Court Opinion

ID: 4625224
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:56:48.421739+00
Date Added: 2024-06-11T07:56:40.147360
License: Public Domain

A. AND J., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.A. & J., Inc. v. CommissionerDocket No. 80815.United States Board of Tax Appeals38 B.T.A. 1248; 1938 BTA LEXIS 764; November 29, 1938, Promulgated 1938 BTA LEXIS 764">*764  1.  Upon the evidence it is found as a fact that petitioner during the taxable year permitted its gains or profits to accumulate beyond the reasonable needs of its business.  Held, this fact, under section 104(b) of the Revenue Act of 1928, is prima facie evidence of a purpose to escape the surtax upon petitioner's shareholders; held, further, the evidence offered by petitioner is insufficient to overcome the presumption specified under section 104(b) and the existing presumption of correctness attaching to the respondent's determination that petitioner was subject to the additional tax of 50 percent provided for in section 104(a).  2.  During the taxable year petitioner was the sole stockholder of the Saranac Investment Corporation.  Prior to the taxable year petitioner had borrowed considerable funds from Saranac.  During the taxable year Saranac declared a dividend in favor of petitioner which petitioner used to liquidate its debt to Saranac.  Held, the dividend is "income" to petitioner under section 22(a), Revenue Act of 1928, and as such is also subject to the provisions of sections 23(p) and 104(c) of the same act.  S. L. Herold, Esq., for the petitioner. 1938 BTA LEXIS 764">*765 R. P. Hertzog, Esq., for the respondent.  BLACK 38 B.T.A. 1248">*1248  Petitioner prays for the redetermination of a deficiency in its income tax for the taxable year 1931 in the amount of $161,346.17.  There are two issues: (1) Whether the respondent erred in holding petitioner subject to taxation under the provisions of section 104 of the Revenue Act of 1928 and (2), in the alternative, whether the respondent erred in determining petitioner's net income to be the amount of $322,692.33.  The record of evidence in the case of ; affd., ; certiorari denied, , was by agreement of counsel incorporated in the present proceeding.  FINDINGS OF FACT.  Petitioner, on March 1, 1927, was organized as a corporation under the laws of the State of Louisiana, with its legal domicile in the city of Shreveport.  On August 16, 1932, by formal act of consolidation under Act 250 of 1928 of the Louisiana Legislature, petitioner was consolidated with several other Louisiana corporations into Saenger Corporation, a Louisiana corporation, but under the provisions of the statute authorizing1938 BTA LEXIS 764">*766  such consolidation petitioner still retains the right to prosecute this proceeding in its own name as if such consolidation had not taken place.  38 B.T.A. 1248">*1249  Prior to the incorporation of petitioner, two brothers, A. D. Saenger and J. H. Saenger, were associated together as a universal part nership under the name and style of Saenger Bros., and as such conducted many different and varied lines of business, including a drug business which they had incorporated under the name of Saenger Drug Co., and a motion picture business which they and one E. V. Richards had incorporated under the name of Saenger Theatres, Inc.  The partnership owned real and personal property in the States of Louisiana, Texas, and California, stocks and bonds of various corporations, bills and accounts receivable of various kinds, and in general all the property of every character owned by the two brothers, who gave it all of their time and services.  J. H. Saenger devoted his time and attention exclusively to the affairs of Saenger Theatres, Inc., and A. D. Saenger conducted the other affairs of the partnership.  Each of the brothers owned an equal number of shares of stock in Saenger Theatres, Inc., and Richards1938 BTA LEXIS 764">*767  owned the remaining shares therein.  On February 28, 1927, the two brothers executed a written agreement concerning their partnership, the concluding paragraph of which is as follows: The affairs of the said partnership being so diversified, and its assets having grown to such large proportions, the partners have agreed that they will form a corporation, into which they will transfer all of the assets of the partnership except the common stock of the Saenger Theatres, Inc.; that is to say, that they will form this corporation, to which will be conveyed every asset of every kind owned by the partnership, including real estate, stocks, bonds and other securities of every character, except the said common stock of the Saenger Theatres, Inc., but including all individual earnings of the said A. D. Saenger and the said J. H. Saenger in every capacity, the said partners each agreeing to give to the said corporation his entire time and all of his services, and agreeing that for any service rendered by him for any other concern he will account to the said corporation, for its account, for salary, remuneration, fee or compensation whatsoever which he may receive.  