Court Opinion

ID: 4634407
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:15:57.094624+00
Date Added: 2024-06-11T07:58:12.848320
License: Public Domain

CHICAGO STOCK YARDS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Chicago Stock Yards Co. v. CommissionerDocket No. 83797.United States Board of Tax Appeals41 B.T.A. 590; 1940 BTA LEXIS 1162; March 20, 1940, Promulgated *1162  The petitioner is a holding or investment company which had on December 31, 1929, a surplus of $19,615,905.69 and a capital surplus of $6,450 over and above its liabilities and a paid-in capital of $1,000,000.  Held, that the petitioner had no need for the accumulation of gains and profits beyond the amount accumulated to December 31, 1929, and a further accumulation of profits in subsequent years was beyond the reasonable needs of the business, and that during the years 1930, 1932, and 1933 the petitioner was "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, within the meaning of section 104 of the Revenue Acts of 1928 and 1932.  Joseph N. Welch, Esq., Edward J. Keelan, Jr., Esq., Lawrence E. Green, Esq., Joseph K. Moyer, Esq., and Francis B. Keeney, Esq., for the petitioner.  Philip M. Clark, Esq., and Stanley B. Pierson, Esq., for the respondent.  SMITH *590  The respondent has determined deficiencies of $1,817,686.10, $1,301,638.97, and $1,147,111.92 in petitioner's income taxes*1163  for the years 1930, 1932, and 1933, respectively.  All issues have been settled by stipulation except one arising from respondent's determination that petitioner is subject to tax under section 104 of the Revenue Acts of 1928 and 1932.  FINDINGS OF FACT.  1.  The petitioner is a corporation, organized under Maine law on September 26, 1911, in pursuance of a plan dated June 30, 1911, in the form of an agreement between a committee acting on behalf of the petitioner, if and when formed, and the holders of the common stock of the Chicago Junction Railways & Union Stock Yards Co. (hereinafter called the Jersey Co.).  The powers of the petitioner, as stated in its charter, include the carrying on of many kinds of *591  active business, including the purchase and lease of real estate, the holding of stocks and bonds of other corporations, the guaranteeing of obligations of others, and the carrying on of any other business which might seem to the company convenient to enhance the value of its properties.  2.  The Union Stock Yards & Transit Co. of Chicago (hereinafter called the Transit Co.) is a corporation, organized under special act of the Illinois Legislature on February 13, 1865. *1164  From 1911 through 1933 it had issued and outstanding 132,000 shares of common stock of a par value of $100 per share.  Under its charter it has power to operate stockyards and a belt line railroad and to borrow money to an amount not in excess of $500,000.  It has continued to operate the stockyards to the present date.  On January 1, 1930, it had outstanding debenture notes in the amount of $500,000, which were paid off in that year, and it did not have any outstanding bond or note obligations thereafter.  During the years 1911-1913 more than 98 percent of the capital stock of the Transit Co. was owned by the Jersey Co., and since December 31, 1913, the Transit Co. has been wholly owned by the Jersey Co.  3.  The Jersey Co. is a corporation, organized under New Jersey law on July 10, 1890, for a period of 50 years.  It was formed at a time when the meat packers having plants in Chicago west of the stockyards, known as Packingtown, had instituted suits to compel the railroads to switch their freight without charge and to have the stockyards declared a nuisance, and had threatened to move to Indiana, where they had purchased and developed a tract of land at a cost of about $1,000,000. *1165  At all times the authorized and issued capital stock of the Jersey Co. has consisted of 65,000 shares of preferred stock of $100 par value and 65,000 shares of common stock of $100 par value, a share of each class being entitled to one vote.  On July 10, 1890, the Jersey Co. issued $10,000,000 5 percent collateral trust gold bonds due July 1, 1915, and on July 15, 1892, it entered into an agreement with certain packers whereby the Jersey Co. agreed to and did pay $3,000,000 in 5 percent bonds due July 1, 1907, and the packers agreed to and did continue to keep their businesses in Packingtown for 15 years from July 1, 1891.  Similar arrangements with other packers were also made in the years 1892-1901, for periods of from 5 to 20 years, the Jersey Co. paying in all $4,665,000 in cash and bonds and other property to the packers.  In 1900 the issuance of $14,000,000 new 40-year 4 percent bonds was authorized, $4,000,000 of which were issued.  In 1915 the remaining $10,000,000 were issued to retire the $10,000,000 5 percent bonds which matured in that year.  Owing to the high rates of interest at which money was loaning at the time the new issue carried an interest rate of 5 percent. *1166 *592  4.  The Chicago Junction Railway Co. (hereinafter called the Railway Co.) is a corporation, organized under Illinois law on April 26, 1898, as a consolidation of two corporations which were wholly owned by the Jersey Co.  One of these was the Chicago Hammond & Western Railroad Co., which owned a belt line railroad (known as the "Outer Belt") in Chicago and its vicinity.  The other was the Chicago & Indiana StateLine Railway Co., which operated another belt line railroad (known as the "Inner Belt") in the same vicinity, directly serving the Chicago stockyards under lease from the Transit Co. dated December 15, 1897.  The Railway Co. had an authorized and issued capital stock of $2,200,000, divided into 22,000 shares of $100 par value, until 1913, when 33,000 additional shares were issued as a stock dividend to the Jersey Co.  The Railway Co. has been at all times wholly owned by the Jersey Co.  During the years 1930-1933 the Railway Co. had no outstanding indebtedness.  The "Outer Belt" line was sold in 1907.  On December 1, 1913, the Transit Co. leased its "Inner Belt" line to theRailway Co. at an annual rental of $600,000, and on May 19, 1922, the Transit Co. and*1167  the Railway Co. entered into a lease under which the "Inner Belt" line was leased by them to the Chicago River & Indiana Railroad Co., wholly owned by the New York Central Railroad Co., for 99 years at a rental, guaranteed by the New York Central, of $1,500,000 for the first year and $2,000,000 for each year thereafter, the lessee to pay all maintenance c arges and taxes.  On May 16, 1922, the Interstate Commerce Commission authorized the lease, subject to the conditions, among others, that nothing should be construed as a finding that the rental was just and reasonable and that any person having an interest in the subject matter might at any future time make application for such modification of the conditions as might be required in the public interest.  Jurisdiction was retained to reopen the proceeding on the Commission's own motion for the same purpose.  The application of the New York Central for authority to buy the Railway Co. properties under an option given with the lease was denied, without prejudice to future proceedings.  5.  The Chicago Junction Railroad Co. (hereinafter called the Elevated Co.) is a corporation, organized under Illinois law on November 20, 1902, for*1168  the purpose of providing elevated passenger service through Packington.  It was created after the city of Chicago had passed an ordinance requiring that all the railroad tracks in Chicago be elevated and after the Transit Co. had elevated its freight tracks.  On September 30, 1903, the Elevated Co. leased its properties to the South Side Elevated Railroad Co., which connected *593  with lines running all through Chicago, and on March 1, 1905, the Elevated Co. issued $2,327,000 first mortgage 4 percent 40-year gold bonds, due March 1, 1945, and guaranteed by the Jersey Co. The rental was the payment of taxes and interest on the Elevated Co. bonds.  During the years 1930-1933 the Elevated Co. had outstanding capital stock of $50,000, which has been at all times wholly owned by the Jersey Co.  6.  The Stock Yards Harness & Saddlery Co. (hereinafter called the Harness & Saddlery Co.) is a corporation, organized in Illinois in 1903.  It is a small company and has continually been wholly owned by the Transit Co.  7.  Central Manufacturing District (hereinafter called the District) is a real estate trust with transferable shares, created by the transfer to trustees on May 2, 1902, of*1169  real estate northwest of and adjacent to the stockyards, the Jersey Co. being the sole beneficiary.  This real estate and another tract later acquired were vacant land which was acquired and used for development into a manufacturing district to provide additional tonnage for the "Inner Belt" line.  The District has its own streets and police, water, lighting, and sewerage facilities.  The District constructs buildings for lessees, the petitioner assisting in financing if the District does not have sufficient funds.  The District had outstanding bonds of $2,915,000 in 1930, $2,700,000 in 1931, $2,475,000 in 1932, and $2,250,000 in 1933.  These bonds were guaranteed by the Jersey Co.  8.  The Produce Terminal Corporation (hereinafter called Produce Terminal) is a corporation which was organized under Illinois law on March 4, 1915, pursuant to an order of the Illinois Commerce Commission to carry on the business of supplying electric light and power to the Chicago stockyards, this having been formerly done by the Transit Co.  During the years 1930-1933 Produce Terminal's capital stock was $2,000,000, consisting of 20,000 shares, of which 7,170 shares were issued in 1927 as a stock dividend*1170  to petitioner.  Produce Terminal was wholly owned by the Transit Co. from the date of its formation until 1921, when all its shares were distributed by the Transit Co. to the Jersey Co. as a dividend.  On December 31, 1926, the Jersey Co. distributed those shares to the petitioner as a dividend and Produce Terminal has since been wholly owned by the petitioner.  Although this stock was entered on the pititioner's books at a value of $499,091.29, its value when distributed was actually $1,032,431.95.  9.  When the Jersey Co.'s 1892 contracts with the packers came to an end in 1907 the packers asked for a further share in the profits of the stockyards, and after efforts of F. H. Prince, a stockholder of *594  the Jersey Co., Armour, 1 one of the packers, became a shareholder of the petitioner, the packers then continuing to do business at the stockyards.  10.  Under the plan for the formation of the petitioner*1171  dated June 30, 1911, the common stockholders of the Jersey Co. were offered the guaranty of the petitioner, by way of stamp on their stock certificates, of $9 annual dividends or the privilege of exchanging their shares at the rate of one share for $200 face amount of 50-year 5 percent collateral trust bonds of the petitioner.  On September 27, 1911, the petitioner agreed with Frank R. Pegram, as agent for Prince, to buy from him the plan and the assents of more than 60,000 common shares of the Jersey Co., plus $1,000,000 in cash, for $8,000,000 par value of the petitioner's capital stock.  On the same day the petitioner agreed with the Jersey Co. common stockholders to pay holders of stamped certificates a 2 1/4 percent quarterly dividend, to stamp certificates, upon presentation, with the guaranty of the petitioner, that the guaranteed shareholders sold all their rights to dividends upon the guaranteed shares, that all dividends on such shares were to be used first to pay the 9 percent guaranteed dividends, the residue to be retained by the petitioner, the petitioner to secure its 5 percent bonds by unstamped Jersey Co.  $100 common stock for each $200 face amount of bonds or by*1172  shares of Jersey Co.  $100 preferred stock for each $120 face amount of bonds, and that the petitioner might withdraw the right of exchange on 30 days' notice.  Also on September 27, 1911, the petitioner issued $1,000,000 par value of its capital stock for $1,000,000 cash.  