Geoli Inv. Co. v. Commissioner

1970 T.C. Memo. 77, 29 T.C.M. 349, 1970 Tax Ct. Memo LEXIS 282

Opinion

Geoli Investment Company v. Commissioner. Eccdor Investment Company v. Commissioner.

Geoli Inv. Co. v. Commissioner

Docket Nos. 6466-66 and 6486-66.

United States Tax Court

T.C. Memo 1970-77; 1970 Tax Ct. Memo LEXIS 282; 29 T.C.M. (CCH) 349; T.C.M. (RIA) 70077;

March 31, 1970, Filed

---

Stephen H. Anderson and Alonzo W. Watson, Jr., Suite 400 Deperat Bldg., 79 South Main St., Salt Lake City, Utah, for the petitioners. Charles W. Nyquist, for the respondent.

---

SCOTT

Memorandum Findings of Fact and Opinion

SCOTT, Judge: Respondent determined deficiencies in petitioners' income taxes for the years and in the amounts as follows: 350

Docket No.	Petitioner	Fiscal year	Deficiency	Addition to	Total
		ended		tax under
				Sec. 531,
				I.R.C. 1954
6466-66	Geoli	April 30, 1962	$20,734.63	$13,985.69	$34,720.32
	Investment Co
		April 30, 1963	24,877.36	16,744.48	41,621.84
		April 30, 1964	30,066.25	19,923.11	49,989.36
6486-66	Eccdor	Sept. 30, 1961	5,807.79	5,981.46	11,789.25
	Investment Co
		Sept. 30, 1962	18,665.69	13,276.03	31,941.72
		Sept. 30, 1963	25,705.67	17,397.43	43,103.10
		May 31, 1964	22,306.93	14,449.08	36,756.01

Some of the issues, including the issue relating to the accumulated earnings tax imposed by section 531, I.R.C. 1954, ¹ have been disposed of by agreement of the parties leaving for our decision the following: Whether respondent properly disallowed, under the provisions of section 269, to each petitioner the deduction for dividends received provided for by section 243.

Findings of Fact

Some of the facts have been stipulated and are found accordingly.

Geoli Investment Co. (hereinafter referred to as Geoli), a corporation organized under the laws of Utah on April 28, 1958, had its principal place of business on the date its petition in this case was filed in Salt Lake City, Utah.

Eccdor Investment Co. (hereinafter referred to as Eccdor), a corporation organized under the laws of Utah on September 2, 1958, had its principal place of business on the date its petition in this case was filed at Salt Lake City, Utah.

Geoli and Eccdor each filed its Federal corporate income tax return for each of the years here in issue with the district director of internal revenue at Salt Lake City, Utah.

George S. Eccles (hereinafter referred to as Eccles) was the organizer of each of the corporations and has been the beneficial owner of all of the stock of Eccdor and Geoli since their incorporation. ² Each of the corporations issued at the date of its incorporation 100 shares of $10 par value stock for total cash of $1,000.

During 1957 and 1958 Eccles was a director and shareholder of Utah Construction Company which was engaged in construction of large projects. The Company would build a commercial building, obtain a tenant on a long-term lease for the building and then offer the building for sale. In 1957 and 1958 Utah Construction Company was engaged in developing an industrial park in South San Francisco, California. At one of the meetings of its board of directors held in the latter part of 1957, each of the directors was offered the opportunity to purchase, upon their completion and leasing but prior to their being offered to the public, some of the commercial buildings in the industrial park.

The prices at which the buildings were offered to the directors were the same as the prices at which the buildings were to be offered to the public. Eccles committed himself to purchase two of the buildings when they were completed and leased and some of the other directors agreed to purchase some of the properties upon their completion. The properties which Eccles agreed to purchase were the Par-T-Pak Building and the Cleveland Cap-Screw Building.

Prior to agreeing to purchase the properties, Eccles considered the estimated return from investment in real properties as compared to other investments as well as the fact that a substantial portion of the cost could be financed by mortgages at comparatively low interest rates. After committing himself to purchase the two properties, Eccles consulted his lawyer with respect to carrying out his agreement to purchase the properties. The lawyer who Eccles consulted had represented Eccles personally and had represented the banks of which 351

Eccles was an officer and director for over 30 years. This attorney advised Eccles not to take title to the properties in his personal capacity but to acquire them through a corporation. He pointed out to Eccles that taking title to the properties in a corporation would relieve him of personal liability with respect to the buildings and any aspect of their operation, would be better from the standpoint of estate planning if the properties were located outside of Utah and would enable Eccles to borrow money to finance the purchase from his own banks. Eccles and his lawyer also discussed the tax aspects of taking title to the buildings in a corporate name. Eccles then requested his attorney to proceed with the organization of Geoli.

After Eccles agreed to purchase the two California properties upon their completion he considered other possible real estate acquisitions in Idaho and Utah. In March of 1958 he began to negotiate for the purchase of the El Paso Natural Gas Building in Salt Lake City, (later named the Pacific Northwest Pipeline Co. Building) and the J.C. Penney Building in Twin Falls, Idaho. The offering prices of the El Paso Natural Gas Building and the J.C. Penney Building were $270,000 and $280,000, respectively. In April 1958 Eccles entered into negotiations for the purchase of the Eccles Hotel Bank Building ³ in Logan, Utah for a price of $105,000. Eccles was successful in purchasing the J.C. Penney property and on May 9, 1958, completed the transaction having title to the property taken in the name of Geoli which as heretofore noted had been incorporated on April 28, 1958.