Upon incorporation of1938 BTA LEXIS 764">*768  petitioner, it acquired all of the assets of the partnership of Saenger Bros., except the common stock of Saenger Theatres, Inc., in exchange for the entire issue of its capital stock of the par value of $1,500,000, and the assumption by petitioner of liabilities of the partnership in the amount of $192,013.10.  Petitioner issued 7,499 shares of its capital stock to A. D. Saenger, 7,499 shares to J. H. Saenger, and 2 shares to Harry K. Oliphint as qualifying shares.  The fair market value of the net assets acquired by petitioner at the time of its incorporation was $1,500,000.  On March 3, 1927, the board of directors of petitioner adopted a resolution reading in part as follows: The purpose of this resolution is that this corporation does hereby become, except as to the common stock in Saenger Theatres, Inc., the universal successor 38 B.T.A. 1248">*1250  to the firm of Saenger Brothers, acquiring hereby all of its assets, except the common stock of Saenger Theatres, Inc., and assuming all of its liabilities of every character, the net worth of the said partnership being fixed at One Million Five Hundred Thousand ($1,500,000.00) Dollars, the consideration here authorized.  Early in the1938 BTA LEXIS 764">*769  year 1929 the stockholders of Saenger Theatres, Inc., commenced negotiations with the Paramount Famous Lasky Corporation with a view of making a disposition of their stock in Saenger Theatres, Inc.  On or about July 22, 1929, the Paramount Famous Lasky Corporation organized under the laws of the State of Delaware two new corporations called Saranac Investment Corporation and Rochelle Investment Corporation.  It exchanged 51,000 shares of its capital stock for the entire capital stock of the Saranac Investment Corporation, consisting of 2,500 shares.  It also exchanged 20,233 shares of its capital stock for the entire capital stock of the Rochelle Investment Corporation.  It then, prior to August 7, 1929, acquired from the two Saenger brothers all of their stock in Saenger Theatres, Inc., in exchange for the entire capital stock of the Saranac Investment Corporation, and at about the same time acquired either from Richards or from R. & L. Inc., a corporation organized by Richards on March 3, 1927, all of the remaining stock in Saenger Theatres, Inc., in exchange for the entire capital stock of the Rochelle Investment Corporation.  Paramount's name was later changed to Paramount-Publix1938 BTA LEXIS 764">*770  Corporation.  Upon receipt of the 2,500 shares of stock of the Sarance Investment Corporation the two Saenger brothers transferred the 2,500 shares to petitioner, which shares were entered on petitioner's books at a cost of $3,069,000.  The principal asset owned by petitioner on and after August 7, 1929, was the 2,500 shares of Saranac Investment Corporation, which in turn owned 51,000 shares of the Paramount-Publix Corporation.  The fair market value of the Paramount-Publix Corporation stock on August 7, 1929, was $68 a share; on December 31, 1929, it was $48 a share; and during the taxable year 1931 it sold at from $17 to $2 a share.  On January 1, 1933, 10,000 shares were sold at one dollar a share.  On August 7, 1929, A. D. Saenger caused to be organized under the laws of the State of Louisiana a new corporation called A. D. Saenger, Inc.  He acquired the entire capital stock of the new corporation in exchange for his 7,499 shares of petitioner's stock.  On August 7, 1929, J. H. Saenger caused to be organized under the laws of the State of Louisiana a new corporation called J. H. Saenger, Inc.  He acquired the entire capital stock of the new corporation in exchange for his1938 BTA LEXIS 764">*771  7,499 shares of petitioner's stock.  During the 38 B.T.A. 1248">*1251  taxable year 1931 all of petitioner's capital stock, with the exception of two qualifying shares, was owned by A. D. Saenger, Inc., and J. H. Saenger, Inc.Petitioner duly filed an income tax return for the taxable year 1931 and reported gross income and deductions as follows: Gross income:Interest$6,439.66Rents18,089.14Dividends on stock of domestic corporations371,175.00Miscellaneous income415.45Total gross income396,119.25Deductions:Interest$32,231.06Taxes973.86Dividends371,175.00Salary of H. K. Oliphint13,000.00Net loss for 193031,854.77Insurance and miscellaneous expenses4,998.55Total deductions454,233.24Net loss for 193158,113.99In a schedule attached to its return petitioner further itemized the above item of rents.  This schedule shows that the amount of $18,089.14 is the net income from rents received rather than the gross.  It shows a gross income from rents received from 17 different sources in the total amount of $38,946.38, and deductions for repairs, insurance, taxes, depreciation, and miscellaneous expenses with respect to each1938 BTA LEXIS 764">*772  particular piece of rental property in the total amount of $20,857.24, thus leaving a net income from rents received in the amount of $18,089.14.  The item of dividends reported both as gross income and deductions on the fact of the return was itemized in schedule H thereof as follows: Saranac Investment Corporation$370,000Southwestern Gas & Elec. Co8First National Bank330City Savings Bank & Trust Co220Hibernia Bank & Trust Co500National Cash Register Co117371,175During the taxable year 1931 petitioner loaned $5,600 to the R. & D. Shoe Corporation, the stock of which was owned by one Rosenburg and one Dryer.  