Siegel
v.
Comm'r of Internal Revenue

Tax Court of the United States.Mar 21, 1966
45 T.C. 566 (U.S.T.C. 1966)

Docket No. 563-63.

1966-03-21

SAM SIEGEL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Hugh F. Culverhouse, Arthur J. England, Jr., and George H. DeCarion, for the petitioner. Edwin A. Easton and George L. Hudspeth, for the respondent.


Hugh F. Culverhouse, Arthur J. England, Jr., and George H. DeCarion, for the petitioner. Edwin A. Easton and George L. Hudspeth, for the respondent.

In 1956, petitioner, who had been in the food brokerage business in Florida for many years, formed a Panamanian corporation for the purpose of having it invest in a joint venture to conduct farming operations in Cuba. Held, there were bona fide business reasons for forming the corporation, and its corporate entity may not be disregarded so as to attribute its income to its sole stockholder. Held, further, section 269 of the 1954 Code does not authorize the Commissioner to allocate corporation's income to its sole stockholder in the circumstances involved herein.

Respondent determined a deficiency in income tax of petitioner for the year 1958 in the amount of $491,524.10.

The sole question for decision is whether income in the amount of $549,876.89 distributed by a Cuban joint farming venture in 1958 to Ainsley Associates, S.A., a Panamanian corporation, is includable in the income for that year of petitioner, its sole stockholder.

FINDINGS OF FACT

Some of the facts have been stipulated, and, as stipulated, are incorporated herein by reference.

Petitioner is a resident of Pompano Beach, Fla. His income tax return for 1958 was filed with the district director of internal revenue for Jacksonville, Fla.

Petitioner came to this country as an immigrant from Lithuania, had virtually no formal education, and has spent most of his life in activities relating to the distribution of domestic and foreign produce (fruit and vegetables) in the United States. For a number of years prior to the fall of 1956, he was engaged in the distribution of produce in Pompano, Fla., as commission agent and broker for the accounts of others. He frequently traveled to Cuba in the course of his activities as selling agent for Cuban farmers, and became acquainted with Jose Garcia (hereinafter sometimes referred to as Garcia), and Jose Copa (hereinafter sometimes referred to as Copa). During the years 1951 to 1956 he sold in the United States tomatoes and cucumbers grown by Garcia and Copa in Cuba. They paid him a certain number of cents for each package sold.

Prior to 1956 petitioner had invested substantial amounts of money in land in Cuba, and in the fall of that year he still had an economic interest in two parcels— one owned jointly with Garcia consisting of about 3,300 acres in Pinar Del Rio Province, for which he, petitioner, had paid $31,500, and one owned jointly with Copa consisting of several acres on the Isle of Pines for which he paid approximately $27,000. The land acquired in Pinar Del Rio was adjacent to the Pan American Highway about 5 miles from La Fe and was purchased for speculative purposes. The land on the Isle of Pines was purchased for use as a cattle ranch.

Garcia presently resides in Pompano Beach. For many years prior to July 1959, when he left Cuba because of the revolution, he had been a citizen and resident of Cuba, and had engaged in produce farming in that country for approximately 15 years. He had also engaged in other business and investment activities in Cuba prior to 1956, including cattle ranching, real estate, and the co-ownership with his father of a wholesale produce distributorship in Havana.

Garcia's farming business in Cuba expanded during the years 1944 through 1956, and about 1956 he determined to expand his farming operations still further. However, he required additional cash for such proposed expansion and invited other persons to participate in such enlarged operation as joint venturers. The venture contemplated the growing of four crops— tomatoes, cucumbers, peppers, and pumpkins— on leased lands in three provinces of Cuba. The planned venture was to be larger than any previous farming activity in which Garcia had engaged, and it in fact was one of the largest growing operations of its type in Cuba during the years 1957 through 1959. The persons who were invited by Garcia to join the venture were Copa, Allen Smith, Joseph Posnack, and petitioner. Allen Smith, now deceased, was an American citizen who resided and farmed in Cuba and had been a business associate of Garcia since 1944. Copa, a farmer, was a resident of Cuba and from 1951 to 1956 had managed a farm for Garcia in Camaguey Province. Posnack was a resident of the United States and was engaged in the produce business in Pompano Beach, Fla.