Prior to the incorporation of Geoli, Eccles was aware of the fact that by incorporating a business he was relieved of personal liability. Eccles was an officer and director of the First Security Bank of Utah and the First Security Bank of Idaho, both national banks. Eccles knew even before being so advised by his attorney that he was not permitted to borrow money from these banks in his own name, but that a corporation owned by him would be permitted to do so with proper security. Eccles also knew that because he was a director of these banks he would be required to report any personal borrowing from other sources to the board of directors of the banks, thereby disclosing his personal affairs to other businessmen and associates. Eccles was of the opinion that a corporation owned by him would not be required to make such a report. Eccles also was aware that if he contributed stock to his wholly owned corporation to enable it to have security upon which to borrow the money to purchase real estate that the corporation would be entitled to a deduction for dividends received of 85 percent of the dividends received. Eccles was aware that California and Idaho were community property states and was of the opinion that confusing problems might develop in the probation of his estate if he personally owned real property in those states.

In January of 1958 Eccles and his wife purchased a long-term lease for $32,000 on a cottage located on the grounds of the El Dorado Country Club. The El Dorado Country Club is a golf club located at Riverside, California of which Eccles was a member. Its membership includes many prominent people. In June of 1958 Eccles and his wife assigned the lease to Geoli. Eccles occupies the cottage from 4 to 12 weeks each year and at all other times the cottage is available for renting by other club members in accordance with the club's rules. When the buildings Eccles had agreed to purchase from Utah Construction Company were completed and leased, Eccles decided it would be advisable to form another corporation to hold title to these California properties and therefore had his attorney arrange the organization of Eccdor. On September 4, 1958, 2 days after the organization of Eccdor on September 2, 1958, Eccles had title to the Par-T-Pak Building in South San Francisco taken in its name.

Petitioners actually purchased from the sellers with whom Eccles had made arrangements the various properties they owned. Petitioners would give a mortgage on the property and borrow the remaining money needed for the purchase on a demand note secured by stock transferred by Eccles to petitioners. The following chart shows all the real property purchased by each petitioner from its incorporation to the time of trial of this case together with the purchase prices, mortgages given, notes given in connection with the purchase, and terms of the leases on the properties when they were purchased: 352

		Geoli	Eccdor
	Date	purchase	purchase	Original
Property	acquired	price	price	mortgage
J. C. Penney Bldg. Twin	May 9, 1958	$280,000.00		$165,302.55
Falls, Idaho
El Dorado Cottage	June 17, 1958	32,000.00		---
Riverside, Calif.
Par-T-Pak Bldg., South San	Sept. 4, 1958		$145,901.55	95,500.00
Fran- cisco, Calif.
Cleveland Cap- Screw Bldg.	Nov. 11,1958		204,982.49	135,000.00
South San Fran- cisco,
Calif.
Zeno Hydraulic Corp. Bldg.	June 19, 1959	185,000.00		96,897.59
Salt Lake City, Utah
B.F. Goodrich Bldg. Salt	Dec. 19, 1960	246,300.00		160,000.00
Lake City, Utah
Skaggs Drug Center Bldg.	Sept. 16, 1961		350,464.67	225,000.00
Ogden, Utah

	Original			Approximate
	note	Date of	Term of	monthly
Property	payable	lease	lease	rental
J. C. Penney Bldg. Twin	$114,900.00	March 24,	20 yrs.	2.75 % of
Falls, Idaho		1954		monthly
				sales
El Dorado Cottage
Riverside, Calif.
Par-T-Pak Bldg., South San	48,000.00	Sept. 1,	15 yrs.	$1,076.00
Fran- cisco, Calif.		1958
Cleveland Cap- Screw Bldg.	68,000.00	Nov. 1,	15 yrs.	1 1,625.00
South San Fran- cisco,		1958
Calif.
Zeno Hydraulic Corp. Bldg.	90,000.00	April 15,	15 yrs.	1 1,260.00
Salt Lake City, Utah		1958
B.F. Goodrich Bldg. Salt	90,000.00	Dec. 1,	15 yrs.	1 1,642.00
Lake City, Utah		1960
Skaggs Drug Center Bldg.	124,000.00	April 1,	20 yrs.	1 2,333.34
Ogden, Utah		1961

1

On December 31, 1964, petitioners each purchased for $478,710 a one-fourth ownership in the Shoshone Pipeline Ltd., a partnership. In July 1968, the Shoshone Pipeline interest was sold and petitioners each acquired one-fourth ownership in the Cheyenne Pipeline Co. for $400,000.

In order to enable petitioners to finance their real estate purchases, Eccles transferred certain stock which he owned to each petitioner. These stocks were carried on petitioners' books as "paid-in surplus" at their basis to Eccles. The following charts show for each Geoli and Eccdor the dates of transfer of the stocks, the number of shares transferred, and the bases of the stocks in Eccles' hands which is the same bases at which they were carried on the corporate books:

Geoli
Investment Company
	Number of
	shares	Name of company	Eccles' bases
Date	tranferred	issuing stock	in the stocks
1958
May 16	6,000	First Security	$71,721.67
		Corporation
May 26	200	Mountain Fuel Supply	16,011.00
		Company
May 27	2,333	Farmers Underwriters	72,552.70
		Association
May 28	1,000	Utah Construction Company	25,023.80
June 13	3,000	Amalgamated Sugar Company	86,429.77
		- common
	Balance April		271,738.94
	30,1959
1959
Sept. 10	5,000	Amalgamated Sugar Company	20,027.99
		- common
	Balance April		291,766.93
	30,1960
1962
March 1	5,000	Eccles Investment Company	12,128.15
	Balance April		$303,895.08
	30,1964
Eccdor Investment Company
1958
Sept. 5	5,000	First Security	$42,646.19
		Corporation
Nov. 28	8,000	First Security	56,005.29
		Corporation
Nov. 28	1,500	Amalgamated Sugar Company	29,799.87
		- common
	Balance Sept.		128,451.35
	30,1959
1962
March 1	10,000	Eccles Investment Company	24,256.30
	Balance Sept.		152,707.65
	30,1962
1963
Jan. 24.	5,000	Eccles Investment Company	12,128.15
	Balance Apr.		$164,835.80
	30,1964

Eccles is president of the First Security Corpo

Eccles is president of the First Security Corporation. He had owned the 19,000 shares of stock in that company which he contributed to Geoli and Eccdor since 1928. The market value of these shares of stock in 1958 was substantially in excess of Eccles' bases in the stock. Eccles Investment Company is a personal holding company, the assets of which are almost entirely stock. Eccles had owned the 20,000 shares of this stock which he contributed to Geoli and Eccdor since 1912. The market value of this 20,000 shares of stock on April 30, 1964, was approximately $700,000. None of the Eccles Investment Company stock was pledged by Geoli or Eccdor as security for bank borrowing.