On October 2, 1911, the petitioner executed a trust indenture providing for the issuance of $13,000,000 5 percent 50-year callable gold bonds, secured by all the Jersey Co. common shares owned or thereafter acquired by it; it was required to do whatever might be necessary to maintain or preserve the corporate existence of the Jersey Co., but not to prevent the consolidation or merger of the Jersey Co. with, or the sale, or transfer of its property to, the petitioner.  11.  On November 11, 1911, the petitioner's capital stock was increased from $1,000,000 to $8,000,000, divided into 80,000 shares of common stock, and on March 21, 1912, $7,000,000 of its stock was issued in payment of the plan of June 30, 1911.  From that time to June 1922 Prince was the owner of 64,480 shares and Armour was owner of the remaining 15,520 shares.  12.  By August 31, 1914, the petitioner had acquired in exchange for its bonds*1173  31,075 Jersey Co. common shares and 33,922 shares had been *595  stamped with the guaranty; in July 1919 it acquired the remaining three shares.  13.  On October 1, 1914, the petitioner and the Jersey Co. made an agreement whereby the petitioner guaranteed the interest upon the Jersey Co.'s bonds; promised to fulfill all obligations of the Jersey Co. under the deeds of trust, except the payment of principal of the bonds; guaranteed all payments the Jersey Co. mignt be required to make by virtue of its guaranty of interest, but not of principal of $2,327,000 bonds of the Elevated Co., and guaranteed 6 percent dividends on the Jersey Co. preferred stock and 9 percent dividends on whatever Jersey Co. common stock the petitioner had not acquired.  The Jersey Co. assigned to the petitioner all of its right to dividends thereafter declared or distributable by the Transit Co. and the Railway Co., and directed those companies to pay certain specified amounts of interest on the Jersey Co. bonds, and dividends on the Jersey Co. preferred stock and such common stock as the petitioner had not acquired, and to pay any surplus to the petitioner upon its request.  The Jersey Co. promised*1174  to direct the Railway Co. to apply $600,000 annual rent payable by the Railway Co. to the Transit Co. under the lease of the latter's properties to interest on the Jersey Co.'s bonds, and to use its own income first to pay its own expenses and taxes, and then to pay the surplus to the petitioner upon its request.  14.  On October 15, 1921, the petitioner issued to F. H. Prince & Co., an enterprise engaged until 1931 in the brokerage and banking business, with seats on the New York, Boston, and Chicago Stock Exchanges, entirely owned by F. H. Prince, $1,500,000 face value 10-year 7 percent serial debentures in partial payment at par of a debt then owned by the petitioner to F. H. Prince & Co.  On June 1, 1922, the petitioner issued $2,000,000 face value 10-year 7 percent serial debentures, of which $1,500,000 were used to retire the issue of October 15, 1921, and the remaining $500,000 were issued to F. H. Prince & Co. in partial payment at par of a debt then owed by the petitioner to F. H. Prince & Co.  In December 1922 the $2,000,000 face value of bonds dated June 1, 1922, were reacquired by the petitioner for $1,860,000, and were set up on its balance sheet in that year as treasury*1175  bonds in the amount of $1,860,000.  By the end of 1933 the petitioner had reacquired $3,642,000 face value of its own 5 percent bonds for $3,165,286.14 cash.  15.  On February 27, 1920, Armour, holding 15,520 of the petitioner's 80,000 outstanding common shares, was ordered by a consent decree in the so-called Packers Case to dispose of them.  On November 2, 1920, Armour and Prince agreed that Armour should receive preferred stock of the petitioner in exchange for the 15,520 common shares, and, with the court's approval dated February 24, *596  1921, Armour retained in the earnings and assets of the District and Produce Terminal the same proportionate interest as it had as owner of the 15,520 common shares, and Prince bought the 15,520 shares in June 1922 for $1,500,000, thus becoming the sole owner of the petitioner's common stock.  Armour received from Prince $300,000 in cash and $2,000,000 in bonds of the petitioner which Prince had received from F. H. Prince & Co.  Under an agreement dated May 11, 1922, between the petitioner and the Central Manufacturing District Co., a Delaware corporation with an authorized capital of 8,000 no par shares, 2 and an agreement dated June 2, 1922, between*1176  Prince, Armour, and the petitioner, 6,448 Central Manufacturing District Co. shares were issued to the petitioner and 1,552 shares to Armour in partial payment for the 15,520 shares of petitioner purchased by Prince.  Under the agreement of May 11, 1922, the petitioner assigned to the Central Manufacturing District Co. all its rights in respect of dividends and liquidation distributions made by the District and by Produce Terminal.  The petitioner in 1925 purchased the 1,552 shares of Central Manufacturing District Co. from Armour for $500,000 and in 1930 sold them for $26.92, and charged off the balance.  16.  On June 1, 1932, F. H. Prince & Co., Inc., was organized under the laws of Maine, and its entire capital stock of 20,000 shares was issued for 48,000 common shares of the petitioner owned by Prince.  On June 3, 1932, Prince transferred to himself and his wife as trustees under a deed of trust, of which his relatives and friends were the beneficiaries, the 20,000 shares of F. H. Prince & Co., Inc., and since that date Prince has owned no stock in that company and the trustees have been the sole*1177  stockholders.  From December 19, 1932, to December 31, 1933, the following persons were officers and directors of F. H. Prince & Co., Inc.; F. H. Prince, president and director; F. H. Prince, Jr., vice president and director; James A. McDonough, secretary-treasurer and director; John F. Dana, clerk; Abbie Norman Prince, director; Frank R. Pegram, director.  17.  Throughout the years 1929-1933 the Jersey Co. owned all the capital stock of the Transit Co. (which owned the Harness & Saddlery Co.), the Railway Co., and the Elevated Co., and all the shares of beneficial interest in the District.  During this period, under a mortgage and deed of trust dated April 10, 1900, and a supplemental mortgage and deed of trust dated April 1, 1915, the Jersey Co. had outstanding $14,000,000 face value of its noncallable bonds maturing April 1, 1940, of which $10,000,000 bore interest at 5 percent, and $4,000,000 at 4 percent and, as collateral security for these bonds.  *597  had pledged 131,083 of the 132,000 outstanding shares of the Transit Co., 54,991 of the 55,000 outstanding shares of the Railway Co. and $2,500,000 face value bonds of the Indiana Harbor Belt Railway Co., maturing in*1178  1957 and guaranteed by the Lake Shore &Michigan Southern Ry. Co., and Michigan Central R.R. Co.  18.  During 1929 the Transit Co. had outstanding $500,000 face value debenture notes which matured in 1930, and throughout the years 1929-1933 the Elevated Co. had outstanding $2,327,000 of first mortgage 4 percent bonds issued March 1, 1905, maturing in 1945, and guaranteee by the Jersey Co.  19.  On December 31, 1929, the District had outstanding $3,909,000 of bonds bearing interest at different rates between 5 and 6 percent, guaranteed by the Jersey Co., and maturing on March 1 of each year until 1941 as follows: 1930$994,0001931215,0001932-1938(each year)225,0001939$205,0001940185,0001941735,000On June 6, 1931, the District became the owner of all of the capital stock of two Illinois corporations, the Central Storage Corporation and the Central Storage & Forwarding Corporation; the former was merged into the latter on December 31, 1931, and the District has since been the sole owner of the surviving corporation.  20.  On October 29, 1931, the Pau Corporation was organized under Illinois law, with a capital stock of $5,000.  F. H. Prince*1179  & Co. was and is the sole stockholder.  The Pau Corporation was formed to take over the easements covering the properties served with light and power by Produce Terminal.  With money loaned to it by the petitioner, the Pau Corporation purchased machinery which was installed in the plant of Produce Terminal.  The petitioner received no interest upon the loans.  21.  Western Associates, Inc., a corporation wholly owned by the petitioner, was organized in January 1933 under Delaware law to enable the petitioner to hold the shares of the Stock Yards Bank & Trust Co., which was formed on January 1, 1933, as a consolidation of the Stock Yards National Bank and the Stock Yards Trust & Savings Bank, and later to hold the shares of the Live Stock National Bank of Chicago.  It received $1,500,000 from the petitioner on the issue of its 40,000 shares of capital stock and immediately paid it to the Stock Yards Bank & Trust Co., a bank organized under Illinois law and located in the stockyards district of Chicago, for 40,000 shares of that corporation's capital stock.  In April 1933 the Stock Yards Bank & Trust Co. was reorganized, and Western Associates, Inc., received in exchange for the shares*1180  of that bank 40,000 *598  shares of the capital stock of the resulting Live Stock National Bank of Chicago.  Western Associates, Inc., has owned these shares since that time.  22.  On December 31, 1929, the structure of the Chicago stockyards enterprise was as follows: A.  The petitioner, upon a paid-in cash capital of $1,000,000, had an earned surplus of $19,615,905.69 and a capital surplus of $6,450.  It owned all of the capital stock of Produce Terminal, carried at a value of $1,032,431.95, and Central Manufacturing District Co., carried at a cost of $506,448; 58,742 Jersey Co. common shares out of 65,000 outstanding, carried at a cost of $10,993,551.74; and 457 Jersey Co. preferred shares out of 65,000 outstanding, carried at a cost of $45,821.50.  The Produce Terminal was a prosperous corporation.  It had net earnings of $262,213.73 for 1929 and annual average earnings of $172,517.68 for the five-year period ended with 1929.  It paid dividends to the petitioner from 1928 to 1933, inclusive, at the rate of $200,000 per annum.  Its excess of assets over liabilities at December 31, 1929, was $2,552,071.05, although carried on the petitioner's books at a value of $1,032,431.95. *1181  The petitioner had outstanding at December 31, 1929, 5 percent bonds in the amount of $3,227,000.  Its excess of assets over all liabilities, including its capital stock on that date, was $19,622,355.69.  B.  The Jersey Co. owned all the shares of capital stock of the Transit Co., the Railway Co., the Elevated Co., and the beneficial interest of the District.  It filed a consolidated return for 1929, which included the operations of the above named wholly owned subsidiaries (including therein the operations of the Harness & Saddlery Co., a subsidiary of the Transit Co.) and showed a net income of $2,835,382.71 for the entire group.  The group had outstanding bonds and debenture notes as follows: Jersey Co. 5% bonds maturing 4/1/40$10,000,000Jersey Co. 4% bonds maturing 4/1/404,000,000Elevated 4% bonds maturing 3/1/452,327,000District bonds maturing at various dates3,909,000Transit Co. debenture notes maturing 1930500,000Total20,736,000Net consolidated assets$73,322,871.58Net consolidated liabilities33,191,175.08Excess of assets40,131,696.08C.  Against the total bonded indebtedness of $23,963,000 standing against the entire group*1182  of companies were the following liquid assets: PetitionerCash$6,689,304.26Accounts receivable252,447.08Notes receivable (Prince)3,104,400.00District 6's 193027,000.00District 5's55,733.00Transit Co. 5 1/2's15,022.50Other investments1,467,338.35Produce TerminalCash499,575.93Total12,110,821.12Jersey Co. and subsidiaries 19,594,363.94Total21,705,185.06*599  In addition to the above, the petitioner and the Jersey Co. and its subsidiaries owned fixed and other assets of a book value of approximately $40,000,000.  23.  