Saigh v. Commissioner ( 1961 )

Elizabeth Lewis Saigh, Transferee, et al., ¹ Petitioners, v. Commissioner of Internal Revenue, Respondent

Saigh v. Commissioner

Docket Nos. 63355, 63352, 63353, 63354, 63356, 63357, 63358, 63359

United States Tax Court

36 T.C. 395; 1961 U.S. Tax Ct. LEXIS 142;

May 25, 1961, Filed

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Decisions will be entered under Rule 50.

1. Where an individual (agent) acts on behalf of a corporation in the acquisition of another corporation, the acquiring corporation (principal) is a "shareholder" for the purposes of section 115(a), I.R.C. 1939, and where the acquired corporation transfers funds to the acquiring corporation under circumstances not indicating an intention to repay or to be repaid, held, the transfer was a dividend to the extent of earnings and profits of the acquired corporation within the meaning of section 115(a).

2. Held, the doctrines of equitable estoppel, election of remedies, and laches, either as evolved in this Court or as applied by the courts of Missouri, are not applicable to the instant facts, and petitioners are liable as transferees.

3. Held, this Court has no authority to grant an offset, counterclaim, or recoupment.

4. Held, the corporation owning the building is entitled to treat the cost of paying off certificates issued to finance the building as part of the cost of that building and to take the depreciation deduction on that basis.

5. Held, the failure to file personal holding company returns was not due to reasonable cause.

6. Held, interest is computed according to the rule set forth in Henry Cappellini, 16 B.T.A. 802">16 B.T.A. 802.

C. Rudolf Peterson, Esq., William D. Crampton, Esq., and Floyd F. Toomey, Esq., for the petitioners in Docket Nos. 63355 and 63356.

Ray Eder, Esq., for the petitioners in Docket Nos. 63352, 63353, 63354, 63357, 63358, and 63359.

Gilbert Weiss, Esq., for the petitioners in Docket Nos. 63353 and 63354.

Douglas L. Barnes, Esq., and Ivan L. Onnel, Esq., for the respondent.

Van Fossan, Judge.

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VAN FOSSAN

Respondent determined the following deficiency, interest, and addition to tax of Investment Realty Corporation:

Year	Kind	Deficiency
1946	Personal holding company surtax	$ 1,454,088.18

		Addition to tax,
Year	Interest	sec. 291(a),
		I.R.C. 1939
1946	$ 380,692.24	$ 363,522.05

Based on the above deficiency, respondent determined that petitioners are liable, as transferees of Investment Realty Corporation (transferor), to the extent provided below:

Docket
No.	Petitioner	Amount
63352	Estate of A. L. Watson, Deceased Oscar G. Schaefer,
	Administrator, Transferee	$ 93,138.45
63353	Irma Hannegan, Transferee	174,695.23
63354	Robert E. Hannegan Trust, Irma Hannegan and Mercantile
	Trust Company, Trustees, Transferee	73,352.26
63355	Elizabeth Lewis Saigh, Transferee	159,251.35
63356	Fred M. Saigh, Jr., Transferee	902,428.67
63357	Sidney Salomon, Jr., Transferee	30,161.84
63358	Jean Salomon, Transferee	90,483.92
63359	Estate of R. Vernon Clark, Deceased, St. Louis Union
	Trust Company and Wilbur B. Jones,
	Coexecutors, Transferee	93,138.45

There are numerous concessions made by the parties in the submitted stipulation of facts and on brief. These concessions will be given effect under Rule 50.

The issues are as follows: (1) Whether the transfer by Railway Exchange Building, Inc., of $ 2,205,000 to Investment Realty Corporation constituted a distribution to Investment Realty Corporation taxable as a dividend to the extent of the available earnings and profits of Railway Exchange Building, Inc.; (2) whether the petitioners are liable as transferees for the deficiency, interest, and addition to tax of Investment Realty Corporation, the transferor corporation; (3) whether petitioners are entitled to offsets against the deficiencies asserted here for taxes paid by petitioners as the result of actions taken by respondent with respect to petitioners for the years 1952 through 1954; (4) the proper amount of the earnings and profits of Railway Exchange Building, Inc., accumulated as of December 31, 1945, and for the year 1946; (5) whether the failure on the part of Investment Realty Corporation to file a personal holding company return for the year 1946 was due to reasonable cause and not due to willful neglect; and (6) what constitutes the proper amount of interest accruing against these petitioners.

FINDINGS OF FACT.

The facts stipulated by the parties are adopted as findings herein and are incorporated by this reference. Other facts are taken from the evidence submitted, including the transcript of testimony.

Petitioners, other than the Estate of A. L. Watson, the Robert E. Hannegan Trust, and the Estate of R. Vernon Clark, are individuals residing in or near St. Louis, Missouri. Oscar G. Schaefer is the administrator of the Estate of A. L. Watson. Irma Hannegan and the Mercantile Trust Company, St. Louis, Missouri, are the duly appointed and acting trustees of the Robert E. Hannegan Trust, created under the will of Robert E. Hannegan. The St. Louis Union Trust Company and Wilbur B. Jones are the coexecutors of the Estate of R. Vernon Clark.

Investment Realty Corporation (hereinafter sometimes referred to as Investment) filed Federal income tax returns for the years 1946 through 1950, and for the short year January 1 to July 27, 1951, with the then collector of internal revenue, St. Louis, Missouri.

Investment did not file personal holding company returns for any of the taxable years 1946 through 1948. No personal holding company tax has been paid by or on behalf of Investment for the taxable year 1946.

Investment earned no income of its own in the years 1946 through 1950.

Railway Exchange Building, Inc. (hereinafter referred to as Building Inc.), was incorporated on January 4, 1924, under the laws of the State of Missouri and had its office and principal place of business in St. Louis. Its authorized capital consisted of 20,000 shares of no-par-value common stock. Building Inc. leased city block No. 128, together with the Railway Exchange Building, from the Annuity Realty Company. Its business at all times was the operation of the building.

City block No. 128 is located in the retail shopping area of downtown St. Louis. The Railway Exchange Building located thereon was completed in 1913 on leased land at the cost of $ 4,159,592.03, together with certain other expenses during construction for maintaining the leases on the underlying land in the amount of $ 469,133.01. It had 21 stories, the first 7 of which were occupied by the May Department Stores Company.

St. Louis Improvement Company was incorporated under the laws of the State of Missouri on July 9, 1941, with authorized capital stock of 5,000 shares, par value $ 1 per share. The stock was not issued at the time of incorporation and the company had no assets and conducted no business. On December 13, 1945, the name of the corporation was changed to Investment Realty Corporation. The stock was then issued, 4,998 shares to Fred M. Saigh, Jr. (hereinafter sometimes referred to as Saigh), 1 share to M. Boulicault, and 1 share to Paul Hutchinson.

In connection with another transaction, not here involved, Building Inc. on April 1, 1944, borrowed $ 2,500,000 from May Building Company. In an agreement of the same date, and later confirmed in a supplemental agreement of June 29, 1946, it was agreed by Building Inc. that --

so long as any part of the aforesaid note shall remain unpaid, it will not declare or pay any dividend, * * * without the consent of Lessee [May Department Stores Company], if the payment of such dividend would reduce its net current assets below the sum of One Hundred Thousand Dollars ($ 100,000.00).

It was also agreed to deliver to the May Department Stores Company a copy of its regular annual balance sheet and operating statement certified by an independent certified public accountant.

Prior to June 1946, the stock of Building Inc. was owned by Claude B. Ricketts and various members of the Orr family (including a trust). Saigh learned, through real estate brokers, that these stockholders were interested in selling their stock for $ 2,200,000.

On March 14, 1946, formal application was made to the Massachusetts Mutual Life Insurance Company (hereinafter referred to as the insurance company) for a loan of $ 3 million to Building Inc., the application being signed "Railway Exchange Building, Inc., by Fred M. Saigh, Jr., Applicant." The application contained the following notation: "Note: Applicant has an option to purchase the stock of the Railway Exchange Building, Inc. The proceeds of this loan will be part of the purchase price and would be placed in escrow pending delivery of the stock and other instruments." In May 1946 the insurance company gave a commitment for the loan.

On June 17, 1946, Saigh wrote the attorney representing the insurance company in the transaction, as follows:

I told you last week that we had a corporation which, in my opinion, was sufficient to take over the stock of the Railway Exchange Building, Inc. * * *

The name of St. Louis Improvements Company was changed to Investment Realty Corporation by amendment on the 14th day of December 1945, and was recorded on the 18th day of December * * *

Events Occurring On June 28, 1946.

A special meeting was held at an unspecified hour by the directors of Building Inc. (Claude B. Ricketts, Isaac H. Orr, Erastus Wells, and A. L. Roffman). Claude B. Ricketts, acting as chairman, informed the directors that he was engaged in closing the sale of all of the authorized, issued, and outstanding capital stock of the corporation. The purpose of the meeting was to settle the affairs of the corporation.

At a special meeting of Building Inc., held at 11:30 a.m., the directors listed above resigned, and in their place Saigh, A. L. Watson, John Grossman, and Paul Hutchinson were appointed directors.

A waiver of notice of joint meeting of stockholders and directors of Building Inc. was executed by Saigh and his associates, including Ruth Hall, at 1 p.m. The waiver contained the following language:

We, the undersigned, being all of the stockholders of the RAILWAY EXCHANGE BUILDING, INC., owning respectively the number of shares set opposite our respective names, do hereby consent to the holding of a joint special meeting of Stockholders and Board of Directors of the said company * * *

The number of shares listed was as follows:

	Number of
Shareholder	shares
Fred M. Saigh, Jr.	19,996
John Grossman	1
Paul Hutchinson	1
Ruth Hall	1
A. L. Watson	1

At the special meeting, the directors voted upon and approved the following resolutions:

(a) Authorizing the president and secretary to issue Building Inc.'s note for $ 3 million;

(b) Requiring, in the event the loan was granted, that $ 800,000 be appropriated toward the reduction of an obligation of $ 2,300,000 owing to the May Building Company;

(c) Authorizing the assignment of certain leases to Massachusetts Mutual Life Insurance Company as required by the terms of the loan;

(d) Reducing the capital stock of the company from 20,000 to 12,000 shares by the retirement of the difference pro rata among the shareholders by the payment to them of $ 2,285,747.11.

On the basis of an application filed at 3:40 p.m., the secretary of state of the State of Missouri issued a certificate of amendment to the charter recognizing the capital stock reduction. The necessary documents bore the signature of Saigh as president or chairman of the directors.