Most of the stocks contributed to Geoli and Eccdor were held and not sold by them. The only stocks contributed by Eccles to petitioners which were sold by them were 150 shares of common stock of Amalgamated Sugar Company, 900 shares of the First Security Corporation, and 380 shares of Mountain Fuel Supply Company.

Petitioners did purchase and sell stocks during the years here in issue. The following chart shows such purchases and sales by petitioners:

Geoli Investment Company
Date of	Number of shares
purchase	purchased	Company	Amount
July 7, 1958	5	Permanente Cement		$5.10
		Company
Jan. 22, 1959	10	Amalgamated Sugar		400.00
		Co. - Common
Feb. 10, 1959	35	Amalgamated Sugar		1,400.00
		Co.
Sept. 4, 1959	400	Morrison-Knudsen		14,475.00
		Company
Oct. 8, 1959	1,411	Amalgamated Sugar		12,699.00
		Co. - Preferred
Oct. 1, 1959	3,000	Lucky Mae Uranium		14,981.40
Oct. 8, 1959	3,000	Lucky Mae Uranium		14,400.00
Nov. 5, 1959	900	Aubrey G. Lanston		9,000.00
		and Company
April 22, 1960	700	Union Pacific		19,001.90
		Railroad Company
Feb. 23, 1961	900	Aubrey G. Lanston		9,000.00
		and Co. - Class A
July 21, 1961	2,500	Hidden Splendor		24,884.96
		Mining Co. - 6%
		preferred
Feb. 16, 1962	200	Husky Oil Company -		20,000.00
		6-1/2% preferred
May 4, 1962	205	Husky Oil Company -		20,500.00
		6-1/2% preferred
May 21, 1962	500	Union Pacific		16,049.40
		Railroad Company
May 23, 1962	400	Utah Power and Light		10,260.00
		Company - $1.18
		cumulative preferred
		B
Sept. 21, 1962	1,000	Cyprus Mines		23,750.00
		Corporation
Aug. 23, 1963	600	Husky Oil Company -		60,000.00
		6-1/2% preferred
		Total stocks		$270,806.76
		purchased
Stocks paid in				303,895.08
Total				$574,701.84
Less stocks
sold:
Apr. 20, 1960	200	Amalgamated Sugar	$5,658.00
		Co. Common
Apr. 22, 1960	300	Morrison Knudsen Co.	10,875.00
Apr. 22, 1960	380	Mt. Fuel Supply Co.	7,948.50
March 16, 1961	500	First Sec. Invest.	376.18
		Co.
Feb. 2, 1962	400	First Sec. Invest.	334.88
		Co.
Aug. 22, 1962	400	Utah Power and Light	10,260.00
		Co. $1.18 cumulative
		pfd.
Sept. 20, 1962	2,500	Hidden Splendor	24,884.96
		Mining Co. -
		Preferred
July 29, 1963	1,000	Cyprus Mines Corp.	23,750.00
July 29, 1963	100	Morrison Knudsen Co.	3,600.00
		Total stocks sold		87,687.52
Balance April				$487,014.32
30, 1964
Eccdor Investment Company
Sept. 4, 1959	900	Morrison-Knudsen		$32,606.27
		Company
Nov. 5, 1959	900	Aubrey G. Lanston &		9,000.00
		Company
Apr. 20, 1959	200	Amalgamated Sugar		9,800.00
		Company - Common
July 21, 1961	2,500	Hidden Splendor		24,884.96
		Mining Company
Feb. 16, 1962	200	Husky Oil Company -		20,000.00
		6-1/2% pfd.
May 4, 1962	200	Husky Oil Company -		20,000.00
		6-1/2% pfd.
May 21, 1962	500	Union Pacific		16,036.83
		Railroad Company
May 23, 1962	400	Utah Power & Light		10,260.00
		Company - $1.18
		cumulative preferred
Sept. 21, 1962	1,000	Cyprus Mines		23,750.00
		Corporation
July 3, 1963	400	First Security		20,000.00
		Corporation
Aug. 23, 1963	600	Husky Oil Company -		60,000.00
		6-1/2% pfd.
		Total stocks		$246,338.06
		purchased
Stocks paid in				164,835.80
Total				$411,173.86
Less stocks
sold:
Feb. 27, 1961	906	Aubrey G. Lanston &	$9,000.00
		Company
Apr. 30, 1962	100	First Security In-	60.44
		vestment Company
Aug. 28, 1962	400	Utah Power & Light	10,260.00
		Co. - $1.18
		cumulative pfd.
Sept. 20, 1962	2,500	Hidden Splendor	24,884.96
		Mining Co.
July 29, 1963	750	Cyprus Mines	17,812.50
		Corporation
July 29, 1963	400	Morrison-Knudsen Co.	14,500.00
		Total stocks sold		76,517.90
Balance April				$334,655.96
30, 1964

Under the lease on the J.C. Penney Building the landlord is liable for taxes, insurance, painting, and redecorating every 5 years, and exterior and structural maintenance and heating and air conditioning repairs and replacement. The monthly rent is computed by a formula of 2.75 percent of the gross monthly sales with a provision that if the annual sales exceed $1,400,000, the lessee may require the landlord to build a second floor according to the specifications set out in the lease. By 1964 only $582 had been added to Geoli's basis in the J.C. Penney Building for capital improvements. The following chart shows the expenses in connection with the J.C. Penney lease and the rents received by Geoli:

	Fire	Liability	Property
Year	insurance	insurance	tax	Miscellaneous	Rent
1958	$459.52	$227.27	$ 831.23	$ 169.29	Not shown in
					the record
1959	404.38	22.47	5,734.80	1,519.26	Not shown in
				(Paint-glass)	the record
1960	404.38		5,848.10		Not shown in
					the record
1961	$404.38	$205.89	$5,681.26	$ 106.49	$ 29,238.73
				(Front door)
1962	404.38		5,687.99		34,541.77
1963	739.85		5,916.22	100.00	37,789.97

In each of the other leases on petitioners' buildings the lessee paid a stated monthly rental and was liable for property taxes, fire and liability insurance, interior repairs and maintenance, and with the exception of the B.F. Goodrich Building for the exterior maintenance and repairs. The lease on the Skaggs Drug Building limited the responsibility of the lessee to $1,000 annually for each interior and exterior repair. The record does not contain the lease on the Par-T-Pak Building.

The following charts show petitioners' expenses in connection with each building and the rents received from each building for the years indicated:

Year	Property tax	Insurance	Miscellaneous	Rent
Zeno Hydraulic
Building
1959	1	1	1	1
1960	$1,693.32			1
1961	1,758.20	$ 49.69		$16,878.20
1962	1,908.06	73.25		17,028.06
1963	1,970.58		$25.07	1
B.F. Goodrich
Building
1961	2,615.71	80.55		22,319.71
1962	2,858.99			22,562.99
1963	2,952.68		23.92	22,636.68
El Dorado
Cottage
1958			$1,000.00 per	1
			contract
1959			2,341.50 per	1
			contract
1960			2,994.93 per	1
			contract
1961			3,261.65 per	4,930.00
			contract
1962			3,173.92 per	4,069.00
			contract
1963			3,885.97 per	2,121.50
			contract
1959	3,525.68	2 80.20		1
Par-T-Pak
Building
1958		2 80.21	$119.79	1
1959	2,188.02	2 80.21		1
1960	2,155.28	2 80.21		1
1961	2,421.76	2 80.21		1
1962	2,431.14	2 73.24		15,931.26
1963	2,656.88	2 163.23		10,412.24
Cleveland Cap
Screw Building
1958	185.64	2 80.20	186.00	1
1960	3,418.80	2 80.20		1
1961	3,146.50	2 73.20	n2/ 116.06	1
1962	3,146.66	2  73.20		19,993.13
1963	3,439.52	2 150.23		13,000.00
(short)
Skaggs Drug
Center Building
1960				1
1961	3,794.08		2 116.06	1
1962	4,999.62			37,656.93
1963	5,773.72	2 190.10		31,260.91
				(short year)

During the years ending April 30, 1959, through 1964, Geoli's total rental income was as follows:

Year ended April 30	Rents
1959	$26,778.02
1960	45,369.96
1961	60,029.56
1962	73,366.64
1963	78,201.82
1964	79,658.73

During the years ending September 30, 1959 through 1963 and the short year October 1, 1963 through May 31, 1964, Eccdor's rental income was as follows:

Year ended September 30	Rents
1959	$31,325.00
1960	35,255.54
1961	49,959.40
1962	67,710.97
1963	73,581.32
October 1, 1963 throughMay	54,673.15
31, 1964

Neither Eccdor nor Geoli acquired any real estate subsequent to September 1961. Subsequent to the year 1964 Geoli sold the property which was under lease to J.C. Penney Company, and Eccdor sold the properties which were under lease to Cleveland Cap Screw Company and Par-T-Pak.

Eccles' personal office is located in the Deseret Building in Salt Lake City. Geoli and Eccdor used this address as their business address. They had no office space separate from Eccles' personal office space and their names are not listed on the building directory. There were no telephone listings for either of petitioners. Neither Geoli nor Eccdor had printed or engraved business stationery. Correspondence carried on in the name of Geoli and Eccdor was on Eccles' letterhead with the name of Geoli or Eccdor always typed below the closing of the letter and often typed at the top. Neither petitioner paid any amounts designated as wages or salaries from the time of its incorporation through the years here in issue.

At all times since their formation each petitioner has maintained separate and complete books of account and an active bank account. Regular shareholders and directors meetings have been held by the directors and shareholders of each petitioner and corporate minutes of these meetings have been kept. Each petitioner has entered into various contracts in its own name.

From the time of its incorporation to the close of the years here in issue neither petitioner has paid any dividend.

During 1958, 1959, and early 1960 Eccles entered into negotiations for the purchase of the Pacific Northwest Pipeline Company Building in Salt Lake City for $270,000. Eccles contemplated purchasing this building for either Geoli or Eccdor.

There was a merger between Pacific Northwest Pipeline Company and El Paso Gas and the building was withdrawn from the market.

In 1961 Eccles made an offer of $800,000 for the purchase of the W.T. Grant Building and an offer of $800,000 for the Eccles 358 Building in Ogden, Utah. Both of these properties were sold to higher bidders for $850,000 and $1,000,000, respectively. Between 1960 and 1965 Eccles investigated the possibility of purchasing the Strevell Paterson Building, Addressograph Building, Merrill Lynch, Pierce, Fenner & Smith Building and the Blair Motor Company Building, all of Salt Lake City, and the Seattle Garage, Seattle, Washington. For various reasons all five of these buildings were withdrawn from the market.

In 1964 Geoli negotiated for the acquisition of a water system in Mexico, but the system was not sold because of its being financed by a local bond issue.