During the years 1930, 1931, 1932, and 1933 the petitioner, the Jersey Co., and some of the company's subsidiaries had large deposits in banks in the stockyards district or its vicinity.  The petitioner and some of the subsidiaries of the Jersey Co. owned shares of stock in such banks.  If the banks failed the depositors stood to lose a large part of their deposits and the stockholders might be subject to a 100 percent assessment upon their stock.  Prince believed that it was necessary*1183  to protect these banks.  He was particularly interested in maintaining the solvency of the Stock Yards National Bank, which was known throughout the country as the Stock Yards Bank.  The failure of that bank would be a serious blow to the Jersey Co. and its subsidiaries.  In order to assist the banks the Transit Co. in 1930 paid $464,000 for shares of capital stock of Stock Yards National Bank and purchased real estate bonds from the Stock Yards Trust & Savings Bank for $100,000.  In 1931 Produce Terminal purchased from the Central Manufacturing District Bank real estate bonds for $490,000 cash.  In 1932 the petitioner purchased notes of individuals and corporations from the Central Manufacturing District Bank, paying therefor $501,439.58.  These were carried in its balance sheet at December 31, 1932, at a value of $327,307.55.  The petitioner loaned $3,071,779.19 to the Stock Yards National Bank and the Stock Yards Trust & Savings Bank.  The Transit Co. during this year purchased debentures of the Stock Yards Investment Co., an affiliate of the Stock Yards *600  National Bank, for $1,340,000 and Produce Terminal purchased similar debentures for $350,000.  In 1933 the Transit*1184  Co. loaned to the Stock Yards Bank & Trust Co. $1,016,414.84 in Government bonds.  This loan became a loss to the Transit Co. in 1933.  The banks needing further assistance, the petitioner agreed to subordinate $1,800,000 of its deposits in the Live Stock National Bank to the claims of other depositors.  The Transit Co., Produce Terminal, and District likewise subordinated deposits in the amounts of $1,300,000, $300,000, and $600,000, respectively.  The subordinated deposits were to be paid only out of certain assets which the bank was not allowed by the bank examiners to treat as good assets.  The agreement for the subordination of the deposits was that the repayment would be made by the bank out of recoveries from unacceptable assets which were written off on the books of the bank, such recoveries to be applied, in the first instance, to the amounts subordinated by the petitioner.  24.  At the end of each year from 1911 to 1921, inclusive, Prince 3 was indebted to the petitioner upon cash borrowed from it.  His indebtedness at the end of 1911 amounted to $300,000.  This amount steadily increased up to 1921 when the amount was $760,000.  The loans of cash and of securities by the*1185  petitioner to Prince at the end of each year from 1922 to 1933, inclusive, were as follows: SecuritiesYearCashBondsStockPetitioner and United States TreasuryNew Jersey Co. common shares1922$760,000.00$160,00016,8551923785,000.00160,50016,8551924760,000.00164,00015,3551925760,000.00172,00015,3651926947,867.08172,00014,75519271,600,000.00150,00011,00019281,700,000.00150,00011,00019293,104,400.00150,0006,00019302,529,400.00150,0004,20019312,619,400.00241,0003,40019322,408,000.0091,0001,71019334,848,000.0041,0001,800From 1918 the petitioner was indebted to F. H. Prince & Co. for shares of common stock of the Jersey Co., and bonds of the petitioner acquired by it from F. H. Prince & Co.  The amount owing at the end of 1918 was $3,433,694.35.  The amount of the debt at the end of each year from 1922 to 1925, inclusive, was as follows: 1922$717,001.281923497,396.641924269,352.26192540,460.37*1186 *601  This indebtedness was entirely liquidated during the year 1926 and the petitioner was not thereafter indebted to either F. H. Prince or F. H. Prince & Co.Prince's indebtedness to the petitioner and the petitioner's indebtedness to Prince have always been carried in separate accounts.  Upon the petitioner's debts to Prince it paid interest at the rate of 5 percent or more, depending upon the rate charged by F. H. Prince & Co. to other margin customers.  Upon its loans to Prince the petitioner always collected interest at the rate of 4 percent per annum.  Prince paid the petitioner nothing for the securities borrowed by him.  From 1912 to 1933, Prince pledged collateral with the petitioner for the cash loans advanced to him, which consisted principally of common stock of the petitioner.  The fair market value of the collateral pledged at the end of each year was as follows: 1922$397,700.001923411,106.00192460,878.00192520,978.0019265,956.0019273,284,128.001928$3,620,626.0019294,786,332.5019303,673,608.0019313,769,684.2519325,541,695.2019338,664,199.00The loans were used by Prince for any purpose desired*1187  by him.  In 1932 the petitioner loaned Prince $160,000 for the purchase of a home in Newport, Rhode Island; also $450,000 in order to strengthen the financial statement of F. H. Prince & Co. which Prince was required to file with the New York Stock Exchange.  In 1933 the petitioner loaned an additional amount of $440,000 to Prince for the same purpose and $1,000,000 to enable him to acquire shares of stock of Armour & Co.  In 1933 Prince purchased Armour & Co. common A and B shares and preferred stock at a cost to him of $1,067,389.50.  With the acquisition of stock of Armour & Co. Prince became chairman of the board of directors of Armour & Co.25.  The balance sheets of the petitioner for the years 1930 to 1933, inclusive, revised to reflect correct earned surplus, are as follows: Assets1930193119321933Cash$9,628,450.77$9,516,616.07$7,779,716.27$7,645,235.97Accounts receivable123,311.35106,473.7511,884.6745,285.50Notes receivable (District)800,000.00800,000.001,350,000.001,625,000.00Other notes receivable2,529,400.003,027,660.613,424,550.744,848,000.00Interest and dividends receivable57,377.1666,408.2081,053.6877,769.25Investments:New Jersey Co. common11,036,509.9911,136,385.4911,193,549.1911,241,352.19New Jersey Co. preferred64,935.00124,844.25150,823.28218,933.33District 5's48,703.0046,693.0040,667.0030,747.00Produce Terminal1,032,431.951,032,431.951,032,431.951,032,431.95District capital stock506,421.08506,421.08506,421.08506,421.08Other investments1,410,771.112,774,886.991,443,966.141,333,989.27Own 5% bonds in treasury2,818,740.892,862,462.893,156,483.643,165,286.14Own 7% bonds in treasury372,000.00186,000.00Notes receivable - Pau Corporation189,503.34236,536.51Western associates stock1,500,000.00Notes receivable taken over327,307.55322,801.51Subordinated deposits1,800,000.00Advances to banks3,071,779.19Investment account7,000,000.007,000,000.007,000,000.007,000,000.00Total37,429,052.3039,187,284.2840,760,137.7242,629,789.70Liabilities5% bonds of 19616,260,000.006,260,000.006,260,000.006,260,000.0010-year 7% bonds400,000.00200,000.00Notes and accounts payable109.81109.6523,786.00Accrued bond interest78,250.0078,250.0078,250.0078,275.00Capital stock8,000,000.008,000,000.008,000,000.008,000,000.00Surplus22,684,242.4924,642,474.6326,415,437.7228,259,278.70Capital surplus6,450.006,450.006,450.006,450.00Total37,429,052.3039,187,284.2840,760,137.7242,629,789.70*1188 *602  26.  The net income of the petitioner and the dividends paid by it in the years 1911 to 1933, were as follows: YearNet earningsDividends paidExcess of net earnings1911-1929$24,375,905.69$4,760,000$19,615,905.6919303,468,336.80400,0003,068,336.8019312,358,232.14400,0001,958,232.1419322,172,963.09400,0001,772,963.0919332,243,840.98400,0001,843,840.9834,619,278.706,360,00028,259,278.7027.  A comparison of petitioner's balance sheets at December 31, 1929, and December 31, 1933, as corrected by stipulations filed, shows as follows: 19291933Increase or (decrease)AssetsCash$6,689,304.26$7,645,235.97$955,931.71Cash (subordinated deposits)1,800,000.001,800,000.00Notes receivable (District)1,625,000.001,625,000.00Notes receivable (F. H. Prince)3,104,400.004,848,000.001,743,600.00Notes receivable (Pau Corp.)236,536.51236,536.51Accounts receivable252,447.0845,285.50(207,161.58)Interest and dividends receivable71,038.0777,769.256,731.18Investments at cost:Jersey Co. common 110,993,551.7411,241,352.19247,800.45Jersey Co. preferred 245,821.50218,933.33173,111.83AssetsInvestments at cost - Continued.District 6's of 1930$27,000.00($27,000.00)District 5's55,733.00$30,747.00(24,986.00)Transit Co. 5 1/2's15,022.50(15,022.50)Produce Terminal (capital stock)1,032,431.951,032,431.95District Co. (capital stock)506,448.00506,421.08(26.92)Other investments1,467,338.351,333,989.27(133,349.08)Own 5's of 19612,742,178.893,165,286.14423,107.25Own 7's558,000.00(558,000.00)Western Associates, Inc. (capital stock)1,500,000.001,500,000.00Notes receivable (taken from bank)322,801.51322,801.51Investment account7,000,000.007,000,000.00Total34,560,715.3442,629,789.708,069,074.36Liabilities5% bonds of 1961$6,260,000.00$6,262,000.00$2,000.0010-yr. 7% bonds600,000.00(600,000.00)Notes and accounts payable109.6523,786.0023,676.35Accrued bond interest78,250.0078,275.0025.00Capital stock8,000,000.008,000,000.00Surplus19,615,905.6928,259,278.708,643,373.01Capital surplus6,450.006,450.00Total34,560,715.3442,629,789.708,069,074.36*1189 *603  The net earnings of the petitioner for the four years 1930 to 1933 were $10,243,373.01.  Of these earnings $1,600,000 was paid out in dividends, $8,069,074.36 is represented by an increase in assets, and $574,298.65 was used in reduction of liabilities.  In explanation of the above balance sheets it should be noted that the asset, "Investment Account" of $7,000,000, has no asset value at the present time.  It represents the $7,000,000 of capital stock which was issued for the plan turned over to the corporation shortly after its organization in 1911.  It had no fair market value at the date of its acquisition.  It should further be noted that the asset "Own 5's of 1961" in the amount of $2,742,178.89 for 1929 represents the cost to the petitioner of $3,033,000 of its own bonds and the asset "Own 7's" in the amount of $558,000 cancels a liability of $600,000.  The petitioner had no outstanding 7 percent bonds*1190  in either 1929 or 1933.  If these bonds were canceled instead of being carried as treasury bonds the surplus of the corporation at December 31, 1929, would be increased in the amount of $332,821.11.  Likewise, the corresponding asset of $3,165,286.14 in the balance sheet for 1933 shows the cost to the petitioner of $3,642,000 par value of 5 percent bonds.  If these bonds were canceled the petitioner's liability on 5 percent bonds of 1961 would be shown as $2,620,000 and its surplus at the end of 1933 increased in the amount of $476,713.86.  28.  The consolidated net income of the petitioner and the Jersey Co. and their subsidiaries in the years 1930 to 1933 was as follows: Net Income1930 1931Transit Co$1,867,913.59Less dividends10,000.001,857,913.59Harness & Saddlery Co5,771.21Railway Co1,242,627.46Elevated Co(25,758.14)Produce Terminal341,102.08Jersey Co$2,481,647.14$2,441,980.87Less dividends3,081,857.963,085,651.35(600,210.82)District289,403.32Central Storage & Forwarding CorpCentral Storage CorporationPau CorporationPetitioner$3,468,336.80$2,358,232.14Less dividends2,178,897.682,184,985.96789,466.04Total4,400,287.82*1191 *605  29.  