Louis Adler Realty Co. v. Commissioner , 6 T.C. 778 ( 1946 )

Louis Adler Realty Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent

Louis Adler Realty Co. v. Commissioner

Docket No. 5643

United States Tax Court

6 T.C. 778; 1946 U.S. Tax Ct. LEXIS 225;

April 19, 1946, Promulgated

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Decision will be entered under Rule 50.

Petitioner was the owner of certain real estate against which there was an outstanding second mortgage of $ 1,717,500. In 1937 petitioner's president and sole stockholder, Louis Adler, learned that this mortgage could be purchased for $ 600,000. A plan was devised whereby the mortgage was purchased by Thurlim, a corporation Adler had formed a few months previously, but which had not yet issued any stock or transacted any business. Three trusts, two of which had been created by Adler's wife and one by his son, acquired all the capital stock of Thurlim for a total of $ 1,000 and contracted with Thurlim to buy the mortgage from Thurlim in consideration for notes of $ 200,000 from each trust. Thurlim paid for the mortgage with funds borrowed from Adler and a bank. A part of the funds from Adler originally came from petitioner. Later, petitioner loaned substantial funds to Thurlim which Thurlim used principally to pay the indebtedness at the bank. Adler was president of Thurlim. During the taxable year petitioner went through the form of paying interest on the mortgage to the trusts, which turned the sums paid over to Thurlim, which used them to pay off its loans from petitioner and the bank. Petitioner also advanced large sums to the trusts as loans to be used to pay taxes and insurance premiums. Held, Thurlim and the trusts were in substance petitioner's agents or nominees and were used by petitioner for the purpose of acquiring the mortgage at a substantial discount; held, further, petitioner is not, therefore, entitled to an interest deduction for the taxable year on the mortgage, but is only entitled to deduct interest on the outstanding bank indebtedness which was in substance incurred for petitioner's benefit.

Ferdinand Tannenbaum, Esq., Seymour Klein, Esq., and Henry Homes, C. P. A., for the petitioner.

Sidney B. Gambill, Esq., and Laurence F. Casey, Esq., for the respondent.

Black, Judge. Disney, J., concurs only in the result. Opper, J., concurring. Smith and Leech, JJ., concur. Kern, J., dissenting.

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BLACK

This proceeding involves the determination by the respondent of deficiencies in petitioner's income and declared value excess profits taxes for the fiscal year ended May 31, 1939, in the amounts of $ 13,190.84 and $ 713.31, respectively. The deficiencies are the result of five adjustments made by the respondent to the net income as disclosed by petitioner's return. By appropriate assignments of error petitioner contested two of the adjustments, namely, "(b) Depreciation $ 14,453.25" and "(d) Interest $ 55,875.00." The respondent now concedes that he erred as to the depreciation adjustment, and this concession will be given effect under Rule 50. In a statement attached to the deficiency notice the respondent explained the interest adjustment as follows:

(d) The deduction for mortgage interest on property located at 530 Seventh Avenue, New York, N. Y., is decreased from $ 85,875.00 to $ 55,875.00 [should be $ 30,000, as respondent disallowed $ 55,875] in accordance with the provisions of the Internal Revenue Code.

By amended answer, the respondent claimed increased deficiencies in income and declared value excess profits taxes in the amounts of $ 3,529.92 and $ 1,185.86, respectively, based upon the affirmative allegation that for the taxable year petitioner is entitled to an interest deduction of only $ 10,235.62 instead of the $ 30,000 allowed in the deficiency notice. Therefore, the sole question for our determination is whether petitioner is entitled to an interest deduction of $ 85,875 as deducted in its return, or whether the amount allowable as a deduction should be reduced to $ 10,235.62, as contended for by the respondent, or to some other amount.

FINDINGS OF FACT.

Petitioner is a corporation, organized in 1928 under the laws of the State of New York, with its principal office at 1450 Broadway, New York City. It filed its return for the fiscal year ended May 31, 1939, with the collector for the third district of New York. At all times since its organization, Louis Adler has been president and sole stockholder of petitioner.