In August 1956, during the return airplane flight on a trip to California with petitioner in connection with the wholesale produce business conducted by Garcia and his father in Havana, Garcia for the first time discussed with petitioner his plans to engage in more extensive farming in Cuba and to form a joint venture. Petitioner then told Garcia that he would invest $25,000 to $30,000 in the venture, that he would like to be the buyer of the produce exported to the United States by the venture, and asked for a 25-percent interest in the joint venture. Garcia later offered to give petitioner a 20-percent interest.

Petitioner wanted to buy the tomatoes and cucumbers to be exported to the United States by the venture, rather than work on a basis of so many cents per package sold, because he believed as a buyer he would make more money. Garcia expected that petitioner would want to purchase the exported produce and he never spoke to anyone else about purchasing it. At or about the time the joint venture was formed in 1956, petitioner and Garcia entered into an oral agreement that petitioner would purchase the tomatoes and cucumbers, exported to the United States by the venture, f.o.b. Havana ‘at the top dollar’ price on the U.S. market on the day purchased, less the cost of bringing the merchandise from Havana to the United States. During the years 1957, 1958, and 1959 petitioner was the only person who purchased this exported produce from the venture. During the year 1957 the purchases of tomatoes and cucumbers made by petitioner from the venture amounted to approximately $245,000; during 1958 approximately $2,500,000; and during 1959 approximately $1 million.

In 1956, after Garcia agreed to give him a 20-percent interest in the joint venture, petitioner consulted Harold Zinn, a Miami attorney, about the formation of a corporation. This was the first time Zinn had met petitioner. Petitioner told Zinn he was a broker in the produce line in Florida; that he was going to undertake a joint venture type of arrangement for the growing of tomatoes in Cuba; and that he wanted to organize a corporation in respect of his interest in the venture. He told Zinn in substance that his reasons for wanting a corporation were to maintain his own produce business separate and apart from the farming venture; to insulate his personal assets from the risks of the venture; to protect his reputation and credit; and to avoid jeopardizing in any way his license under the Perishable Commodities Act. There were bona fide business reasons which in fact motivated petitioner, at least in substantial part, in seeking to have the corporation formed.

Petitioner indicated to Zinn that he had in mind the organization of a Cuban corporation. Zinn told petitioner that he had no familiarity with Cuban corporate law, and suggested that if he was interested in a corporation, other than a U.S. corporation, petitioner give some consideration to a Panamanian corporation because of the banking facilities available in Panama and other factors. Zinn also told petitioner that he was not a tax lawyer, but that he had some familiarity with the tax law, which was part of his day-to-day practice, and he discussed with petitioner the ‘tax implications' of the proposed plan.

Petitioner accepted Zinn's recommendation to form a Panamanian corporation, and Ainsley Associates, S.A. (hereinafter sometimes referred to as Ainsley), was incorporated under the laws of the Republic of Panama on September 20, 1956. Zinn received a fee of approximately $500 for services rendered in connection with the formation of Ainsley. Petitioner had no immediate need for any profits realized by the venture, and his plan at the time of the formation of Ainsley was ultimately to obtain the ‘fruits' of the venture through liquidation of Ainsley.

Under date of October 18, 1956, petitioner drew a check payable to the order of Ainsley Associates, S.A., in the amount of $15,000 on the First National Bank of Pompano Beach, Pompano, Fla. The $15,000 on the First National Bank of Pompano Beach, Pompano, Fla. The $15,000 was used to open a checking account at the First National City Bank of New York at Surcursal de Panama, R.P. (hereinafter referred to as the City Bank), in the name of Ainsley Associates, S.A. This amount was given in exchange for Ainsley's common stock consisting of 100 shares. Throughout the corporate existence of Ainsley petitioner was the beneficial owner of all of its outstanding stock, and pursuant to a resolution of the board of directors, had complete control of the funds in the account in its name at the City Bank; he was the only person who signed checks on that account. Funds of the corporation, other than funds paid to the joint venture, were at all times retained exclusively in this account. Petitioner at no time used them for his personal or other business needs.

Petitioner at no time served as an officer or director of Ainsley. Its officers and directors were citizens of Panama who were ‘the original organizers' of the corporation. The reason for this, as expressed to Zinn by Charles Ramirez, a Panamanian attorney who was named in the articles of Ainsley as its president and treasurer, was to expedite and facilitate the handling of the ‘corporate work’ in Panama. Petitioner does not know who served as the officers and directors of Ainsley, and has never met Ramirez.