The income and deductions of the petitioner in the years 1930 to 1933, as shown on its income tax returns for those years, were as follows: Income1930193119321933Interest$546,120.45$570,987.68$572,055.03$462,252.74Profit on sales614,047.2116,389.50(105,791.54)64,164.69Dividends2,217,331.682,225,316.502,216,260.352,197,221.52Profit on real estate967.30Total income3,377,499.342,813,660.982,682,523.842,723,638.95DeductionsSalary, president50,000.0050,000.0050,000.0050,000.00Salary, treasurer500.00500.00500.00500.00Interest313,256.53313,549.34313,000.00313,343.87Taxes425.00425.00242.1248,167.70Wages2,000.002,000.002,000.002,000.00Maintenance of trust960.00960.00960.00Commissions690.10680.62680.62Rent375.00420.00439.50352.00Directors' fees90.0090.00120.0090.00Auditors5,276.924,392.97Legal expense50.0015,875.52Postage, etc18.7431.69102.67212.92Traveling12.0012.1412.44Bad debt13,386.00Scrvices of trustees1,493.03Corp. trust100.00Draft expense4.49Error on return0.01Dividends2,217,331.682,225,316.502,216,260.352,197,221.52Total deductions2,604,321.982,598,378.262,584,367.702,629,361.05Net income773,177.36215,282.7298,156.1494,277.90*1192  The net income of the Jersey Co., the dividends paid by it, and its earned surplus on December 31 in the years 1930 to 1933 were as follows: YearNet incomeTotal dividendsDividends to others than petitionerEarned surplus on Dec. 311930$2,481,647.14$2,421,857.96$443,028.75$5,062,663.2219312,441,980.872,425,651.35436,872.005,060,554.7619322,406,220.022,420,872.44428,987.255,027,464.3619332,268,079.382,373.500.00425,412.004,903,605.76The net income of the Transit Co., the dividends paid by it, and its earned surplus on December 31 in the years 1930 to 1933 were as follows: YearNet incomeDividendsEarned surplus on Dec. 311930$1,867,913.59$1,844,357.96$5,019,956.0519311,607,169.301,848,151.354,778,974.0019323,617,984.991,843,372.446,262,414.551933(827,463.491,716,000.003,718,951.06*606  Included in the net income for 1932 was a nonrecurrent item of $2,426,433.29, consisting of impounded reweighing charges, plus interest, accumulated since 1921.  In 1933 a nonrecurrent item resulting from a charge-off of securities, including real estate bonds*1193  taken over from the Stock Yards Trust & Savings Bank, capital stock of the Stock Yards National Bank, and debenture bonds of the Stock Yards Investment Co. which Government examiners had ordered taken out of the Stock Yards National Bank, caused a decrease in income in the amount of $2,204,754.77.  The net income of the Railway Co., the dividends paid by it, and its earned surplus on December 31 in the years 1930 to 1933 were as follows: YearNet incomeDividendsEarned surplus on Dec. 311930$1,242,627.46$1,237,500.00$2,073,581.7219311,468,683.491,237,500.002,304,765.2119321,193,618.301,237,500.002,260,883.5119331,352,138.321,187,500.002,425,521.83In each of the years 1930-1933 the Elevated Co. sustained a loss of $25,758.14 and on December 31 in the years 1930-1933 it had deficits as follows: 1930$57,361.55193183,119.651932108,877.831933134,635.97The net income of Produce Terminal, the dividends paid by it, and its earned surplus on December 31 in the years 1930-1933 were as follows: YearNet incomeDividendsEarned surplus on Dec. 311930$341,102.08$200,000$1,039,253.661931340,796.63200,0001,180,050.291932372,616.30200,0001,352,666.59193329,850.39200,0001,182,516.98*1194  The net income of the District and its earned surplus on December 31 in the years 1930-1933 were as follows: YearNet incomeEarned surplus on Dec. 311930$289,403.32$5,126,553.501931119,666.315,254,553.211932207,492.825,462,046.031933237,932.625,699,978.65The District has never paid a dividend.  *607  The Central Storage Corporation had income in the amount of $11,686.78 in 1931 and paid no dividends.  The Central Storage & Forwarding Corporation paid no dividends and had losses in the years 1931-1933 as follows: 1931$41,121.97193287,765.6319335,467.26On December 31, 1931, the Central Storage Corporation had a surplus of $27,526.71.  The earned surplus of the Central Storage & Forwarding Corporation on December 31 was $12,432.85 in 1931 and it had deficits of $113,928.04 and $119,395.30, respectively, on December 31, 1932, and December 31, 1933.  The net income of the Harness & Saddlery Co., the dividends paid by it, and its earned surplus on December 31 in the years 1930-1933 were as follows: YearNet incomeDividendsEarned surplus on Dec. 311930$5,771.21$10,000$36,527.5319313,659.488,00032,187.011932(1,107.77)8,00023,079.2419334,290.162,00025,369.40*1195 Western Associates, Inc., received no income and had no expenses prior to December 31, 1933.  30.  In the years 1923-1933 transactions in Jersey Co. 4 percent and 5 percent bonds took place on the Boston Stock Exchange as follows: Year5% bonds4% bonds1923$294,000$80,0001924374,000119,0001925320,000109,0001926290,000133,0001927138,00033,000192895,00028,0001929490,00099,0001930$168,000$113,0001931161,00051,0001932191,00099,0001933161,00065,000Total2,682,000929,000In the years 1926-1933 the Jersey Co. 4 percent and 5 percent bonds were offered for sale by brokers on the over-the-counter market, the high and low asked prices being as follows: 4% bonds5% bondsHighLowHighLow1926 (last half)9190101 1/297 3/419279390102100 1/4192892 1/2921039819291930959010310019319681 3/8104 1/4901932906898831933938510193 1/4*608  The high and low actual market sales prices of the Jersey Co. 4 percent and 5 percent bonds in the years 1913-1933 were as follows: 4% bonds5% bondsHighLowHighLow191386 1/279100 3/898 1/419148480101 1/89919158582100 1/810019168784102100 1/219178784 3/4102 1/291 1/419187572 1/29387 1/21919777194 1/283 1/21920716084 1/274192175 1/46388 1/47419228474 3/49789 3/419238478 1/29588 1/2192484 1/28098 1/292 3/41925878410096192690861029919279188 1/2102 7/8100 1/2192894 1/289104100 3/419298983101 7/894193094 1/886102 3/898 1/2193195 1/490104901932907598 1/281193393 3/482101 1/490*1196  In the years 1926-1933 the Elevated Co. bonds were offered for sale by brokers on the over-the-counter market, the high and low asked prices being as follows: HighLow1926 (last half)85 1/283 1/2192789 1/284 1/2192889 1/282 1/2192919308378 1/2193185731932806219337567 1/231.  During the years 1930-1933 there grew up among the packers a practice of buying livestock directly from the farmers in the country, shipping to smaller stockyards and conveying it by truck to the packing houses, thereby aboiding the Chicago stockyards entirely.  Packing houses had also been built in Iowa and southern Minnesota, causing a shrinkage in the revenue of the Chicago stockyards in the years 1930-1933.  In 1932-1933 Prince, with the funds in the form of notes furnished by the petitioner, purchased $1,000,000 of stock in Armour & Co., sufficient to enable him to become chairman of the board of directors of that company and retain its business for the Chicago stockyards.  32.  During the years 1930-1933 the petitioner had substantial sums on deposit in banks, receiving interest at the rate of 3 percent for the first six months in 1930, *1197  2 1/2 percent for the last six months in 1930 and for the first six months in 1931, 2 percent for the last six months in 1931 and for the year 1932, and 1 1/2 percent for the first six months *609  of 1933, when interest payments on ordinary commercial deposits stopped.  In the years 1930-1933 the petitioner loaned to the District amounts as follows: 1930, $800,000 to meet the District's maturing bonds; 1932, $275,000 to meet bonds maturing in that year and $275,000 to assist in the erection of a building upon land sold by the District; 1933, $275,000 to meet maturing bonds.  The petitioner loaned to the Pau Corporation, for the purpose of purchasing machinery installed in the plant of Produce Terminal, $189,503.34 in 1932 and $47,033.17 in 1933, no interest being paid to the petitioner on such loans.  33.  The petitioner acquired Jersey Co. common stock continually from 1911 through 1933.  On December 31, 1929, it had acquired 58,742 of the 65,000 shares outstanding, and on December 31, 1933, it had acquired 60,336 shares.  Of the 60,336 shares, 31,310 were acquired in exchange for $6,262,000 par value of the petitioner's bonds and 29,026 for $4,979,352.19 cash.  In the*1198  years 1929-1933 the petitioner acquired 2,362 shares of Jersey Co. preferred stock at a total cost of $218,933.33; it had made no purchases of such stock prior to 1929.  In 1918 the petitioner paid F. H. Prince & Co. $3,190,339.96 for 17,929 shares of Jersey Co. common stock, which the latter had acquired in the years 1911-1918, and $243,354.39 for $286,000 face value of petitioner's 5 percent bonds.  In 1922 the petitioner began to pay cash for its purchases of Jersey Co. stock.  During the years 1930-1933 the petitioner purchased Jersey Co. common and preferred and its own 5 percent bonds in amounts and at costs as follows: YearSecurityCost1930253 shares Jersey Co. common$42,958.25190 shares Jersey Co. preferred19,113.50Petitioner's 5% bonds, $90,00076,562.00Total138,633.751931604 shares Jersey Co. common$99,875.50616 shares Jersey Co. preferred59,909.25Petitioner's 5% bonds, $57,50043,722.00Total203,506.751932380 shares Jersey Co. common$57,163.70302 shares Jersey Co. preferred25,979.03Petitioner's 5% bonds, $447,500294,020.75Total377,163.481933357 shares Jersey Co. common$45,803.00797 shares Jersey Co. preferred68,110.05Petitioner's 5% bonds, $14,0008,802.50Total122,715.55*1199  In 1933 the petitioner also issued $2,000 face value of its 5 percent bonds for 10 shares of Jersey Co. common.  *610  34.  In the years 1931-1933 F. H. Prince & Co. sold securities to the petitioner, and Prince on his income tax returns for these years took and was allowed by the Commissioner deductions for losses on such sales, the selling price, cost, and losses being as follows: YearSelling priceCostLoss1931$150,000 Amoskeag Mfg. Co. 6's$84,000.00$141,299.55$57,299.55$10,000 Chi. Mil. & St. Paul R. R. 5's1,155.0010,600.009,445.001,500 shares Western Dairies4,140.0016,422.8412,282.84846 shares Tidewater Asso. Oil2,229.2120,900.0018,670.791,000 shares Hoosac Mills 7% pfd22,819.00100,000.0077,189.0010,000 shares Armour & Co., "B"5,850.0027,087.5021,237.50Total196,124.681932$141,400 Amoskeag Mfg. Co56,148.94133,198.36$77,049.42884 shares Soo Leased lines3,402.4046,205.6442,803.243,000 shares First Natl. Bk. Boston78,557.00180,333.42101,776.42Total221,629.0819332,486 shares First Natl. Bk. Boston58,664.00152,766.22$93,102.22*1200  No securities were sold by F. H. Prince & Co. to the petitioner in 1930.  In 1932 the petitioner sold to F. H. Prince & Co., Inc., 3,050 shares of the Stock Yards National Bank and 240 shares of the Central Manufacturing District Bank at a loss to the petitioner of $221,202.03.  35.  In each of the years 1930-1933 Prince held offices and received annual salaries as follows: President of the Jersey Co$17,500.00Chairman of the board of directors of the Transit Co17,500.08Chairman of the board of directors of the Railway Co12,499.92President of the petitioner50,000.00Until his death in 1926 J. A. Spoor was president of the Transit Co. and in complete control of the Transit Co., Railway Co., and Elevated Co.  He sent reports to F. H. Prince & Co. in Boston.  After Spoor's death Prince became chairman of the board of directors of the Transit Co. and representatives of the petitioner went to Chicago with increasing frequency, giving orders and directions.  There was daily contact by telephone between the men operating the companies in Chicago and the officers of the petitioner.  Prince handled the stockyards banking situation from 1930 to 1933.  Ultimate*1201  choice as to officers, directors, and other personnel was dictated by Prince and he decided dividend policies.  He also gave instructions as to the banks in which funds were to be deposited and his authority was necessary for unusual expenditures by the Transit Co.  After the destruction of part of the went to Chicago and gave orders as to what buildings should be rebuilt and how.  The yards were not entirely restored.  The restoration was paid for with insurance funds received by the Transit Co.  In certain instances suggestions of the officers in Chicago were rejected by Prince.  In 1933 Prince refused to permit the Transit Co. to spend *611  enough money to build fireproof hog and sheep houses requested by the men in Chicago.  Prince granted permission to rebuild the amphitheatre in which the International Live Stock Exposition was held.  36.  Produce Terminal, the Transit Co., the District, and the Railway Co. sent to the petitioner monthly reports showing a summary of operations, which, except for the District's report, were copies of reports required by the Illinois Commerce Commission, the form of reports by the Transit Co. having been devised by its auditors.  The petitioner*1202  assisted the District on many occasions in financing the construction of buildings.  In 1932 it furnished between $300,000 and $400,000 for one building.  