The dividend income reported in each of the joint Federal income tax returns filed by Eccles and his wife for the years 1957 through 1964 and the highest income bracket applicable to the income reported on each of these returns are as follows:

	Dividends	Highest tax
Year	reported	bracket applicable
1957	$139,409.06	75 percent
1958	140,764.82	84 percent
1959	124,386.01	75 percent
1960	156,451.93	78 percent
1961	207,342.63	84 percent
1962	197,411.96	85 percent
1963	197,112.50
1964	225,872.68

Petitioners on their Federal corporate income tax returns for the years in issue reported dividends received and claimed deductions for dividends received in the following amounts:

		Dividends	Dividends received
Petitioner	Fiscal year ended	reported	-deductions claimed
Geoli	April 30, 1962	$58,624.81	$49,831.09
Geoli	April 30, 1963	63,464.62	53,944.93
Geoli	April 30, 1964	72,010.56	61,208.96
Eccdor	Sept. 30, 1961	32,106.40	19,359.32
Eccdor	Sept. 30, 1962	54,431.00	43,716.35
Eccdor	Sept. 30, 1963	64,765.10	55,041.84
Eccdor	Sept. 30, 1964	52,712.10	44,805.29

The highest tax bracket applicable to the income reported on the corporation returns filed by each petitioner for its taxable years 1959 through 1963 was 30 percent. The 52 percent bracket was applicable to some of the income reported by each petitioner for the taxable year ended in 1964.

Changes in the personal holding company law caused Eccles to have Geoli and Eccdor each purchase an interest in the Shoshone Pipelines, Ltd. After this purchase by petitioners, Shoshone purchased another pipeline, a gasoline plant, producing wells and a small pipeline in New Mexico andTexas. Each of petitioners also acquired an interest in the Cheyenne Pipeline Co., a general partnership operating a gathering and transmission system covering many states. Eccles was active on behalf of both petitioners in negotiating the acquisition of these interests and in the management of both Shoshone and Cheyenne. Eccles was so active in the management of Shoshone on behalf of petitioners that the general partner, Nielsen Enterprises, considered petitioners also to be general partners and inquired of Eccles' attorney whether a change in documentation was necessary.

The following show the balance sheets and income statements for Geoli for the years 1959 through 1964: 359

Geoli Investment Company
Comparative Balance Sheet -- April
30, 1959 through April 30, 1964
	1959	1960	1961
ASSETS
Cash	$ 3,037.88	$ 8,884.58	$ 17,928.25
Stocks at cost	273,544.04	353,647.83	362,271.65
Stocks-apprec. to market value	388,000.21	667,140.30	993,975.10
Automobile		4,452.80	4,452.80
Less: Accum. depreciation		(311.68)	(2,092.84)
Furniture & fixtures		236.82	1,567.26
Less: Accum. depreciation			(78.91)
Real estate	312,000.00	497,000.00	743,882.00
Less: Accum. depreciation	(9,901.34)	(24,785.50)	(45,172.61)
Total Assets	$966,680.79	$1,506,265.15	$2,076,732.70
LIABILITIES
Mortgage notes payable	$158,945.19	$ 241,365.60	$ 383,737.53
Com. notes payable	122,700.00	243,500.00	297,800.00
Total liabilities	$281,645.19	$ 484,865.60	$ 681,537.53
CAPITAL & RETAINED EARNINGS:
Cap. stock; auth. 1,000 shares of	1,000.00	1,000.00	1,000.00
$10 par val. each issued &
outstand. 100 shares
Paid-in surplus	271,738.94	291,766.93	291,766.93
Surp. aris. from apprec. of stocks	388,000.21	667,140.30	993,975.10
to market val.
Retained earnings	24,296.45	61,492.32	108,453.14
Total capital and retained	685,035.60	1,021,399.55	1,395,195.17
earnings
TOTAL	$966,680.79	$1,506,265.15	$2,076,732.70
Geoli Investment Company
Comparative Statement of Income
and Retained Earnings
For the Fiscal Years Ended April
30, 1959, through April 30, 1964
Dividends	$22,664.24	$38,393.11	$ 44,945.45
Rents	26,778.02	45,369.96	60,029.56
Interest
Gain on sale of securities		3,861.10	9,088.77
Gain on sale of automobile
Total income	$49,442.26	$87,624.17	$114,063.78
Expenses
Interest	12,377.06	22,430.03	29,163.57
Insurance	686.79	500.10	568.32
Property taxes	831.23	5,859.91	7,618.97
Other taxes	20.00	912.28	2,022.37
Depreciation	9,901.34	15,195.84	22,247.18
Automobile		49.05	180.28
Business expense	115.00	1,622.03	650.00
Repairs and maintenance	1,169.29	2,349.50	3,023.93
Miscellaneous	45.10
Total expenses	25,145.81	48,918.74	65,474.62
Income before Federal income taxes	24,296.45	38,705.43	48,589.16
Provision for Federal income tax		1,509.56	1,628.34
(of prior yr.)
Net income	$24,296.45	$37,195.87	$ 46,960.82
Retained earnings
Beginning		$24,296.45	$ 61,492.32
Ending	$24,296.45	$61,492.32	$108,453.14