Prior to the taxable year petitioner had endorsed 38 B.T.A. 1248">*1252  paper for the R. & D. Corporation in an amount of about $105,000.  The respondent attached a statement to his deficiency notice which read in part as follows: After careful consideration of your Federal income tax return and of all other available information, the Bureau holds that your corporation is subject to taxation under the provisions of section 104 of the Revenue Act of 1928.  In this statement the respondent disallowed $8,877.66 of the $31,854.77 net loss1938 BTA LEXIS 764">*773  for 1930 deducted by petitioner and also $753.66 of the depreciation deducted by petitioner from gross rentals, and thus determined that under section 21 of the Revenue Act of 1928 petitioner had a net loss for the taxable year 1931 of $48,482.67 instead of the $58,113.99 reported by petitioner.  Having determined that petitioner was subject to taxation under the provisions of section 104, the respondent, under section 104(c), then increased petitioner's net income as defined in section 21 (here a net loss of $48,482.67) by the amount of $371,175, the dividend deduction allowed under section 23(p), and thus determined petitioner's net income subject to the 50 percent tax under section 104(a) to be the difference between $371,175 and $48,482.67 or $322,692.33.  The Saranac Investment Corporation at no time carried an account with any bank.  Its only asset was capital stock ($51,000 shares) of the Paramount-Publix Corporation.  All dividends declared and paid by the Paramount-Publix Corporation on the 51,000 shares owned by the Saranac Investment Corporation were paid direct to petitioner, which would deposit them in its bank account and give the Saranac Investment Corporation credit1938 BTA LEXIS 764">*774  for the amount thus received and deposited.  At the beginning of the taxable year 1931 the credit in favor of the Saranac Investment Corporation for dividends paid direct to petitioner by the Paramount-Publix Corporation and treated by petitioner as money borrowed from the Saranac Investment Corporation amounted to over $300,000.  During the taxable year 1931 the Saranac Investment Corporation declared a dividend in favor of petitioner, its sole stockholder, in the amount of $370,000, for the purpose of absorbing the liability which petitioner then owed the Saranac Investment Corporation.  During the year 1929 petitioner declared dividends in the total amount of $412,500.  These dividends exhausted all of petitioner's earnings or profits at that time.  It did not declare any dividends during the year 1930 or the taxable year 1931.  Petitioner's balance sheets as of the beginning and end of the taxable year as reported in schedule K of its income tax return are as follows: Beginning of 1931End of 1931ASSETSCash$253,162.66$6,250.80Notes receivable5,820.00Accounts receivable21,798.1412,743.64Stocks of domestic corporations3,475,886.343,177,622.09Land326,633.81326,633.81Buildings197,439.05197,439.05Life insurance value19,717.604,294,637.603,726,509.39Less: Reserve for depreciation40,700.0053,300.00Total assets4,253,937.603,673,209.39LIABILITIESNotes payable$445,000.00$160,000.00Accounts payable313,783.78301,995.19Mortgages77,500.0072,500.00Common stock1,500,000.00900,000.00Surplus and undivided profits1,917,653.822,238,714.20Total liabilities4,253,937.603,673,209.391938 BTA LEXIS 764">*775 38 B.T.A. 1248">*1253  The assets listed in the above balance sheets are stated at cost to the petitioner.  Both at the beginning and end of the taxable year the fair market value of petitioner's stocks of domestic corporations, land, and buildings, due to the depression which began in the year 1929, was very much less than the cost of such assets as recorded on petitioner's books and reflected in the above balance sheets.  In schedule L of its return petitioner explained the $321,060.38 net increase in its surplus and undivided profits during 1931 as being due to four items, as follows: 1.  Dividends on Stocks of Domestic Corporations$371,175.002.  Net loss for 1930, deducted on return but not from surplus during 193131,854.77$403,029.77Less: 3.  Net loss for 1931$58,113.994.  Unallowable deductions23,855.4081,969.39Net increase in surplus & undivided profits$321,060.38During December 1931 petitioner bought in and retired $600,000 of its outstanding capital stock at par.  The officers and directors of petitioner from the time of its incorporation to and throughout the taxable year 1931 were A. D. Saenger, J. H. Saenger, and Harry1938 BTA LEXIS 764">*776  K. Oliphint.  These individuals were also the officers and directors of A. D. Saenger, Inc., J. H. Saenger, Inc., and the Saranac Investment Corporation.  A. D. Saenger, Inc., J. H. Saenger, Inc., and petitioner were consolidated during 1932 into the Saenger Corporation, a newly organized 38 B.T.A. 1248">*1254 Louisiana corporation, at which time the net value of the assets of all three corporations that went into the Saenger Corporation was the amount of $334,000.  During the taxable year petitioner permitted its gains or profits to accumulate beyond the reasonable needs of its business.  