belonging to it at the date of the borrowing, and relied upon as reason for incorporation, consisted of the home of the petitioner. A home is a very personal thing. Inherently, the term suggests a negation of business purpose. The petitioner continued through the entire period of the life of the corporation to live in that home and to pay the taxes and expenses thereon. In such a situation, we may not without difficulty entertain the idea of metamorphosis of a home into a business entity. Also, the corporation possessed no property that the petitioner had not previously possessed. It had no greater financial foundation. Petitioner argues, however, in substance, that individually he could not have borrowed upon the property. The evidence on the point we consider insufficient to sustain it. As to why he did not put mortgages upon the properties, petitioner said: ‘Because I didn't want them.‘ He also stated that, ‘It might have been embarrassing,‘ because it was more difficult to mortgage all the property than it would be to put it into a company, that he formed a corporation ‘as a matter of convenience and business,‘ that he was in an embarrassing situation, and that the use of the Investment Corporation enabled him to save his skin. This evidence, in our opinion, itself indicates that the reason for the formation of the corporation was personal, rather than financial, and fails to demonstrate that the incorporation itself actually was intended to, or did, save the petitioner's financial skin. In fact, the evidence is equivocal as to whether there really would have been embarrassment in mortgaging the properties. Such mortgages ‘might have been‘ embarrassing, but the mere contingency that there might have been such embarrassment should not tip greatly the scales of evidence. Actual embarrassment and reasons therefor are necessary proof of the point as to necessity for incorporation to place the real estate in usable collateral form.

There is evidence that nothing but listed stock could be used as collateral; but the record does not indicate that the stock of Investment Corporation when formed was listed anywhere, so that it is apparent that incorporation is not shown to effect a change. Though listed stock was borrowed from Piedmont, by pledging that of Investment Corporation, nothing of record demonstrates that the incorporation of Investment Corporation was necessary for such borrowing from Piedmont. That company had very recently loaned petitioner $218,000 value of bonds without any collateral, and had loaned him 1,500 shares of Coca-Cola International, worth about $222,500 on the security of life insurance of a cash surrender value of $69,769.21 in January 1933. In the absence of any evidence that Piedmont or its owner, Woodruff, required the incorporation, or would not have made the loan of collateral without it, other more substantial reasons for the formation of the corporation are requisite to the establishment of the business purpose claimed to have been served thereby. So far as the record shows, it appears that either the loan from Piedmont was obtained upon the strength of the assets of the corporation, that is, the real properties which had at that time been placed in it by petitioner, or it was obtained on the personal word of the petitioner, or through the personal relationship between petitioner and Woodruff, the owner of Piedmont. In the latter case, the incorporation is seen neither to have nor to serve a business purpose, while in the former the corporation adds nothing to the value of the property, therefore contributes no business, but only a possibility of personal purpose or advantage.

The petitioner argues, however, that under Moline Properties, Inc. v. Commissioner, 319 U.S. 436, the corporation may merely serve the personal or undisclosed convenience of its creator, yet the entity be property recognized. However, under the language of that case such is true, ‘so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation.‘ Here there being no ‘carrying on of business by the corporation,‘ that element of the quoted language is eliminated; yet, we find no purpose which is ‘the equivalent of business activity‘ in the mere fact that petitioner did not wish to mortgage the realty, and that it might have been embarrassing to him to mortgage the properties themselves, instead of incorporating them and doing the same thing with the stock of the corporation. It is to be noted that in the Moline Properties case the Court proceeded to find in fact that the corporation actually transacted various business matters, including ‘an unambiguous business venture of its own‘; also sold property and filed income tax returns showing the transactions. The conclusion in the case is not founded on equivalency of corporate purpose to business purpose. Moreover, the individual was there seeking to avoid the effect of a corporation which he had set up for good reason— pressure from his creditor, and at its suggestion, and in part to secure as additional loan with which to pay taxes on the property mortgaged to the creditor. The Court says: ‘Business necessity, i.e., pressure from creditors, made petitioner's creation advantageous to Thompson.‘ Even if the Court had not, in fact, found actual business activity by the corporation, and had in fact based its decision on the above facts as ‘equivalent of business activity,‘ they are so essentially distinguishable from those here, where the creator of a corporation is seeking to use it for tax purposes, that we think the case is not of significance. Higgins v. Smith, 308 U.S. 473.