Geoli Investment Company
Comparative Balance Sheet -- April
30, 1959 through April 30, 1964
	1962	1963	1964
ASSETS
Cash	$ 12,339.59	$ 3,324.92	$ 31,320.03
Stocks at cost	418,949.88	454,364.32	487,014.32
Stocks-apprec. to market value	1,078,648.89	1,398,449.08	1,280,752.43
Automobile	4,611.70	4,611.70	4,611.70
Less: Accum. depreciation	(768.64)	(2,301.69)	(3,164.04)
Furniture & fixtures	1,567.26	2,301.98	4,613.87
Less: Accum. depreciation	(235.63)	(409.67)	(725.81)
Real estate	743,882.00	743,882.00	748,467.96
Less: Accum. depreciation	(71,884.32)	(97,067.41)	(120,937.63)
Total Assets	$2,187,110.73	$2,507,155.23	$2,431,952.83
LIABILITIES
Mortgage notes payable	$ 361,732.32	$ 331,966.01	$ 296,488.15
Com. notes payable	277,100.00	241,400.00	245,700.00
Total liabilities	$ 638,832.32	$ 573,366.01	$ 542,188.15
CAPITAL & RETAINED EARNINGS:
Cap. stock; auth. 1,000 shares of	1,000.00	1,000.00	1,000.00
$10 par val. each issued &
outstand. 100 shares
Paid-in surplus	303,895.08	303,895,08	303,895.08
Surp. aris. from apprec. of stocks	1,078,648.89	1,398,449.08	1,280,752.43
to market val.
Retained earnings	164,734.44	230,445.06	304,117.17
Total capital and retained	1,548,278.41	1,933,789.22	1,889,764.68
earnings
TOTAL	$2,187,110.73	$2,507,155.23	$2,431,952.83
Geoli Investment Company
Comparative Statement of Income
and Retained Earnings
For the Fiscal Years Ended April
30, 1959, through April 30, 1964
Dividends	$ 58,624.81	1 $ 64,302.12	$ 72,010.56
Rents	73,366.64	78,201.82	79,658.73
Interest			200.00
Gain on sale of securities	6,062.56	3,676.08	245.03
Gain on sale of automobile	1,654.16
Total income	$139,708.17	$146,180.02	$152,114.32
Expenses
Interest	34,952.09	32,805.94	29,247.10
Insurance	543.22	404.38	788.84
Property taxes	10,155.57	10,539.79	10,906.05
Other taxes	2,197.09	2,697.14	3,243.79
Depreciation	28,191.19	26,890.18	25,048.71
Automobile	436.47	267.00	522.17
Business expense	644.99	1,248.91	894.26
Repairs and maintenance	3,574.03	3,247.17	3,985.97
Miscellaneous
Total expenses	80,694.65	78,100.51	74,636.89
Income before Federal income taxes	59,013.52	68,079.51	77,477.43
Provision for Federal income tax	2,732.22	2,368.89	3,805.32
(of prior yr.)
Net income	$ 56,281.30	$ 65,710.62	$ 73,672.11
Retained earnings
Beginning	$108,453.14	$164,734.44	$230,445.06
Ending	$164,734.44	$230,445.06	$304,117.17

The following show the balance sheet and income statement for Eccdor for the years 1959 through April 30, 1964:

Eccdor Investment Company
Comparative Balance Sheet -- Fiscal
years ended September 30, 1959
through September 30, 1963 and
April 30, 1964
	1959	1960	1961
ASSETS
Cash in bank	$ 6,065.54	$ 4,573.24	$ 6,513.55
Stocks at cost	161,057.62	179,857.62	195,742.58
Stocks-apprec. to market value	730,817.38	852,529.88	1,549,982.42
Automobile		1,703.35	1,703.35
Less: Accum. depreciation		(551.54)	(1,153.22)
Real estate	347,734.50	348,109.21	698,948.59
Less: Accum. depreciation	(12,795.84)	(25,630.95)	(51,618.23)
Other assets Accrued interest
Total assets	$1,232,879.20	$1,360,590.81	$2,400,119.04
LIABILITIES
Mortgage notes payable	224,283.14	216,989.90	432,809.31
Commercial notes payable	118,000.00	105,000.00	209,000.00
Lease deposits	2,466.00	2,466.00	2,466.00
Total liabilities	$ 344,749.14	324,455.90	644,275.31
CAPITAL & RETAINED EARNINGS:
Cap. stock: auth. 1,000 shares of
$10 par va. each issued & outstand.
100 shares	1,000.00	1,000.00	1,000.00
Paid-in surplus	128,451.35	128,451.35	128,451.35
Surp. aris. from apprec. of stocks	730,817.38	852,529.88	1,549,982.42
to market value
Retained earnings	27,861.33	54,153.68	76,409.96
Total capital and retained earnings	888,130.06	1,036,134.91	1,755,843.73
TOTAL	$1,232,879.20	$1,360,590.81	$2,400,119.04
Eccdor Investment Company
Comparative Statement of Income and
Retained Earnings
For the Fiscal Years Ended
September 30, 1959 through
September 30, 1963, and
For the 7 Months Ended April 30,
1964
	1959	1960	1961
Income
Dividends	$24,725.00	$31,311.25	$32,108.40
Rents	31,325.00	35,255.54	49,959.40
Gain (loss) on sale of securities
Interest
Total income	56,050.00	66,566.79	82,067.80
Expenses
Interest	14,691.50	17,804.03	24,587.06
Insurance	160.23	5,713.70	160.23
Property taxes	185.64	160.23	5,597.94
Other taxes	20.00	1,033.11	1,293.02
Depreciation	12,795.84	13.386.65	26,588.96
Automobile			464.92
Business expense			600.00
Miscellaneous	335.46	123.20
Total expenses	28,188.67	38,220.92	59,292.13
Income before Federal income taxes	27,861.33	28,345.87	22,775.67
Provision for Federal income tax		2,053.52	519.39
(of prior year)
Net income	$27,861.33	$26,292.35	$22,256.28
Retained earnings
Beginning		27,861.33	54,153.68
Ending	$27,861.33	$54,153.68	$76,409.96