A statement of assets and liabilities of Building Inc. as of June 28, 1946, indicated the following total current assets:

	Actual	After	After new
	amounts at	revaluations	loan
	June 28, 1946
		$ 4,838,785.63	$ 3,000,000.00
Current assets:
Cash	$ 143,930.60	143,930.60	143,930.60
U.S. Government bonds	70,846.88	70,846.88	70,846.88
Rents receivable	3,946.41	3,946.41	3,946.41
Sundry assets	1,494.31	1,494.31	1,494.31
Total current assets	220,218.20	220,218.20	220,218.20

		After 40 percent
	After	distribution
	certain	in
	payments	partial
		liquidation
	$ 925,000.00	$ 2,317,029.08
Current assets:
Cash	143,930.60	97,748.40
U.S. Government bonds	70,846.88
Rents receivable	3,946.41	3,946.41
Sundry assets	1,494.31	1,494.31
Total current assets	220,218.20	103,189.12

These totals were accepted and approved at the special meeting as "the latest current financial condition of the company."

Events Occurring On June 29, 1946.

The proceeds of the loan from the insurance company were deposited in the account of Building Inc. at the First National Bank in St. Louis. Building Inc. executed a note in the face amount of the loan, with interest at 3 3/4 percent, and assigned two long-term leases in consideration of the loan. The note and assignments were executed by Saigh as president of the corporation. The attorney for the insurance company thought, at this time, that the plan for paying out the liquidating dividend would be carried out as evidenced in the corporate minutes. The liquidating dividend was never paid to any of the shareholders.

Building Inc. drew a check to the order of Investment in the amount of $ 2,205,000, the proceeds of which were deposited to the account which Investment had just opened at the First National Bank for this purpose.

Investment purchased cashier's checks at the First National Bank which were issued as follows:

Individual payee	Amount
Ann M. Orr	$ 220,000
Isaac H. Orr	55,000
William C. Orr	275,000
Claude B. Ricketts	1,100,000
Ann M. Orr and Union Trust Co., Trustees	550,000
Total	2,200,000

The stock of Building Inc. was surrendered by the above-named individuals upon receipt of the foregoing amounts. No payments had been made to these individuals for their stock prior to this date.

On July 1, 1946, Building Inc. transferred an additional $ 15,000 to Investment's account and also transferred to Investment United States bonds having a value of $ 15,672.62. The total value of assets transferred as of this date was $ 2,235,672.62.

Building Inc. stock certificates bearing the date July 9, 1946, were issued as follows:

	Number of
Individual stockholder	shares
John Grossman	1
Fred M. Saigh, Jr.	1
R. Vernon Clark	1
A. L. Watson	1
Sidney Salomon, Jr.	1
Investment Realty Corporation	19,995

On the same date, Saigh sold, at the par value of $ 1 per share, shares of Investment to A. L. Watson, Sidney Salomon, Jr., and R. Vernon Clark. M. Boulicault transferred his 1 share to John Grossman. The ownership of Investment as of July 9, 1946, was as follows:

	Number of
Individual stockholder	shares
Fred M. Saigh, Jr.	4,123
A. L. Watson	250
Sidney Salomon, Jr	375
R. Vernon Clark	250
John Grossman	1
Paul Hutchinson	1

Saigh was the beneficial owner of the shares held in the names of Grossman and Hutchinson.

There was a meeting of those interested in the acquisition of Building Inc.'s stock on July 25, 1946; however, no mention was made of anything in connection with the final transaction involving the organization or acquisition of stock therein by Saigh or other interests.

A joint meeting of stockholders and directors of Building Inc. was held on September 19, 1946. The following actions were considered and approved:

(a) The resolution (June 28, 1946) reducing the capital stock by 8,000 shares was rescinded, and the necessary steps authorized to increase the capital stock to 20,000 shares;

(b) The resolution (June 28, 1946) authorizing the liquidating dividend of $ 2,285,747.11 was rescinded;

(c) A loan of $ 2,240,000 to Investment with its holdings in Building Inc. pledged as security and evidenced by a demand note bearing a one-eighth of 1 percent rate of interest per annum.

On September 24, 1946, pursuant to the application of Building Inc. the secretary of state of the State of Missouri issued his certificate of amendment certifying the increase in capital stock.

The minutes of a joint meeting of the stockholders and directors of Investment on October 9, 1946, contained the following paragraphs:

The attention of the Board was called to the fact that the Investment Realty Corporation was indebted to the Railway Exchange Building, Inc. in the sum of $ 2,200,000.00 advanced by the Railway Exchange Building, Inc. on June 28th and July 1st of 1946. Since arrangements have been made for an additional advance of $ 20,000.00 it was the opinion of the Board and Stockholders that a note for $ 2,240,000.00 be executed by the Investment Realty Corporation, which note shall be payable on demand and shall carry interest at the rate of 1/8 of 1% per annum, payable annually, and that the stock of the Railway Exchange Building, Inc., owned by the Investment Realty Corporation be pledged with the Railway Exchange Building, Inc. as collateral to secure the payment of said promissory note.

Mr. Clark moved that Mr. Saigh and Mr. Grossman execute, on behalf of the corporation, the aforesaid note upon the aforesaid conditions, and to deliver said note to the Railway Exchange Building, Inc. Mr. Watson seconded said motion and upon being put to vote the said motion carried unanimously.

Saigh and John Grossman did, on behalf of Investment, execute a note dated June 28, 1946, in favor of Building Inc., as provided above. On December 31, 1946, the note and stock certificates representing 20,000 shares of Building Inc. were kept in the safety-deposit vault of Building Inc.

On October 10, 1946, Saigh sold additional shares of Investment and after further transfers between the shareholders, the shares of Investment were held as follows:

	Number of
Individual shareholder	shares
Fred M. Saigh, Jr	2,550
A. L. Watson	250
Sidney Salomon, Jr	125
R. Vernon Clark	250
Irma Hannegan	500
Robert E. Hannegan	500
Jean Salomon	375
Elizabeth Saigh	450

The corporate income tax return for 1946 filed on March 15, 1947, by Building Inc. indicated on schedule L a note receivable in the amount of $ 2,235,672.62.

On October 18, 1948, the Building Inc. note, referred to above, was sold by the May Department Stores Company and May Building Company to the Massachusetts Mutual Life Insurance Company. In this agreement, vendors warranted that they had no knowledge of any fact which would impair the validity of said note.

On July 5, 1951, the stockholders of Investment, as sellers, entered into a contract of sale with Joseph K. Eichenbaum and Morris Glasser, as purchasers, which contemplated (1) the liquidation of Investment; (2) the liquidation of Building Inc.; and (3) the transfer by the sellers to the purchasers of the assets and liabilities, with minor exceptions, of Building Inc. The agreed purchase price was $ 2,015,000, subject to adjustment for the contingencies and conditions enumerated in the contract.

On July 23, 1951, the purchasers assigned to the May Building Company all their right, title, and interest in and to the contract of sale into which they entered on July 5, 1951.

At the July 25, 1951, special meeting of the board of directors of Building Inc. the following resolution was adopted:

Resolved that the Corporation pay forthwith a dividend in kind to Investment Realty Company, its sole stockholder, of the note of Investment Realty Corporation in the principal amount of $ 2,235,672.62 now held by Railway Exchange Building, Inc. on which there is interest accrued in the amount of $ 14,159.32 as of this date, such dividend to be charged to the extent of $ 1,192,617.84 to Earned Surplus and the balance of the amount thereof to be a partial liquidating dividend.

Resolved Further that the officers of the Corporation are hereby authorized to make all necessary reports to the taxing authorities.

Prior to this date, Investment had made no payments of interest or principal on the demand note of $ 2,240,000 held by Building Inc.

On July 26, 1951, Investment was dissolved and all of its assets, consisting principally of the capital stock of Building Inc., were distributed to its stockholders, the petitioners herein. The fair market value of the assets so received by each petitioner is set forth as follows:

Individual stockholder	Amount
A. L. Watson	$ 93,138.45
Irma Hannegan	174,695.23
Robert E. Hannegan
Trust	73,352.26
Elizabeth Saigh	159,251.35
Fred M. Saigh, Jr	902,428.67
Sidney Salomon, Jr	30,161.84
Jean Salomon	90,483.92
R. Vernon Clark	93,138.45
Total	1,616,650.17

On July 27, 1951, Building Inc. was dissolved, and its assets, consisting principally of the Railway Exchange Building and underlying leaseholds, were distributed to its then stockholders, the petitioners herein. The petitioners thereafter on July 31, 1951, conveyed by special warranty deed the assets received upon dissolution of Building Inc. to the May Building Company pursuant to the contract of sale of July 5, 1951.

The net proceeds realized by each of the petitioners herein from the sale of the assets received in the dissolution and liquidation of Investment and Building Inc. are the amounts set forth above.

Section 351.165, Mo. Ann. Stat. (Vernon), provides as follows:

and no loan of money shall be made by the corporation to any shareholder therein; and if such loan shall be made to a shareholder, the officers making it, or who shall assent thereto, shall be jointly and severally liable to the corporation for the repayment of such loan and interest.

A "Report On Examination Of Financial Statements With Supplementary Data" for the year ended December 31, 1947, transmitted by certified public accountants to Building Inc. on March 10, 1948, contained the following entry on the balance sheet:

Other Assets:
Note receivable -- Investment Realty Corporation (against
which 20,000 shares of capital stock of Railway Exchange
Building, Inc. have been pledged)	$ 2,235,672.62

On October 6, 1949, Robert E. Hannegan died. On May 11, 1951, in connection with the distribution of his estate, 250 shares of Investment held by him were transferred to petitioner Irma Hannegan (Docket No. 63353), and the remaining 250 shares to petitioners Irma Hannegan and Mercantile Trust Company, as trustees (Docket No. 63354). In order to familiarize itself with the trust corpus, the bank requested and received an Investment balance sheet which indicated for the years 1946 through 1949, under "Liabilities," a note payable to Building Inc. of $ 2,235,672.62.

The July 5, 1951, contract between the stockholders of Investment, as vendors, and Joseph K. Eichenbaum and Morris Glasser, as vendees, contemplated the liquidation of Investment and Building Inc.

Investment sent notice of the pending liquidation to the collector of internal revenue at St. Louis on July 27, 1951, as provided under Missouri law.

Articles of dissolution and articles of liquidation of Investment were filed with the secretary of state of the State of Missouri on July 26 and 27, 1951, respectively, and on the latter date the secretary issued his certificate of dissolution. Each of the pertinent documents was promptly recorded in the County Recorder's Office, St. Louis, Missouri. Both Investment and Building Inc. notified respondent of their dissolution on Treasury Form 966, and requested prompt audits under section 275(b) of the Internal Revenue Code of 1939 with the filing of their last returns for the short period ending in 1951.

Upon the dissolution of Investment, petitioners received all of its assets, consisting principally of the capital stock of Building Inc. On July 27, 1951, Building Inc. was dissolved and its assets, consisting principally of the Building and underlying leaseholds, were distributed to the petitioners. These assets were conveyed by a special warranty deed on July 31, 1951, to the May Building Company pursuant to the contract of July 5, 1951.