Petitioner during the taxable year 1931 was availed of for the purpose of preventing the imposition of the surtax upon A. D. Saenger and J. H. Saenger through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.  As stated above, A. D. Saenger was the sole stockholder of A. D. Saenger, Inc., and J. H. Saenger was the sole stockholder of J. H. Saenger, Inc., and the two corporations above named were the sole stockholders of A. and J., Inc., the petitioner, except two qualifying shares.  OPINION.  BLACK: The principal question involved in this proceeding1938 BTA LEXIS 764">*777  is whether the respondent erred in determining that petitioner should be taxed under the provisions of section 104 of the Revenue Act of 1928, subsections (a), (b), and (c) of which are set out in the margin. 1 Subsection (d) of section 104 is not involved in this proceeding.  1938 BTA LEXIS 764">*778 Whether petitioner is subject to the application of section 104 depends upon whether it was "formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed." The determination of this question is one of fact.  ; ; . Cf. ; ; . The respondent in his deficiency notice has not indicated whether his determination is based upon a finding by respondent that petitioner was "formed" for the purpose mentioned in the statute or 38 B.T.A. 1248">*1255  whether it was "availed of" for that purpose, or whether it was both formed and availed of for the condemned purpose.  He has simply determined that section 104 applies and that determination "is presumed to be correct until the contrary appears from1938 BTA LEXIS 764">*779  the evidence." Section 104(b) mentions certain facts, which, if any one is present, shall be prima facie evidence of a purpose to escape the surtax.  The presumption thus arising under subsection (b) is in addition to the presumption of correctness attaching to the respondent's determination.  . The respondent in his brief contends that petitioner was a "mere holding or investment company" and that the "record in this case falls far short of overcoming the presumption existing in regard thereto." Counsel for petitioner did not file any brief.  The petition, however, alleges that the respondent erred as follows: (a) In holding that petitioner had a net income for the year 1931 of Three Hundred Twenty-Two Thousand Six Hundred Ninety-Two and 33/100 ($322,692.33) Dollars; (b) In holding that petitioner was formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being distributed; (c) In refusing to consider the financial condition1938 BTA LEXIS 764">*780  of the corporation at the close of the taxable year, and the manner in which its funds were invested at that date; (d) In refusing to recognize the effect of the law of the state of the creation of the petitioner which forbade the payment or distribution of any dividends because of petitioner's condition in 1931; (e) In holding that the profits of the corporation were permitted to accumulate beyond the reasonable needs of its business; (f) In refusing to recognize the rights of the corporation to keep its capital intact; (g) In refusing to recognize that the penalty under Section 104 is applicable only to consummated evasion of the tax through the accumulation of gains and profits in order to prevent the imposition of the surtax upon its stockholders; (h) In refusing to recognize that, in the determination of whether the penalty should be imposed, the inquiry should be into the substance of the corporation's affairs, and not to mere technical matters of accounting or to the form of its book entries; (i) In imposing the penalty upon the petitioner for failure to distribute its apparent or nominal profits as dividends when such action would have been in violation of the laws1938 BTA LEXIS 764">*781  of the State of its creation.  In the prayers for relief assignment of error (a) is to be regarded as in the alternative only.  In his opening statement counsel for petitioner, after referring to the several assignments of error (a) to (i), supra, stated that there were certain differences between the instant proceeding and the case of 38 B.T.A. 1248">*1256 ; affd., ; certiorari denied, . In this connection counsel for petitioner said: A. & J. Incorporated, we contend, was formed as a business corporation and not as a mere holding or investment company.  It was conceded on the trial before [that] A. D. Saenger, Incorporated, was a mere holding or investment company whose sole assets were 50 per cent of the stock of A. & J. Incorporated.  We are also contending and expect to adduce evidence to prove that the corporation did not receive during 1931 the income which the Commissioner finds in the decision.  In other words, there is a question of fact here different from the A. D. Saenger case and a question of law based upon the different corporate purposes of the present petitioner1938 BTA LEXIS 764">*782  in that case.  For the purposes of this opinion we shall assume that petitioner was not formed as a mere holding or investment company for the purpose of preventing the imposition of the surtax on A. D. Saenger and J. H. Saenger, who for many years had conducted their business operations as a universal partnership.  