In Interstate Transit Lines v. Commissioner, 319 U.S. 590, also cited by the petitioner, the subsidiary corporation actually engaged in an intrastate and interstate bus business and the issue turned upon a point other than the separate character of the corporation.

National Investors Corporation v. Hoey, 52 Fed.Supp. 556, strongly relied upon by petitioner, we find clearly distinguishable upon the facts; for therein, as the court points out, the corporation ‘actually functioned as a business enterprise for over a year.‘ Among the business activities indicated, were that the corporation received cash dividends on securities held by it, distributed same as dividends; also that it had declared and paid a 100 percent stock dividend on its outstanding stock. In addition, the corporation had received the securities of three other corporations. These had been received from the plaintiff, under a plan to unite the plaintiff with the three affiliated corporations. When submitted to the stockholders of this corporation, the plan was rejected and thereafter the corporation, after doing business for about a year, as above suggested, was dissolved. Clearly in such a case, where the matter was not within the sole control of one person, but plans were subject to rejection by stockholders of three corporations, we find little similarity to the instant case. The corporation involved in Brudno v. Commissioner, 138 Fed.(2d) 779, actually engaged in business.

Other considerations impelling our conclusion in this matter are as follows: The petitioner on January 3, 1933, transferred the real estate to Investment Corporation, subject to a $56,000 mortgage in the deed of conveyance, and as a part of the consideration the Investment Corporation agreed to pay such encumbrance; yet, four days later, on January 7, 1933 petitioner himself paid off the mortgage. Plainly this is not dealing on a business basis, but a recognition that the corporation is a mere alter ego, its covenant with petitioner to pay the debt being disregarded. Petitioner was never reimbursed. The fact that an existing encumbrance was not assumed by the corporation formed was relied upon by the court in United States v. Brager Building & Land Corporation, 124 Fed.(2d) 349, as negation of business purpose in the corporation, and the same seems even more true here, where, though assumed by the corporation, the debt is immediately discharged by the creator of the corporation. Again petitioner in the formation of the corporation caused the passage of the bylaws that no agent or officer of the corporation could sell, encumber, or convey any corporate assets without previous authorization by the affirmative vote of the majority of the outstanding common stock. Since the petitioner owned all of such stock, except qualifying shares, he thus prevented any possibility of any transfer of any corporate stock. This smacks of very personal control and intent to guarantee the petitioner control of the situation, despite incorporation. The petitioner seems to have been very careful that incorporation would deprive him of no control of the incorporated assets. Also, the informal manner in which the insurance and the Atlantic Steel Co. stock were transferred to Investment Corporation without indication of transfer of stock therefor, and the failure to list the Atlantic Steel stock as assets distributed, indicates an informal personal management of the corporation by the petitioner.

Also, we may not disregard the fact that the Atlantic Steel Co. stock and the life insurance appear to have been transferred to the corporation after the hypothecation of the stock to Piedmont. Therefore, such property was not necessary to the loan of the collateral, already accomplished. The principal element of petitioner's argument lies in the necessity for formation of corporation in order to borrow; yet we find a loss, upon dissolution, predicated upon property not in the corporation until after the borrowing. We note too that Piedmont already had the insurance as collateral for an earlier loan of much more than its value. Obviously incorporation was not necessary for hypothecation of the insurance. An element of informality in the transaction appears also in the fact that insurance policies of $211,000 were transferred to the corporation, yet the stipulation as to insurance distribution on dissolution shows only $111,000 insurance. Whether the company was on a cash or accrual basis appears to have been immaterial, in answering questions on income tax returns. The Atlantic Steel Co. stock does not appear in Investment Corporation balance sheets. Nothing but real estate there appears.