During the months of February and March 1952, but prior to March 15, 1952, the petitioners executed agreements to the effect that they were liable as transferees of Building Inc. to the extent of the assets received by each with respect to the tax liabilities of Building Inc. for the years 1948 through 1950, and for the taxable period January 1, 1951, to July 27, 1951.

The returns of Building Inc. for the years 1948 through 1950 were examined from March 1 to November 3, 1952, and the returns for the short period ending on July 27, 1951, were examined during the period commencing shortly after their filing on July 15, 1952, and prior to November 3, 1952. The examining revenue agent made three separate reports concerning these years, each dated November 3, 1952. These reports were reviewed in the St. Louis regional office and the national office (Corporate Audit) of the Internal Revenue Service.

The disallowance to Building Inc. of interest deductions in the amount of $ 83,837.72 for each of the years 1948 to 1950, inclusive, and in the amount of $ 41,918.86 for the period January 1, 1951, to July 27, 1951, under section 45 of the Internal Revenue Code of 1939, as recommended in the reports and accepted by Building Inc., resulted in additional tax liability in the amount of $ 116,534.42.

The agent's recommendation was on the theory that the loan from the insurance company to Building Inc. to the extent of the sum transferred from Building Inc. to Investment was for the benefit of Investment and was an interest deduction of the latter corporation.

On December 31, 1952, Building Inc. tendered two checks aggregating $ 55,864.41 to respondent in payment of the net deficiencies recommended by the revenue agent in his reports and interest thereon computed to approximately November 15, 1952, for the years 1948 through 1951. This payment was received on December 31, 1952, and deposited to the account of Building Inc.

On January 22, 1953, Investment signed an acceptance of the overassessment in income tax for the period January 1, 1951, to July 27, 1951, in the amount of $ 22,646.51, as determined by the revenue agent, and requested the director of internal revenue, St. Louis, to apply that overassessment toward the payment of deficiencies to be assessed against Building Inc. for the years 1948 and 1949. As a result of the allowance of the overassessment and the subsequent credit, the entire tax in the amount of $ 22,646.51, previously paid for the period January 1, 1951, to July 27, 1951, was fully refunded or credited. On March 6, 1953, the deficiencies determined by the revenue agent for 1948 and 1949 were assessed, and the overassessments likewise determined by him were credited in partial payment of the deficiencies. The balance due of $ 12.62 was paid by Building Inc. on March 21, 1953.

No consent was executed to extend the period during which an additional assessment of tax in respect to the returns of Building Inc. and Investment for 1948, 1949, 1950, and the period January 1, 1951, to July 27, 1951, could be made pursuant to the provisions of section 276(b) of the Internal Revenue Code of 1939. No claim for refund of any part of the taxes of Building Inc. for 1948 to 1950, inclusive, has been filed. Recovery of the additional taxes paid was barred when respondent sent notices of deficiencies to the petitioners herein.

The reports of the revenue agent indicate an examination into and full knowledge of the facts surrounding the transactions as they occurred in 1946, i.e., a knowledge of the insurance company loan, the transfer of funds from Building Inc. to Investment, and the payment of the original shareholders of Building Inc. A total of 21 1/2 days was spent in conducting the examinations. The agent treated the transfer of the funds from Building Inc. to Investment as a loan.

In her 1951 income tax return Irma P. Hannegan reported a long-term capital gain of $ 102,514.18 on the liquidation of Investment on July 26, 1951, a short-term capital gain of $ 8,204.60 on the liquidation of Building Inc. on July 27, 1951, and a short-term capital loss of $ 24,796.76 on the sale on July 31, 1951, of the assets received thereby, and the tax shown due on the return was timely paid.

On audit, these figures were adjusted by the respondent to $ 118,199.72, $ 0, and $ 513.58, respectively. Together with other adjustments, the revenue agent's report dated July 1, 1953, recommended an additional tax due in the amount of $ 18,276.95. On July 3, 1953, Irma P. Hannegan executed a Form 870 agreement, agreeing to the assessment of said deficiency. The assessment thereof, together with interest thereon, was made on August 27, 1953, and this amount paid on September 11, 1953. No consent was executed to extend the period during which an additional assessment of tax in respect of this return could be made pursuant to the provisions of section 276(b) of the Internal Revenue Code of 1939. No claim for refund of any part of the tax has been filed.

In the joint income tax return of Sidney, Jr., and Jean K. Salomon for 1951, Sidney reported a long-term capital gain of $ 30,385.42 on the liquidation of Investment on July 26, 1951, no gain or loss on the liquidation of Building Inc. on July 27, 1951, and a short-term capital loss of $ 90.09 on the sale on July 31, 1951, of the assets received thereby. Jean K. Salomon reported a long-term capital gain of $ 91,154.64, no gain or loss, and a short-term capital loss of $ 267.25, respectively, for the same transactions. The tax shown due on the joint return was timely paid.

On audit, the first of the above figures for each taxpayer (the long-term capital gain on the liquidation of Investment) was increased in the aggregate by the amount of $ 785.50. Together with other adjustments, the revenue agent's report dated January 25, 1954, recommended an additional tax due in the amount of $ 2,198.84. On May 12, 1954, the Salomons executed a Form 870 agreement, agreeing to the assessment of the deficiency. The assessment thereof, together with interest thereon, was made on July 8, 1954, and this amount was paid on August 9, 1954. No consent was executed to extend the period during which an additional assessment of tax in respect to this return could be made pursuant to the provisions of section 276(b) of the Internal Revenue Code of 1939. No claim for refund of any part of said tax has been filed.

In his 1951 income tax return A. L. Watson reported a long-term capital gain of $ 92,964.86 on the liquidation of Investment on July 26, 1951, no gain or loss on the liquidation of Building Inc. on July 27, 1951, and a short-term capital loss of $ 273.56 on the sale on July 31, 1951, of the assets received thereby, and the tax shown due on the return was timely paid. On audit, the first of the above figures was increased by the amount of $ 606.40. Together with other adjustments, the revenue agent's report dated July 30, 1953, recommended an additional tax due in the amount of $ 151.60. On July 30, 1953, Mr. Watson executed a Form 870 agreement, agreeing to the assessment of said deficiency. The assessment thereof, together with the interest thereon, was made on December 24, 1953, and this amount paid on January 15, 1954. No consent was executed to extend the period during which an additional assessment of tax in respect to this return could be made pursuant to the provisions of section 276(b) of the Internal Revenue Code of 1939. No claim for refund of any part of the tax has been filed.

In his 1951 income tax return, R. Vernon Clark reported a long-term capital gain of $ 93,114.86 on the liquidation of Investment on July 26, 1951, no gain or loss on the liquidation of Building Inc. on July 27, 1951, and a short-term capital loss of $ 274.06 on the sale on July 31, 1951, of the assets received thereby, and the tax shown due on the return was timely paid. On audit, the first of the above figures was increased by the amount of $ 606.40. Together with other adjustments, the revenue agent recommended an additional tax on additional income of $ 6.33 but further recommended that the return be accepted as filed because of the small net additional tax due. No additional tax was assessed or paid with respect to the return. No consent was executed to extend the period during which an additional assessment of tax in respect to this return could be made pursuant to the provisions of section 276(b) of the Internal Revenue Code of 1939. No claim for refund of any part of said tax has been filed.

In their joint income tax return for 1951, Fred M. Saigh, Jr., and Elizabeth K. Saigh reported a long-term capital gain of $ 1,073,949.92 on the liquidation of Investment on July 26, 1951, no gain or loss on the liquidation of Building Inc. on July 27, 1951, and a short-term capital loss of $ 3,118.28 on the sale on July 31, 1951, of the assets received thereby. The tax shown due on the joint return was paid prior to March 15, 1952. On June 14, 1955, the respondent sent to petitioners Fred M. Saigh, Jr., and Elizabeth K. Saigh a notice of deficiency for the year 1951. A petition to this Court, Docket No. 59397, was filed on September 7, 1955.

In the 1951 income tax return filed on March 15, 1952, in behalf of the Robert E. Hannegan Trust by the Mercantile Trust Co., trustee, the trust reported no gain or loss on the liquidation of Investment on July 26, 1951, a short-term capital gain of $ 3,445.01 on the liquidation of Building Inc. on July 27, 1951, and a short-term capital loss of $ 10,411.85 on the sale of the assets received from Building Inc. on July 31, 1951. No tax was shown due on the return.

On audit, the second of the above figures (short-term capital gain on the liquidation of Building Inc.) was adjusted to no gain or loss, and the last figure (the short-term capital loss on the sale of the assets received from Building Inc.) was reduced to a short-term capital loss in the amount of $ 215.64. The adjustments did not result in any additional tax due with respect to said trust for 1951 or any other year. No consent was executed to extend the period during which an additional assessment of tax in respect to this return could be made pursuant to the provisions ofsection 276(b) of the Internal Revenue Code of 1939.

In the final determination of the liabilities of the above petitioners for 1951, the gain upon the liquidation of Investment was computed without consideration of any purported liability on the part of Investment for any personal holding company surtax for the year 1946. The recovery of all of the income taxes paid by petitioners for the year 1951 was barred at the time respondent sent notices of deficiencies on April 23, 1956, to each of the petitioners herein except that the petitioners in Docket Nos. 63355 and 63356 had the year 1951 then pending in the Tax Court.

The estate of Robert E. Hannegan, pursuant to adjustments in value made by respondent in an examination of the estate tax return of the deceased, paid an aggregate of $ 18,708.84 of additional taxes on account of the inclusion therein of 500 shares of Investment at a value of $ 129,921.70. This adjusted value was not reduced for any purported liability on the part of Investment for a personal holding company surtax for the year 1946. The estate tax return was filed on January 5, 1950, and the taxes shown due thereon in the amount of $ 88,083.96 were paid at that time. An additional tax, including interest, in the amount of $ 11,325.38 was paid in part on August 7 and the balance on December 23, 1953. No claim for refund of any part of said tax has been filed.

Prior to 1912, Thomas H. McKittrick and certain other officers and directors of the Hargadine-McKittrick Dry Goods Company acquired long-term leases to all of the lots comprising city block No. 128.

Plans were formulated by Thomas H. McKittrick and his associates (hereinafter sometimes referred to as the associates) to erect a large building covering all of city block No. 128, it being contemplated that part of the building would be used as a retail outlet for the Wm. Barr Dry Goods Company (hereinafter referred to as Barr) and that the upper stories thereof would be utilized for office space, principally by various railroads who maintained St. Louis offices.

On March 4, 1911, an agreement was entered into by the associates which provided for the purchase of the Barr stock by or on behalf of the May Department Stores Company or one of its affiliates and for a long-term lease of space in the proposed building (principally the first six floors thereof) for the department store business conducted by Barr or its successor.