In 1956, after Posnack was asked by Garcia to make an investment in the joint venture and agreed to do so, he also consulted Harold Zinn about the formation of a corporation. Upon the recommendation of Zinn, Vizcaya Corp., S.A. (hereinafter sometimes referred to as Vizcaya), was organized under the laws of the Republic of Panama on September 20, 1956. The articles of incorporation of Vizcaya, as amended on November 19, 1956, were virtually identical with the articles of incorporation of Ainsley. Posnack beneficially owned all of the outstanding capital stock of Vizcaya.

After Ainsley was formed, Zinn suggested to petitioner that ‘he should carefully document his transaction.’ Zinn prepared an agreement and told petitioner ‘that he ought to get it signed by the coventurers.’ The agreement, as executed, read as follows:

November 28, 1956.

Mr. Jose Garcia

La Rosa 552

Habana, Cuba

Dear Mr. Garcia:

This will confirm our understanding with respect to our participation in a joint venture which has for its object the growing and sale of produce in Cuba.

You, together with other associates, have an 80% interest in the venture and the undersigned corporation has a 20% interest in the venture. We enclose herewith our check to your order for the sum of $13,000.00, which represents our initial capital contribution to the joint venture.

If additional capital contributions are required, we will contribute same in proportion to our interest in the venture.

It is understood and agreed that we shall be entitled to participate in all profits to the extent of our 20% interest. Please confirm this understanding by your signature hereinafter placed.

Very truly yours,

Ainsley Associates, S.A. By (Signed) Sam Siegel.

Approved and Accepted:

(Signed) J. Garcia (Seal)

Jose Garcia

Another agreement dated November 28, 1956, containing the same wording, was prepared by Zinn for Vizcaya Corp. S.A., and signed by David Posnack.

The check for $13,000, referred to in the foregoing letter of November 28, 1956, to Garcia was drawn on the bank account in the name of Ainsley at the City Bank and signed by petitioner for Ainsley.

The growing season for vegetables in Cuba begins in the fall and ends in the spring. In the fall of 1956 the joint venture commenced its farming operations in Cuba. It used farms leased in the Cuban provinces of Camaguey, Santa Clara, and Pinar Del Rio. The leases were for 1 year with an option to renew for an additional year. Copa managed the farm in Camaguey Province, Smith the farm in Santa Clara Province, and Garcia the largest farm in Pinar Del Rio Province. Garcia also maintained general supervision over all three of the farms, and was in charge of the venture. Petitioner purchased that portion of the produce of the venture which was exported to the United States. Posnack did not perform any services.

The major crops grown on the three farms were tomatoes, cucumbers, peppers, and pumpkins, 70 percent of which were tomatoes and cucumbers. They were sold in part to wholesalers in local Cuban markets, in part (primarily tomatoes) to canneries in Cuba, and in part (tomatoes and cucumbers) to petitioner, individually, for export to the United States.

It was understood when the joint venture was formed in 1956 that it was to be ‘on a year to year basis' and that the end of each growing season a change might be made in the members of the venture, and their respective interests, for the next growing season. For the 1956-57 growing season, Garcia, Copa, Smith, Ainsley, and Vizcaya each had a 20-percent interest in the venture. At the end of the 1956-57 season Garcia informed Posnack that Vizcaya would not be invited to participate in the venture for the coming season since additional capital was no longer needed. For the 1957-58 season Garcia had a 40-percent interest in the venture, and Copa, Smith, and Ainsley each had a 20-percent interest. At the end of the 1957-58 season, Smith retired and the 20-percent interest he had had was acquired by Copa. Garcia and Copa each had a 40-percent interest in the venture for the 1958-59 season, and Ainsley a 20-percent interest.

The members of the joint venture for the 1956-57, 1957-58, and 1958-59 seasons each contributed their proportionate shares of amounts needed by the venture for each of the three growing seasons. Ainsley's contributions to the venture were made by checks signed by petitioner on its behalf and drawn on its account at the City Bank, as follows:

+-------------------------------+ ¦Venture¦Amount ¦Date of ¦ +-------+--------+--------------¦ ¦ ¦ ¦check ¦ +-------+--------+--------------¦ ¦1956-57¦$13,000 ¦Nov. 28, 1956 ¦ +-------+--------+--------------¦ ¦1957-58¦20,000 ¦Oct. 18, 1957 ¦ +-------+--------+--------------¦ ¦ ¦( 25,000¦Sept. 8, 1958 ¦ +-------+--------+--------------¦ ¦1958-59¦( 25,000¦Nov. 10, 1958 ¦ +-------------------------------+