Eccdor Investment Company
Comparative Balance Sheet -- Fiscal
years ended September 30, 1959
through September 30, 1963 and
April 30, 1964
	1962	1963	1964
ASSETS
Cash in bank	$ 21,908.20	$ 9,871.71	$ 71,655.74
Stocks at cost	274,840.31	334,655.96	334,655.96
Stocks-apprec. to market value	1,445,362.19	1,925,622.79	1,779,631.04
Automobile	1,703.35	1,703.35	1,703.35
Less: Accum. depreciation	(1,203.35)	(1,203.35)	(1,203.35)
Real estate	699,748.63	700,548.67	701,348.71
Less: Accum. depreciation	(73,217.09)	(98,450.46)	(112.392.61)
Other assets Accrued interest		487.50
Total assets	$2,369,142.24	$2,873,236.17	$2,775,398.84
LIABILITIES
Mortgage notes payable	417,775.53	402,615.79	394,727.35
Commercial notes payable	219,000.00	184,000.00	184,000.00
Lease deposits	2,466.00	2,466.00	2,466.00
Total liabilities	639,241.53	589,081.79	581,193.35
CAPITAL & RETAINED EARNINGS:
Cap. stock: auth. 1,000 shares of
$10 par va. each issued & outstand.
100 shares	1,000.00	1,000.00	1,000.00
Paid-in surplus	152,707.65	164,835.80	164,835.80
Surp. aris. from apprec. of stocks	1,445,362.19	1,925,622.79	1,779.631.04
to market value
Retained earnings	130,830.87	192,695.79	248,738.65
Total capital and retained earnings	1,729,900.71	2,284,154.38	2,194,205.49
TOTAL	$2,369,142.24	$2,873,236.17	$2,775,398.84
Eccdor Investment Company
Comparative Statement of Income and
Retained Earnings
For the Fiscal Years Ended
September 30, 1959 through
September 30, 1963, and
For the 7 Months Ended April 30,
1964
	1962	1963	April 30,
			1964
Income
Dividends	$51,431.00	$64,755.10	$52,712.10
Rents	67,710.97	73,581.32	51,972.15
Gain (loss) on sale of securities	5,215.00	(1,663.89)
Interest			400.00
Total income	124,356.97	136,672.53	105,084.25
Expenses
Interest	35,690.99	32,347.92	15,986.72
Insurance	378.59	146.47	146.47
Property taxes	9,382.42	10,593.05	11,880.64
Other taxes	973.99	2,252.11	2,636.63
Depreciation	21,648.99	25,233.37	13,942.15
Automobile	176.17	126.60	75.26
Business expense	660.00	850.00	850.00
Miscellaneous
Total expenses	68,911.15	71,549.52	45,517.87
Income before Federal income taxes	55,445.82	65,123.01	59,566.38
Provision for Federal income tax	1,024.91	3,258.09	3,523.52
(of prior year)
Net income	$54,420.91	$61,864.92	$ 56,042.86
Retained earnings
Beginning	76,409.96	130,830.87	192,695.79
Ending	$130,830.87	$192,695.79	$248,738.65

361

Each petitioner claimed on its Federal income tax return for each of the years here in issue the deduction provided under section 243 for 85 percent of the dividends received by it from other corporations.

Respondent in his notice of deficiency disallowed to each petitioner this claimed deduction for each year here in issue. The explanation given in the notice of deficiency to Geoli was that it had been determined that

a principal purpose for your formation was to obtain the benefit of the dividend received deduction on dividends paid on stock contributed to the corporation. Accordingly, the dividend received deductions claimed on your return * * * have been disallowed under the authority of Section 269 of the 1954 Internal Revenue Code.

The same explanation was given in the notice of deficiency to Eccdor except that the words "under the authority of Section 269 of the 1954 Internal Revenue Code" were not contained in the statement of explanation of adjustments.

Opinion

Petitioners take the position that section 269⁴ does not authorize respondent to disallow to a corporation the deduction for dividends received provided for under section 243. Petitioners further contend that if respondent is authorized to disallow such a deduction under the provisions of section 269, his disallowance of the claimed deduction to each of petitioners in this case was erroneous since the principal purpose of Eccles in the formation and the acquisition of the stock of each petitioner was not evasion or avoidance of Federal income tax by securing the benefits of the dividends received deductions for each of the corporations.

Respondent contends that he is authorized under section 269 to disallow to a corporation a deduction for dividends received and that his disallowance in the instant case was proper since the evidence fails to show that the principal purpose for which Eccles formed each petitioner and acquired its stock was not the evasion or avoidance of Federal income tax by securing the benefit of the deduction for dividends received allowed by section 243.

At the outset it might be noted that respondent in his notice of disallowance stated that "a principal purpose" of the formation of each petitioner was to obtain the benefit of a deduction for dividends received. No point is made by petitioners of the use by respondent in his notice of deficiency of the word "a" and not the word "the" which is the word used in section 269. However, petitioners call attention to the fact, and respondent does not contend to the contrary, that in order for respondent's disallowance to each petitioner of the deductions for dividends received to be sustained "the" principal purpose for the acquisition by Eccles of the stock of each petitioner must be tax avoidance. As we stated in Bush Hog Manufacturing Co., 42 T.C. 713, 729 (1964),"under section 269 petitioner need prove only that the evasion or avoidance of tax was not the 'principal purpose' in forming" the corporation. 362

The requirement of section 269 of acquisition of control by a person or a corporation after October 8, 1940, is, of course, met in this case since Eccles became the beneficial owner of all the stock of each petitioner at its formation in 1958. It is now settled that section 269 is applicable whether the contested tax benefit is claimed by the corporation control of which is acquired or by the person who acquired that control. Bush Hog Manufacturing Co., supra. Therefore, if the deduction for dividends received provided for under section 243 is a type of deduction encompassed within the provisions of section 269, the factual determination which must be made in this case is whether the principal purpose of Eccles in forming the two corporate petitioners was to secure the benefit of the deduction for dividends received.

From the facts in this case we do not doubt that at the time Eccles was planning the formation of each of petitioners, he considered the advantages which would result from transferring stocks greatly appreciated in value to these corporations as a contribution to capital so that the corporations would be able to borrow funds to finance real estate dealings on the basis of the appreciated values of the stock contributed to them even though Eccles would not have made a disposition of the stock in such a manner as to result in capital gains taxable to him. We do not doubt that in considering the formation of the corporations Eccles also considered the fact that the corporations would be entitled to deductions for 85 percent of the dividends received on the stocks which he contributed to them.