Negotiations for financing the proposed building were formalized by the Railway Exchange Building Syndicate Agreement (hereinafter sometimes referred to as the syndicate agreement), dated November 15, 1911. Parties to this agreement were Robert McKittrick Jones and John D. Filley (hereinafter referred to as syndicate managers), the St. LouisUnion Trust Company (hereinafter referred to as the Trust Company), and certain subscribers. The main provisions of this agreement were as follows:

(a) A corporation to be called Annuity Realty Company (hereinafter referred to as Annuity) was to be created by the syndicate managers and was to acquire the leasehold interests in city block No. 128 then held by the associates;

(b) A building company would be organized by the syndicate managers, which company would then sublease from Annuity and construct a department store and office building of at least 17 floors at a cost of approximately $ 3,600,000;

(c) The $ 3,600,000 cost of construction of the new building was to be financed as follows: (1) The building company was to have authorized stock of $ 2 million par value, of which $ 300,000 was to be issued for cash, which cash would be available for construction purposes; (2) the building company was to issue $ 2 million par value of its Forty-year Five Per Cent Gold Bonds at 75 percent of par; and (3) Annuity was to issue $ 2 million par value of its Five Per Cent Annuity Certificates at 90 percent of par net (hereinafter sometimes referred to as the certificates), such issue to be redeemed on or before January 1, 1953; and

(d) The building company was to be charged rent equal to an amount necessary to pay the underlying ground rents (an amount not in excess of $ 250,000 per year), the 5 percent payments on the certificates ($ 100,000 per year), all the expenses of management of Annuity, and an adequate provision to retire the certificates at the end of 40 years.

On November 22, 1911, the syndicate agreement was modified and supplemented to provide that the new building should be 21 floors instead of 17 floors, and to permit the issuance of $ 1-million-par-value additional certificates, the rent to be adjusted accordingly.

Railway Exchange Building Co. (hereinafter referred to as Building Co.) was incorporated under the laws of the State of Missouri on January 12, 1912, and Annuity was similarly incorporated on March 28, 1912.

On March 29, 1912, the stockholders of record of Annuity, who were officers and employees of the Trust Company, adopted a resolution to accept assignments of the underlying leases on city block No. 128 on the condition that Annuity would thereupon execute a sublease of the lots to Building Co. for a term of 88 years and 9 months.

On April 1, 1912, the directors of Annuity, who were also the sole stockholders of record of Annuity, met to approve the acceptance of the assignment of the underlying leases and the execution of the sublease to Building Co. The sublease was from April 1, 1912, to December 31, 2000, and provided for rent at the following rate:

(a) Payment of the underlying ground rentals ($ 248,000 per year for the first 15 years and $ 248,500 thereafter);

(b) The 5 percent payments due on the $ 3 million issue of certificates until redeemed ($ 150,000 per year if entire issue unredeemed);

(c) The sum of $ 32,000 per year from July 1, 1918, for the subsequent 35 years as additional rental in order to provide for the redemption of the certificates not later than July 1, 1953;

(d) All taxes and expenses of operatingAnnuity. The sublessee, Building Co., also agreed to construct the building, to keep the building insured at its own expense, and to replace it if destroyed at any time during the period covered by the lease. It was further provided that Annuity, at its option, could forfeit the sublease upon the failure of Building Co. to pay the rent or any part thereof reserved under the sublease, or for failure to pay taxes, expenses, or advances of any type made by Annuity, or for failure to make necessary repairs, or for failure to perform covenants incorporated in the underlying leases, or upon becoming bankrupt. The sublease contained the following language with reference to the forfeiture, i.e., nonperformance of the above-listed conditions --

shall, at the option of the lessor, make and create a forfeiture of this lease and a termination of the time for which said premises are hereby let, and this lease shall cease and be of no further force or virtue, and the estate hereby granted shall be absolutely at an end and terminated, if so determined, at any day or time, however distant after such failure, by notice in writing to that effect given by the lessor to the lessee, and to the Trustee named in any recorded and outstanding deed of trust in the nature of a mortgage on said leasehold estate hereby created, if such Trustee named in such deed of trust be an incorporated company having at the time an office or place of business in the said city of St. Louis, and upon such forfeiture of this lease and termination of the time for which said premises are hereby let, all the improvements then on said leased premises shall be and remain the absolute property of the lessor, wholly free and discharged of and from all rights, claims and demands of the lessee and any and all persons claiming by, through or under it. * * *

On April 2, 1912, an agreement was entered into, further defining the rights of the holders of the certificates. This agreement (hereinafter referred to as the Annuity agreement), was signed by the following parties: The syndicate managers, the Trust Company, Annuity, stockholders of Annuity, Building Co., and all holders of certificates. The following principal provisions were contained therein:

(a) All shares of Annuity were to be transferred to the Trust Company to be managed and controlled by it as trustee for the certificate holders until the certificates were redeemed;

(b) The Trust Company was to act as trustee for the collection of all rentals provided for in the sublease from Annuity to Building Co. and for their disbursement, including the rental payments referred to below;

(c) Provisions were made to administer the $ 32,000 rental payments due pursuant to the sublease as a sinking fund for the retirement of certificates. Building Co. was also given an option at will to purchase the certificates at 110 percent of par upon call. At the end of the period for which the additional rental of $ 32,000 yearly was to be paid, the Trust Company, as trustee, was to redeem the then-outstanding certificates with funds contained in the sinking fund. Any excess in the fund was then to be paid back to Building Co.;

(d) When all the certificates were redeemed, the trustee was to cause Annuity to assign the underlying leases to Building Co. and then to go into dissolution.

The capital stock of Annuity, consisting of 3,000 shares, was assigned by Isaac H. Orr, George G. Chase, and Francis X. Ryan to the Trust Company to be held in escrow by it for the benefit of the Annuity certificate holders until such certificates were redeemed, and thereafter to be canceled, all pursuant to the provisions of the Annuity agreement.

The certificate and 5 percent mortgage bond issues were fully subscribed (or were utilized in payment of a portion of the construction costs of the building). The net proceeds of these securities, together with the $ 300,000 cash paid for the stock of Building Co., were used in payment of the cost of the construction of the building, i.e., $ 4,159,592.03, for maintaining the underlying leases and for other expenses during construction, $ 469,133.01, and for the 5 percent payments on the certificates during construction, $ 107,620.64. The Railway Exchange Building (hereinafter referred to as the building) was completed in July 1913. Bonds were issued to subscribers on June 9, 1914, pursuant to the terms of a mortgage dated September 1, 1913, securing the same. The mortgage and deed of trust contained the following provision:

Whereas, the Building Company has likewise duly resolved to secure the payment of the principal and interest of said series of bonds, or so many thereof as shall be issued and negotiated, by a first mortgage and deed of trust to be executed on behalf of the Building Company, by its officers, to the St. LouisUnion Trust Company as Trustee, upon the leasehold estates, rights, franchises and property, real, personal and mixed, which the Building Company now owns or which it may hereafter acquire; * * *

Building Co. failed to make payment of any interest due on its bonds. It was unable to pay all of its 1915 taxes when due. On February 2, 1916, a bondholders protective committee was formed.

On February 23, 1923, an application was filed in the United States District Court by representatives of the bondholders to have the Building Co. adjudicated a bankrupt, and it was so adjudged on March 26, 1923. On the next day Annuity declared a forfeiture of the sublease to Building Co.

On January 4, 1924, Building Inc. was organized under the laws of the State of Missouri by Claude B. Ricketts and his associates. On February 6, 1924, the trustee in bankruptcy of Building Co. filed an application requesting permission to disclaim title to the leasehold estate. Thereafter, the District Court determined that the sublease from Annuity was forfeited, and in a decree dated April 26, 1924, the receiver in bankruptcy of Building Co. was ordered to deliver possession of city block No. 128 to Annuity.

On April 28, 1924, Building Inc. wrote to the bondholders committee that it was prepared to exchange its bonds for those of Building Co. On May 2, 1924, the trustee in bankruptcy of Building Co. petitioned for an order to sell the rights which Building Co. had acquired under the Annuity agreement, subject to the mortgage securing Building Co.'s bonds. After a hearing, the petition was granted on May 19, 1924. On June 4, 1924, the trustee in bankruptcy reported the sale of the rights to William T. Eddins, an employee of Building Inc., for $ 100, and on that same date the referee in bankruptcy approved the sale. On June 19, 1924, the rights were assigned to William T. Eddins, who in turn assigned them to Building Inc. on June 20, 1924, in consideration of $ 100. On June 28, 1924, Annuity and Building Inc. signed an agreement whereby Building Inc.'s purchase of the rights was recognized.

On June 28, 1924, a sublease from Annuity to Building Inc., effective as of January 1, 1924, was executed, and Building Inc. thereupon entered into the premises. The sublease was identical in all material respects to the sublease to Building Co. (except as to the requirement to construct a building). On June 30, 1924, the board of directors of Building Inc. duly passed a resolution authorizing and directing its bonds to be certified by the Trust Company and delivered to the bondholders protective committee in exchange for bonds of Building Co. and release of the September 1, 1913, mortgage. A mortgage securing the new issue of Building Inc.'s bonds was executed on the same date.

Building Inc. assumed the obligations provided in the Annuity agreement and the sublease from Annuity issued its bonds in 1924 in the face amount of $ 1,750,000, and in addition it agreed to pay, and did pay, interest on the new bonds and certain other expenses incurred by the bondholders and others.

The building at this time had a fair market value of approximately $ 4,700,000. The leaseholds had no market value.

By August 1945 the certificates were redeemed and canceled, and on August 28, 1945, Annuity assigned to Building Inc. the leasehold estates on city block No. 128, together with the building, and was thereupon dissolved. All the Building Inc. bonds were either retired or provision made therefor by January 24, 1947, and the mortgage was released.

In determining from time to time the taxable net income of Building Inc. for the period 1924 to 1946, inclusive, respondent allowed depreciation as follows:

(a) For the years 1924 to 1931, inclusive, for which years Building Inc., as parent corporation, and Annuity, as subsidiary, filed consolidated income tax returns, Building Inc. claimed a basis for depreciation and amortization on the theory that it was entitled to use the cost basis of its predecessor, Building Co., and that such cost was $ 4,159,592.03 for its building and $ 469,133.01 for leasehold. For the purposes of computing depreciation, Building Inc. considered that the building had a life of 50 years from April 1, 1912, and the leasehold a life of 88.75 years from April 1, 1912. Upon these premises it claimed a deduction for depreciation on the building of $ 83,199.19 and for amortization of the leasehold of $ 5,278.01, or a total of $ 88,477.20 for each year. These deductions were allowed by the respondent for each of the years 1924 to 1931, inclusive, as claimed.