In November of 1928 petitioner leased property located at 530 Seventh Avenue in New York City from the Rector, Churchwardens and Vestrymen of Trinity Church, a religious corporation, sometimes hereinafter referred to as Trinity. This property was encumbered by two mortgages securing indebtedness totaling $ 2,750,000.

In or prior to January 1935 petitioner caused the organization of a corporation known as Stiplate Realty Corporation, hereinafter sometimes referred to as Stiplate, for the sole purpose of acquiring the fee to the property from Trinity. All of the capital stock of Stiplate was issued to petitioner. In consideration of the transfer of title to the real estate to Stiplate, subject to the mortgages and lease above referred to, Stiplate issued to Trinity a bond and mortgage in the face amount of $ 1,717,500, bearing interest at 5 percent per annum, payable semiannually from January 1, 1935. The principal of the bond and mortgage was to be paid in semiannual installments of $ 25,000 beginning April 1, 1936, up to and including October 1, 1954, and the balance of $ 767,500 was to become due and payable on January 1, 1955.

On May 22, 1935, Stiplate executed a deed dated January 2, 1935, conveying the title to petitioner, subject to the liens of all the above mentioned mortgages, including the mortgage executed by Stiplate to Trinity and hereinafter sometimes referred to as the second mortgage. Petitioner set up the property on its books at a cost of $ 1,717,500 and the second mortgage was set up as a liability in that same amount, although petitioner did not assume that mortgage. The interest payments called for under this mortgage were made by petitioner directly to Trinity up to the time Trinity sold the mortgage as hereinafter stated.

In January of 1937 Adler caused the incorporation of Thurlim Realty Corporation, a New York corporation, hereinafter sometimes referred to as Thurlim. Adler was and continues to be president of Thurlim. Thurlim's office is maintained and its books are kept in the offices occupied by petitioner.

Bessie Adler is the wife of Adler. She was a director of petitioner, and received a salary of $ 12,000 per year. They have two children, Milton and Ruth. Milton was an adult in the taxable year and was employed by petitioner at a salary of $ 5,200 per year. Ruth was a minor until 1940.

Some time before October 1937 Adler was advised that Trinity was willing to sell its second mortgage of the face value of $ 1,717,500 for $ 600,000. After consultation with accountants and lawyers it was decided at or about that time by the individual members of the Adler family, and for the purpose of benefiting them individually, that Mrs. Adler should create a trust for each of the children, and Milton should create a trust for his mother, and that the three trusts should then acquire the second mortgage.

The trust instruments were executed as of November 3, 1937. Mrs. Adler was named as the grantor of two trusts, one for each child, each having a corpus of $ 1,000, of which she and Adler were original trustees, and Julius Fishman, an officer and employee of petitioner, later became a trustee. Milton Adler became the grantor of a trust for his mother, naming the same trustees, with the same original corpus.

The trusts were unable to borrow the additional money required for the contemplated purchase and it was decided to utilize Thurlim, which thus on October 29, 1937, undertook its first business transaction. On October 28, 1937, Adler opened a bank account in Thurlim's name with a deposit of $ 1,000. On the same day he filled out, except for his signature, a stock certificate for Thurlim's entire authorized capital of 100 shares at $ 10 per share to himself. He did not, however, sign it as president. The $ 1,000 was carried on Thurlim's books as a loan from Adler.

On October 28 two checks were drawn on petitioner's bank account, one for $ 30,000 to Adler as a dividend, and one for $ 20,000 to Fishman as a loan. Fishman deposited his check in his own checking account and issued his check in the same amount to Adler in payment of a debt which he owed to Adler. Adler deposited petitioner's check for $ 30,000 and Fishman's check for $ 20,000 in his personal checking account, and on October 28 issued his check for $ 50,000 to Thurlim, which was deposited in Thurlim's account. On October 29, Thurlim, through Adler as president, offered to purchase the second mortgage from Trinity for $ 600,000, and attached to its offer its check for $ 50,000 as down payment, other payments to be made as follows: $ 150,000 on or before November 9, 1937; $ 200,000 on or before December 15, 1937; and $ 200,000 on or before January 15, 1938. On November 2, 1937, Trinity accepted the offer.