When the South Side Elevated Co., operating the Elevated Co. properties, went into receivership in 1932 the Jersey Co., as guarantor, paid the rental, which was used to pay the interest on the Elevated Co. bonds.  37.  During the years 1930-1933 the individual income and surtaxes assessed against and paid by Prince were as follows: 1930$51,570.96193126,061.08193220,023.94193310,164.29If the petitioner had distributed its annual profits for each of the years 1930, 1932, and 1933 the surtax liability of F. H. Prince would have been increased as follows: 1930$572,234.911932386,582.331933377,706.6138.  It is stipulated that the petitioner is entitled for 1932 to a deduction not claimed on its return of $24,000 paid as an assessment made by the banking authorities of the State of Illinois against 240 shares of the Central Manufacturing District Bank owned by the petitioner.  39.  The stockholders of the petitioner did not report any of the undistributed earnings of that*1203  company in the years 1930, 1932, and 1933 under the provisions of section 104(d) of the Revenue Acts of 1928 and 1932.  40.  Under the contract of October 1, 1914, wherein the petitioner guaranteed certain dividends and expenses of the Jersey Co., it was never called upon to make any payments pursuant to said guaranty, such expenses and dividends having been paid directly by the Jersey Co., after which the Jersey Co. was able to and did make large annual distributions of its earnings to the petitioner.  41.  During the years 1930 to 1933, inclusive, and prior thereto the principal activity of the petitioner was the purchase and holding of securities and the collecting of dividends thereon, together with the *612  lending of money to F. H. Prince.  The majority of the securities so purchased were acquired by the petitioner directly from F. H. Prince or through the brokerage house owned by him which he conducted under the trade name of F. H. Prince & Co., upon which regular brokerage fees were paid by the petitioner.  42.  At no time did the petitioner purchase any of the outstanding bonds of the Jersey Co. or the Elevated Co.43.  In its income tax returns for the years*1204  1930 to 1933, inclusive, the petitioner has described its business as that of "acquiring and guaranteeing securities." 44.  During the years 1930, 1932, and 1933 the petitioner was a mere holding or investment company.  45.  During the years 1930, 1932, and 1933 the petitioner permitted its gains and profits to accumulate beyond the reasonable needs of its business.  46.  During the years 1930, 1932, and 1933 the petitioner was availed of for the purpose of preventing the imposition of the surtax upon its stockholders through the medium of permitting its gains or profits to accuculate instead of being divided or distributed.  OPINION.  SMITH: The only issue for decision in this case is whether in 1930, 1932, and 1933 the petitioner was taxable under section 104 of the Revenue Acts of 1928 and 1932, that section being identical in both revenue acts.  Section 104(a) subjects any corporation to a tax equal to 50 percent of its net income, in addition to the tax imposed by section 13, if it "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 or profits to accumulate instead of being*1205  divided or distributed." Subdivision (b) provides that "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." Subdivision (d) provides that "the tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year." In his deficiency notice the respondent held that the petitioner was liable to the tax under section 104, saying: After a careful consideration of your Federal income tax returns, the protests mentioned above, and all other available information, the Bureau holds that your corporation is subject to taxation under section 104 of the Revenue Acts of 1928 and 1932.  *613  The petitioner in its brief calls attention to the fact that the respondent in his deficiency notice has not determined that the petitioner was either formed or availed of for the interdicted purpose, implying thereby*1206  that the Government's case would be stronger if he had made such a categorical determination in his deficiency notice.  We do not think that this is true.  The respondent has determined, and has stated in his deficiency notice, that the petitioner is "subject to taxation under section 104 of the Revenue Acts of 1928 and 1929." The only possible factual basis upon which such a determination could rest is that the petitioner was either "formed" or "availed of" or that it was bothe formed and availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains or profits to accumulate instead of being divided or distributed.  The necessary implication, we think, carries all the force of a specific determination that such were the facts.  The petitioner apparently so understood, for it has adduced a mass of evidence directed towards disproval of those very facts.  In C. H. Spitzner & Son, Inc.,37 B.T.A. 511">37 B.T.A. 511, and Mellbank Corporation,38 B.T.A. 1108">38 B.T.A. 1108, the respondent sent deficiency notice stating that the taxpayers were "subject to taxation under the provisions of section 104 of the Revenue*1207  Act of 1932," without stating or indicating whether such determination was based upon the premise that the taxpayers were "formed" or "availed of" for the prohibited purpose, or that the taxpayers were mere holding or investment companies or that their gains and profits had been permitted to accumulate beyond the reasonable needs of the business.  Nevertheless, we proceeded to determine the issue raised in the light of the evidence bearing upon the various factors essential to the respondent's determinations.  We think that the respondent's determination that the petitioner here is subject to tax under section 104 places the burden squarely upon the petitioner of proving that it was neither formed nor availed of for the interdicted purpose.  The petitioner makes the further contention that section 104 of the Revenue Acts of 1928 and 1932 is unconstitutional.  This point must be decided against the petitioner's contention, in accordance with Helvering v. National Grocery Co.,304 U.S. 282">304 U.S. 282; rehearing denied, 305 U.S. 669">305 U.S. 669. The petitioner was formed in 1911.  It clearly was not formed for the purpose of preventing the imposition of the surtax upon*1208  its shareholders through the medium of permitting its gains or profits to accumulate instead of being divided or distributed, and the respondent does not so contend.  There remains for consideration only the question whether the petitioner was "availed of" during the taxable years for the interdicted purpose.  The petitioner contends that it was not.  The question must *614  be answered in the light of all of the evidence.  If the evidence establishes the fact either that the petitioner was a "mere holding or investment company" or that the gains or profits have been "permitted to accumulate beyond the reasonable needs of the business," a prima facie presumption arises of a purpose in the part of the stockholders to escape the surtax.  We consider first the question whether the evidence establishes the fact that the petitioner is a "mere holding or investment company." Petitioner admits that it is a holding company, but denies that it is a "mere" holding or investment company.  It submits that it supervises and directs the policies and business operations, other than the daily routine, of all the companies constituting the stockyards enterprise, and acts as banker for them. *1209  If further submits that a "mere holding or investment company" is one that holds securities, collects, and possibly invests and reinvests income therefrom, and does nothing more.  We think that this definition overemphasizes the importance of the word "mere" in the phrase above quoted.  It was apparently the intention of Congress in using the phrase to differentiate a holding or investment company actively engaged in a trade or business from one which has income only from interest and dividends and profits from the sale of securities, and limits its activities to those incident to an ordinary holding or investment company.  Cf. C. H. Spitzner & Son, Inc., supra.In Rands, Inc.,34 B.T.A. 1094">34 B.T.A. 1094, the Board said: * * * The term "holding company" does not exclude one which actively deals with the funds contributed by its principal and almost sole shareholder, instead of being a passive repository or "holder" of the funds or assets.  Cf. Keck Investment Co. v. Commissioner, supra, R. & L., Inc. v. Commissioner, supra. An investment company is not to be defined as one restricted to long term investments for regular income and excluding one*1210  which trades in the market and buys and sells speculative stocks or real estate.  * * * In Reynard Corporation,37 B.T.A. 552">37 B.T.A. 552, the facts were that an individual engaged in the creation of cartoons, whose income therefrom was $1,500 to $2,000 a week, caused a corporation to be organized, to which he transferred the greater part of his property for its capital stock.  He became its president and contracted with the corporation to work for it at a salary of $2,500 a month.  The corporation, through him as president, entered into a contract for three years with a syndicate for a guaranteed minimum payment of $1,500 a week for the use of cartoons to be created by the president during the three-year period.  The activity of the corporation was that of entering into a contract pursuant to which it had a definite and fixed obligation.  The Board held, nevertheless, that it was a "mere holding or investment company." *615  In R. & L., Inc.,33 B.T.A. 857">33 B.T.A. 857; affd. (C.C.A., 5th Cir.), 84 Fed.(2d) 721; certiorari denied, *1211 229 U.S. 588">229 U.S. 588, the taxpayer contended that it was an operating company, engaged in the management of its properties, conducting a film-booking business, and managing a chain of suburban motion picture theaters.  We held that it was a "mere personal holding or investment company." In Almours Securities, Inc.,35 B.T.A. 61">35 B.T.A. 61; affd., 91 Fed.(2d) 427; certiorari denied, 302 U.S. 765">302 U.S. 765, the taxpayer invested a portion of its large income in real estate and in the acquisition of shares of stock of a number of banks and of other corporations whose operations it actively supervised, and also operated a concession at Mt. Vernon, Virginia.  We held that those activities were inconsequential when the size of the corporation was taken into consideration.  Without finding that the corporation was a "mere holding or investment company," we said: "The evidence conclusively shows that the petitioner was primarily a 'holding or investment company.'" In affirming our decision in that case the Circuit Court of Appeals said: Petitioner's operations were conducted largely through subsidiaries, which were looked after by Mr. du Pont and his brother-in-law, *1212  Mr. Ball.  After a portion of its cash net earnings was distributed, the remainder was permitted to accumulate beyond the reasonable meeds of its business, and reinvested, thereby saving a large amount of income tax which the stockholder would have been obliged to pay for the years in controversy.  In all of its income tax returns for the years 1930 to 1933, inclusive, the petitioner described its business as that of "acquiring and guaranteeing securities." So far as the evidence shows the petitioner guaranteed no securities after the execution of its agreement of October 1, 1914.  Since under that agreement it was to receive all of the earnings of the Jersey Co. and its subsidiaries, after the payment of interest and expenses, it guaranteed the payment by the Jersey Co. of interest on the bonds of the Jersey Co. and its subsidiaries, and of dividends of 9 percent upon the stamped certificates of common stock of the Jersey Co. and of 6 percent upon the preferred shares of that company.  It did not, however, guarantee the payment of the principal of the bonds above referred to.  They were fully secured.  