(b) For the years 1932 and 1933, for which years Building Inc. and Annuity also filed consolidated income tax returns, Building Inc. continued to claim a deduction of $ 88,477.20, but respondent reduced the amount so claimed to $ 39,776.77. In making such reduction, the respondent determined that Building Inc. was not entitled to use the cost basis of its predecessor but could use as its cost only the costs or obligations which Building Inc. paid, or assumed, in 1924, in the following amounts:

New bonds issued	$ 1,700,000.00
Interest on bonds	46,875.00
Miscellaneous liabilities assumed	241,863.64
Reversionary rights	100.00
Total	1,988,838.64

Respondent did not include, in the foregoing determination of cost, bonds in the face amount of $ 50,000 initially issued in 1924 but later purchased at par and canceled in the same year. He also did not include in such costs any amounts which Building Inc. was required to pay under the Annuity agreement or its sublease agreement with Annuity dated January 1, 1924. Respondent treated the amount of $ 1,988,838.64 as the cost to Building Inc. of the building and allocated no portion thereof to the leasehold. He held further that the building had a life of 50 years from January 1, 1924, and accordingly allowed annual depreciation in the amount of one-fiftieth of $ 1,988,838.64, or $ 39,776.77. Building Inc. accepted respondent's allowance of depreciation for the years 1932 and 1933 and claimed and was allowed a like amount of depreciation for each of the years 1934 to 1941, inclusive.

(c) As a concomitant adjustment to the consolidated returns filed for 1932 and 1933, respondent allowed an amortization deduction in the amount of $ 33,802.82 to Annuity. Annuity accepted respondent's allowance for those years and claimed and was allowed a like amount of leasehold amortization for each of the years 1934 to 1941, inclusive, as to the separate income tax returns filed for those years.

(d) For the year 1942, for which year Building Inc. and Annuity filed a consolidated income tax return, depreciation was similarly claimed and allowed to Building Inc. in the amount of $ 39,776.77, and leasehold amortization was similarly claimed and allowed to Annuity in the amount of $ 33,802.82.

(e) For the years 1943 to 1945, inclusive, for which years Building Inc. and Annuity filed consolidated income tax returns, Building Inc. continued to claim a like amount of depreciation and amortization on its returns, but refund claims filed by it were allowed in part permitting the computation of depreciation on the building on a remaining life of 20 years beginning in 1943. For the purpose of such computation, respondent reduced the cost basis of the building by $ 6,124.99. Respondent accordingly allowed, and Building Inc. accepted, $ 61,347.75 depreciation on the building for each of the years 1943 to 1946, inclusive, computed as follows:

Cost of building previously allowed		$ 1,988,838.64
Less:
Interest on bonds not paid	$ 3,124.99
Cost allocated to Annuity stock	3,000.00	6,124.99
Cost as adjusted		1,982,713.65
Depreciation allowed or allowable for the
years 1924 to 1942,
inclusive -- $ 39,776.77 X 19 years		755,758.63
Unrecovered cost at Jan. 1, 1943		1,226,955.02
Life of 50 years from 1912 or 20 years
remaining from Jan. 1,
1943; allowable depreciation 1/20
of unrecovered cost		61,347.75

(f) For the years 1943, 1944, and the 8 months of January to August, inclusive, of 1945 prior to the dissolution of Annuity, Annuity was allowed leasehold amortization in the amount of $ 33,802.82 for 1943, $ 33,836.62 for 1944, and $ 22,557.75 for the period January 1, 1945, through August 31, 1945, as to the consolidated returns filed for those years. Building Inc. was allowed a deduction for leasehold amortization for the remaining 4 months of 1945 subsequent to the dissolution of Annuity in the amount of $ 11,278.87 as to the consolidated return for 1945, and a similar deduction in the amount of $ 33,836.62 as to its separate return filed for 1946.

In determining the earnings and profits of Building Inc. to be $ 1,710,927.27, respondent took into account the same amount of depreciation and amortization which he had allowed in computing its net taxable income as described above (plus depreciation in certain additions not here in dispute), except that he reduced the depreciation and amortization of $ 88,477.20 which had been allowed in computing net taxable income for each of the years 1924 to 1931, inclusive, by $ 33,802.82.

In determining the earnings and profits of Building Inc., respondent made no increase or decrease in the amount thereof by reason of the transactions whereby the outstanding certificates were redeemed and Annuity was dissolved on August 31, 1945.

Building Inc. did not claim, and was not allowed, a deduction in computing taxable income or earnings and profits for the additional rental payment at the rate of $ 32,000 per year which it made during the period 1924 to 1936, inclusive, to the Trust Company in the total amount of $ 394,666.67, pursuant to section 5 of its sublease from Annuity.

Pursuant to a supplemental agreement dated April 15, 1938, Building Inc. was relieved of the necessity of making the $ 32,000 annual sinking fund payment for the years 1937 to 1942, inclusive, but was required to resume such sinking fund payments at the annual rate of $ 25,000, payable quarterly, commencing July 1, 1943. In accordance with this provision of the agreement as amended, Building Inc. paid $ 43,750 representing seven quarterly payments of $ 6,250 each, covering the period July 1, 1943, to March 31, 1945. The payments were neither claimed nor allowed as deductions in computing taxable income for those years, nor were they allowed in computing the accumulated earnings and profits herein for the purpose of determining the deficiencies in these cases.

The amendments made by the supplemental agreement provided at section 3 thereof for the cancellation of all the certificates then held by the trustee in the sinking fund. In accordance therewith, certificates in the face amount of $ 1,253,000 were canceled on or about December 10, 1938. Section 3 provided further that such cancellation would not reduce the $ 150,000 annual rental previously paid. At section 5 it was provided that out of the rentals so received by the trustee there would first be made the 5 percent annual payment on the remaining outstanding and uncanceled certificates, and that any excess of rentals remaining in the hands of the trustee would be used to purchase the certificates still outstanding. In accordance with these provisions, Building Inc. made the following payments during the years 1938 to 1946 which were used for the required purposes as follows:

		Used by trustee for --
Year	Total paid	5 percent annual	Purchase of
		payment on	certificates
		outstanding	for retirement
		certificates
1938	$ 150,000.00	$ 134,137.50	$ 15,862.50
1939	150,000.00	85,207.45	64,792.55
1940	150,000.00	81,870.46	68,129.54
1941	150,000.00	78,342.47	71,657.53
1942	150,000.00	74,603.67	75,396.33
1943	150,000.00	70,686.21	79,313.79
1944	104,387.52	19,958.40	84,429.12
1945	22,623.56	1,604.35	21,019.21
Total	1,027,011.08	546,410.51	480,600.57

In computing both net taxable income and earnings and profits, respondent allowed as a deduction only that portion of the above payments totaling $ 546,410.51 which were used by the trustee for the 5 percent annual payments on the certificates outstanding.

In computing both net taxable income and earnings and profits of Building Inc., respondent included for the years 1924 to 1945, inclusive, the earnings of the certificate sinking fund in the total amount of $ 545,901.22.

In each notice of deficiency involved herein, respondent determined that Investment was a personal holding company, that the funds received by such corporation in the amount of $ 2,235,672.62 on or about June 29, 1946, from Building Inc. were in fact a taxable dividend to the extent of its accumulated earnings and profits as of June 28, 1946, and that the amount thereof was $ 1,710,927.27. Of this amount, the respondent determined that $ 1,664,603.99 represented earnings and profits accumulated prior to January 1, 1946, and that the earnings and profits for the period January 1 to June 28, 1946, were $ 46,323.28.

Petitioners concede on brief that Building Inc. was personally liable on the certificates and that the earnings and profits accumulated prior to January 1, 1946, as determined by respondent, should be increased in the amount of $ 69,047.44 for profits on the purchase and retirement of the certificates.

Respondent concedes that earnings and profits should be reduced in the amount of $ 732,450.77 if his position in this case is sustained by the Tax Court. That position is that the initial (1913) investment of $ 3 million arising from the issuance of the certificates is to be amortized prior to August 31, 1945, only over the life of the leasehold interests in city block No. 128.

OPINION.

The first issue is whether the transfer of $ 2,205,000 ² from Building Inc. to Investment on June 29, 1946, constituted a "loan," as argued by petitioners, or a distribution taxable as a dividend, as contended by respondent.

Section 115 of the Internal Revenue Code of 1939 provides as follows:

SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

(a) Definition of Dividend. -- The term "dividend" when used in this chapter * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made. * * *

See sec. 29.115-1, Regs. 111.

We must determine, first, whether Investment was a "shareholder" within the meaning of the above-quoted section, and second, whether there was a "distribution" by Building Inc. "out of its earnings or profits."

In seeking the answer to the first question immediately above and considering the facts as set forth in our Findings of Fact, we start with the rule of many years' standing "that substance and not form should control in the application of Federal income tax laws." Gregory v. Helvering, 293 U.S. 465">293 U.S. 465.

The essential facts are as follows:

Saigh obtained an option to purchase the stock of Building Inc., the owner of the Railway Exchange Building. In its name and with the apparent acquiescence of its then shareholders, he caused Building Inc. to borrow $ 3 million from the Massachusetts Mutual Life Insurance Company.

On June 28, 1946, the directors of Building Inc., then in office, resigned, and in their place Saigh and associates were chosen as directors. Saigh was listed, in a waiver of notice, as possessing 19,996 of the 20,000 authorized and issued shares of Building Inc.

On June 29, 1946, the proceeds of the loan were deposited to Building Inc.'s account. Building Inc. then drew a check in the amount of $ 2,205,000 to the order of Investment, a corporation in which Saigh held all but the qualifying shares of stock. Investment in turn purchased cashier's checks and paid the former Building Inc. shareholders for their stock. Subsequently, the stock was issued in Investment's name.

Investment was not yet the record holder of the stock when the proceeds were transferred to it (which proceeds were used in the purchase of Building Inc.'s stock). Instead, Saigh was listed in the waiver as the owner. However, we are satisfied on the facts that in carrying out this plan of acquisition Saigh was acting on behalf of Investment and that Investment was the real and beneficial owner of Building Inc.'s stock and hence was a "shareholder" within the purview of section 115(a) at the time of the transfer.

We note that Saigh controlled both Investment and Building Inc. on the crucial 2 days, acting as director and president of both. Also important is the fact that Investment actually paid the purchase price, although Saigh ostensibly owned the stock, and paid this price not to Saigh but to Claude Ricketts and the Orr family, the original shareholders. In a letter written by Saigh to the attorney for the insurance company he noted that under the existing modus operandi Investment was to take the 20,000 shares in its name.

We also find support in the revenue agent's report, dated November 3, 1952, which was introduced in evidence and relied on by petitioners, and which reads in part as follows:

Investment Realty Company [Investment] paid $ 2,200,000.00 for the outstanding stock of 20,000 shares of Railway Exchange Building Inc. [Building Inc.] to two individuals by the name of Ricketts and Orr. The balance of $ 35,672.62 was used in the following manner. $ 15,000.00 went to R. Vernon Clark as a commission for help in acquiring the stock of Railway [Building Inc.] and $ 5,000.00 was used for organization expense. It appears that the government bonds in the amount of $ 15,672.62 was to be a commission to Fred Saigh. The Investment Realty Co. [Investment], however, claimed ownership of the bonds although from time to time Saigh used the bonds as collateral on certain personal loans that he made with various banks. In 1951 at time of liquidation these bonds were actually given to Saigh for services rendered in acquiring the stock of the Railway Exchange Building.