We shall assume that there was a real business purpose for organizing the petitioner and that business purpose was to carry on under corporate form instead of partnership form the widespread business activities of the two brothers.  We have accepted the explanation given in that respect as a valid one and we have not found in our findings of fact that petitioner was formed for the purpose of preventing the imposition of the surtax upon A. D. Saenger and J. H. Saenger.  We have, however, found that petitioner, after its organization, was availed of for that purpose.  This finding is based upon the fact that in 1929, two years after petitioner corporation was organized, the two brothers, A. D. Saenger and J. H. Saenger, entered into negotiations with the Paramount Famous Lasky Corporation to sell to the latter the stock which the brothers owned in Saenger Theatres, Inc. 1938 BTA LEXIS 764">*783  The deal was consummated in 1929 and the manner of its consummation is detailed in our findings of fact and those details need not be here repeated.  Suffice it to say that when the two brothers received the Saranac Investment Corporation stock as a result of the deal they transferred it to petitioner and immediately organized personal holding companies to hold the stock which each petitioner then owned in petitioner, A. & J., Inc.  That organized for A. D. Saenger was known as A. D. Saenger, Inc., and we have already held, in ; affd., , that this latter corporation was formed and availed of for the purpose of preventing the imposition of the surtax upon the sole stockholder, A. D. Saenger. The evidence in the instant case does not reveal any reasonable and valid business purpose for the transfer in 1929 by the brothers to petitioner of the stock which they received in the Saranac Investment Corporation as a result of their disposal to the Paramount Famous Lasky Corporation of their stock in Saenger Theatres, Inc.  This 38 B.T.A. 1248">*1257  stock had at that time a fair market value of more than $3,000,000 and1938 BTA LEXIS 764">*784  paid good dividends and it was apparently transferred to petitioner as paid-in surplus, although the record does not make that entirely clear.  There is no showing that petitioner was in need of any such capital contribution from its stockholders.  So far as the record shows, petitioner had ample capital at that time to carry on all of its business transactions.  We must conclude from the evidence that the transfer of this Saranac Investment Corporation to petitioner was a part of the plan of preventing the imposition of the surtax upon the two brothers, A. D. Saenger and J. H. Saenger.  Therefore for reasons which we shall state more at length later on, we hold that petitioner was availed of in the taxable year for the purpose of preventing the imposition of the surtax upon A. D. Saenger and J. H. Saenger.  We shall next consider assignment of error (e).  If the respondent held, as alleged by petitioner, that petitioner's profits were permitted to accumulate beyond the reasonable needs of its business, such a holding is embodied in his general determination that petitioner was "subject to taxation under the provisions of section 104," as the respondent did not mention this point1938 BTA LEXIS 764">*785  in his brief.  The only evidence on the point, however, is the fact that petitioner's balance sheets show surplus and undivided profits at the beginning and end of the taxable year of $1,917,653.82 and $2,238,714.20, respectively.  Petitioner's only business during the year, aside from collecting dividends on stocks of domestic corporations, was collecting gross rentals of $38,946.38 from 17 different pieces of property and loaning $5,600 to the R. & D. Shoe Corporation.  Petitioner has offered no explanation for this large amount of surplus and undivided profits.  As will be noted later in this opinion when we consider assignment of error (f), it could be that a part or all of this large surplus and undivided profits was actually a paid-in surplus, paid in at the time petitioner acquired the 2,500 shares of Saranac Investment Corporation from the two Saenger brothers in 1929.  But there is no evidence in the record that it was so paid in.  Therefore, upon the evidence which is before us, we are compelled to find as a fact that petitioner permitted its gains or profits to accumulate beyond the reasonable needs of its business.  This fact is, under subsection (b), prima facie evidence1938 BTA LEXIS 764">*786  of a purpose to escape the surtax upon petitioner's shareholders.  Our next inquiry is whether petitioner has succeeded in overcoming with evidence the presumption of correctness attaching to the respondent's determination and the additional presumption arising under subsection (b) by reason of our finding that during the taxable year petitioner had permitted its gains or profits to accumulate 38 B.T.A. 1248">*1258  beyond the reasonable needs of its business.  In addition to the evidence mentioned above, petitioner offered some proof to the effect that the market value of its assets both at the beginning and end of the taxable year was substantially less than the cost of such assets.  