The profits realized by the joint venture were substantial. Its success was due, among other reasons, to (1) an assured market for a substantial portion of the output by reason of Garcia's co-ownership of a wholesale produce business in Havana and petitioner's undertaking to purchase for his own account all the tomatoes and cucumbers that were to be exported to the United States, (2) the experience and skill of Garcia in growing the crops in Cuba, (3) the cheap Cuban labor employed on the farms, and (4) unusually severe weather in Florida having destructive effect upon Florida crops thus enabling Cuban grown produce to command high prices in the United States approximately 1,500 acres were cultivated by the venture during the 1956-57 season, and 2,500 acres during the 1957-58 and 1958-59 seasons.

The books and records of the joint venture were kept by Garcia, with the aid of his Cuban bookkeeper, Manuel Delgado, and were maintained (and eventually left) in Cuba. At the end of each growing season Garcia computed the profits of the venture for that season and the share each member was entitled to receive. Checks in the aggregate amounts of $68,681.96 in 1957, $599,876.89 in 1958, and $202,747.69 in 1959 were thus sent by Garcia to Ainsley Associates, S.A., c/o Charles E. Ramirez, P.0. Box 86, Balboa, Canal Zone' and were deposited in the account in the name of Ainsley at the City Bank. These amounts represented in part a return of capital in part profits from the venture. The only other deposit made in the account in the name of Ainsley at the City Bank during the period November 16, 1956, when the account was opened, to August 14, 1959, when it was closed, was the $15,000 received from petitioner in October 1956. The withdrawals from the account during that period, and the purposes for which they were made insofar as disclosed, were as follows:

+-----------------------------------------------------------------------------+ ¦Date of ¦Payee ¦Amount ¦Purpose ¦ ¦check ¦ ¦ ¦ ¦ +------------+--------------------------+----------+--------------------------¦ ¦11/28/56 ¦Jose Garcia ¦$13,000.00¦Contribution to joint ¦ ¦ ¦ ¦ ¦venture. ¦ +------------+--------------------------+----------+--------------------------¦ ¦11/18/56 ¦Charles E. Ramirez ¦550.00 ¦(1 ) ¦ +------------+--------------------------+----------+--------------------------¦ ¦10/18/57 ¦Jose Garcia ¦20,000.00 ¦Contribution to joint ¦ ¦ ¦ ¦ ¦venture. ¦ +------------+--------------------------+----------+--------------------------¦ ¦9/8/58 ¦Jose Garcia and Jose Copa ¦25,000.00 ¦Do. ¦ +------------+--------------------------+----------+--------------------------¦ ¦11/10/58 ¦Jose Garcia and Jose Copa ¦25,000.00 ¦Do. ¦ +------------+--------------------------+----------+--------------------------¦ ¦11/—/58 ¦Charles E. Ramirez ¦100.00 ¦(1 ) ¦ +------------+--------------------------+----------+--------------------------¦ ¦3/9/59 ¦S. Siegel ¦100.00 ¦(2 ) ¦ +------------+--------------------------+----------+--------------------------¦ ¦7/8/59 ¦Schwarz and Zinn Trust ¦10,322.23 ¦Legal fees— ¦ ¦ ¦Account ¦ ¦ ¦ +------------+--------------------------+----------+--------------------------¦ ¦ ¦ ¦ ¦liquidation. ¦ +------------+--------------------------+----------+--------------------------¦ ¦7/8/59 ¦Charles E. Ramirez ¦400.00 ¦(1 ) ¦ +------------+--------------------------+----------+--------------------------¦ ¦8/4/59 ¦Sam Siegel ¦500,000.00¦Liquidation withdrawal. ¦ +------------+--------------------------+----------+--------------------------¦ ¦8/4/59 ¦-----do ¦150,000.00¦Do. ¦ +------------+--------------------------+----------+--------------------------¦ ¦8/4/59 ¦S. Siegel ¦70,000.00 ¦Do. ¦ +------------+--------------------------+----------+--------------------------¦ ¦8/4/59 ¦Sam Siegel ¦71,830.06 ¦Do. ¦ +------------+--------------------------+----------+--------------------------¦ ¦ ¦ ¦886,302.29¦ ¦ +------------+--------------------------+----------+--------------------------¦ ¦ ¦Bank charges ¦4.25 ¦ ¦ +------------+--------------------------+----------+--------------------------¦ ¦ ¦Total ¦886,306.54¦ ¦ +-----------------------------------------------------------------------------+