The petitioner has never been required to pay out a dollar under its guaranty. *1213  During the tax years before us the petitioner collected its income, sold certain securities, made loans to Prince and to the Pau Corporation, wholly owned by Prince, and to the District, and purchased shares of stocks and bonds.  The petitioner's income during the years 1930 to 1933 consisted exclusively of interest, dividends, and profits from the sale of securities.  It received no fees for the management and supervision of other corporations.  Its office was Prince's office at 1 Court Street, *616  Boston, Massachusetts.  An inspection of its income tax returns shows that it had practically no office expenses.  It paid no rent except vault rent.  It paid its president a salary of $50,000 per annum, its treasurer a salary of $500 per annum, and "wages" of $2,000 per annum.  It paid no other salaries or wages.  McDonough was Prince's secretary and was also vice president of the petitioner.  He did not, however, receive any salary from the petitioner.  On brief the petitioner submits: We do not see how the fact that a company had small expenditures is of any real materiality in determining whether or not it is a mere holding company when the only functions claimed for*1214  it to bring it out of the category of "mere" is that it supervises and directs the policies and business operations, other than daily routine, of other companies, and finances these companies, acting as sort of a bank for the enterprise.  These are functions which require more brain than brawn, so to speak, and do not require any physical expenditure of funds.  No large office or office force is needed.  As was testified to, the work consisted of mental operations on the part of Mr. Prince and his assistant, Mr. McDonough.  * * * It is true, of course, that Prince supervised the operations of the Jersey Co. and all of its subsidiaries as well as of the subsidiaries of the petitioner.  He was enabled to do this through ownership of all the stock of the petitioner, which had virtual control through stock ownership of the other corporations.  He was president of the Hersey Co., from which he received an annual salary of $17,500.  He was also chairman of the board of directors of the Transit Co., from which he received a like salary, and chairman of the board of directors of the Railway Co., from which he received a salary of $12,499.92.  He dictated the policies of the petitioner and*1215  of all of the other companies.  It does not appear, however, that the petitioner supervised and managed the operations of its subsidiaries and those of the Jersey Co. and its subsidiaries.  Prince did this himself. So far as appears, there were no meetings of the board of directors of the petitioner for the determination of any acts to be done by any of the companies.  The returns of the Transit Co. and the Railway Co. report Prince as devoting 58 percent of his time to the affairs of the former and 42 percent to the latter.  When directing the affairs of those companies Prince was acting as a paid employee of those companies and not of the petitioner.  A corporation which is a mere holding or investment company is subject to the tax imposed by section 104(a) in the absence of a showing that it was not availed of for the interdicted purpose or that the stockholders included in their individual returns the company's earnings in accordance with section 104(d).  The evidence shows that the stockholders of the petitioner did not return the undistributed earnings and we think that it fails to show that the corporation *617  was not availed of to prevent the imposition of the surtax*1216  upon its stockholders.  Section 104 was not leveled solely against holding and investment companies.  Any corporation which permits its gains or profits to accumulate beyond the reasonable needs of the business is presumably availed of for the condemned purpose.  We next consider the evidence bearing on the accumulation of gains or profits beyond the reasonable needs of the business.  Up to December 31, 1929, the petitioner had accumulated an earned surplus of $19,615,905.69.  It had outstanding 5 percent bonds maturing in 1961 of a par value of $3,227,000.  It had on hand cash in the amount of $6,689,304.26.  It had notes receivable from F. H. Prince, its sole stockholder, in the amount of $3,104,400.  Its principal investments consisted of Jersey Co. common shares, $10,993,551.74; Jersey Co. preferred shares, $45,821.50; and other investments at cost, some of which were not related to the Chicago stockyards enterprise, of $1,467,338.35.  The character of some of these investments is shown by an analysis of petitioner's dividend receipts for 1929 as follows: Chicago Junct. Rys. & Union Stock Yards Co$200,000.00Chicago Junct. Rys. & Union Stock Yards Co. common247,272.75Union Stock Yards & Transit Co420,702.00Union Stock Yards & Transit Co. investment account128,521.74Chicago Junction Railway Co1,427,500.00produce Terminal Co200,000.00Old Colony Trust Associates2,000.00Stock Yards National Bank9,760.00First National Bank of Chicago2,413.00U.S. Cold Storage common4,333.50U.S. Cold Storage preferred1,750.00Central Mfg. District Bank4,000.00Midland Warehouse common2,796.00National Shawmut Bank350.25Westland Oil340.002,651,739.24*1217  During the four years 1930 to 1933 the petitioner had a net income of $10,243,373.01.  During the same period it paid out in dividends $1,600,000; reduced its liabilities in the amount of $574,298.65; added to its cash on hand $2,755,931.71, $1,800,000 of which was subordinated to the claims of other depositors in a Chicago bank; loaned to the District (Central Manufacturing District), a common law trust beneficially owned by the Jersey Co., $1,625,000 to enable it to pay off some of its bonds and to make improvements to its properties; increased its loans to Prince in the amount of $1,743,600; loaned $236,536.51 to the Pau Corporation (wholly owned by Prince) *618  upon which no interest was ever received; and spent $1,500,000 in the acquisition of shares of stock of Western Associates, Inc., $245,800.45 for 1,584 shares of common stock and $173,111.83 for 1,905 shares of preferred stock of the Jersey Co., $423,107.25 in the purchase of $609,000 par value of its 5 percent bonds of 1961, and various amounts in the purchase of other securities.  As a holding company, the petitioner had no need for the accumulation of gains and profits.  In the ordinary holding or investment*1218  company the excess of income over expenses is either paid out in dividends or invested in additional income-producing assets.  That is the use which the petitioner made of its excess income.  That use can not be regarded within the reasonable needs of the business.  The petitioner contends, however, that it was more than a holding or investment company - that it was engaged in the business of managing the Chicago stockyards enterprise through subsidiary companies in which it owned an interest and that it was necessary for it to finance those companies.  It claims that for that purpose it had need of a large surplus.  But even as a management company, we can not see that the petitioner had need for the accumulation of a large surplus.  The only expenses connected with the management were the payment of salaries and wages in the amount of $52,500 per year, and the annual income amply provided that revenue.  We do not see either that the petitioner had any need of an accumulation of gains and profits for the purpose of financing other corporations.  It was not obligated on the principal of any bonds other than its own which were outstanding at December 31, 1929, in the amount of*1219  $3,227,000.  It had guaranteed the interest on the bonds of the Jersey Co. and its subsidiaries and dividends on the Jersey Co. common and preferred shares outstanding.  But the evidence is to the effect that the petitioner had never been required to pay out a dollar under its guaranty.  If it might be assumed that the petitioner needed some accumulation of gains and profits to provide for its guaranty, it should be noted that upon a paid-in capital of $1,000,000 it had accumulated gains and profits up to December 31, 1929, of almost $20,000,000.  Certainly there is no indication of the need for any further accumulation in the years 1930, 1932, and 1933.  The evidence shows the manner in which the petitioner has used its earnings from the date of incorporation.  It has been free to use them in any manner it saw fit.  It has used a large part of them in the purchase of shares of stock of the Jersey Co.  The next most important item is loans made to Prince.  During the years 1930 to 1933 the petitioner loaned $1,625,000 to District and $236,536.51 to *619  the Pau Corporation.  It had no financial interest in the latter.  The necessity for these loans, if any existed, is not*1220  shown.  It is the claim of the petitioner that Prince, its principal stockholder, and during most of the years its sole stockholder, contemplated the liquidation of the Jersey Co. upon the expiration of its charter on June 10, 1940; that for such purpose Prince desired to acquire as many shares of Jersey Co. common stock as he could purchase at a reasonable price before 1940; that he was not so much interested in the purchase of preferred stock because that could all be acquired at par upon the liquidation of the Jersey Co. in 1940; that he also desired to accumulate in the treasury of the petitioner sufficient assets to pay off all the bonds of the petitioner and of the Jersey Co. and its subsidiaries by 1940.  The plan as at the close of the year 1929 contemplated an accumulation of cash and liquid assets in the treasury of the petitioner, its subsidiary, produce Terminal, and the Jersey Co. and its subsidiaries of approximately $36,000,000.  divided as follows: Total bonded indebtedness$23,963,000.00Preferred stock Jersey Co. (64,543 shares)6,454,300.00Common stock Jersey Co. (6,258 shares)1,034,134.50Working capital5,000,000.00Total36,451,434.50*1221  The bonds and debenture notes of the petitioner and the Jersey Co. and its subsidiaries outstanding on December 31, 1929, were as follows: Petitioner5% bonds maturing 1961$3,227,000Jersey Co.5% bonds maturing April 1, 194010,000,0004% bonds maturing April 1, 19404,000,000Transit Co.Debenture notes maturing 1930500,000Elevated Co.4% bonds maturing March 1, 19452,327,000District maturing various dates to 19413,909,000Total23,963,000We do not think that an accumulation of surplus for the purposes above indicated was within the reasonable needs of the petitioner's business.  As above indicated, the petitioner was obligated to pay off only $3,227,000 of the $23,963,000 bonds outstanding at the end of 1929.  It had on hand more than twice as much cash as was necessary to redeem those bonds and they did not become due until 1961.  Clearly, there was no reasonable need for the petitioner to acquire the balance of the common stock and the outstanding preferred shares *620  of the Jersey Co.  Amounts spent in the acquisition of those shares simply represented investments by the petitioner.  The same also is true of*1222  any amounts that it might expend in acquiring the bonds of the Jersey Co. and its subsidiaries.  The bonds of the Jersey Co. and of its subsidiaries were well secured by deposit of collateral.  The Jersey Co. had $14,000,000 of bonds outstanding since about 1890.  In 1915 $10,000,000 of its bonds matured and were refunded without any assistance from the petitioner.  The evidence shows that the real estate of the District has increased greatly in value since purchased.  The earnings of the Jersey Co. have likewise increased greatly and that company is assured of the receipt of $2,000,000 annual rental of the Belt Line railway.  This lease does not terminate until 2021.  Prince testified to the great value of this lease to the New York Central and that he had nothing to fear from a receivership of that company, since the lease was desired by other railroads.  The bonds of the Elevated Co. outstanding in the amount of $2,327,000 appear not to be well secured except through the guaranty by the Jersey Co.  