We are unable to find from the evidence what this market value was, but, even if we assume the situation most favorable to the petitioner, namely, that petitioner's liabilities both at the beginning and end of the year were in excess of petitioner's total assets valued at market, we should still have to hold that such a finding would be of no ultimate assistance to petitioner and that its assignments of error (c), (d), and (i) are without merit.  Rands, Inc.; Nipoch Corporation; R. L. Blaffer & Co., all1938 BTA LEXIS 764">*787 supra.The evidence relative to assignment of error (f) is also wholly insufficient to sustain petitioner's position.  As a matter of law it is not disputed that a corporation may keep its "capital" intact without incurring the liability imposed by section 104.  ; affd., ; certiorari denied, . But the evidence in the instant proceeding does not show that the declaration of a dividend equal to petitioner's gains or profits for the taxable year 1931 would have impaired petitioner's capital.  In other words, petitioner could have declared a dividend of $322,692.33 during the taxable year and still have had surplus and undivided profits of $1,916,021.87, as shown by its books at the close of the year 1931.  Of course, as suggested in this opinion under our discussion of assignment of error (e), it might be that a part of the large surplus and undivided profits appearing on petitioner's balance sheets at the beginning and end of the taxable year, if not all, represented a paid-in surplus, in which event the principles enumerated in 1938 BTA LEXIS 764">*788 , might be applicable.  We say this for the reason that the record is not clear as to the manner in which petitioner acquired the 2,500 shares of stock of the Saranac Investment Corporation, which stock had a value of over $3,000,000 at the time it was acquired by petitioner.  But if any part of this large surplus and undivided profits represented a paid-in surplus and had been impaired by prior losses so that at the end of the year there were capital deficits instead of earned surplus, the burden was upon petitioner to prove that fact.  . Without such proof we are unable to find that the respondent erred as alleged in assignment (f).  Regarding assignments (g) and (h), suffice it to say that they are identically the same as were assigned by the petitioner and considered by the Board in the case of We need not prolong this opinion further with the discussion of every point that is necessarily inherent in a case of this kind.  It 38 B.T.A. 1248">*1259  would serve no useful purpose here for the reason that, after a careful consideration of all1938 BTA LEXIS 764">*789  the evidence contained in the record, we are of the opinion that it falls far short of overcoming the presumption of correctness attaching to the respondent's determination, and the prima facie evidence of a purpose to escape the surtax upon petitioner's shareholders which is present by reason of the existence of some of the facts mentioned in subsection (b) of the statute.  We have therefore found as a fact that petitioner was during the taxable year 1931 availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.  The fact that the sole stockholders of petitioner were A. D. Saenger, Inc., and J. H. Saenger, Inc., and that we hold that these two latter corporations were formed and availed of for the purpose of preventing the imposition of the surtax upon A. D. Saenger and J. H. Saenger, respectively, brings the instant case, we think, within the rule of . Regarding petitioner's alternative position, little need be said.  On petitioner's income tax return it reported as a part of its gross income1938 BTA LEXIS 764">*790  under section 22(a) dividends on stocks of domestic corporations in the amount of $371,175.  It also deducted the same amount under section 23(p).  Section 104(c) provides that such deductions must be restored to income.  Petitioner apparently contends that it was in error in reporting the $370,000 dividend declared by the Saranac Investment Corporation as a part of its gross income, for the reason that it was declared for the purpose of absorbing the liability which petitioner then owed Saranac.  This is not a valid reason for excluding the dividend from petitioner's gross income.  The petitioner correctly reported the item, and, under section 104(c), the respondent was correct in including it in his computation of net income subject to the 50 percent additional tax under section 104(a) of the Revenue Act of 1928.  The respondent's determination is approved.  Decision will be entered for the respondent.Footnotes1. SEC. 104.  ACCUMULATION OF SURPLUS TO EVADE SURTAXES.  (a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 13 and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.  (b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.  (c) As used in this section the term "net income" means the net income as defined in section 21, increased by the sum of the amount of the dividend deduction allowed under section i3(p) and the amount of the interest on obligations of the United States issued after September 1, 1917, which would be subject to tax in whole or in part in the hands of an individual owner. ↩