In our view the fact that the corporations would be able to use the appreciated value of the stocks as security for amounts borrowed to finance the purchase of real properties under long-term leases was at least as important to Eccles in considering the formation of petitioners as was the fact that the corporations would have available to them the deduction for dividends received. However, in our view of the facts the reason for the formation of Geoli was that Eccles had committed himself to acquire from Utah Construction Company two buildings which were then under construction by that company at such time as the building had been completed and leased for a long term. Eccles testified specifically that he committed himself to acquire the buildings prior to considering how title to the buildings would be taken and that after making the commitment to acquire the buildings he discussed that problem with his attorney. The attorney's testimony substantiated the testimony of Eccles. While the other benefits which might be derived by taking title to the properties in a corporation owned by Eccles were discussed by Eccles and the attorney prior to the actual incorporation of Geoli, our conclusion from the facts is that the advantages of holding income properties which were under long-term leases in a wholly owned corporation as distinguished from holding such property as an individual was a factor in Eccles' decision to form Geoli which was of at least equal weight to any other factor. The fact that the corporate acquisitions could be financed by borrowing on stocks which had appreciated in value, thereby having Eccles personally in no way required to personally guarantee loans so as to be required to disclose his financial affairs to other directors of the banks of which he was an officer and director, was in our view likewise a factor of equal weight to any other factor influencing Eccles' formation of Geoli. The deduction for dividends received which the corporations would obtain with respect to the dividends paid on the stock transferred to them by Eccles was only one factor considered and it was only one of several of Eccles' purposes in forming Geoli. We therefore conclude that the evidence in this case does not support a finding that a tax avoidance purpose exceeded in importance any other purpose in the formation of Geoli and Eccdor. For this reason we hold that a tax avoidance purpose did not constitute the "principal purpose" of the acquisition by Eccles of control of Geoli and Eccdor. Commodores Point Terminal Corporation, 11 T.C. 411, 418 (1948).

We have considered the fact that prior to the completion of buildings which Eccles had originally committed himself to purchase, Eccles had agreed to purchase other property and the J.C. Penney Company Building had been purchased by Geoli. However, this does not cause us to change our conclusion that a primary purpose in Eccles' formation of Geoli was to have that corporation take title to the properties he had agreed to purchase from Utah Construction Company. This fact merely shows that prior to the time that the purchase from Utah Construction Company 363 had been consummated, Eccles had arranged to have Geoli purchase other real property which was under long-term lease. It is not completely clear in the record why Eccles formed a second corporation to purchase the two California properties which he had agreed to purchase from Utah Construction Company. Eccles' testimony was to the effect that since these two properties were in California, he considered there to be some advantage in forming Eccdor and having these properties held by a separate corporation from Geoli which had by that time acquired properties in other States. He further testified that he later decided that there was no advantage in having Eccdor hold only California properties. Whatever the motivating factor in the formation of Eccdor about 5 months after Geoli was formed, there was no purpose of tax avoidance by obtaining a deduction for dividends received since such a deduction could have been obtained as well by placing all the rental properties and all the contributed stocks in one as distinguished from two corporations. We therefore conclude that the principal purpose in the formation of Eccdor was not the avoidance of tax by receipt of a deduction for dividends received.

Having concluded on the basis of the evidence in this case that the principal purpose of the formation of Geoli and Eccdor was not the avoidance or evasion of Federal income tax by securing the benefit of deductions for dividends received which would not have been available had those corporations not been formed, it is unnecessary for us to discuss whether a deduction for dividends received is within the purview of section 269. It might be noted that this issue has been inherent in two prior cases decided by this Court. ⁵ In both of these cases we concluded that the principal purpose of the acquisition was not tax avoidance and did not reach the question of the applicability of section 269 to disallow a deduction for dividends received, if any such issue was raised by the parties in either case.

Decision will be entered under Rule 50.

---

Footnotes

• 1. All references are to the Internal Revenue Code of 1954.

• 2. While both respondent and petitioner requested the finding that George S. Eccles owned or was the sole beneficial owner of all of petitioners' stock, the chart of outstanding stocks found in the stipulation showed the 100 shares owned as follows:

  Name	Number of shares	Amount
  George S. Eccles	96	$ 960
  Delores Dore Eccles	1	10
  S. J. Quinney	1	10
  C. U. Benzley	1	10
  Grace F. Madison	1	10
  Total	100	$1,000

• 3. The Eccles Hotel Bank Building is not a hotel but derives its name because it had been a hotel owned at an earlier date by the Eccles' family.

• 1. The monthly rental rates are subject to adjustments based on increases in taxes or insurance when paid by petitioners. In all leases, except J.C. Penney, the lessee is liable for all property taxes, assessments, insurance, interior repairs and maintenances and exterior repairs and maintenances. [Petitioners are liable for exterior repairs and maintenance in the B.F. Goodrich lease and for the excess of $1,000 annually for interior and exterior repairs in the Skagg Drug Center Bldg. lease.] The terms of the lease for the Par-T-Pak Bldg. are not shown by the evidence.

• 1. Individual figure not shown in the record.

• 2. Estimate from Eccdor's tax returns.

• 1. The income tax return for 1963 shows dividends income in the amount of $63,464.62. The statutory notice of deficiency required that $837.50 be included in the dividend income. This adjustment was conceded by petitioner.

• 4. SEC. 269. ACQUISITIONS MADE TO EVADE OR AVOID INCOME TAX.

  (a) In General. - If -

  (1) any person or persons acquire, or acquired on or after October 8, 1940, directly or indirectly, control of a corporation, or

  (2) any corporation acquires, or acquired on or after October 8, 1940, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation, and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary or his delegate may disallow such deduction, credit, or other allowance. For purposes of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.

• 5. Commodores Point Terminal Corporation 11 T.C. 411 (1948) and Armais Arutunoff, T.c. Memo. 1963-192.