All of these facts are impelling to the conclusion that the entire transaction involved in the incorporation of the Investment Corporation was personal, rather than one of business. Though of course, it is well recognized that corporate entity will ordinarily be respected, it is equally settled that this is not true under many circumstances, and where upon examination of all of the circumstances it becomes clear that a true business function was not served by the corporate entity, it should not be respected. Lack of actual transaction of business is found reason for denying corporate entity in various cases, perhaps most notably in Gregory v. Helvering, 293 U.S. 465; also in United States v. Brager Building & Land Corporation, supra. Perceiving in this instance that petitioner must, therefore rely upon a business purpose served, we find no proof of the service of such purpose sufficient to meet the fact that the petitioner emerged from the transaction with the same property as he held before, and, finding neither corporate business transacted nor business reason for the transaction, nor equivalent of business purpose or activity, but only suggestions of possible embarrassment, we think that the personal element here precludes a conclusion that the corporation should be recognized separately from the petitioner himself. There is no real distinction to be made, we think, between the situation of petitioner here and petitioner in North Jersey Title Ins. Co. v. Commissioner, 84 Fed(2d) 898, where the corporation was formed to hold title to property in order to avoid publicity, and where the court concluded that the only purpose of the corporation was to act as agent for its parent. Indeed, in that case the corporation did deal in the property, whereas here it did nothing but hold. See Carling Holding Co., 41 B.T.A. 493; Archibald R. Watson, 42 B.T.A. 52.

Other reasons appear for denying deduction for loss sustained in the liquidation of The investment Corporation. The Andrews Drive and Ponce de Leon Avenue properties were not held for investment purposes until 1929. There is no evidence of record of the fair market value of the properties at that time or at the time they were conveyed to the Investment Corporation for stock. See Heiner v. Tindle, 276 U.S. 582. Neither is there any evidence as to the cost or fair market value at any time of the Atlantic Steel Co. stock which was transferred to the Investment Corporation sometime after it was organized and was received by petitioner for stock in the liquidation proceedings. On this issue we sustain the respondent.

The position of the petitioner on the second issue is that the exchange of International stock for Coca-Cola Co. stock and the sale of 2,000 shares of the latter stock were parts of a single transaction resulting in a cash sale of International stock. The respondent argues that they were two separate and distinct transactions and should be taxed as such.

The argument of petitioner was fully considered in proceedings instituted by other stockholders of the two corporations who had made exchanges of stock of International for Coca-Cola Co. stock, followed by a sale of the newly acquired stock, and decided against the petitioners, Gus T. Dodd, 46 B.T.A. 7; affd., 131 Fed.(2d) 382 (the parties stipulated that the facts found in the Dodd case should be considered as facts herein— with a slight and immaterial exception); Estate of Emanuel Ulman, 46 B.T.A. 517; affd., 136 Fed.(2d) 406; George C. Woodruff, 46 B.T.A. 727; affd., 131 Fed.(2d) 429. No new theories are presented by petitioner upon brief, and the cases he relies upon, with two exceptions, were cited by the petitioner in the Dodd case. The additional cases involved questions of whether steps in a plan of reorganization should be considered separately or as parts of one transaction. Like issues were present in some of the cases previously relied upon. The new citations shed no new light on the question. The stock here was received in a partial liquidation and later sold.

Petitioner testified that he sold the 2,000 shares of stock of the Coca-Cola Co. to the Equitable Co. and to obtain the stock for the sale was required to exchange shares of stock of International, and that he would not have made the exchange without the intention of disposing of the Coca-Cola Co. stock. The inference of the testimony is that petitioner made a short sale of Coca-Cola Co. stock to the Equitable Co. Petitioner's books show sales of the stock after the exchange and only 1,000 shares through the Equitable Co. Assuming the deliveries of Coca-Cola Co. stock were covering transactions, the fact would not change the result. Short sales of Coca-Cola Co. stock were involved in the Woodruff case. Following that case, and the Dodd and Ulman cases, also James S. Floyd, 2 T.C. 744, we sustain the respondent on this issue.

Decision will be entered under Rule 50.