On November 3, 1937, Thurlim's capital stock was issued to the three trusts in equal shares of 33 1/3 shares each for a total consideration of $ 1,000, two trusts paying $ 333.33 each and one trust paying $ 333.34. On the same day Thurlim and the trustees, grantors and beneficiaries of the three trusts, entered into an agreement by the terms of which Thurlim agreed to assign to the trustees the bond and mortgage, when received from Trinity, in consideration of which the trustees agreed to deliver three promissory notes in the face amount of $ 200,000 each to Thurlim, and, until the $ 600,000 represented by those notes was paid, to assign to Thurlim to be credited on the notes, all payments which might be payable to the trustees pursuant to the mortgage. The beneficiaries agreed to lend to their respective trustees such amounts as might be needed to meet the notes to Thurlim, the trustees' discretion in that respect to be binding on the beneficiaries.

In order to finance the purchase of the second mortgage, Thurlim borrowed $ 400,000 at 4 percent from the Manufacturers Trust Co. of New York, and executed promissory notes bearing the following dates and amounts:

November 8, 1937	$ 160,000
December 13, 1937	200,000
January 13, 1938	40,000

The balance of the purchase price was furnished by Adler, without interest, on January 13, 1938. As collateral for the loans from the Manufacturers Trust Co., Adler and his wife deposited their individual life insurance policies and Adler also deposited some stock in petitioner owned by him.

Thurlim made the last payment to Trinity on January 14, 1938, and on the same day Trinity executed and delivered an assignment of the bond and mortgage to Thurlim.

Beginning in 1938, petitioner made advances to the three trusts for the payment of taxes, insurance premiums, or other such items. During the taxable year such advances totaled $ 43,767.14 and by May 31, 1941, they totaled $ 110,833.73.

Petitioner advanced as loans to Thurlim the following amounts on the dates indicated:

May 7, 1938	$ 50,000
Dec. 7, 1938	101,000
Mar. 8, 1939	2,000
Sept. 9, 1939	1,500
Sept. 11, 1939	25,000
Dec. 8, 1939	26,000
Mar. 7, 1940	25,750
June 8, 1940	25,500
Sept. 10, 1940	$ 50,000
Oct. 27, 1941	125
Dec. 4, 1941	125
Mar. 10, 1942	500
May 9, 1942	200
June 10, 1942	400
Total	308,100

On January 12, 1938, petitioner paid interest on the second mortgage totaling $ 38,405 to the three trusts, which on the same day paid it to Thurlim, to be applied on the notes of the three trusts. On July 1, 1938, petitioner paid to the trusts as interest on the second mortgage a total of $ 47,470. The trusts paid $ 47,470 to Thurlim to apply on their notes. These amounts were used by Thurlim to pay on its obligations to Manufacturers Trust Co.

On January 3, 1939, petitioner paid to the trusts as interest on the second mortgage the total sum of $ 42,937.50; the trusts paid $ 42,937.50 to Thurlim to be applied on the notes; and Thurlim paid $ 42,937.50 to petitioner to apply on its loans.

On July 3, 1939, petitioner paid to the trusts $ 42,937.50 as interest on the mortgage; the trusts paid Thurlim $ 42,937.50 to apply on the notes; and Thurlim paid petitioner $ 42,937.50 to apply on its loans.

On January 2, 1940, petitioner paid $ 42,937.50 to the trusts as interest on the mortgage; the trusts paid Thurlim $ 42,937.50 to apply on the notes; and Thurlim applied the $ 42,937.50 on the notes of Manufacturers Trust Co.