By indicating that commissions were paid by Investment to R. Vernon Clark and Saigh for obtaining Building Inc.'s stock, the report shows an agency between Saigh and Investment and that Investment was thus the principal in the transaction.

In answer to the first question, as posed above, considering the letter, the interlocking control, Saigh's prominent role, and Investment's resulting beneficial and real ownership of Building Inc.'s stock, and all other facts in the record, we hold that Investment was a "shareholder" of Building Inc. within the meaning of the statute. Ben R. Meyer, 45 B.T.A. 228">45 B.T.A. 228; William C. Baird, 25 T.C. 387">25 T.C. 387; Elliott J. Roschuni, 29 T.C. 1193">29 T.C. 1193, affd. 271 F. 2d 267 (C.A. 5).

Whether the transfer of $ 2,205,000 by Building Inc. to Investment was a loan or a dividend to the extent of Building Inc.'s earnings and profits, is a factual question to be determined upon consideration of all of the facts and circumstances present in the case. Wiese v. Commissioner, 93 F. 2d 921 (C.A. 8), affirming 35 B.T.A. 701">35 B.T.A. 701, certiorari denied 304 U.S. 562">304 U.S. 562. In view of the broad definition of "dividend" contained in section 115(a) and the presumption that respondent's determination is correct, petitioners have the burden of presenting sufficient facts to establish affirmatively that the transfer here in dispute falls without the section. W. T. Wilson, 10 T.C. 251">10 T.C. 251.

The evidence before us, in essence, presents the following picture:

The disputed transfer from Building Inc. to Investment occurred on June 29, 1946. At that time nothing was said concerning the nature of the transfer. There was at that time no agreed plan of repayment, no security, no note, and accordingly no fixed time for repayment. A meeting of the interested parties was held on July 25, 1946; however, no mention was then made of the June transaction. On September 19 the directors of Building Inc. met and authorized a loan to Investment in the sum of $ 2,240,000, which included the amount previously transferred. On October 9 the directors of Investment met and acknowledged the indebtedness by authorizing the execution of a note payable to Building Inc. with the stock as security.

If, from the limited evidence before us, any "intention" may be discovered, it must result in the negative finding that on June 29, 1946, no "loan" was intended. Saigh testified that, in fact, he contemplated two plans, i.e., a plan of partial liquidation and a plan for a loan. We find no intimation of that fact in the corporate minutes which reflect only a plan of partial liquidation. Such is inconsistent with any intention to make a loan. The lawyer representing the insurance company thought, when the money was delivered, that a partial liquidation was to be effected by Building Inc. Testimony by others with knowledge of the matter which might serve to cast light on the affair was not produced at the hearing.

Furthermore, the acceptance of Saigh's testimony concerning the dual plans only fortifies us more firmly in the conviction that there was no intention to make a loan. The fact of having two plans and being unsure of which to adopt affirmatively dismisses the possibility that on the date of transfer there was an unconditional intention to repay on the part of the transferee (Investment) and an unconditional intention on the part of the transferor (Building Inc.) to secure repayment.

In the absence of evidence from which to find that a loan was intended or, as here, in the absence of any showing of the true intention at the time of the transaction, we are justified in relying upon the rule promulgated in Waldheim v. Commissioner, 244 F. 2d 1 (C.A. 7), at page 5:

Under such circumstances the purpose or intent of the parties is not controlling or in absence of proof to the contrary may be assumed or found to be in accord with the actual effect of the transaction. * * *

In this instance we have the disbursement of $ 2,205,000 to Investment without any intimation of the nature of the transaction. Thus, we believe that we are justified in holding that Building Inc. intended to and did distribute a dividend to Investment to the extent of its earnings and profits. Waldheim v. Commissioner, supra.

The determinative fact is the intention as it existed at the time of the transaction. That intention cannot be vitiated by changed circumstances or subsequent actions bred in the cold light of tax consequences.

Petitioners argue that actions taken subsequent to the date of transfer, when combined with the original event, clearly establish the real intention of the parties. They rely upon the confirmation of the loan by the directors of Building Inc. and Investment and the execution and acceptance of the note. This action was not undertaken until 2 months after the transaction in issue occurred. No explanation is given of why nothing was done or said at the July 25, 1946, meeting. While the confirmation and note would ordinarily be some evidence, other facts present in the record destroy their probative value. The actions taken were tardy, and undertaken only after reflection and a shift in opinion. Petitioners would overlook the interlocking control between Investment and Building Inc. What was done was not the act of independent directors, i.e., it was not the result of bargaining between parties, each looking after his own self interest. Saigh acted on both sides and, indeed, guided and engineered the entire transaction step by step.

The note was payable on demand and carried only one-eighth of 1 percent interest. The alleged debt was secured by 20,000 shares of Building Inc. However, the decision to demand repayment, or actually to repay, rested in the same hands. Similarly, the security given was of no moment since, here again, the decision to enforce payment and take the stock rested in the same parties. William C. Baird, supra.

Investment conducted no business of its own and had no earnings at that time. Petitioner did not demonstrate any expected source of revenue with which Investment anticipated making the repayment. It does not appear whether Building Inc. had a generous dividend record in the past, and we must discount this factor as a possible source. The interest rate of one-eighth of 1 percent would seem to indicate limited and meager resources on the part of Investment. Building Inc. was paying 3 3/4 percent on this same money. This is not a case of a loan to a going business which, though lacking present means of repayment, has every expectation of continuing in business and based on a record of past earnings anticipates earning sufficient profits with which to pay its debts. It would be reasonable to infer that Investment did not expect to repay, and Building Inc. did not expect to be repaid.

Not to be overlooked is the fact that no interest was ever paid and no repayment of any part of the principal amount ever made.

These factors belie any real creditor-debtor relationship or any intention to create such a relationship.

Petitioners also argue that the books and records of the interested parties reflect the transfer as a loan. While this is evidence to be considered, it is not controlling, and its effectiveness is weakened by the fact that petitioners have not produced evidence which indicates how the parties treated the transaction around June 29, 1946. We have a Building Inc. balance sheet as of December 31, 1947, and a tax return dated March 15, 1947, indicating that the funds were carried as a note receivable, and an Investment balance sheet received by the Mercantile Bank & Trust Company in 1950 indicating a note payable. These records are too far removed in time from the actual date of the transfer to be persuasive. M. Jackson Crispin, 32 B.T.A. 151">32 B.T.A. 151.

Petitioners rely further upon the agreement of April 1, 1944, later confirmed by supplemental agreement of June 29, 1946, to the effect that Building Inc. would not declare a dividend without permission if the dividend would reduce its net current assets below $ 100,000. On the basis of this agreement, petitioners reason that the transfer of funds by Building Inc. to Investment must have been a loan since if it were a dividend it would have violated the contract. Petitioners also argue that when the May Department Stores Company and May Building Company sold the note of Building Inc. underlying the contract, the vendors warranted that the contract was not breached.

According to the totals given in the statement of assets and liabilities of Building Inc. as of June 28, 1946, its total current assets would not have fallen below $ 100,000 if the transfer of $ 2,205,000 on June 29, 1946, was in fact a dividend. While we do not take the figures in this statement as conclusive, petitioners have not placed the full financial picture of Building Inc. before us. This June 28 statement, when coupled with the statement of the attorney for May Department Stores Company that he did not really concern himself with this question, lessens the effect to be accorded the argument.

Even if we were to grant petitioners' last argument full weight, we would be forced to balance it against the fact that Missouri law appears to forbid a corporation from making loans to its shareholders. See sec. 351.165, Mo. Ann. Stat. (Vernon). Assuming, as we must, that Building Inc. acted properly, such fact indicates that the transfer was in fact a dividend rather than a loan. M. Jackson Crispin, supra.

Based on the record as a whole, we are constrained to find that petitioners have failed to prove that the 1946 transfer was not an informal dividend distribution within the intendment of section 115(a). William C. Baird, supra;Elliott J. Roschuni, supra;M. Jackson Crispin, supra.

Petitioners argue that they are not liable as transferees at law or in equity for the alleged liability of Investment. Under the facts there can be no serious charge of fraud in the transfer of assets after the liquidation, and we need not discuss the point.

While it is not entirely apparent from petitioners' brief, it seems that they advance two theories in support of their position. Relying on United States v. Brown, 86 F. 2d 798 (C.A. 6), and Vestal v. Commissioner, 152 F. 2d 132 (C.A.D.C.), they contend that respondent is barred from proceeding against them by reason of the application of the doctrines of estoppel and/or election of remedies as applied by the Federal courts. Secondly, based on the Supreme Court decision in Commissioner v. Stern, 357 U.S. 39">357 U.S. 39, they argue that the existence and the extent of transferee liability must be determined by application of the Missouri law. Petitioners would place respondent in the "shoes" of an ordinary creditor in Missouri, and determine his right to recover under that law. Missouri law makes available to defendants generally the defenses of estoppel, laches, and election. These defenses would be important, so petitioners argue, in determining the extent of their liability in Missouri. See Robert Leslie Bowlin, 31 T.C. 188">31 T.C. 188.

As a factual basis to support the stated defenses, petitioners call our attention to the following facts: The transfer of funds now alleged to be a dividend occurred on June 29, 1946. In 1952 respondent's agent made an examination into the transactions and, as evidenced by his reports, became fully aware of the facts surrounding the transaction. On the basis of these reports, respondent allocated interest payable to the insurance company on that part of the funds transferred to Investment, and which had been paid by Building Inc., to Investment on the ground that Investment really had the benefit of the money. As a consequence the petitioners, as transferees of the dissolved corporation, were required to pay the resulting additional tax liability. By the time the respondent sent the notices of deficiencies in these cases, the applicable statutes of limitations barred a refund. Similarly, after the 1951 liquidation of Investment, the individual petitioners reported the appropriate gain or loss on the transaction. Taxes were paid with respect to the transaction without consideration of whether Investment was liable for a large personal holding surtax. Except as to the petitioners in Docket Nos. 63355 and 63356, recovery of the taxes paid is barred.

Upon the examination of the Federal estate tax return of Robert E. Hannegan, deceased, respondent determined deficiencies resulting from increasing the valuation of Investment's stock. This value was considered without diminution for any liability on the part of Investment for personal holding company surtaxes. The estate paid the deficiencies. Any recovery of the additional taxes paid is now barred. Sec. 322, I.R.C. 1939. The question of whether the mitigating effects of section 3801 are applicable to these facts has not been raised and we need not decide whether that section is or will become applicable.

Respondent received notice of the contemplated liquidation and he was requested to make a prompt audit. Approximately 4 years passed between the examination of the transaction by respondent and the date of the notices of deficiency.

Without entering upon a lengthy discussion of the elements of estoppel, as applied by this and other Federal courts, in our view the facts do not warrant a finding that respondent is estopped to proceed in this case on a dividend theory. Petitioners had the burden of proving the application of the doctrine and we hold that they failed to do so. United States Trust Co. of New York, 13 B.T.A. 1074">13 B.T.A. 1074.