In 1959, after the Castro regime had taken over in Cuba, petitioner went to see Zinn and told Zinn his joint venture in Cuba had been wound up and that ‘he had an accumulation of monies in Panama and wanted to liquidate the monies and distribute the assets' of Ainsley. Apart from the prevailing conditions in Cuba making it impossible to continue the joint venture, the liquidation of Ainsley was also prompted by petitioner's need for funds for proposed farming ventures with Garcia in the United States as well as by petitioner's need for funds for proposed farming ventures with Garcia in the United States as well as by petitioner's concern over unrest in Panama as it might affect the safety of Ainsley's funds in that country.

On July 16, 1959, Ainsley was formally dissolved under the laws of the Republic of Panama. No meetings of its board of directors were held other than upon incorporation and liquidation. In August 1959, petitioner acquired all of the funds in the account in the name of Ainsley at the City Bank by drawing four checks on that account, dated August 4, 1959, totaling $791,830.06, which were payable to him and signed by him. These funds were the only assets then held in the name of Ainsley.

In his income tax return for the year 1959, petitioner treated the amount of $776,284.91 as a distribution in complete liquidation of Ainsley and reported it in that return as a long-term capital gain. This amount was computed as follows:

+---------------------------------------------+ ¦Gross sales price ¦ ¦$791,830.06¦ +----------------------+----------+-----------¦ ¦Cost of stock ¦$15,000.00¦ ¦ +----------------------+----------+-----------¦ ¦Expenses of sale ¦545.15 ¦15,545.15 ¦ +----------------------+----------+-----------¦ ¦Long-term capital gain¦ ¦776,284.91 ¦ +---------------------------------------------+

One-half of $776,284.91, or $388.142.45, was included in the income reported in petitioner's return.

In the notice of deficiency the respondent determined a deficiency in income tax of petitioner for the year 1958 in the amount of $491,524.10 and an overassessment in the amount of $26,668.45 for the year 1959. In determining the deficiency for 1958, respondent added to the taxable income reported in petitioner's return for that year the amount of $549,876.89, which amount represented the portion of the $599,876.89 distributed by the joint venture to Ainsley in 1958 which was in excess of the capital contribution of $50,000 made in that year.

In determining the overassessment for the year 1959, respondent added to the income reported in petitioner's return for that year the amount of $202,202.54 (the distribution of profits of $202,747.69 made by the joint venture in 1959 less expenses of $545.15) and eliminated from petitioner's 1959 income the amount reported as capital gain from the liquidation of Ainsley on the ground that petitioner had realized no such gain in 1959. Respondent's determination for the year 1959 is not at issue in this proceeding.

Petitioner's income tax returns for the years 1957, 1958, and 1959 reflect his transactions as buyer of produce from the Cuban joint ventures. These transactions are not at issue in this proceeding inasmuch as the Commissioner has nowhere proposed adjustments to or questioned petitioner's manner of reporting same.

OPINION

Raum, Judge:

In 1958 the Cuban joint venture distributed to Ainsley, petitioner's wholly owned Panamanian corporation, $549,876.89 in excess of Ainsley's contribution to the venture for that season; and in determining the deficiency herein, the Commissioner included that amount directly in petitioner's 1958 gross income. He seeks to support that determination in this Court, upon either of two alternative theories: (1) That Ainsley was a sham, and that its corporate identity must be disregarded, with the consequence that income otherwise chargeable to it must be treated as petitioner's income under section 61 of the 1954 Code; (2) that the ‘principal purpose’ of petitioner's acquisition of control of Ainsley was the ‘evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance’ within the meaning of section 269(a)(1), so that the Commissioner was empowered to distribute, apportion, or allocate gross income, deductions, credits, or allowances to the extent provided by section 269(b)(2), which, he contends, authorizes, the inclusion of the amount in question in petitioner's gross income. We hold that neither of these theories supports the deficiency upon the record before us.

Exhibits in evidence indicate that payments made to Ramirez were for legal services rendered in connection with the preparation and registration of the certificate of incorporation of Ainsley and in connection with the dissolution of Ainsley, and that he was also paid $100 for each of the years ending Nov. 30, 1957, 1958, and 1959, for “Representation as Resident Agent in the Republic of Panama for Ainsley Associates, S.A.”