But the Jersey Co. is amply able to take care of both its own bonded indebtedness, and that of the Elevated Co.The petitioner submits that on December 31, 1929, all of the companies*1223  constituting what it regards as the Chicago stockyards enterprise had cash and assets readily convertible into cash, without selling any of the shares of stock of the companies of the enterprise of a value of $19,691,666.52.  However, that does not take into account the fixed assets of the companies representing the investment in the stockyards, in the railroad, and in other properties.  Those assets are income-producing assets of great value.  The net consolidated assets of the Jersey Co. and its subsidiaries, as shown by its consolidated return at December 31, 1929, was approximately $40,000,000 in excess of all liabilities and the evidence is to the effect that the book values of some of the assets are much less than their real value.  For instance, the book value of $2,500,000 Indiana Harbor Belt Railroad Co. bonds maturing in 1957 and bearing 4 percent interest and guaranteed principal and interest by the Lake Shore & Michigan Southern Railway Co. and the Michigan Central Railroad Co., is only $50,000.  Under his program Prince, through the instrumentality of the petitioner, would own in 1940 all of the assets of the Jersey Co. and its subsidiaries, of a value of more than $60,000,000, *1224  free of debt.  In Keck Investment Co.,29 B.T.A. 143">29 B.T.A. 143; affd. (C.C.A., 9th Cir.), 77 Fed.(2d) 244; certiorari denied, 296 U.S. 633">296 U.S. 633; the taxpayer contended "that it was necessary for it to finance the Superior Oil Co., which had little bank credit, and that if it had not financed that company its investment in it would have been lost by forfeiture of leases." In our opinion we stated that we were not impressed by this argument; *621  that "The business of the Superior Oil Co., was not the business of this company." In the proceeding at bar we do not think that the evidence shows a reasonable need of the petitioner for any further accumulation of gains and profits during any of the years 1930, 1932, and 1933.  We have found on the evidence before us (1) that the petitioner is a "mere holding or investment company", and (2) that its gains or profits have been permitted to "accumulate beyond the reasonable needs of the business." The existence of these facts raises the statutory presumption that the corporation was "availed of" for the interdicted purposes, and we think that the evidence has not overcome the presumption.  Even without*1225  the benefit of the statutory presumptions, we think there is sufficient evidence in the record to show the existence of the condemned purpose.  The bare recital of the undisputed facts relating to the organization of the petitioner, the balance sheets, the source of earnings, the nature of the investments, the large accumulations of cash and surplus, the loans of cash and securities to the petitioner's sole stockholder, and the continued reinvestment of its gains and profits in securities, present, in our opinion, a situation typical of situations which Congress intended to cover by section 104 of the Revenue Acts of 1928 and 1932.  It should be borne in mind that the petitioner was solely owned by Prince from 1922 to June 1, 1932, and, for all practicable purposes, thereafter.  The petitioner was the alter ego of Prince.  It was Prince in corporate clothes.  It was of no monent to Prince whether the earnings of the petitioner were carried in his individual pocketbook or in his corporate pocketbook, except that if they had been received in the first instance in his individual pocketbook or distributed to him by the petitioner he would have been subjected to heavy surtaxes upon*1226  them, while he avoided such surtaxes by retaining them in the corporation.  The situation is analogous to that which obtained in Helvering v. National Grocery Co., supra, where an operating company organized in 1908 had accumulated a surplus of approximately $8,000,000 and had cash and securities on hand aggregating approximately $4,250,000, which represented four-fifths of the total accumulation of surplus profits during the last ten years.  The Supreme Court said: Since Kohl was the sole owner of the corporation, the business would have been as well protected against unexpected demands for capital, and assured of capital for the purpose of any possible expansion, by his personal ownership of the securities as by the corporation's owning them.  * * * The petitioner was the means by which Prince had succeeded in accumulating up to 1929 a personal fortune of between $15,000,000 and $20,000,000 practically immune from taxation; for the income of the petitioner consisted almost exclusively of dividends received *622  from domestic corporations which were a legal deduction from its own gross income.  The result was that the petitioner had in many years no*1227  taxable income, and in other years only a small taxable income.  The evidence shows that the petitioner was availed of by Prince for the purpose of reducing his own tax liabilities.  Over a number of years Prince had accumulated more than 17,000 shares of Jersey Co. common stock upon which he was receiving an annual dividend of $9 per share.  These were his own shares of stock.  The dividends on them were taxable to him.  In 1918 he transferred all of those shares of stock to the petitioner at cost and was thereafter relieved from the payment of surtax upon the dividends thereon.  Prince started borrowing money from the petitioner in 1911.  The amount of his borrowings increased irregularly from year to year.  He was indebted to the corporation at December 31, 1929, in the amount of $3,104,000 and at the end of 1933 in the amount of $4,848,000.  The amount of the debt increased in subsequent years. The borrowed funds were used for various purposes.  It is true that he paid interest to the petitioner of 4 percent upon the money borrowed, the payment of which interest was deducted from his gross income in his individual tax returns.  He also borrowed securities of large value from*1228  the petitioner, which he used as collateral to obtain loans at banks.  There is no satisfactory explanation of why the petitioner did not make a dividend distribution to Prince of the funds which he needed.  In the case of Helvering v. National Grocery Co., supra, the Supreme Court said:  * * * As was stated in United Business Corporationv. Commissioner, supra, 62 F.2d page 755: "These loans are incompatible with a purpose to strengthen the financial position of the petitioner, but entirely accord with a desire to get the equivalent of his dividends under another guise." To the same effect see William C. deMille Productions, Inc.,30 B.T.A. 826">30 B.T.A. 826, and Mead Corporation,38 B.T.A. 687">38 B.T.A. 687. It furthermore appears that in 1931, 1932, and 1933 Prince sold securities to the petitioner for $120,193.21, $138,108.35, and $59,664, respectively, which enabled him to deduct from gross income in his income tax returns for those years losses of $196,124.68, $221,629.08, and $93,102.22, respectively, and in 1932 the petitioner sold to F. H. Prince & Co., Inc., which was organized by Prince on June 1, 1932, shares of the*1229  capital stock of the Stock Yards National Bank and of the Central Manufacturing District Bank, which enabled the petitioner to claim a deductible loss of $221,202.03.  The shifting of these securities from Prince to the petitioner and from the petitioner to Prince really meant no economic loss to Prince and the *623  investment by the corporation of the amounts of money spent in acquiring the securities from Prince was not in furtherance of the program which Prince claims to have had for the corporation.  It is agreed that if all of the net income of the petitioner for the taxable years 1930, 1932, and 1933 had been paid out as dividends the additional surtaxes payable by Prince would have amounted to $572,234.91 for 1930; $386,582.23 for 1932; and $377,706.61 for 1933, or a total for the three years of $1,336,523.85.  This does not take into account any tax liabilities which might have been incurred by the other stockholder after January 1, 1932, or the tax which would have been payable by the F. H. Prince Trust if it had received and passed on the dividends.  By the failure of the petitioner to distribute its profits during the three years before us Prince has avoided the*1230  payment of surtaxes in the amount of at least $1,336,523.85.  Section 104(d) of the Revenue Acts of 1928 and 1932 provides a means by which a holding or investment company which accumulates its gains or profits beyond the reasonable needs of the business may avoid the payment of the tax imposed by section 104(a).  Subdivision (d) provides that the tax shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year.  It has been stipulated in this proceeding that the stockholers of the petitioner did not so report the earnings of the petitioner during the years before us.  Although Prince testified that under his program it was contemplated that the Jersey Co. would be liquidated in 1940, there appears to be no necessity for its liquidation and many reasons why it probably will not be liquidated.  When the petitioner was organized in 1911, an issue of $14,000,000 bonds was provided for.  The petitioner covenanted with the trustee that it would do all that was necessary for it to do to continue the existence*1231  of the Jersey Co.  The outstanding bonds of the petitioner are callable at 105. but if they are not called and paid off the petitioner is under obligation to continue the existence of the Jersey Co.  McDonough, petitioner's vice president, testified that either he or Prince had consulted counsel as to the possibility of obtaining an extension or renewal of the Jersey Co.'s charter.  Counsel advised that such an extension or renewal could undoubtedly be obtained under the New Jersey statutes.  They simply require a consent of two-thirds of each class of stock of the old corporation.  It is inconceivable that the petitioner can not obtain such a consent.  It owns more than two-thirds of the common shares, and the preferred shares bearing a 6 percent dividend are well secured by assets and earnings.  *624  Upon a liquidation of the Jersey Co. in 1940 the petitioner would apparently be subject to heavy income taxes; for its investment in the common and preferred shares and in the bonds of the Jersey Co. and its subsidiaries would amount to not more than $35,000,000 and the assets acquired would apparently have a value, based upon cost, book values, and earnings, of more than*1232  $60,000,000.  Although it may be desirable to merge or consolidate the petitioner and the Jersey Co., it seems doubtful whether the Jersey Co. will be liquidated in 1940.  In its brief petitioner calls attention to our opinion in Mellbank Corporation, supra. It states that its situation is in no great respect different from the situation which existed in that case and that, since we reached a conclusion that the taxpayer was not subject to tax under section 104, the same conclusion is warranted here.  Each case involving the application of section 104 must be decided upon its own facts.  In the Mellbank case the Board said in its opinion: * * * Obviously, petitioner was not a mere holding or investment company.  It had no investments in, and was not holding any corporate stocks, other than stocks of its member banks, which was necessary to enable it to carry on its business of managing, supervising, and operating those banks.  * * * The only year before us was 1932.  The taxpayer had no taxable income for that year, after the deduction of dividends received upon certain shares of stock.  Its net accumulation of gains and profits for the taxable year was*1233  only $98,444.32.  We held upon the evidence as a whole that the corporation had not been availed of for the interdicted purpose stated in section 104 of the Revenue Act of 1932.  