On July 1, 1940, petitioner paid the trusts $ 42,937.50 as interest on the mortgage; the trusts paid Thurlim $ 42,937.50 to apply on their notes; and Thurlim paid $ 42,937.50 to petitioner to apply on its loans.

On January 3, 1941, petitioner paid the trusts $ 42,937.50 as interest on the mortgage; the trusts paid Thurlim $ 42,937.50 to apply on their notes; and Thurlim paid $ 28,000 to Adler on his loans, and $ 14,937.50 to petitioner to apply on its loans.

On July 1, 1941, petitioner paid $ 42,937.50 to the trusts as interest on the second mortgage; the trusts paid $ 41,137.50 to Thurlim to apply on their notes; and Thurlim paid Adler $ 41,000 to apply on his loans.

On January 2, 1942, petitioner paid to the trusts $ 42,937.50 as interest; the trusts paid the same amount to Thurlim; and Thurlim paid it to petitioner to apply on its loans.

On July 6, 1942, petitioner paid the trusts $ 42,937.50 as interest on the mortgage; the trusts paid to Thurlim $ 39,587.15 to apply on their notes; and Thurlim paid to petitioner $ 39,587.15 to apply on its loans.

On January 28, 1944, Thurlim, in an agreement with the Aetna Life Insurance Co., expressed its intention to record the mortgage and assignment from Trinity. At that time Thurlim stated it was the owner of the second mortgage, although it had previously assigned the mortgage to the trusts.

Petitioner has made no payments on the principal of the second mortgage.

Thurlim, the trusts, and petitioner each has a separate bank account and separate books of account.

Petitioner kept its books on an accrual basis of accounting.

During the fiscal year ended May 31, 1939, which is the taxable year we have before us, petitioner accrued on its books interest at the rate of 5 percent per annum on the second mortgage in the total amount of $ 85,875, which amount was credited each month in equal shares to the trusts, and was duly paid within two and one-half months after the close of the taxable year. This amount of $ 85,875 was claimed as a deduction on petitioner's income tax return for interest accrued during the taxable year. Respondent originally allowed a $ 30,000 deduction on the theory that petitioner's indebtedness was in the amount of $ 600,000, the amount for which the second mortgage was purchased. By amended answer respondent reduced the allowable deduction to $ 10,235.62 on the ground that the entire amount of $ 600,000 indebtedness was not outstanding throughout the taxable year.

We make the following ultimate findings of fact:

(1) In the aforesaid acquisition of the second mortgage, and subsequent thereto, Thurlim and the trusts served no business purpose, but functioned substantially as controlled agents or nominees of petitioner.

(2) During the taxable year the second mortgage was not an indebtedness of petitioner within the meaning of section 23 (b) of the Revenue Act of 1938.

(3) As far as the present issue is concerned, the only indebtedness upon which petitioner is entitled to an interest deduction for the taxable year ended May 31, 1939, is an indebtedness of $ 350,000 from June 1 to July 1, 1938, due the Manufacturers Trust Co.; $ 300,000 from July 1 to December 9, 1938; and $ 200,000 from December 9, 1938, to May 31, 1939, due the same company. The interest rate is 4 percent per annum and the total allowable interest deduction is the amount of $ 10,235.62, instead of $ 85,875 as claimed by petitioner in its return.

OPINION.

Section 23 (b) of the Revenue Act of 1938, the applicable statute involved, provides that in computing net income there shall be allowed as a deduction "All interest paid or accrued within the taxable year on indebtedness * * *."