We need only comment that there was no fraud, concealment, misrepresentation, omission, negligence, violation of duty, or unfair conduct on the part of respondent. There is absent in these cases that element of error or fault by respondent. Both parties were aware of all the facts surrounding the 1946 transaction. It cannot be said that petitioners were in the dark with respect to what respondent was doing in 1952. This being the case, we cannot say that petitioners were misled or actually relied upon any representation or omission of the respondent.

It is apparently petitioners' position that it is sufficient here to establish that they were harmed by respondent's actions with respect to their returns (including that of the Estate of Robert E. Hannegan) in 1952. Respondent's determination of additional taxes against petitioners was made without regard to the alleged liability of Investment for personal holding company surtaxes. Similarly, additional taxes were collected from petitioners because of respondent's action in allocating the interest deduction to Investment. If petitioners felt that respondent's determinations in 1952 were erroneous, they were free to adopt a different theory and pursue it through the judicial machinery provided by law. The record does not indicate that they followed even the administrative remedies available in respondent's office to review an agent's actions. In fact, it was to petitioners' apparent advantage for respondent to proceed as he did. If there was harm, it was in large measure of petitioners' own doing and not because of some fact hidden from petitioners by respondent. Knowing all the facts at the time, petitioners cannot sit idly by when respondent's theory is erroneous, although to their advantage, and then claim estoppel when respondent seeks to retrace his steps and proceed down the correct path. Cf. Sugar Creek Coal & Mining Co., 31 B.T.A. 344">31 B.T.A. 344; Tide Water Oil Co., 29 B.T.A. 1208">29 B.T.A. 1208; South Chester Tube Co., 14 T.C. 1229">14 T.C. 1229.

The cases (Brown and Vestal) relied upon by petitioners actually involve the doctrine of election of remedies, but to the extent that they deal with estoppel, they concern estoppel by decision of this Court, and hence are distinguishable from the instant facts.

Petitioners argue that by allocating the interest deduction from Building Inc. to Investment, respondent chose to treat the transaction as a loan and thus elected a remedy inconsistent with the present dividend theory. We are not able to determine that the allocation under section 45 of the Internal Revenue Code of 1939 is inconsistent with a dividend approach. According to petitioners' own argument, the allocation was premised on the idea that Investment was really enjoying the benefits of the money and should be charged with the interest deduction on that part of the insurance company's loan which it received from Building Inc. This does not necessarily mean that the transfer of funds from Building Inc. to Investment was not a dividend. In any case, an election of remedies presupposes a choice between two equally available remedies. In this case the transfer was a dividend, and respondent was duty bound so to treat it. He had no option but to tax it as a dividend. If he treated it as a loan, he took a path not open to him. Having no choice in the matter, respondent cannot be said to have made an election of remedies. Cf. Goldstein v. United States, 227 F. 2d 1 (C.A. 8).

Respondent here was in reality mistaken in his impression of the law. He is at liberty to correct that mistake. Automobile Club v. Commissioner, 353 U.S. 180">353 U.S. 180. It was his duty to determine the correct tax liability of the parties here involved and he has authority to change any determination considered erroneous. The mere fact that the revenue agent referred to the transfer as a loan in his reports does not estop the Commissioner. Cf. Birch Ranch & Oil Co., 13 T.C. 930">13 T.C. 930, affirmed on another issue 192 F. 2d 924 (C.A. 9); Catharine D. Sharpe, 38 B.T.A. 502">38 B.T.A. 502, affd. 107 F. 2d 13 (C.A. 3); Frances P. McIlhenny et al., Executors, 13 B.T.A. 288">13 B.T.A. 288, affd. 39 F. 2d 356 (C.A. 3).

Petitioners appear also to raise the defense of laches. Section 276 (a), I.R.C. 1939, provides as follows:

SEC. 276. SAME -- EXCEPTIONS.

(a) False Return or No Return. -- In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.

In so legislating, Congress has fixed the limitation time which applies in the case where no return was filed. No personal holding company return for 1946 was filed by Investment. The statute of limitations did not commence to run and the assessment of the personal holding surtax was not barred. Commissioner v. Lane-Wells Co., 321 U.S. 219">321 U.S. 219. The prescribed time in which the Commissioner could act having been fixed, we are not at liberty to shorten or lengthen that time for any reason, including any theory of laches. Cf. Phillips v. Commissioner, 283 U.S. 589">283 U.S. 589; United States v. Summerlin, 310 U.S. 414">310 U.S. 414; Tobacco and Allied Stocks v. Transamerica Corp., 143 F. Supp. 323">143 F. Supp. 323 (D. Del.), affd. 244 F. 2d 902 (C.A. 3).

The Supreme Court in Commissioner v. Stern, supra, promulgated the rule to be followed in transferee cases, as follows (pp. 42, 44, 45):

The courts have repeatedly recognized that § 311 neither creates nor defines a substantive liability but provides merely a new procedure by which the Government may collect taxes. * * * Therefore, since § 311 is purely a procedural statute we must look to other sources for definition of the substantive liability. Since no federal statute defines such liability, we are left with a choice between federal decisional law and state law for its definition.

* * * *

* * * we hold that, until Congress speaks to the contrary, the existence and extent of liability should be determined by state law.

This being the law with reference to substantive transferee liability, we are required to look to the law of Missouri to determine the right of the respondent to assert the deficiencies against the petitioners in these cases. Under Missouri law, respondent's right to recover via the equity route ³ is circumscribed by the defenses of estoppel, election, and laches.

In Osburn v. Court of Honor, 152 Mo. App. 652">152 Mo. App. 652, 133 S.W. 87">133 S.W. 87, 89-90, the Springfield Court of Appeals stated the Missouri view of equitable estoppel as follows:

Equitable estoppels or estoppels in pais grow out of the acts and declarations of the parties sought to be charged and are applied for the prevention of fraud, and to prevent a person who has been influenced by such acts and declarations from the injury of a denial. In order to constitute an estoppel, three things must be shown: (1) That the parties have done some act or made a declaration inconsistent with the truth for the purpose of securing the action of the other parties; (2) that the parties alleging the estoppel were ignorant of the truth and relied upon such acts and declarations; and (3) that injury would result to them by the denial. * * * But it is the policy of the law "to guard estoppels strictly because estoppels may exclude the truth."

The Supreme Court of Missouri, in Rhoads v. Rhoads, 342 Mo. 934">342 Mo. 934, 119 S.W.2d 247">119 S.W. 2d 247, stated the rule thus:

The rule as to such estoppel is considered, with citation of numerous authorities, in Grafeman Dairy Co. v. Northwestern Bank, 290 Mo. 311">290 Mo. 311, 235 S.W. 435">235 S.W. 435, wherein it is held that if both parties know the facts or have equal means of ascertaining them there can be no estoppel, and the court quotes (290 Mo. 311">290 Mo. 311 loc. cit. 336, 235 S.W. 435">235 S.W. 435, loc. cit. 443) the rule as stated in Bigelow on Estoppel, 5th Ed., p. 470, thus: "First. There must have been a false representation or a concealment of material facts. Second. The representation must have been made with knowledge, actual or virtual, of the facts. Third. The party to whom it was made must have been ignorant, actually or permissibly, of the truth of the matter. Fourth. It must have been made with the intention, actual or virtual, that the other party should act upon it. Fifth. The other party must have been induced to act upon it."

This rule was further explained by the Supreme Court of Missouri in Central States Life Ins. Co. v. Bloom, 345 Mo. 982, 137 S.W.2d 517">137 S.W. 2d 517:

The basis of estoppel is "that a person is held to a representation made or a position assumed when otherwise inequitable consequences would result to another who, having the right to do so under all the circumstances of the case, has, in good faith, relied thereon"; but that ordinarily "mere expressions of opinion by interested persons cannot, although subsequently shown to be groundless or false, be regarded as misrepresentations for the purpose of creating an estoppel"; * * *

See also Board of Education v. St. Louis County, 347 Mo. 1014">347 Mo. 1014, 149 S.W. 2d 878; Prouse v. Schmidt, 156 S.W. 2d 919; United Finance Plan v. Parkview Drugs, 250 S.W.2d 181">250 S.W. 2d 181.

Thus, we find that Missouri Courts treat estoppel much the same as we treat it and as it was developed in this and other Federal courts. Our remarks above are equally applicable here. We have no representations by respondent which were inconsistent with the truth. Petitioners were not ignorant of the facts surrounding the 1946 transaction and could not have been misled by respondent. Such being the case, there could be no estoppel under Missouri law. Although the agent's report considered the transfer of funds from Building Inc. to Investment as a loan, this was but a mere expression of opinion by a subordinate and forms no basis for estoppel under Missouri law.

The rule concerning election of remedies in Missouri was stated in Pemberton v. Ladue Realty & Construction Co., 359 Mo. 907">359 Mo. 907, 224 S.W. 2d 383, 385:

"It is equally well settled that there can be no election of remedies unless two or more inconsistent remedies exist, and before a party can be held to have elected his remedy, or be estopped from asserting a different remedy, he must have known at the time he proceeded of the existence of more than one available remedy. We must not lose sight of the distinction between pursuit of one of two inconsistent remedies and pursuit of an imaginary or mistaken remedy. It is obvious from the record before us that plaintiff did not have two remedies in point of fact. That he misconceived his rights and pursued a supposed remedy to which he was not entitled, is not enough to prevent him from pursuing one to which he is entitled. * * *"

See also State v. Holt, 348 Mo. 982, 156 S.W. 2d 708;Brown v. Essig, 1 S.W.2d 855">1 S.W. 2d 855.

Sweeping aside the question of whether the allocation under section 45 of the Internal Revenue Code of 1939 was actually inconsistent with dividend treatment, we have stated above that respondent had no choice but to treat the 1946 transfer as a dividend. His mistaken pursuit of a loan theory, if such was the case, cannot form a basis for holding that respondent has made an election under Missouri law.

Laches, as applied in Missouri courts, is an equitable remedy which cannot be invoked to defeat justice. A mere lapse of time is never sufficient to support laches. Bickel v. Argyle Inv. Co., 343 Mo. 456">343 Mo. 456, 121 S.W.2d 803">121 S.W. 2d 803. Only 4 years elapsed between the date when respondent came into possession of the facts and the date he acted. In our view, no Missouri court would hold that sufficient to bar respondent for being tardy in asserting his rights.

No other argument with respect to transferee liability having been raised by petitioners, we hold that they are liable as transferee of Investment.

We need not decide whether petitioners would have been entitled to an offset, counterclaim, or recoupment under Missouri law for the additional taxes paid. Section 272(g) of the Internal Revenue Code of 1939 provides as follows:

(g) Jurisdiction Over Other Taxable Years. -- The Board in redetermining a deficiency in respect of any taxable year shall consider such facts with relation to the taxes for other taxable years as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid.