SEC. 61. GROSS INCOME DEFINED.(a) GENERAL DEFINITION.— Except as otherwise provided in this gross income means all income from whatever source derived, including (but not limited to) the following items:(2) Gross income derived from business:(13) Distributive share of partnership gross income;

The record does not disclose the purpose of this check.

SEC. 269. ACQUISITIONS MADE TO EVADE OR AVOID INCOME TAX.(a) In general.— If—(1) any person or persons acquire, or acquired on or after October 8, 1940. directly or indirectly, control of a corporation. * * * and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed. For purposes of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock of the corporation.(b) POWER OF SECRETARY OR HIS DELEGATE TO ALLOW DEDUCTION. ETC., IN PART—In any case to which subsection (a) applies the Secretary or his delegate is authorized—(1) to allow as a deduction, credit, or allowance any part of any amount disallowed by such subsection, if he determines that such allowance will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or(2) to distribute, apportion, or allocate gross income, and distribute, apportion, or allocate the deductions, credits, or allowances the benefit of which was sought to be secured, between or among the corporations, or properties, or parts thereof, involved, and to allow such deductions, credits, or allowances so distributed, apportioned, or allocated, but to give effect to such allowance only to such extent as he determines will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or(3) to exercise his powers in part under paragraph (1) and in part under paragraph (2).

1. Disregard of Corporate Entity. It is undisputed that Ainsley was a properly organized corporation and that it existed as a legal entity. Nevertheless, if it in fact was organized or utilized solely as a device for defeating taxes and carried on no business of consequence, there is ample authority to justify ignoring the corporate form. See Aldon Homes, Inc., 33 T.C. 582, and cases cited at 596, 597. What was the situation here?

We have uncontradicted testimony that petitioner had valid and substantial business reasons for incorporating Ainsley. He was a broker or commission merchant, selling produce in the United States. He had never previously engaged in a farming venture, and was concerned about its risky character, its possible threat to his personal fortune and its possible effect upon his license under the Perishable Commodities Act. By incorporating Ainsley to take his place in the joint venture, he would thus insulate or attempt to insulate these matters from the risk that was being undertaken. We have corroborating testimony that he outlined these considerations to Zinn, the attorney who was engaged to incorporate Ainsley for him, and we have reached the conclusion on the record, although without strong conviction, that petitioner in fact was moved by these considerations in substantial part, in having Ainsley incorporated.

To be sure, we are not so naive as to think that tax consequences were not taken into account in organizing Ainsley, and the record suggests that tax considerations did play a part. The only apparent purpose for the formation of a Panamanian corporation rather than a U.S.CORPORATION was to avoid payment of any tax on the income from the joint venture as it was earned. But, prior to the Revenue Act of 1962, assign section 951 to the 1954 Code, there was a loophole in the Code which permitted that result, and petitioner was free to take advantage of it. The question before us is not to be clouded by the use of a foreign corporation, rather than a domestic corporation, to escape U.S. taxation, except as it may bear on the question whether that corporation was in fact ‘formed for a substantial business purpose or actually engage(d) in substantive business activity.’ Aldon Homes, Inc., supra at 597.

Our concern is whether petitioner had any substantial bona fide business reason for forming a corporation to participate in the venture, or whether the corporation formed, Ainsley, did in fact conduct any ‘business' in the ordinary meaning. If these questions may be answered in the affirmative, then the existence of Ainsley must be recognized for tax as well as corporate purposes. Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 439; National Investors Corporation v. Hoey, 144 F.2d 466, 467-468 (C.A.2); Aldon Homes, Inc., 33 T.C. 582, 596.

Petitioner has spent most of his life in activities relating to the distribution of domestic and foreign produce in the United States, and during the years 1951 to 1956 he sold in the United States tomatoes and cucumbers grown by Garcia and Copa in Cuba. Prior to the fall of 1956 petitioner had no connection with the growing of produce. About September 1956, Garcia invited petitioner to invest in a join venture the purpose of which was to farm vegetables in three different provinces in Cuba. Garcia was to be in charge of the operation and was plainly the dominant member of the venture. Relying upon his confidence in petitioner, Garcia agreed to accept a corporation owned and controlled by petitioner as a member of the venture in place of petitioner himself. Petitioner contributed $15,000 to Ainsley which he had formed for that purpose, and it in turn contributed $13,000 in 1956 to the joint venture.