Petitioner contends that during the entire taxable year it had an outstanding indebtedness of $ 1,717,500 upon which it was obligated to pay interest at the rate of 5 percent per annum. The respondent contends that Thurlim and the three trusts were in substance petitioner's controlled agents or nominees; that, through Thurlim and the trusts, petitioner must be considered as having purchased its own indebtedness, which thereupon ceased to be an outstanding indebtedness upon which interest is accruable and deductible for tax purposes; and that the only indebtedness upon which petitioner is entitled to deduct interest is the outstanding indebtedness of petitioner's subservient agent, Thurlim, to Manufacturers Trust Co., which bore interest at the rate of 4 percent per annum and consisted of $ 350,000 at the beginning of the taxable year, which amount was reduced to $ 300,000 on July 1, 1938, and to $ 200,000 on December 9, 1938. We agree with the respondent.

The respondent does not question the validity or bona fides of the original bond and mortgage which were issued by petitioner's wholly owned subsidiary, Stiplate, in 1935 as consideration for the transfer of title to the real estate in question. It is the manner in which this bond and mortgage were acquired from Trinity that raises the tax question at issue. In 1937 it was learned that Trinity was willing to accept $ 600,000 in cash in full payment for the obligation of $ 1,717,500 which had been created two years before. If petitioner had directly liquidated its 1935 obligation by paying Trinity the $ 600,000 either with its own or borrowed funds, it is obvious that the present question would not have arisen. We think, however, that petitioner has indirectly accomplished the same result by permitting its funds to be used by Thurlim and the three trusts in the manner set out in our findings.

In 1432 Broadway Corporation, 4 T. C. 1158 (on appeal to C. C. A., 2d Cir.), we had the question of the deductibility of interest before us and in the course of our opinion we said:

* * * Although a taxpayer has the right to cast his transactions in such form as he chooses, and the form he chooses will generally be respected, the Government is not required to acquiesce in the taxpayer's election of form as necessarily indicating the character of the transaction upon which his tax is to be determined. "The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purpose of the tax statute." Higgins v. Smith, 308 U.S. 473">308 U.S. 473. See also Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331. * * *

Cf. W. C. Hay, 2 T.C. 460">2 T. C. 460; affd., 145 Fed. (2d) 1001. In the Hay case the taxpayer, with the primary object of escaping estate and income taxes, being a naturalized citizen, repatriated himself as a Canadian citizen, organized a Nassau corporation, transferred to that corporation all the stock of a California company, and four months thereafter caused the Nassau corporation to liquidate the California company. On these facts, relying on such cases as Higgens v. Smith, 308 U.S. 473">308 U.S. 473, and Griffiths v. Commissioner, 308 U.S. 355">308 U.S. 355, we held the Nassau corporation lacked business purpose, its existence should therefore be disregarded for tax purposes, and the liquidation of the California company was in effect a distribution to the taxpayer, William C. Hay, individually.

We think the principles stated in the foregoing cases are applicable here. In 1937, when Adler learned that Trinity was considering discounting the second mortgage for approximately one-third of its face value, he talked the matter over with his wife and son and they in turn consulted their accountants and lawyers. At that time Thurlim was nothing but an empty shell. It had not yet issued any of its capital stock. It owned no assets. Adler, the sole stockholder of petitioner, had caused Thurlim to be incorporated several months before, but it transacted no business until October 29, 1937, when it wrote the letter to Trinity offering to purchase the bond and mortgage in question for the sum of $ 600,000 and tendered its check for $ 50,000 as a down payment. As indicated in our findings, this $ 50,000 originally came from petitioner in the manner detailed in our findings. Trinity accepted the offer to purchase on November 2, 1937, and on the following day the trusts were created and Thurlim issued all of its stock to the trusts for a total consideration of $ 1,000 and entered into an agreement with the trusts to sell them the bond and mortgage it was purchasing from Trinity for the same amount of $ 600,000, agreeing to take a promissory note from each trust for the amount of $ 200,000. Adler arranged with the Manufacturers Trust Co. for it to loan Thurlim $ 400,000 on his personal signature and security deposited by Adler and his wife. The balance of the purchase price was furnished by Adler as a loan to Thurlim. After this was done, petitioner began paying the so-called interest on the original amount of $ 1,717,500 to the trusts, which in turn would pay it over to Thurlim as a part payment on the $ 200,000 notes, and Thurlim would then use it to pay off its obligations to the Manufacturers Trust Co., petitioner, and Adler. As shown in our findings, petitioner loaned Thurlim a total of $ 308,100 from May 7, 1938, to June 10, 1942. This was separate and apart from the so-called interest. Most of this $ 308,100 was used by Thurlim to pay off its borrowings from the Manufacturers Trust Co. Up to May 31, 1941, petitioner had also advanced to the trusts a total of $ 110,833.73 in addition to the so-called interest which was used by the trusts to pay taxes, insurance, premiums and other such items. After Trinity had received the final payment on January 14, 1938, it executed and delivered an assignment of the bond and mortgage to Thurlim, which was then placed in petitioner's safe, where it has since remained. We think that, when consideration is given to the entire record, the conclusion must be that Thurlim and the trusts were simply being used by petitioner as its agents or nominees in the purchase of petitioner's outstanding indebtedness at a substantial discount.