In our opinion the evidence in the proceeding at bar establishes that the petitioner is a mere holding or investment company; that its gains and profits were permitted to accumulate beyond the reasonable needs of the business; that the petitioner had no reasonable need to add to the earned surplus on hand at December 31, 1929, any part of the gains and profits of the years 1930, 1932, and 1933; and that it fails to show that such accumulation was not for the purpose of preventing the imposition of the surtax upon its shareholders.  Reviewed by the Board.  Decision will be entered under Rule 50.STERNHAGEN STERNHAGEN, dissenting: In my opinion, the evidence requires a finding that the petitioner was not availed of for the purpose of enabling its shareholder to escape surtax.  The accumulation of earnings and profits was not for the purpose of reducing or preventing taxes but for the purpose of meeting the forthcoming demands occasioned by the termination of the Jersey Co.'s charter in*1234  1940.  *625  This positive business purpose appears not alone from the testimony of Prince, but also from the testimony of others who have been intimately associated with the business for many years.  These witnesses were entitled to belief and their testimony is credible and in no respect impugned or otherwise weakened either by cross-examination or countervailing testimony.  Throughout the existence of the corporation since 1911, the dominant objective has been to accumulate a surplus with which to acquire all of the Jersey Co.'s common and preferred shares by 1940 and liquidate its indebtedness and the outstanding indebtednesses of other companies which the liquidation would entail.  There is no reason why the Board should be incredulous of the several statements of that continuous purpose.  It would be reasonable to infer such a purpose even if there were no direct testimony that it existed.  Furthermore, opinion witnesses for both the petitioner and the Government all testified that such a purpose would be reasonable.  The only witnesses for the Government were three analysts who, after a study of the history and the probable future, agreed that the liquidation of the*1235 Jersey Co. in 1940 was a desirable objective and that it would not be unreasonable to build up a fund to provide for it.  Despite this evidence, however, the Board holds from the circumstances that it will not be necessary to liquidate the Jersey Co. or the several indebtednesses which will then and soon thereafter become due, and concludes that the accumulation for that purpose is unnecessary and unreasonable.  Upon these rationalized postulates, the Board, contrary to the only direct evidence in the record, holds that there was a purpose to prevent the imposition of the surtax upon the shareholder.  Thus the single ultimate finding of fact upon which the imposition of the additional tax is expressly required by the statute to be conditioned is built up from circumstances many of which are beside the point of the statute.  The purpose which the Board finds to exist is not an actual purpose but is a sort of constructive purpose, as if from the circumstances one must inevitably conclude that the conduct of the corporation and its officers could not reasonably have occurred unless the tax-saving purpose existed. Section 104, however, clearly requires the actual existence of the tax-saving*1236  purpose to support the 50 percent additional tax; and where the taxpayer by a fair preponderance of the evidence establishes that the purpose did not in fact exist, there is no justification for fabricating it by construction.  The corporation began its life as a vehicle to facilitate the reorganization which would be required in 1940.  This is not questioned.  Never throughout its history has there been a departure from this plan.  It began in 1911 before there was any substantial corporation tax, before there was any constitutional power to impose an income *626  tax, and many years before there was any thought of an individual surtax.  There has been a uniform policy since 1923 to distribute a dividend of 5 percent on the capital stock and accumulate the remaining earnings.  There was no change in this policy in 1930 to denote a tax-saving purpose.  This plan persisted without question throughout the years after the 1918 Act, when there was first imposed an additional tax upon the corporation by reason of the nondistribution of earnings.  During all the years since such a tax was first enacted it has been predicated on the purpose to prevent shareholders' surtax.  Always*1237  this factor has been known to be a difficult one for the Government and a serious impediment to the collection of such taxes.  Purpose has always been recognized as something hard for the Government to prove and easy for the taxpayer to disprove.  Yet the tax with this condition was deliberately reenacted time and time again.  It still exists in section 102 of the 1938 Act. 1 Not until the enactment, after vigorous legislative debate, of the Revenue Act of 1934 was a tax imposed on undistributed net income irrespective of purpose.  This was in the personal holding company tax of Title I A.  It was new and prospective legislation.  Later, in section 14 of the 1936 Act, the undistributed profits tax was added.  It is improper, therefore, for the Board, in 1940, to apply the 1928 and 1932 statutes as if they imposed the high additional tax upon all the corporation's net income although it had no purpose of preventing surtax on its shareholders.  This is in effect to apply the later type of tax retroactively to a period when it was expressly and knowingly rejected by Congress.  It is treating the language of the controlling statute as if it were a mere figure of speech.  *1238  If I understand the Board correctly, they say that the accumulation of $19,615,905.69 by December 31, 1929, was enough for the forthcoming needs of 1940, and that the profits added in 1930, 1932, and 1933 were therefore beyond the reasonable needs of the business and ergo only explicable as a means of tax avoidance for the shareholder.  No doubt the Board has the power and the duty to determine whether gains or profits have been permitted to accumulate beyond the reasonable needs of the business; but the determination should be more than a substitution of the Board's judgment for that of the managers of the business - particularly when the Commissioner has made no determination on subject.  For myself, I am unable to draw a line at December 31, 1929, between the limit of reasonable accumulation and additions to it, label the latter as excessive and unreasonable, *627  and, so labeled, regard the additions in the taxable years as a manifestation of the disapproved purpose.  To point to the fact that Prince began his stockyards venture with a comparatively small investment which has grown into a large fortune, and that in the intervening years his personal taxes and those*1239  of the petitioner have been relatively small, is to disclose a type of reasoning which, in my opinion, should have no place in tax adjudication.  Nothing in the record discloses any actual or attempted escape from taxes imposed by law.  This drastic additional tax can not be justified for the years in question by pointing to the extent to which the taxpayer and its shareholder have paid less than it is thought, by some nonlegal yardstick, that they should have paid.  The tax, to be sure, was intended as a penalty; but that is the more reason why it should be applied with a careful regard for its terms and not sentimentally.  The loans which petitioner made to Prince were consistently used by him and his brokerage firm to buy the securities of stockyards corporations.  Only once does it appear that he used any of the borrowed funds for a private purpose.  This was in 1932, when he used $160,000 for a short period to finance the construction of his Newport house until he could sell his North Shore place.  The securities which petitioner loaned to Prince were used by him as collateral to secure loans from banks for the purchase of stockyards securities, and the cash which petitioner*1240  loaned to Prince was used for the purchase of similar securities.  Prince paid interest to the petitioner at the going rate on the cash loans and the petitioner received the income upon the securities which it loaned to Prince for purposes of collateral.  In view of the evidence that the loans were made to Prince because as a broker he was in good position to buy stockyards securities whenever they were available, and that this was, throughout the entire history of the company, an incident to its general plan, it is misleading to find, as the Board does, that "the loans were used by Prince for any purpose desired by him." There is a clear distinction between these loans to Prince in carrying out the petitioner's business plan and the loans to the president in Helvering v. National Grocery Co.,304 U.S. 282">304 U.S. 282. In that case the loans were used by the corporate officer to invest in wholly unrelated securities for a profit, just as they might have been used by him if they had been distributed to him in dividends.  The amounts loaned to Prince during the taxable years did not serve the purpose of disguised dividends.  In 1930 the loans actually decreased by $916,250. *1241  Over the four years, 1930-1933, the net amount loaned to Prince was $886,070.  Included in this net was the loan in 1933 of $1,000,000 which Prince used in the purchase, for $1,067,000, of the Armour shares.  This purchase was made to acquire control of the *628  Armour stock so that the profitable Armour business would be kept in the stockyards enterprise.  I think, therefore, that when the circumstances of all the loans by petitioner to Prince are given consideration they lose force as indicating any purpose to enable him to have the personal use of petitioner's earnings and yet escape surtax.  It is said that Prince sold securities to the petitioner at a loss, which gave him a personal income tax deduction, and the petitioner took similar loss deductions on sales to Prince.  Aside from the fact that the amounts were comparatively too small to be indicative of a purpose under section 104, the decision in W. S. Farish & Co.,38 B.T.A. 150">38 B.T.A. 150; affd., 104 Fed.(2d) 833, establishes that this has no place under that section.  Such transactions in themselves have no significance in determining whether the corporation was availed of to prevent surtax*1242  on the shareholder "through the medium of permitting its gains or profits to accumulate instead of being divided or distributed." I am, therefore, of opinion that the reasoning of the Board in reaching its conclusion is unsound.  The taxpayer has shown affirmatively an absence of actual purpose to prevent the imposition of surtax upon its shareholder, and, since this is the crux of the case, the determination of the Commissioner that the case is one under section 104 should be reversed and the resulting deficiency set aside.  MURDOCK, LEECH, and KERN agree with this dissent.  Footnotes1. There are several places in the record where it is not clear whether the individual J. Ogden Armour is meant or the corporation Armour & Co.  Since for present purposes the distinction has no importance the name Armour is used equivocally to apply to either. ↩2. This corporation is not the real estate trust herein called the District. ↩1. Includes impounded charges of $2,013,523.54 which were not released to the Transit Co. until 1932. ↩3. The name Prince is hereinafter sometimes used to include F. H. Prince & Co., the same under which he conducted his brokerage business. ↩1. For 1929 - 27,442 shares at cost, $4,733,551.74, and 31,300 shares for $6,260,000 5% bonds; for 1933 - 29,026 shares at cost, $4,979,352.19, and 31,310 shares for $6,262,000 5% bonds.  ↩2. For 1929 cost of 457 shares; for 1933 cost of 2,362 shares. ↩1. Section 102 of the 1938 Act still fixes purpose as a necessary condition of the tax but the presumption that an unreasonable accumlation evidences the disapproved purpose is made more difficult to overcome since the taxpayer must prove its absence of purpose by a clear preponderance of the evidence and not merely by enough evidence to overcome a prima facie case. ↩