Having been in the business of selling produce for a long period of time, and never having had any association with any farming operations, petitioner's desire to separate these two distinct businesses was natural, particularly in view of the risky character of the projected farming venture. The fact that the venture turned out to be highly successful is irrelevant. The disproportionately large profits were due in large part, as disclosed by the evidence, to unusually bad weather in Florida that enabled the competitive Cuban produce to sell at more favorable terms in this country— a circumstance that could not reasonably have been counted upon in advance.

Nor may it be said that Ainsley's minimal activity did not constitute the conduct of business. The point is that Ainsley was formed for only a limited purpose, namely, to invest in the joint venture, and it in fact carried out that purpose. This was a sufficient amount of business in these circumstances to justify recognition of the corporation if in fact such business was done by Ainsley rather than by petitioner.

Petitioner as sole stockholder of Ainsley, although not an officer or director thereof, caused Ainsley to enter into the joint venture in each of the 3 years of its operation. Pursuant to a resolution of the directors of Ainsley, petitioner was given sole and absolute control over its bank account in Panama. Distributions from the venture were made annually to Ainsley and deposited in its account. Prior to liquidation, the moneys in that account were used to invest and reinvest in the Cuban farming venture and to pay certain corporate expenses in Panama. The excess remained in the corporate bank account and was not used for any of petitioner's personal or business needs. While the matter may not be entirely free from doubt, we think that petitioner was acting on behalf of Ainsley rather than on his own behalf, and that it was Ainsley rather than petitioner that must be regarded as having invested in the joint venture.

There is a $100 check to petitioner which is unexplained, but there is no suggestion that it was used for petitioner's personal benefit. From the pattern of the corporation's account it seems likely that the proceeds of that check were used to maintain the corporation as a viable Panamanian entity.

In addition, as already noted, while the evidence presented, including the fact that Ainsley was incorporated in Panama rather than in the United States, convinces us that petitioner was aware of and considered the tax implications of setting up a corporation, and in particular a foreign corporation, we are also reasonably satisfied that petitioner had substantial bona fide business reasons for arranging his affairs in this manner. In the circumstances. we cannot disregard the existence of Ainsley as the Commissioner would have us do.

2. Section 269.— The Government argues alternatively that, apart from disregarding the corporate fiction, the Commissioner's determination is correct under section 269. Under subsection (a) (fn. 2, supra), if petitioner's ‘principal purpose’ in acquiring control of Ainsley was ‘evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance’ which he would not otherwise enjoy, ‘then such deduction, credit, or other allowance shall not be allowed.’

Our decision above on the first point that petitioner had substantial bona fide business reasons for incorporating Ainsley goes far to render section 269 inapplicable. In any event, however, section 269, by its terms, does not apply here.

In determining the deficiency for 1958 the Commissioner added to petitioner's reported income Ainsley's profit from the joint venture for that year. He did not disallow any ‘deduction, credit, or other allowance’ claimed by petitioner. As a consequence, section 269 is not applicable. John F. Nutt, 39 T.C. 231, 250, remanded in another respect 351 F.2d 452 (C.A. 9), so holds, and we regard it as decisive here. The Government's attempt to distinguish the Nutt case on the ground that the corporations therein had not yet been liquidated is not persuasive. To be sure, a deduction was claimed here by petitioner under section 1201 in 1959 as a result of the reported capital gain upon liquidation of Ainsley. But the Commissioner did not disallow that deduction. He relieved petitioner of all tax with respect to capital gain on the 1959 liquidation, thereby determining an overpayment rather than a deficiency for 1959.

SEC. 1202. DEDUCTION FOR CAPITAL GAINS.In the case of a taxpayer other than a corporation, if for any taxable year the net longterm capital gain exceeds the net short-term capital loss, 50 percent of the amount of such excess shall be a deduction from gross income. * * *

Nor is the Government's position supportable under section 269 (b) (2), which presupposes the applicability of subsection (a) in the first instance. Moreover, the very language of (b) (2) is inapplicable here, because it authorizes the Commissioner ‘to distribute, apportion, or allocate gross income and distribute, apportion, or allocate the deductions, credits, or allowances, * * * between or among the corporations, or properties, or parts thereof, involved.’ (Emphasis added.) This statute was drawn with a high degree of specificity, and there was not involved herein any distribution apportionment, or allocation ‘between or among * * * corporations or properties.’ Whatever reason there may have been for drafting the statute so narrowly, it does not cover the case before us.

Decision will be entered under Rule 50.