The Supreme Court has held that the usual import of the term interest "is the amount which one has contracted to pay for the use of borrowed money." Old Colony Railroad Co. v. Commissioner, 284 U.S. 552">284 U.S. 552; Deputy v. Du Pont, 308 U.S. 488">308 U.S. 488. During the taxable year petitioner made two payments of so-called interest to the trusts; one on July 1, 1938, in the amount of $ 47,470, and one on January 3, 1939, in the amount of $ 42,937.50. The trusts passed both payments over to Thurlim, to be applied on the notes. Thurlim turned the first payment over to Manufacturers Trust Co. and returned the second payment to petitioner. Petitioner has not shown to our satisfaction that these payments by petitioner were in truth and substance compensation for the use of money. We think the only real payments of interest were those made by Thurlim to Manufacturers Trust Co., which we hold were made for petitioner's benefit. The parties agree that the sums so paid or accrued during the tax year amounted to $ 10,235.62. As has already been stated, the Commissioner in his determination of the deficiency allowed petitioner a deduction of $ 30,000 interest on account of the transactions here involved. Respondent in his amended answer alleges that he erred in this respect and that he should have allowed only $ 10,235.62, and he asks for an increased deficiency accordingly. The burden of proof is, of course, upon respondent to sustain these affirmative allegations. For reasons we have stated above, we think that burden has been discharged and that petitioner is entitled to have allowed a deduction for interest of only $ 10,235.62, as the Commissioner has claimed in his amended answer. We so hold.

Decision will be entered under Rule 50.

OPPER

Opper, J., concurring: In making the determination now in issue respondent "decreased" the deduction for mortgage interest as "in accordance with the provisions of the Internal Revenue Code." A provision of the code which seems to conform exactly to the present facts and would by its express terms warrant the Commissioner's action is section 45:

SEC. 45. ALLOCATION OF INCOME AND DEDUCTIONS.

In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.

The fact that there is no reference to that section by number in the notice of deficiency where, as here, "it may be assumed that the adjustment was made in order that the real income of the petitioner might be clearly reflected," is not necessarily an impediment to its application by us. Gordon Can Co., 29 B. T. A. 272. There can be no question of petitioner's awareness of its relevance to the present proceeding as is indicated by the reliance in its brief upon a case where the application of that section was the basic issue. Seminole Flavor Co., 4 T. C. 1215.

KERN

Kern, J., dissenting: Respondent asks us to disregard the separate and independent entities of the Thurlim Realty Corporation and of the three Adler family trusts on the theory that they were acting for petitioner's benefit, as its nominees or controlled agents. Respondent then continues his argument by contending that petitioner has brought the second mortgage indebtedness under its own legal and economic control by the use of its funds and through the subservient trusts and the subservient Thurlim Realty Corporation. Therefore, respondent concludes, petitioner must be considered as having purchased its own indebtedness, which thereupon ceased to be an outstanding indebtedness during the taxable year upon which interest is accruable and deductible for tax purposes.