A finding that petitioners are entitled to an offset, counterclaim, recoupment, or other such relief would, of necessity, require us to find that an overpayment had been made in taxable years not before us. We have no jurisdiction so to do. Commissioner v. Gooch Co., 320 U.S. 418">320 U.S. 418; Rothensies v. Electric Battery Co., 329 U.S. 296">329 U.S. 296.

The issue here concerns further the amount of the earnings and profits of Building Inc. accumulated as of December 31, 1945, and for the year 1946.

Divested of the multitudinous details, the basic facts are these: The associates secured long-term leases on city block No. 128. They decided to erect a building on the site. To carry through with such plan, two corporations were created: Building Co. and Annuity. Annuity was assigned the leases on condition that it sublet the premises to Building Co. ⁴ Building Co. was to construct the building, with approximately one-half the construction costs to be raised by issuing its own bonds. The remainder was to be raised by the issuance of Annuity certificates. Building Co. actually was slated to pay (and its successor in fact repaid) all of the funds borrowed by Annuity.

Petitioners contend that Building Inc. had an aggregate cost basis with respect to two assets, the building and the leasehold, in the amount of $ 4,691,963.64, made up as follows:

Net liability with respect to Annuity certificates	$ 2,700,000.00
Mortgage bonds	1,750,000.00
Miscellaneous liabilities	241,863.64
Reversionary rights	100.00
Total	4,691,963.64

Petitioners further contend that this entire cost should be allocated to the building and that the additional depreciation for the period 1924 to 1945, inclusive, and for the calendar year 1946 should not be less than $ 1,281,878.78 and $ 42,452.29, respectively.

The leases were held as security for the certificate holders. The record establishes that the leases in themselves were valueless, because of the large ground rent, if Building Co. defaulted on the certificates. The protection or source of equity for the certificates was the building which had been constructed in part with funds obtained from their sale. The building was of sufficient value to protect the interests of both the bond and certificate holders. The leases were to be assigned to Building Co. after the retirement of the certificates. When such event occurred the assignment included not only the leases but Annuity's interests in the building.

The record suggests to us that the reason for not transferring the leases outright to Building Co. in 1912 was to provide some device to reach the building. Since two separate corporations were involved, the building, title of which rested in Building Co., could not be reached except through a forfeiture device. See Commissioner v. H. F. Neighbors R. Co., 81 F. 2d 173 (C.A. 6).

Annuity did not borrow the money for its own purposes. The proceeds ended in the coffers of Building Co., not Annuity. Annuity profited nothing by the transaction. Building Co. actually had the obligation to repay the loan (such being settled before the certificates were ever issued), to pay all the costs including those arising from the operation of Annuity, and to pay the ground rent on the leases. Nor can we lose sight of the fact that the various manipulations here were always under tight control because the syndicate managers and various shareholders and directors were a closely knit group. It may be, as sometimes is the case, that two corporations were utilized on the prospect that the two could borrow more in the aggregate than one could separately.

Looking through form to substance we find that Building Co. raised the necessary construction funds by borrowing on bonds and certificates. This the respondent recognized in permitting Building Co. depreciation on the basis of its actual cost in constructing the building. The record before us indicates that the cost of the leases was actually no more than an undertaking to pay the excessive ground rents.

Such was the situation when Building Inc. stepped into Building Co.'s "shoes" in 1924. It sought depreciation on the same basis used by Building Co. The respondent, however, determined that Building Inc. was not entitled to use the cost basis of its predecessor but could use as its cost only the costs or obligations which Building Inc. paid or assumed in 1924. He excluded from this basis the obligations assumed on the certificates, but included the bonds. Nevertheless, to obtain the building, Building Inc. had to undertake to repay the funds borrowed to construct the building, i.e., pay off the bonds and certificates. If Building Inc. defaulted on payment of the certificates, the holders could foreclose, terminate the leases, and take the building subject to the bondholders' equity. As to the leases, it had to assume the payment of the ground rents just as had its predecessor.

We see no reason for treating the certificates differently from the bonds. The proceeds from the sale of the certificates were used to build the building. There is no basis for treating the certificates as the cost of the leases. Annuity did not sell the leases to Building Co. and did not receive any rent in the true sense of the word for subleasing the premises. Actually, it proceeded to borrow $ 3 million and then loaned it to Building Co. to construct the building. What Building Co. undertook was to repay that money. The sublease was at best a security device. Surely the certificate holders would not accept leases with no market value as security. If we "short cut" the circuitous route taken here, we see that Building Co. in substance issued the certificates. Building Inc. assumed this obligation. Its cost basis for the building was the price of paying off the certificates. It was the complete owner of the building after the retirement of the certificates and bonds. Building Inc., or its predecessor, bore the entire cost of the building's construction and it was entitled to the statutory deduction for that cost. Cf. Commissioner v. Revere Land Co., 169 F. 2d 469 (C.A. 3); Frank G. Shattuck Co. et al., 2 B.T.A. 7">2 B.T.A. 7. This deduction should be spread over the projected life of the building. Secs. 23 and 114, I.R.C. 1939; Regs. 111, secs. 29.23(a)-10 and 29.23(1); Duffy v. Central R.R., 268 U.S. 55">268 U.S. 55. Even if we should say that Building Inc. assumed the bonds and certificates in order to obtain the building and the leaseholds, the testimony establishes that the leaseholds had no value in 1924.

Rents paid for leases, of course, do not form a cost basis for depreciating the leases. However, the lessee is entitled to depreciate the costs, other than rent, of acquiring the lease. ⁵

If it be said that our holding here, that Building Inc. is entitled to depreciate the cost of paying off the certificates, is somewhat at variance with the prior method of treating depreciation by the parties, we are, nonetheless, guided by the record before us and not by their unconfirmed prior actions. Cf. Gowran v. Commissioner, 87 F. 2d 125 (C.A. 7).

The next issue is whether the failure to file a personal holding company return was due to reasonable cause. Petitioners argue that the failure to file the return was due to the fact that "reasonable" men could differ in their opinion or interpretation of the 1946 transaction. If the transfer of funds from Building Inc. to Investment was a loan, then Investment would have no personal holding company income and there would be no need to file a return. We have held that the transfer was a dividend and hence a return should have been filed.

To support their argument, petitioners point to the fact that the revenue agent knew that Investment was a personal holding company, was acquainted with the facts surrounding the transfer, referred to the transfer as a loan in his reports, and yet said nothing concerning the need for the filing of such a return.

Although the agent indicated a full knowledge of the transaction, still he did not have the year 1946 before him, and there is no showing that he brought his ability to bear on the question of whether the transfer was a loan or whether a personal holding return should have been filed. The cases cited by petitioners involve the actions of agents who were considering the year in dispute and are distinguishable from the instant facts.

Secondly, although reasonable men might differ on the effect of the transfer, petitioners failed to show that they consulted a lawyer or other tax counsel concerning the transactions of 1946 or that they relied upon any competent advice received on the matter. Indeed, there is no showing that petitioners themselves considered the question, even though they were aware of all the facts.

We conclude that petitioners have failed to show reasonable cause for failure to file a personal holding company return for the year in question and therefore are liable for the addition to tax. Coshocton Securities Co., 26 T.C. 935">26 T.C. 935; Hermax Co., 11 T.C. 442">11 T.C. 442, affd. 175 F. 2d 776 (C.A. 3); Tarbox Corporation, 6 T.C. 35">6 T.C. 35.

The final question is the amount of interest petitioners are to be charged with in this case. The rule in this respect has long been regarded as settled. It is stated fully in Henry Cappellini, 16 B.T.A. 802">16 B.T.A. 802, as follows:

While the courts seem to hold divergent views as to when interest begins to run against stockholders who are liable to creditors of a corporation, we are impressed with the decision in United States v. Snook, 24 Fed. (2d) 844, as being a fair and equitable rule to be applied in transferee cases. That decision, where the tax liability was greatly in excess of the amount received by the transferees in distribution, holds the transferees liable to the full extent of the amounts received by them with interest from "the fair average date of receiving" the sums distributed. Cf. McWilliams v. Excelsior Coal Co., 298 Fed. 844. That method of computation represents the maximum liability of the transferees and applies where the tax and interest imposed on the corporate transferor is greater than the amount received in distribution, plus interest from that date. Where the tax and interest thereon is less than the amount distributed to any one transferee, then the liability of such transferee would be limited to the amount of tax and interest thereon.

Petitioners do not seriously contend that the rule is otherwise. Instead, they seek to bring themselves within the recent exception carved out by Voss v. Wiseman, 237">234 F. 2d 237 (C.A. 10), and subsequently followed in various District Courts. As we read that case, it stands for the proposition that, absent malum fides, a transferee cannot be held accountable for interest prior to the time when he has notice of the existence of a debtor-creditor relationship between himself and the Government, if the transferees receive assets which are not of sufficient value to cover the interest assessed. This matter may be settled under Rule 50.

Decisions will be entered under Rule 50.

---

Footnotes

• 1. Proceedings of the following petitioners are consolidated herewith: Estate of A. L. Watson, Deceased, Oscar G. Schaefer, Administrator, Transferee, Docket No. 63352; Irma Hannegan, Transferee, Docket No. 63353; Robert E. Hannegan Trust, Irma Hannegan and Mercantile Trust Company, Trustees, Transferee, Docket No. 63354; Fred M. Saigh, Jr., Transferee, Docket No. 63356; Sidney Salomon, Jr., Transferee, Docket No. 63357; Jean Salomon, Transferee, Docket No. 63358; Estate of R. Vernon Clark, Deceased, St. Louis Union Trust Company and Wilbur B. Jones, Co-Executors, Transferee, Docket No. 63359.↩

• 2. The deficiency notice asserted that $ 2,235,672.62 was transferred (including the transfer of July 1, 1946). However, on brief respondent asserts that the transfer was $ 2,205,000.↩

• 3. It would appear that respondent is proceeding in equity. His argument on brief does not specify the exact theory which he relies upon under Missouri law. Ordinarily, liability at law is predicated on an agreement of the transferee to pay the obligations of the transferor or a State statute requiring the transferee of assets to pay the tax-liability of the transferor. No agreement or statute exists in these cases. Furthermore, it would seem that section 351.565, Mo. Ann. Stat.↩ (Vernon), in creating a 2-year statute of limitations on the right to sue on predissolution causes of action, provides a limitation incident to or inherent in the substantive right, and as such it might be interpreted as extinguishing the substantive remedy after 2 years. If such were the case, respondent would be barred at law. See 3 Beale, Conflicts of Laws, secs. 603.1-605.1.

• 4. The parties made no arguments concerning the fact that the initial sublease to Building Co. was executed prior to Mar. 1, 1913. In view of the fact that Annuity issued a new sublease in 1924, no issue is raised in this respect.↩

• 5. We have found that this does not include the cost of the certificates.↩