As authority for his contention respondent relies on general language contained in Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331; Anderson v. Abbott, 321 U.S. 349">321 U.S. 349; Higgins v. Smith, 308 U.S. 473">308 U.S. 473; and Griffiths v. Helvering, 308 U.S. 355">308 U.S. 355.

The majority opinion accepts and approves the argument of respondent, and cites as authority W. C. Hay, 2 T. C. 460; affd., 145 Fed. (2d) 1001, and a dictum in our opinion in 1432 Broadway Corporation, 4 T.C. 1158">4 T. C. 1158.

I am unable to agree. The basic reason for my disagreement is the fact that in this case the petitioner corporation did not cause the incorporation of Thurlim or the formation of the Adler family trusts and did not control them. Therefore, the conclusion can not be reached in my opinion that the petitioner corporation, directly or indirectly, purchased the indebtedness secured by a mortgage on its property, either itself or through agencies which petitioner itself controlled. This indebtedness at all times remained an outstanding obligation secured by a mortgage on petitioner's property pursuant to which interest was payable by petitioner. The truth is that Thurlim was controlled by Adler either directly, or indirectly through the Adler family trusts, in much the same way in which Adler controlled petitioner itself through ownership of its stock. However, it can not be said that petitioner corporation so controlled Thurlim or the Adler family trusts that the acquisition by Thurlim or the trusts of the petitioner's mortgage indebtedness was equivalent to an acquisition thereof by petitioner. The fact that petitioner was caused by its controlling stockholder to advance money to him and to Thurlim does not establish petitioner's control over Thurlim, but rather establishes Adler's control over both petitioner and Thurlim; and the fact that petitioner and Thurlim were controlled by the same stockholder does not result in a relationship between the two corporations of reciprocal agency. Even though we consider the situation with the realistic approach approved by the cases cited by respondent and disregard legalistic technicalities, I am unable to consider ownership by corporation A as equivalent to ownership by corporation B because the two corporations are controlled by the ownership of their respective common stock by the same individual or group of individuals. A fortiori, ownership by trusts of which Adler's wife, son, and daughter were beneficiaries is not equivalent to ownership by petitioner corporation, all of whose stock was owned by Adler.

It should be pointed out that no question arises as to the bona fides or business purpose of the debt here involved before its acquisition by Thurlim. The crux of respondent's argument is that that debt must be considered by us as having been acquired in effect by the petitioner. In support of this position he argues that no business purpose existed for its acquisition by Thurlim. We understand this argument to be that from petitioner's standpoint there was no business purpose for Thurlim to acquire the indebtedness rather than petitioner. This argument would be pertinent only upon the assumption that petitioner created and controlled Thurlim and caused the latter as its agent to acquire the indebtedness. As we have already pointed out we are unable to accept this assumption and therefore the argument based upon it is without validity.

In this case the transaction actually accomplished by Adler and the members of his family resulted in a tax advantage to petitioner, as well as to Adler, which would not have been available to it if it had purchased and retired the indebtedness. This fact, however, does not justify us in treating possibilities as actualities for the purpose of imposing upon petitioner an increased tax burden. See Seminole Flavor Co., 4 T.C. 1215">4 T. C. 1215.

The cases cited by the majority would, in my opinion, be relevant only to a situation where corporations or trusts were created and controlled by the taxpayer itself for no business purpose other than to minimize the tax liability of the taxpayer who created and controlled them. They are not relevant to the situation presented in the instant case, where the taxpayer corporation did not create or control either Thurlim or the trusts.

It should be pointed out that the tax liability of Adler, who controlled petitioner as well as Thurlim and the trusts, is not here in question, and that the respondent makes no contention that the corporate entity of petitioner should be disregarded. In my opinion, the majority has, in its reasoning, approached the problem as if the petitioner corporation were Adler or had done those things which Adler did. This approach is not warranted by the record, the pleadings, or the law, and the result reached compels my dissent.